The covenant of good faith still applies despite "buyer's sole subjective discretion."
The standard Colorado residential real estate sales form has 14 instances of the language "sole subjective discretion." Notwithstanding 10th Circuit and Kansas case law to the contrary, a Denver District Court decision has now examined a buyer's behavior for good faith and fair dealing.
-
10th Circuit and Kansas Case Law? Covenant of Good Faith is Irrelevant with Unfettered Discretion
In cases where a contract allows one side to exercise its discretion, the covenant of good faith and fair dealing cannot be used to override the carefully negotiated provisions set forth in the agreement. Flight Concepts Ltd. Partnership v. Boeing Co., 38 F.3d 1152, 1157 (10th Cir. 1994) ("[a]lthough the [implied covenant of good faith and fair dealing is generally implied for all contract provisions, it is irrelevant where the contract is drawn so as to leave a decision to the 'uncontrolled' discretion of one of the parties"); Big Horn Coal Co. v. Commonwealth Edison Co., 852 F.2d 1259, 1267 (10th Cir. 1988) ("[a]lthough good faith is generally applicable to all contract provisions, it is possible to so draw a contract as to leave decisions absolutely to the uncontrolled discretion of one of the parties and in such a case the issue of good faith is irrelevant"). This is a corollary of well-established contract principles in Colorado that: (1) written contracts that are complete and free from ambiguity will be enforced according to the plain language of their terms (Amoco Oil Co. v. Ervin, 908 P.2d 493 (Colo.1995); (2) a covenant of good faith and fair dealing, whether express or implied, does not inject new substantive terms into a contract but simply is a principle of contract interpretation (Wells Fargo Realty Advisors Funding, Inc. v. Uioli, Inc., 872 P.2d 1359 (Colo.App.1994); (3) the implied covenant of good faith and fair dealing does not override or nullify an express contractual provision (Amoco Oil Co. v. Ervin, 908 P.2d 493 (Colo.1995); and (4) the exercise of an express contractual right cannot breach or violate the implied covenant of good faith and fair dealing.
-----------------------------------------------------------------------------------------------------------------------------------------------------
Pizza Hut, Inc. v. Koch Indus., 2001 Kan. App. Unpub. LEXIS 826 (Ct. App. 2001)(unpublished), goes even further. The contract in Pizza Hut stated, in relevant part, "[i]f the results of the Phase I environmental study are not satisfactory to Buyer, in Buyer's sole discretion, Buyer shall have the right to terminate this Agreement...." When the Buyer terminated, Seller brought claims for breach of contract and breach of the covenant of good faith and fair dealing. Upon Buyer's motion for summary judgment in Pizza Hut, the trial court granted the motion in favor of Buyer. Specifically, the Trial Court found that "when the decision to terminate a contract is left to the sole discretion of one of the contracting parities, the implied warranty of good faith and fair dealing is not relevant." On appeal, the Court of Appeals affirmed summary judgment. Citing Augusta Medical Complex, Inc. v. Blue Cross, 227 Kan. 469, 608 P.2d 890 (1980), the Pizza Hut Court held that "when the right to terminate an agreement is absolute, the motive of the terminating party is irrelevant." -
Cases to the Contrary
In Covington v. Robinson, 723 S.W.2d 643 (Tenn. App. 1986), the court found that the prospective purchasers in a real estate contract were not entitled to return of their earnest money because they had failed to make a reasonable effort to obtain the financing. Similarly, in Huckleberry v. Wilson, 284 S.W.2d 205 (Court of Civil Appeals of Texas, El Paso 1955), the court found that if purchaser by his words or actions caused the application for the loan to be cancelled, he would not be entitled to recovery of his earnest money because of failure to obtain loan. Also, in Smith v. Evans, 620 S.W.2d 627 (Court of Civil Appeals of Texas, Dallas 1981), the Court found that because buyer failed to apply for a loan on the stated terms, the condition for return of the earnest money was not satisfied.
