Bad things occasionally happen to good contract parties. Let’s assume you’ve
done everything right in the negotiation process. You’ve been transparent about
risk; honest about your capabilities; and pellucid in setting your terms. Indeed,
your contract documents cause veteran lawyers to gasp at their thoroughness
and shrewdness. You have planned for every contingency except the one factor
you cannot contract around: sheer unreasonableness by the other party.
There are two basic ways your reasonable expectations can be thwarted by an
unreasonable counter-party (hereafter, “UCP”). First, the UCP can make extracontractual demands. In such an instance, the UCP decides that he will not accept
the terms he agreed to and, instead, insists on different terms. Alternatively, the UCP
nominally adheres to the letter of the contract, but acts in such a way as to frustrate
its purpose. Happily, the law anticipates both situations. Let’s take each in turn.
INSISTING ON DIFFERENT TERMS – “REPUDIATION”
Let’s say the contract in question clearly calls for payment on delivery of 100
standard widgets. The UCP informs you that he will now only accept and pay for
customized widgets. The customization will increase your manufacturing cost. The
UCP offers no premium. Worse, the UCP informs you that he has the opportunity to
make a million-dollar profit on the resale of the widgets in question. He threatens
to sue you for his full expectancy damages if you do not meet his new, extracontractual expectations.
By insisting on extra-contractual performance, i.e., by insisting that you perform
more than is required of you under the contract, the UCP may have repudiated the
contract as a matter of law. The law, sensibly, does not require a party threatened
with breach simply to stand by and wait for it to happen. Rather, a statement of
intent from the UCP that is inconsistent with an intent to honor your contract is
deemed a repudiation of the contract. Under those circumstances, you can treat
the contract as breached by the UCP. By accepting the repudiation as such, in
writing, you may avoid being pegged with the extra-contractual burden and you
may sue for any damages caused by the UCP’s attempt to change the contract
terms. Of course, you also have the option of accepting the new terms because
it may, after all, be profitable to proceed even on the altered terms.
One note of caution: The legal doctrine of repudiation can only be triggered by
a communication that represents a clear departure from the contracted terms.
Mumbles, grumbles, or arguable points – even an invitation to renegotiate – will
not sustain a repudiation. In other words, anything less than a clear communication
will not be construed as a breach. In that event, you may be the party charged
with repudiating. It’s a brave businessperson who will make such calls without
the advice of counsel.
ABUSE OF DISCRETION — “BREACH OF GOOD FAITH AND FAIR DEALING”
The second way in which an unreasonable counter-party (“UCP”) can make your
business life miserable is in the exercise of contractual discretion. The law implies a
covenant of good faith and fair dealing in every contract. Contractually-delegated
discretion must be exercised reasonably.
A good example of this doctrine in action comes out of Hollywood. Sandra Locke
was an actor and a director. She had also been romantically involved with Clint
Eastwood. That relationship ended in acrimonious litigation. Locke then obtained
a contract with Warner Brothers, which paid her a fixed amount for a right of first
refusal in connection with movie projects she proposed. Warner Brothers had
the discretion to accept or reject each project. An acceptance would result in
additional payments to Locke, as well as a boost to her career as a director. Warner
Brothers turned down every project Locke pitched, though she was paid her
fixed amount. Locke contended that Warner Brothers rejected her proposals, not
based on the quality of her projects, but out of fear of offending Clint Eastwood.
The court looking at the case held that Locke was entitled to Warner Brothers’
honest judgment of the merits of her proposals, even though the contract never
specified as much and even though she was paid the baseline amount. Even
subjective dissatisfaction must be honestly held dissatisfaction. This is a condition
that is implied in every contract. Hence, the fact that it was not written into the
contract of the parties in this specific case had no bearing on the court’s decision.
As a practical matter, contractual discretion may involve “satisfaction,” but it may
also involve a range of choices relating to dates, pricing, cooperation, changing
conditions, even breaches of the spirit, but not the letter, of the contract. The test
used by the courts is this: Did the UPC abuse his discretion in such a manner as
to deprive you of the benefit of the contract? In such a case, you may call him out,
even if he can plausibly claim he is not technically in breach.
THEREFORE …
If your contracting counter-party is unreasonable enough, he is likely to breach
the contract with inconsistent demands or conduct, or breach the covenant of
good faith by abusing his contractual discretion. Either way, you are not at the
UPC’s mercy. A well-reasoned warning to that effect may even avert litigation.
