How to Deal with an Unreasonable Contract Party

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.