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Under Florida law, every contract has a duty of good faith and fair dealing.  A party to a contract generally cannot subvert the very purpose of a contract through an improper exercise of its discretion.  A party does not violate the duty of good faith and fair dealing, however, when the parties expressly contemplated the method by which the party would exercise its discretion and the party complied with that method.  Peter Mavrick is a Fort Lauderdale business litigation lawyer, and also represents clients in business litigation in Miami, Boca Raton, and Palm Beach.  The Mavrick Law Firm represents clients in breach of contract litigation, non-compete agreement litigation, trade secret litigation, trademark infringement litigation, and other legal disputes in federal and state courts and in arbitration.

Essentially, the contractual duty of good faith makes it unlawful for a contracting party to violate the spirit of the contract by improperly exercising discretion in a way that is not contradicted by the agreement.  “[E]very contract includes an implied covenant that the parties will perform in good faith.”  Cty. of Brevard v. Miorelli Eng’g, Inc., 703 So. 2d 1049 (Fla. 1997).  “[T]he implied covenant of good faith and fair dealing is designed to protect the contracting parties’ reasonable expectations.” Speedway SuperAmerica, LLC v. Tropic Enterprises, Inc., 966 So. 2d 1 (Fla. 2d DCA 2007).  “[W]here the terms of the contract afford a party substantial discretion to promote that party’s self-interest, the duty to act in good faith nevertheless limits that party’s ability to act capriciously to contravene the reasonable contractual expectations of the other party.”  Cox v. CSX Intermodal, Inc., 732 So.2d 1092 (Fla. 1st DCA 1999).  For example, the covenant of good faith and fair dealing can prevent a landlord from unreasonably withholding his consent to assign a lease when the terms of the lease only permit assignment upon the written consent of the landlord. Fernandez v. Vazquez, 397 So.2d 1171 (Fla. 3d DCA 1981) (holding that it may be a violation of the duty of good faith for a landlord to withhold consent for leverage in contract negotiations).

“[T]here are two limitations on [claims of a breach of the contractual duty of good faith]: (1) where application of the covenant would contravene the express terms of the agreement; and (2) where there is no accompanying action for breach of an express term of the agreement.” QBE Ins. Corp. v. Chalfonte Condo. Apartment Ass’n, Inc., 94 So. 3d 541 (Fla. 2012).  Accordingly, the duty of good faith must “relate to the performance of an express term of the contract and is not an abstract and independent term of a contract which may be asserted as a source of breach when all other terms have been performed pursuant to the contract requirements.” Ins. Concepts & Design, Inc. v. Healthplan Servs., Inc., 785 So.2d 1232 (Fla. 4th DCA 2001); Johnson Enter. of Jacksonville, Inc. v. FPL Group, Inc., 162 F.3d 1290 (11th Cir. 1998) (“[G]ood faith requirement does not exist ‘in the air’. Rather, it attaches only to the performance of a specific contractual obligation”).  “Allowing [a party] to pursue the claim for breach of duty of good faith where no enforceable executory contractual obligation on [other party’s] part remained would add an obligation to the contract which was not negotiated by the parties and not in the contract.”  Hosp. Corp. of Am. v. Florida Med. Ctr., Inc., 710 So. 2d 573 (Fla. 4th DCA 1998).  Parties can avoid potential claims of the breach of the covenant of good faith and fair dealing by expressly agreeing to the method by which discretion may be exercised or providing terms which indicate that the party has complete discretion to take such an action.

In Diageo Dominicana, S.R.L. v. United Brands, S.A., 45 Fla. L. Weekly D1312 (Fla. 3d DCA June 3, 2020), the court was evaluating whether the trial court should have set aside a jury verdict finding that the plaintiff breached the duty of good faith and fair dealing.  The Diageo plaintiff was an alcohol distributor that entered into an agreement with defendant to be the plaintiff’s exclusive distributor for the Dominican Republic.  The plaintiff subsequently engaged in discussions with the defendant and suggested that they would be able to grow substantially if the defendant was to expand its capacity.  The defendant enacted this expansion at the cost of $5.7 million.  The plaintiff subsequently elected to terminate the contract under its terms and went into business with a competitor of defendant instead. The jury ultimately concluded that the plaintiff never breached the parties’ contract, however, the jury also found that the plaintiff breached the duty of good faith and fair dealing in the original distributor agreement by suggesting that it would continue the agreement if the defendant expanded.

Diageo reversed the trial court and held that the trial court should have set aside the jury’s verdict.    Diageo found that the plaintiff’s statements concerning the extension of the contract could not be a violation of the duty of good faith and fair dealing because the plaintiff “terminated the [contract] pursuant to the plain and unambiguous termination provision of that contract.” Id. The jury’s finding that the plaintiff’s termination was conducted in accordance with these express terms precluded a claim of violation of good faith and fair dealing.

Parties to a contract may be bound to exercise the discretion afforded them under the contract by the contractual duty of good faith and fair dealing.  As illustrated by Diageo, the parties may contemplate the method by which a party can exercise that discretion within the contract.  Compliance with such a provisions cannot breach of the duty of good faith and fair dealing.  Peter Mavrick is a Fort Lauderdale business litigation attorney who also practices business litigation in Miami, Boca Raton, and Palm Beach.  This article does not serve as a substitute for legal advice tailored to a particular situation.

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