Where The States Meet

The Legal Advisor

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Written by: Frank Murray
Attorney at Law, Stoops, Denious, Wilson & Murray, PLC


Arizona has always been a “liberal state” with respect to the implied covenant that arises out of every contract, that there is a duty of “good faith and fair dealing” between the parties. The concept is broad, and as pervasive as contractual dealings can be between humans. It is also, deceptively simple, arising from a “reasonable expectation” on the part of a party that the other will not do anything to deprive him of a benefit of the agreement.

Arizona’s seminal case, of national significance, is Wells Fargo Bank v. Arizona Laborers, Teamsters and Cement Masons Local No. 395 Pension Trust Fund, 201 Ariz. 474, 38 P.3d 12 (2002), which held that a party can violate its covenant of good faith and fair dealing by using its position without exactly, technically violating an express or implied term of the contract. In accord is Wells’ “twin” case in Arizona, Bike Fashion Corp. v. Kramer, 202 Ariz. 420, 46 P.3d 431 (Ariz. App. 2002). Bike Fashion holds that even if there are express terms permitting behavior in a contract a party may breach the implied covenant of good faith and fair dealing if the party exercises discretion in a way inconsistent with a party’s reasonable expectations and by acting in ways not expressly excluded by the contract terms but which bear adversely on the party’s reasonably expected benefits of the bargain. The obligation of this duty is to preserve the spirit of the bargain, states the court in Bike Fashion.

These broad contract concerns, recently upheld again in Arizona in Silving v. Wells Fargo Bank, NA, 800 F.Supp.2d 1055, 1070-71 (D.Ariz. 2011), give the Arizona courts the ability to examine the ultimate abuse of prolix, obtuse written agreements, generated by one party and potentially used in such a way to abuse the other – even though the abusive party is in technical compliance with the documents he created. The courts above have looked at manipulation of bargaining power, what a reasonable expectation of each party would be, and discretionary provisions of a contract that might allow exercise of discretion, but for an improper purpose.

The duty of good faith and fair dealing is a covenant implied in any contract: real estate sale, any form of loan, any commercial agreement of any kind.

Outside Arizona, many states still regard the strict technical adherence to the terms of a contract as a defense that can be asserted against a claim of a violation of the covenant of good faith and fair dealing. Arizona courts have made a separate subject header for themselves in legal hornbooks by recognizing that a party can develop and/or become so familiar with a written contract that they can unreasonably abuse the other party and still technically comply with its terms. Having observed this abuse of the law of contract, Arizona has fashioned a remedy.

Frank Murray, who has practiced law in Arizona for over 40 years, is a partner at the law firm of Stoops, Denious, Wilson & Murray where he continues to practice in the field of commercial litigation. He can be reached by phone at (602) 263-8861.