Business Judgment Rule No Protection from Claim of Breach of Duty of Good Faith and Fair Dealing

On October 28, 2015, the Second Department issued a decision in Waterways at Bay Pointe Homeowners Association, Inc. v. Waterways Development Corp., 2015 NY Slip Op. 07832, holding that the business judgment rule was not a defense to a claim for breach of the duty of good faith and fair dealing.

In Waterways at Bay Pointe Homeowners Association, the parties asserted claims and counterclaims regarding the agreement between a homeowner's association and a developer. One claim was that the defendant developer (the "sponsor") had beached its contractual obligation to "pay a 'deficiency contribution' equal to the lesser of the plaintiff's actual budget deficiency or the assessments on the units to which the sponsor held title." The developer conceded that it had not made the deficiency contributions, but presented a defense of the plaintiff's breach of the covenant of good faith and fair dealing "by preparing a budget which would ensure a substantial deficit payable by the sponsor." The Second Department agreed that the developer had created an issue of fact for trial, explaining:

Implicit in every contract is a covenant of good faith and fair dealing, which encompasses any promise that a reasonable promisee would understand to be included. The implied covenant of good faith and fair dealing is breached when a party to a contract acts in a manner that, although not expressly forbidden by any contractual provision, would deprive the other party of the right to receive the benefits under their agreement.

. . .

Contrary to the plaintiff's contention, the business judgment rule does not protect it from attack upon its budget decisions. Pursuant to the business judgment rule, courts exercise restraint and defer to good faith decisions made by boards of directors in business settings. Here, the defendants' defense is precisely that the plaintiff's budget was not prepared in good faith and that its decision making was tainted by discriminatory considerations. The plaintiff's reliance on the business judgment rule does not, therefore, change the fact that the defendants have successfully raised a triable issue of fact regarding whether the sponsor in fact breached the contract by failing to pay its deficiency contribution for 2000, 2001, and 2004 deficiency claims (i.e., portions of its first and fourth causes of action).

(Internal quotations and citations omitted).