New York Recognizes Breach of Implied Duty of Good Faith and Fair Dealing and Breach of Contract as Independent Causes of Action

On April 21, 2022, in Anexia, Inc. v. Horizon Data Solutions Ctr., LLC, Index No. 657444/2019, Justice Robert R. Reed of the New York County Commercial Division, among other things, granted plaintiff’s motion to dismiss defendant’s counterclaim for tortious interference but denied its motion to dismiss the counterclaim for breach of the implied duty of good faith and fair dealing. The Court explained that while a tortious interference claim grounded on the same conduct as a breach of contract claim are duplicative, under certain circumstances New York recognizes the implied duty of good faith and fair dealing as an independent cause of action:

New York courts have repeatedly affirmed that a party may be in breach of an implied duty of good faith and fair dealing, even if it is not in breach of its express contractual obligations, when it exercises a contractual right as part of a scheme to realize gains that the contract implicitly denied or to deprive the other party of the fruit of its bargain (see Dalton v Educ. Testing Serv., 87 NY2d 384, 389, 663 N.E.2d 289, 639 N.Y.S.2d 977 [1995]; Outback/Empire I, Ltd. Partnership v Kamitis, Inc., 35 AD3d 563, 563, 825 N.Y.S.2d 747 [2d Dept 2006]; Richbell Info. Servs., Inc. v Jupiter Partners, L.P., 309 AD2d 288, 302-03, 765 N.Y.S.2d 575 [1st Dept2003] [refusing to dismiss cause of action for breach of implied covenant of good faith and fair dealing based on the allegation that defendant exercised contractual veto power "for an illegitimate purpose and in bad faith" as part of scheme to deprive plaintiffs of benefits of their joint venture]).

The First Department in Maddaloni Jewelers, Inc. v. Rolex Watch U.S.A., Inc. confirmed the principle that a claim for breach of the implied covenant of good faith and fair dealing can occasionally stand on its own (41 AD3d 269, 838 N.Y.S.2d 536 [1st Dept 2007]). In Maddaloni, the defendant had [**3] moved on summary judgment to dismiss the plaintiff's third amended complaint, [*8] which alleged a cause of action for breach of an implied duty of good faith and fair dealing but did not assert a cause of action for breach of contract. The First Department sustained the cause of action for breach of an implied duty of good faith and fair dealing. The Court found that, although the parties' contract permitted the defendant to accept plaintiff's orders and time its deliveries at its "discretion," the plaintiff's allegations had "raised a triable issue of fact as to whether [the defendant]'s discretion under the [contract] was exercised in bad faith (id. at 270).Maddaloni makes it clear that a plaintiff may bring a cause of action for breach of the implied covenant of good faith and fair dealing alleging that a defendant has exercised its rights under its contract in bad faith in order to realize gains that the contract implicitly denied or to deprive the other party of the fruit of its bargain, even if the plaintiff has not alleged a breach of that contract.

Most of the decisions that appear to reach a contrary result rely on the oft-cited rule that a claim for breach of an implied duty of good faith and fair dealing cannot stand alone if it only substitutes for a nonviable [*9] breach of contract claim (Triton Partners LLC v Prudential Sec. Inc., 301 AD2d 411, 411, 752 N.Y.S.2d 870 [1st Dept 2003]; accord Jacobs Private Equity, LLC v 450 Park LLC, 22 AD3d 347, 347-48, 803 N.Y.S.2d 14 [1st Dept 2005] [good faith claim duplicated insufficient breach of contract claim]; Cerberus Int'l, Ltd. v BancTec, Inc., 16 AD3d 126, 127, 791 N.Y.S.2d 28 [1st Dept 2005]; Parker E. 67th Assocs., L.P. v Minister, Elders & Deacons of Reformed Protestant Dutch Church, 301 AD2d 453, 454, 754 N.Y.S.2d 255 [1st Dept 2003]). This rule does not bar VAZATA's good faith counterclaim, where VAZATA alleges that Anexia acted in bad faith as part of scheme to deprive it of the benefit of its bargain.

In Richbell, the First Department acknowledged the "tension between, on the one hand, the imposition of a good faith limitation on the exercise of a contract right and, on the other, the avoidance of using the implied covenant of good faith to create new duties that negate explicit rights under a contract" (Richbell, 309 AD2d at 302). But notwithstanding this tension, it upheld the plaintiffs' cause of action for breach of implied covenant of good faith and fair dealing, alleging that the defendant had exercised its contractual right malevolently, for its own gain, as part of a purposeful scheme designed to deprive the plaintiffs of the benefits of their contract. Such a claim "do[es] not create new duties that negate [the party']s explicit rights under a contract, but rather, seeks imposition of an entirely proper duty to eschew this type of bad faith targeted malevolence in the guise of business dealings" (id.).

In such circumstances, the [*10] claim for breach of an implied duty of good faith and fair dealing does not depend on a breach of the contract; therefore, a party may bring such a claim, whether or not there is a viable breach of contract claim (Chase Manhattan Bank, N.A. v Keystone Distribs. Inc., 873 F Supp 808, 815 [SD NY 1994] [under New York law, "a party may be in breach 2022 N.Y. Misc. LEXIS 1471, *6; 2022 NY Slip Op 50320(U), **2 Page 4 of 4 of its implied duty of good faith and fair dealing even if it is not in breach of its express contractual obligations," where that party does something to "destroy or injure the right of another party to receive the benefits of the contract"]).

It is worth noting, finally, that one of this court's distinguished predecessors in the Commercial Division, the Honorable Bernard J. Fried, in Gross v Empire Healthchoice Assur., Inc., 16 Misc 3d 1112(A), 847 N.Y.S.2d 896 [Sup Ct NY County 2007], specifically criticized the holding in Cohen v Nassau Educators, supra, as "reflect[ing] a short-sighted view of the New York law on this subject."

The attorneys at Schlam Stone & Dolan frequently litigate disputes concerning breach of contract and breach of the implied duty of good faith and fair dealing. Contact the Commercial Division Blog Committee at commercialdivisionblog@schlamstone.com if you or a client have questions concerning such issues.