Summary of Seidenberg v. Summit Bank
Citation: 791 A.2d 1068 (2002), 348 N.J. Super. 243
Relevant Facts: Plaintiff Richard Seidenberg, together with business partner Eric Raymond, formed two business entities for the purposes of providing consultation and insurance benefit plans to employers. After years of success, Seidenberg and Raymond sold their businesses to defendant Summit Bank. Under the terms of the sales contract, both Seidenberg and Raymond retained executive positions in the firms and would continue in their day to day roles. Under the terms of the contract, both plaintiffs received substantial shares in Summit Bank’s parent company in compensation for ownership of their businesses in which they were formerly the only shareholders. The sales contract defined, in some detail, the continuing relationship between Seidenberg, Raymond, and Summit Bank, establishing a working business relationship for the mutual benefit of the parties. After the sale, plaintiffs allege that defendant did not perform as required, depriving them of potential income and resulting in their eventual termination. Seidenberg and Raymond brought suit, but were eventually able to settle all of their claims except for breach of the implied covenant of good faith and fair dealing. In a second, amended complaint, they allege that Summit Bank violated the implied covenant through refusal to honor their obligations and depriving them of anticipated earnings opportunities. The trial court granted defendant’s motion to dismiss, concluding that plaintiffs had failed to state a claim. Seidenberg appealed.
Issue: Are the allegations of plaintiffs’ second amended complaint sufficient to state a cause of action for breach of the implied covenant of good faith and fair dealing? Are plaintiffs only remaining claim barred by the parole evidence rule?
Holding: Yes, the allegations in the complaint are sufficient to state a claim and survive a motion to dismiss. No, the parole evidence is not a bar to plaintiffs claim as parol evidence is admissible to demonstrate the understanding of the parties regarding the contract.
Reasoning: Judge Fisher delivered the opinion of the Court, joined by judges King and Winkelstein. At the outset, the Court noted that the implied covenant of good faith and fair dealing was implicit in all contracts under New Jersey law, and that in order to survive a motion to dismiss the Court must assume the allegations in the complaint are true, including all favorable inferences available to the non-moving party. The Court then pointed out that while the judge below relied on the relative equality of bargaining power between the parties, and their adequate representation, that was only one factor to evaluate a claim of bad faith. Rather, the covenant of good faith has been applied in three ways. First, it permits inclusion of terms not expressly included in the contract. Next, the covenant allows claims for breach for bad faith performance notwithstanding the lack of breach of an express term. Third, the covenant permits Courts to inquire as to how parties exercise discretion afforded under contractual terms. In this case, the plaintiffs sufficiently allege violations of each of the three iterations, first by alleged breach through failure to continue the business relationship indefinitely despite express terms allowing for discharge, second through insufficient energy directed to performing discretionary tasks, and third through alleging bad faith performance plaintiffs presented a question for the trier of fact rather than a legal question. Finally, the Court explained application of the parol evidence rule to this case. While outside agreements are not admissible contradict express contractual terms, the Court must first determine the meaning of the parties’ agreement. Then, the Court may consider evidence as to the parties’ motives and understanding regarding the contract, without violating the parol evidence rule. In conclusion, while the Court pointed out that plaintiffs may not be able to prove their case, they had sufficiently state a cause of action for breach of the implied covenant of good faith and fair dealing, and could use parol evidence to demonstrate proper understanding of the agreement at issue.
Conclusion: The relative power of the parties negotiating an agreement is part of, but not conclusive in determining, bad faith performance of a contract. Courts may consider the parties understanding of the agreement to determine if a party has breached the implied covenant of good faith through failure to properly perform discretionary duties or through bad faith performance notwithstanding express contractual authority.