JCPenney entered into an agreement with GE Pension Trust to sell GE its properties for capital and lease them from GE for 30 years.
Paragraph 34 of the lease agreement says entitles the lessee to request GE to finance the costs of construction and improvements as long as they are over $250k. If the negotiations fail, the lessee can repurchase the property at a price roughly equal to what Penney sold it for plus 6% a year.
Penney doled out one of the properties to Market Street Associates. MSA needed additional funds to build a drug store in the shopping center. After trying to get financing from other sources, they turned to GE for financing. The letter made no reference to paragraph 34.
GE refused to help MSA with financing. Later, MSA told GE that they were exercising the option of buying the property under paragraph 34.
GE refused, so MSA sued for specific performance.
The trial judge felt that MSA was trying to swindle GE, didn't really want financing, and just wanted to get the property for cheap.
Procedural History:
District court granted summary judgment to GE.
7th Cir COA reversed, granted MSA new trial.
Issues:
Is the duty of good faith still required during the performance stage of a contract (as opposed to the formation stage)?
Holding/Rule:
The duty of good faith is required during the performance stage of a contract, even more so than in the formation stage.
Reasoning:
Paragraph 34 does not require the lessee to mention the lease or otherwise alert the lessor to the consequences of failing to give reasonable consideration to granting financing.
The duty of honesty and good faith, even expansively conceived, is not a duty of candor. You can make a binding contract to purchase something you know your seller undervalues.
There is a difference between exploiting your knowledge of a market and taking deliberate advantage of an oversight by your contract partner. Sharp dealing provides no social product.
If the information is readily available to both parties, the failure of one to disclose it to the other, even if done in the knowledge that the other party is acting on mistaken premises, is not actionable.
The duty of good faith is to act halfway between a fiduciary duty and the duty merely to refrain from active fraud.
During the formation or negotiation phase of a contract, the duty is minimized. It is greater not only at the performance stage but also at the enforcement stage.
As performance unfolds, circumstances change, often unforeseeably; the explicit terms of the contract become progressively less apt to the governance of the parties' relationship; and the role of implied conditions--and with it the scope and bite of the good faith doctrine--grows.
Deliberately taking advantage of your contracting partner's mistake during the performance stage is a breach of good faith. To be able to correct your contract partner's mistake at zero cost to yourself and decide not to do so is a species of opportunistic behavior that the parties would have expressly forbidden in the contract had they foreseen it.
In a summary judgment decision, the judge must view the facts in a light most favorable to the nonmoving party.
Dissent:
None.
Notes:
The central issue that caused this case to be sent back for a new trial was the state of mind of MSA's negotiator.
This ruling with greatly unsettle the certainty of contractual relationships.
