Amoco Oil Co. v. Ervin
1995 WL 709416, 908 P.2d 493 (1996)
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Rule of Law:
Every contract contains an implied covenant of good faith and fair dealing, which is breached when one party uses its discretionary authority over a contract term in a way that violates the other party's reasonable expectations, even if the contract is fully integrated and contains a specific price term.
Facts:
- Amoco Oil Company (Amoco), a petroleum marketer, leased service station facilities to numerous independent dealers through written lease and dealer supply agreements.
- The agreements specified a monthly rent amount but also contained a clause granting Amoco the right to modify the rent annually.
- Amoco used an internal formula, the Investment Value Report (IVR) program, to calculate the rent for each station based on the asset value.
- The IVR calculation included a charge for capital improvements, which encompassed buildings, machinery, and equipment like service bays.
- In addition to the charge for capital improvements, Amoco's IVR formula added a separate, uniform charge for each service bay at the facility.
- This calculation method resulted in the dealers being charged twice for the service bays.
- Amoco did not disclose this double-charging component of its rent calculation to the dealers during or after contract negotiations.
Procedural Posture:
- Sixteen service station dealers sued Amoco Oil Company in a Colorado trial court.
- The dealers' claims included breach of an implied covenant of good faith and fair dealing and tortious interference with prospective business relations.
- A jury returned a verdict in favor of the dealers on both claims, awarding them over $2.5 million in damages, interest, and costs.
- Amoco, as the appellant, appealed the judgment to the Colorado Court of Appeals.
- The Court of Appeals, an intermediate appellate court, affirmed the trial court's judgment in favor of the dealers.
- The Colorado Supreme Court granted Amoco's petition for certiorari to review the decision of the Court of Appeals.
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Issue:
Does a party with discretionary authority to set rental rates under a lease agreement breach the implied covenant of good faith and fair dealing by using an internal accounting method to charge a lessee twice for the same asset, contrary to the lessee's reasonable expectations?
Opinions:
Majority - Justice Scott
Yes, Amoco breached the implied covenant. A party with discretionary authority over a contract term breaches the implied covenant of good faith and fair dealing when it exercises that discretion in a manner contrary to the other party's reasonable expectations. Every contract contains an implied duty of good faith, which applies when one party has the power to determine terms like price. Although the dealers' lease agreements contained specific rent figures and a rent modification clause, Amoco retained discretion in how it calculated the rent internally. The dealers were justified in expecting that Amoco would not charge them twice for the same asset. By implementing an undisclosed IVR program that included a duplicate charge for service bays, Amoco violated the dealers' reasonable expectations and thus breached the implied covenant. This duty is implied by law to effectuate the parties' intentions and cannot be nullified by general merger or 'no implied covenants' clauses.
Concurring-in-part-and-dissenting-in-part - Chief Justice Vollack
No, Amoco did not breach the implied covenant. The implied covenant of good faith and fair dealing should not be used to rewrite unambiguous, express terms of a contract between sophisticated parties. The lease agreements granted Amoco absolute and uncontrolled discretion to modify the rent, with the only condition being to provide proper notice. In such cases, the issue of good faith is irrelevant because the dealers could not have reasonably expected Amoco to refrain from exercising a right for which they expressly contracted. Allowing the jury to override the explicit rental terms undermines the freedom of contract and permits parties to use the implied covenant to escape bargains they no longer find favorable.
Analysis:
This case establishes that the implied covenant of good faith and fair dealing can be used to scrutinize the exercise of discretionary power within a contract, even if the contract is fully integrated and has explicit price terms. It prioritizes the parties' reasonable expectations over a strictly literal interpretation of contractual language, preventing a party with discretionary authority from using it to deprive the other party of the benefit of their bargain. The decision reinforces that the covenant is a tool to police fairness in contract performance, but the dissent highlights the significant tension this creates with the principle of enforcing unambiguous written agreements as negotiated between sophisticated parties.
