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Market Street Associates Limited Partnership v. Frey

United States Court of Appeals, Seventh Circuit
941 F.2d 588 (1991)
ELI5:

Rule of Law:

The implied contractual duty of good faith and fair dealing may be violated when one party deliberately takes advantage of an oversight by its contractual partner concerning that partner's rights and obligations under the contract.


Facts:

  • In 1968, J.C. Penney Company and General Electric Pension Trust entered into a sale and leaseback agreement for a shopping center property.
  • Paragraph 34 of the lease required the Pension Trust (lessor) to give 'reasonable consideration' to requests from the lessee to finance improvements.
  • Paragraph 34 also stipulated that if financing negotiations failed, the lessee had an option to repurchase the property at a predetermined price, which was potentially below current market value.
  • J.C. Penney later assigned the lease to Market Street Associates Limited Partnership.
  • Market Street Associates sought to build a new store for a drugstore chain but could not secure third-party financing without owning the property.
  • Market Street Associates' general partner, Orenstein, first attempted to buy the property from the Pension Trust, but the Trust's representative, Erb, was unresponsive and eventually quoted a price Market Street Associates considered too high.
  • Market Street Associates then sent a letter formally requesting financing for improvements but did not mention Paragraph 34 or the repurchase option.
  • The Pension Trust rejected the financing request, stating the amount was below its 'current investment criteria,' apparently unaware of the consequences under Paragraph 34.
  • Upon receiving the rejection, Market Street Associates immediately sent a letter exercising its option to repurchase the property at the favorable price stipulated in Paragraph 34.

Procedural Posture:

  • Market Street Associates sued General Electric Pension Trust in Wisconsin state court, seeking specific performance of the purchase option.
  • The Pension Trust removed the case to the U.S. District Court for the Eastern District of Wisconsin based on diversity of citizenship.
  • Both parties filed cross-motions for summary judgment in the district court.
  • The district court judge granted summary judgment in favor of the Pension Trust, finding that Market Street Associates had violated its duty of good faith.
  • Market Street Associates (appellant) appealed the district court's judgment to the U.S. Court of Appeals for the Seventh Circuit.

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Issue:

Does a party to a contract violate the implied duty of good faith and fair dealing by knowingly taking advantage of the other party's failure to recognize a key contractual provision to secure a benefit for itself?


Opinions:

Majority - Posner, Circuit Judge.

Yes, taking deliberate advantage of a contracting partner's oversight can violate the duty of good faith. While parties are not fiduciaries and are not required to be altruistic, the duty of good faith prevents opportunistic behavior, such as sharp dealing, in a cooperative contractual relationship. Exploiting a partner's mistake during the performance stage of a contract, when it would cost nothing to correct, is a form of opportunism the parties would have forbidden had they foreseen it. However, whether Market Street Associates' actions rose to this level depends on the state of mind of its partner, Orenstein. If Orenstein knew the Pension Trust was unaware of Paragraph 34 and tried to trick them, it would be bad faith. If he reasonably believed a sophisticated party like the Pension Trust knew the terms of its own contract, it would not be. This question of intent is a disputed issue of material fact that cannot be resolved on summary judgment, and therefore a trial is necessary to determine Orenstein's state of mind.



Analysis:

This case provides a foundational modern analysis of the implied duty of good faith in contract performance. Judge Posner's opinion clarifies that the doctrine is not a vague injection of morality but an economic tool to approximate the terms the parties would have included to prevent opportunistic behavior in a cooperative venture. It draws a critical distinction between exploiting superior information at the contract formation stage (generally permissible) and exploiting a partner's oversight during the performance stage (a potential breach of good faith). This decision solidifies the idea that a party's subjective intent—whether they are engaging in 'sharp dealing'—is a key factual inquiry in good faith cases, often making them unsuitable for summary judgment.

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