Good Faith and Fair Dealing Developments - Part I

by E. Lee Reichert

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Over the past two years, the Colorado Supreme Court has shown a marked interest in addressing "good faith and fair dealing" issues. Beginning with its 1996 decision in Amoco Oil Company v. Ervin,1 the Supreme Court has devoted substantial attention to such issues in nine opinions, a sizable percentage of its commercial litigation cases. This recent attention has not been limited to the Supreme Court. In adopting the Colorado Uniform Partnership Act ("CUPA") in its 1997 session, the Colorado legislature statutorily codified an obligation of good faith and fair dealing.

This two-part article addresses the recent Colorado developments in good faith and fair dealing. This Part I discusses the cases decided by the Supreme Court since 1996 and the implications for business attorneys. Part II of this article, which will be published in the July issue, focuses on the obligation of good faith and fair dealing in CUPA and highlights the drafting issues Colorado attorneys now face.

To appreciate good faith and fair dealing issues fully, it is necessary to understand the recent development of the doctrine in both tort and contract cases. While the Supreme Court has provided rough contours to the doctrine, this article points out a number of issues that remain unanswered, particularly in the contractual area. The resulting uncertainties create constraints that later may be placed on performance under agreements. Hence, transactional attorneys need to be familiar with these issues in negotiating and drafting contracts, and in advising their clients.

Overlap of Tort and Contract Theories

The law governing good faith and fair dealing has long been confusing in many jurisdictions, and the precise treatment of good faith and fair dealing issues varies significantly from state to state. The confusion has arisen in large part from the blurring of the distinctions between tort and contract theories. Of course, the determination of whether a tort or contract action is involved is critical because it affects the measure and availability of certain damages (for example, punitive damages), statutes of limitations, and other procedural requirements. While Colorado courts have attempted to differentiate between tort and contract theories in a number of cases, their varying degree of success has led to requests for judicial clarification of the overlapping theories.2

Language in the opinions compounds the problem, particularly the constant interchanging of the terms "covenant" and "duty." To add further confusion, § 7-64-404(3) of CUPA uses the term "obligation of good faith and fair dealing," while § 4-1-203 of Colorado's Uniform Commercial Code ("UCC") simply uses the phrase "obligation of good faith."3 [Emphasis added.]

In an attempt to create some level of consistency, this article uses the term "duty of good faith and fair dealing" when dealing with tort issues. As discussed below, in certain circumstances, Colorado law imposes a legal duty on a party, which, if breached, leads to tort liability.

On the other hand, this article uses the term "covenant of good faith and fair dealing" when dealing with contract issues. The law implies a mutual covenant of good faith and fair dealing with respect to certain obligations in certain contracts. The implied covenant does not create an independent cause of action for breach of contract, but is a principle of contract interpretation that is applied by courts to an express contract term as a gap-filling device. In addition, as discussed below, parties may agree to an express covenant of good faith or fair dealing which, if breached, will result in an ordinary breach of contract action. While the distinction between "duties" and "covenants" may appear overly simplistic, consistent use of such terminology could alleviate some of the confusing overlap in judicial opinions between contract and tort theories.

Recognition of Tort Duty

The overlap of tort and contract theories is particularly noticeable in the insurance context. In large part, the overlap exists because the contractual relationship creates the insurers' tort duty recognized in Colorado (and in the majority of other jurisdictions). As a result, the Supreme Court occasionally discusses the contours of an insurer's tort duty by reference to the underlying insurance contract.

In Farmers Group, Inc. v. Trimble,4 the Supreme Court first addressed the distinction between contractual and tort theories of good faith and fair dealing in the insurance coverage context. In imposing a good faith legal duty on an insurer, the Trimble court focused on the different nature of contract and tort remedies and the "special nature of the insurance contract and the relationship that exists between the insurer and insured." As a result of the "quasi-fiduciary" relationship that arose from the underlying insurance contract, the Supreme Court concluded that an insured could assert a separate and additional tort cause of action apart from a contract action.

In Traveler's Insurance Company v. Savio,5 the Supreme Court extended Trimble's basic rationale to permit tort actions where an insurer allegedly handled a workers' compensation claim in bad faith. The Savio court noted that the duty of good faith and fair dealing "permeates all of the dealings between the insurer and the insured." Following these two decisions, the Colorado legislature has recognized the duty of good faith and fair dealing for insurers.6

Recent Tort Decisions

Following the Trimble/Savio insurance cases, Colorado litigants have attempted to extend the doctrine by analogizing different relationships to the insurance context. Previously, the Colorado Court of Appeals has shown a strong predisposition to reject such efforts, refusing on a number of occasions to recognize or create new tort causes of action.7In the past year, the Supreme Court has addressed both the continuing viability of the Trimble/Savio doctrine, and its extension to other areas.

Continuing Viability of a Common Law Tort Action

Last fall, in Vaughn v. McMinn,8 the Supreme Court concluded that its Savio decision had not been abrogated by subsequent legislative changes to Colorado's workers' compensation statutes. In doing so, the Supreme Court stressed that the legislative changes following Savio did not explicitly bar the common law tort action for breach of an insurer's duty of good faith and fair dealing.

Expansion of Common Law Tort Action

On two separate and recent occasions, the Supreme Court also addressed whether the Trimble/Savio doctrine should be extended or expanded. As discussed below, the majority and dissenting opinions in these cases suggest factors that Colorado appellate courts likely will apply to determine whether a tort duty of good faith and fair dealing applies to other relationships.

In Transamerica Premier Insurance Company v. Brighton School District 27J,9 the Supreme Court considered whether the Trimble/Savio doctrine should be extended to commercial sureties. The Supreme Court concluded (over a vigorous dissent) that it was proper to impose a legal duty of good faith and fair dealing on a commercial surety, thereby allowing a tort action to proceed.

In finding a special relationship sufficient to support the legal duty, the majority opinion considered: (1) the purposes of commercial sureties and insurers; (2) the legislative statutes governing commercial sureties; (3) the nature of the relationship between commercial sureties and obligors; (4) case law from other jurisdictions; and (5) the sufficiency of contract damages. In contrast, the dissenting opinion found essential differences between the surety/obligee relationship and the insured/insurer relationship. The dissent did not find a tort duty because none of the considerations underlying the special relationship in the insured/insurer context (such as quasi-fiduciary obligations, protection against unforeseeable loss, and unequal bargaining power) existed in the suretyship context.

Conversely, in Decker v. Browning-Ferris Industries (Thomas Decker),10 the Supreme Court refused to extend the Trimble/Savio doctrine to the employee-employer relationship and unanimously concluded that Colorado does not recognize a tort claim in the employment context for breach of a duty of good faith and fair dealing. In Russell Decker v. Browning-Ferris Industries (Russell Decker),11 the Supreme Court reaffirmed its decision in Thomas Decker.

The Thomas Decker court found the employer-employee relationship dissimilar to the insured-insurer relationship and determined that a tort action for wrongful discharge provided adequate employee protection. The Supreme Court further suggested that, like the cause of action recognized in Trimble/Savio, the wrongful discharge cause of action was grounded in legislative and other public policy declarations, which ensured that all parties were aware of the scope of the relevant duty which gave rise to the tort cause of action.

While Thomas Decker is not cited in Transamerica, the analysis is fairly similar. The majority and dissenting opinions in these cases demonstrate that the justices give serious consideration to the imposition of a duty of good faith and fair dealing and generally are disinclined to impose such a duty outside the insurance context. Taken together, these cases set forth the considerations and factors (for example, nature of the underlying relationship, existing legislative statutes and declarations, comparability to the insurer/insured relationship, sufficiency of contractual damages) that Colorado appellate courts likely will apply in determining whether a tort duty of good faith and fair dealing applies to other relationships.

Contours of Tort Cause of Action in Insurance Context

In addition to the foregoing opinions, the Supreme Court recently has issued three other opinions in the insurance context that address the contours of the tort cause of action for breach of the duty of good faith and fair dealing by an insurer.

Dale v. Guaranty National Insurance Company12 is the latest opinion addressing the duty of good faith and fair dealing. In Dale, the Supreme Court attempted to clarify the relationship between a contract claim of willful and wanton misconduct by an insurance company arising under Colorado's No-Fault Act, and common law tort claims. The Supreme Court emphasized that the tort claim encompassed all dealings between an insurer and an insured, including subsequent acts that occurred during the course of prosecuting an action for breach of contract under Colorado's No-Fault Act. As a result, collateral estoppel did not preclude an insured from further litigating the issue of bad faith when an arbitrator had concluded that the insurer's acts were not willful and wanton conduct for purposes of a contract action arising under the No-Fault Act.13

The emphasis in the Dale opinion on the entire relationship between the insurer and the insured is consistent with a number of the Supreme Court's earlier opinions expanding the contours of the Trimble/Savio doctrine. However, this approach is somewhat at odds with the Supreme Court's prior statements in Bernhard v. Farmers Insurance Exchange14 and Lira v. Shelter Insurance Company,15 two other recent opinions arising in the insurance context. Bernhard and Lira each appear to suggest that in analyzing the duty of good faith and fair dealing imposed on insurers, it is necessary to take into account the constraints set forth in the underlying insurance contract that delineates the boundaries of the duty.

In its 4-3 Lira decision, the Supreme Court determined that the insured's duty of good faith and fair dealing established in Trimble/Savio does not include a duty of the insurer to settle in good faith with regard to punitive damages where there is no underlying contractual duty to indemnify the insured for such damages. The result of the Lira decision is that the insured may not recover from the insurer punitive damages awarded against the insured in the underlying lawsuit. Because the duty of good faith and fair dealing is based on the quasi-fiduciary nature of the insurance relationship and predicated on the parties' contractual responsibilities, the Lira court found that the tort duty imposed on the insurer "must be within the scope of the obligations imposed by the contract."16

Similarly, in Bernhard, the Supreme Court found that an insured could not recover attorney fees incurred in the successful litigation of a breach of the duty of good faith and fair dealing claim unless the underlying insurance contract specifically provides for such fees.17In doing so, the Supreme Court stated that Trimble did "not find good faith and fair dealing to be a benefit of the contract itself" and noted that while Trimble created a tort cause of action, it did not give rise to a claim that the failure to deal in good faith is a denial of a contract benefit. Bernhard further downplayed the insured's attempts to analogize the quasi-fiduciary relationship to a true fiduciary relationship, and instead characterized the insured-insurer relationship as "a contractual one, created for the mutual benefit of the parties."18

Recent Contract Decisions

The above decisions provide some basic contours to the good faith and fair dealing doctrine in tort cases. In addition, the Supreme Court also has issued a number of opinions in the past two years addressing the covenant of good faith and fair dealing in the context of contract actions. The Thomas Decker and Russell Decker cases, as noted above, discuss both contract and tort issues. While these and other recent Supreme Court cases provide some guidance to contractual causes of action, they have left open a number of issues and have raised further questions.

Express Covenants

While Thomas Decker involved a tort claim in the employment context, it also is relevant in contract cases involving "express" covenants of good faith or fair dealing. In each of the two actions consolidated in Thomas Decker, there was evidence that the employer expressly promised to treat the plaintiff-employees "fairly." As a result, the Supreme Court in Thomas Decker stated that an "express" covenant of good faith and fair dealing was involved, and engaged in an extended discussion regarding such an express covenant. Prior to Thomas Decker,

no Colorado appellate court had addressed an express covenant of good faith and fair dealing.

To the extent that Thomas Decker draws a distinction between express and implied covenants of good faith and fair dealing, the dicta generally is sound. It is fairly common to negotiate in a contract an express requirement that one or both parties act in good faith in performing a specified task (such as in negotiating a future definitive agreement).19Alternatively, or in addition to a covenant of good faith, a party could expressly agree to act "fairly" (for example, in an employment contract). Hence, a party's breach of an express covenant of good faith or fair dealing would constitute a breach of an express covenant.20As such, an action for such a breach of an express covenant is nothing more than a breach of contract claim, as suggested in Thomas Decker.21

Implied Modifications Of Contracts

In its initial opinion in Russell Decker, the Supreme Court appeared to endorse the dicta in Thomas Decker regarding express covenants, stating that it had determined in Thomas Decker "that a breach of an express covenant of good faith and fair dealing is equivalent to a breach of contract claim."22On rehearing, the Supreme Court substantially modified its original opinion in Russell Decker by recharacterizing its dicta in Thomas Decker as a determination that an express covenant of good faith and fair dealing had "modified the employment contract."23The Supreme Court noted, however, that it was not addressing the elements of a claim of breach of an express contractual obligation or the proof necessary to sustain such a claim.

In a new footnote, the Supreme Court further stated that the modifications at issue in Thomas Decker and Russell Decker could be characterized as "implied in fact" modifications to a contract (which arise from the statements or conduct of the parties) as opposed to "implied in law" modifications to a contract (which arise from a duty imposed by law where the contract itself is silent). By implication, the Supreme Court appeared to suggest that the implied covenant of good faith and fair dealing is an implied in law modification, while an express covenant of good faith and fair dealing is the same as an implied in fact modification.24Because the relevance of this new distinction is not readily apparent, the new focus on implied modifications in Russell Decker likely will serve to confuse matters further.

General Applicability of The Implied Covenant

Thomas Decker also highlights an important question regarding the implied covenant of good faith and fair dealing--whether such an implied covenant in fact applies to all agreements. In Amoco, the Supreme Court, citing § 4-1-203 of the UCC (which sets forth an obligation of good faith for contracts covered by the UCC), stated that every contract contains an implied covenant of good faith and fair dealing. In both Thomas Decker and Bayou Land Company v. Talley,25 however, the Supreme Court appears to have moved away from the broad statement in Amoco.

In a long line of previous cases, the Colorado Court of Appeals had declined to recognize the existence of an implied covenant of good faith and fair dealing in employment agreements.26 Amoco did not expressly overrule these cases, notwithstanding its broad language. Moreover, because the Thomas Decker court concluded that the questions at issue arose in the context of an express covenant of good faith and fair dealing, the Supreme Court expressly refused to decide whether to overrule the implied covenant precedent of the Colorado Court of Appeals.27 Bayou Land Company further stated that the implied covenant of good faith and fair dealing applied to certain contracts under Colorado law and specifically pointed out that Colorado courts never had addressed whether a deed of trust was such a contract.28

The more recent cases addressing the implied covenant of good faith and fair dealing raise a question as to the breadth of the implied covenant of good faith and fair dealing outlined in the Amoco decision and suggest that the Supreme Court may not elect to impose such an implied covenant in certain agreements (such as employment and real estate contracts). This threshold issue, however, is just one of the many questions left unresolved by the Amoco decision and its progeny.

Discretion and Reasonable Expectations

The discussion in Amoco regarding implied covenants of good faith and fair dealing focused on contractual provisions that allow one party to exercise discretion. Both the majority and the dissenting opinions in Amoco agreed that an overriding purpose of the implied covenant of good faith and fair dealing is to protect the "reasonable expectations" of the parties so as to further their intentions. The crux of the disagreement between the majority and the dissenting opinions, however, related to what a party reasonably should have expected with respect to a discretionary clause in the lease agreement in question.

In Amoco, the defendant Amoco had entered into written lease agreements that expressly set forth the monthly rental amount that was required to be paid by dealers. The leases also contained a modification provision in which Amoco reserved the right to modify the amount of the monthly rental payments on an annual basis with ninety days' notice. The majority and dissenting opinions in Amoco both characterized the modification provision as providing Amoco with unfettered discretion in setting the monthly rental amounts for the dealers.

The majority opinion in Amoco emphasized the need for the implied covenant of good faith and fair dealing to place constraints on contractual terms that allow one party to exercise discretion. Prior reported Colorado appellate cases generally had not focused on discretionary provisions in analyzing the implied covenant of good faith and fair dealing.29There is some suggestion, however, in both Amoco and the subsequent Bayou Land Company decision, that the implied covenant of good faith and fair dealing may apply only where the contractual clause at issue allows one party to exercise such discretion.30

More importantly, as the dissenting opinion in Amoco suggests, a party may specifically bargain for the right to act in its sole and absolute discretion. A common example of such "bargained-for discretion" is the right to withhold consent under an agreement (for example, to a subsequent assignment of the agreement, the sale of underlying collateral pursuant to a security agreement, or the expansion of the uses of an easement), even if such consent may be unreasonably or arbitrarily withheld. Similarly, to best reconcile Amoco with well-established contract principles, the case should not be broadly read as adopting the "reasonable expectations doctrine." The doctrine (which also is referred to as the "reasonable expectations of the insured") has been recognized by a handful of jurisdictions as a tool for the interpretation of insurance contracts.36 The doctrine is used by courts to honor the reasonable expectations of an insured in unique circumstances and is closely related to the unconscionability and adhesion contract doctrines.

Colorado, like the majority of the jurisdictions that recognize the limited doctrine, applies it only where a provision in the underlying insurance contract is ambiguous.37Colorado courts have further emphasized on numerous occasions that the reasonable expectations doctrine does not supplant well-established principles of contract interpretation.38While the reasonable expectations doctrine is a tool of contract interpretation similar to the implied covenant of good faith and fair dealing, they are two separate and distinct doctrines.

Accordingly, Amoco should not be interpreted to mean that a court necessarily must determine what the complaining party reasonably expected in analyzing the application of the implied covenant of good faith and fair dealing in contractual disputes. In fact, in the typical case a party should reasonably expect that bargained-for discretion may be exercised within the constraints of the bargain by the other party in the future, which, depending on the bargain, may mean arbitrarily, capriciously, unreasonably, or in a manner that leads to a result that a party in hindsight might believe is unfair. Any other result would create commercial uncertainty as to the validity of contracts and contractual rights, but more importantly would fail to effectuate the intentions of the parties. Such uncertainty likely would lead to additional lawsuits involving attempts to convince courts or juries either to rewrite contracts in order to avoid a party's contractual obligations, or to create new or additional contractual obligations.

Conclusion

There is some question as to how Amoco and its progeny will apply in future cases involving such bargained-for provisions that allow for discretion.39Until Colorado appellate courts address this issue and the other questions raised by Amoco and its progeny, and develop an appropriate analytical framework, the scope and interpretation of the implied covenant of good faith and fair dealing will remain unclear. Consequently, parties necessarily will be forced to spend additional resources at the negotiation stage in an attempt to achieve greater contractual certainty. Part II of this article will highlight the drafting issues facing Colorado attorneys attempting to alleviate such uncertainty.

NOTES

1. 908 P.2d 493 (Colo. 1996).

2. See Phillips, "Tort or Contract: A History of Ambiguity and Uncertainty," 21 The Colorado Lawyer 241 (Feb. 1992).

3. Section 38-33.3-113 of Colorado's Common Interest Ownership Act ("CCIOA") similarly imposes an "obligation of good faith" for contracts and duties governed by CCIOA. While the relevant sections of the UCC and CCIOA speak only of an obligation of "good faith," § 4-2-103 of the UCC provides that in the case of merchants governed by Article 2 (Sales) of the UCC, "good faith" includes the observance of reasonable commercial standards of fair dealing in the trade. Similarly, the comment to § 1-113 of the Uniform Common Interest Ownership Act (which contains the same language as § 38-33.3-113 of CCIOA) states that "good faith" includes the observance of reasonable standards of fair dealing.

4. 691 P.2d 1138 (Colo. 1984).

5. 706 P.2d 1258 (Colo. 1985).

6. See CRS § 10-3-1113(1) ("in any civil action for damages founded upon contract, or tort, or both against an insurance company, the trier of fact may be instructed that the insurer owes its insured the duty of good faith and fair dealing, which duty is breached if the insurer delays or denies payment without a reasonable basis for delay or denial"); see also CRS § 10-1-101 ("such policy requires that all persons having to do with insurance services to the public be at all times actuated by good faith in everything pertaining thereto"); CIV Jury Instruction 25:5.

7. See Colorado Interstate Gas Co. v. Chemco, Inc., 833 P.2d 786, 792-93 (Colo.App. 1991) (quasi-fiduciary relationship between gas buyer and seller did not exist; relationship was not similar to that between an insurer and insured), aff'd on other grounds, 854 P.2d 1232 (Colo. 1993); Friedman v. Colorado Nat'l Bank, 825 P.2d 1033, 1042-43 (Colo.App. 1991) (relationship of bank, as the representative of limited partner, to general partner was not similar to the relationship of insurer to insured), aff'd in part, rev'd in part on other grounds, 846 P.2d 159 (Colo. 1993); Centennial Square, Ltd. v. Resolution Trust Co., 815 P.2d 1002, 1004 (Colo. App. 1991) (no tort action stated by borrower against lender); cf. Wells Fargo Realty Advisors Funding, Inc. v. Uioli, Inc., 872 P.2d 1359

19. Such an express covenant often is found in a letter of intent to acquire a company, where one or both parties agree to negotiate the subsequent definitive agreement in good faith, and in the context of the development of intellectual property, where the parties contractually agree to negotiate the terms or scope of a future license in good faith.

20. Unlike an implied covenant of good faith and fair dealing which does not inject new substantive terms into a contract, a true express covenant of good faith or fair dealing is an express promise. As such, unlike an implied covenant of good faith and fair dealing, an express covenant is in fact a substantive term which itself can be independently breached or which can place limitations on other rights in the contract.

21. See Marsh v. Delta Air Lines, Inc., 952 F.Supp. 1458, 1465 (D.Colo. 1997).

22. 26 Colo.Law. 273 (Dec. 1997) (S.Ct. No. 96SC303, annc'd 10/27/97).

23. Russell Decker, supra, note 11 at 939.

24. Both Thomas Decker and Russell Decker cited to Wagenseller v. Scottsdale Memorial Hospital, 710 P.2d 1025 (Ariz. 1985), which discussed in detail the distinction between implied-in-fact contract terms and implied-in-law contract terms. Wagenseller, however, did not discuss express covenants at all, and specifically noted that an implied-in-fact contract term is "one made by the parties, though not expressly." Id. at 1036. See also Soderlun v. Public Service Co., 944 P.2d 616, 623 (Colo.App. 1997) (assuming based on Thomas Decker that the use by an employer of general language can give rise to an express obligation of good faith).

25. 924 P.2d 136 (Colo. 1996).

26. See Farmer v. Central Bancorporation, Inc., 761 P.2d 220, 221-22 (Colo.App. 1988); Montoya v. Local Union III, Int'l Brotherhood of Elec. Workers, 755 P.2d 1221, 1225 (Colo. App. 1988); Pittman v. Larson Distrib. Co., 724 P.2d 1379, 1385 (Colo.App. 1986).

27. See Thomas Decker, supra, note 10 at 443 n.5; see also Soderlun, supra, note 24 at 623 (decided after Thomas Decker and assuming that an employment at-will contract did not contain an implied covenant of good faith and fair dealing).

28. Bayou Land Company concluded that the implied covenant of good faith and fair dealing could not be breached by bringing a lawsuit to settle a dispute over the meaning of a contract. See Bayou Land Company, supra, note 25 at 154. As a result, the Supreme Court did not reach the question of whether the implied covenant of good faith and fair dealing even applied to a deed of trust.

29. But see Wells Fargo, supra, note 7 at 1363 (stating that a contract is breached where one party uses discretion conferred by a contract to act dishonestly or to act outside of accepted commercial practices to deprive the other party of the benefits of the contract).

30. See Amoco, supra, note 1 at 498 ("[t]he covenant may be relied upon only when the manner of the performance under the specific contract term allows for discretion on the part of either party"); see also Bayou Land Company, supra, note 25 at 154 (implied covenant of good faith and fair dealing is necessary when the manner of performance under specific contract terms allows for discretion on the part of either party).

31. There are many other examples where a party bargains for discretion in a contract. For example, in many agreements it is commonplace for one party to negotiate for the right to terminate its obligation to purchase real property, assets, or a business, provided that the party is not satisfied with its due diligence review of the items to be purchased in its sole and absolute discretion.

32. In Cafeteria Operators, L.P. v. AMCAP/ Denver Limited Partnership, 27 Colo.Law. 160 (App.No. 96CA14593, annc'd 3/5/98), a tenant asserted a good faith and fair dealing claim against its landlord, alleging that the landlord unreasonably withheld its consent to the tenant subletting the premises. After specifically noting that neither party argued that the lease contained a negotiated provision allowing the landlord the right to withhold consent in its sole discretion, the Court of Appeals held that "under Colorado law, without a freely negotiated provision in the lease giving the landlord an absolute right to withhold consent, a landlord's decision to withhold consent must be reasonable." [Emphasis added.] See also Layne v. Fort Carson Nat'l Bank, 655 P.2d 856, 857 (Colo.App. 1982) (bank did not violate covenant of good faith and fair dealing by standing on its rights under security agreement that did not limit bank's right to withhold consent); cf. Larese v. Creamland Dairies, Inc., 767 F.2d 716, 718 (10th Cir. 1985) (under Colorado law a franchisor must bargain for a provision expressly granting the right to withhold consent unreasonably to ensure that the franchisee is put on notice); Basnett v. Vista Village Mobile Home Park, 699 P.2d 1343, 1346-47 (Colo.App. 1984) [adopting The Restatement (Second) of Property § 15.2(2) (1977), which provides that "a restraint on alienation without the consent of the landlord of the landlord's interest in the leased property is valid, but the landlord's consent to an alienation cannot be withheld unreasonably, unless a freely negotiated provision in the lease gives the landlord an absolute right to withhold consent"] [emphasis added], rev'd on other grounds, 731 P.2d 700 (Colo. 1987). In fact, in Scrima v. Goodley, 731 P.2d 766, 768 (Colo.App. 1986), the court itself specifically construed a contract to allow one party to act in its unbridled discretion.

33. Of course, parties regularly negotiate and bargain for the right to constrain another party from discretionary actions, and attorneys often spend a great amount of time negotiating issues as to whether such discretion must be exercised "reasonably" rather than in a party's "sole and absolute discretion."

34. Based on a cursory review of books published by Colorado practitioners for use by Colorado attorneys, it is common practice to use clauses providing one party with the right to act in its sole and absolute discretion. See, e.g., Carpenter, Mutual Easement Deed in 2 Colorado Methods of Practice § 1768 (1991 and 1998 Supp.); Krendl, Agreement of Limited Partnership in 1 Colorado Methods of Practice § 3.49 (1998 Supp.); Moye, Work-Out and Settlement Agreement in 2 Colorado Corporate Forms, § 5.6.21 (2d ed. 1995); Ribstein and Keatinge, Limited Liability Operating Agreement in 1 Ribstein and Keatinge on Limited Liability Companies App. A-1, at A-43 (June 1995).

35. See Flight Concepts Ltd. Partnership v. Boeing Co., 38 F.3d 1152, 1157 (10th Cir. 1994) ("[a]lthough the [implied covenant of good faith and fair dealing] is generally implied for all contract provisions, it is irrelevant where the contract is drawn so as to leave a decision to the 'uncontrolled' discretion of one of the parties"); Big Horn Coal Co. v. Commonwealth Edison Co., 852 F.2d 1259, 1267 (10th Cir. 1988) ("[a]lthough good faith is generally applicable to all contract provisions, it is possible to so draw a contract as to leave decisions absolutely to the uncontrolled discretion of one of the parties and in such a case the issue of good faith is irrelevant"); cf. Crown Life Ins. Co. v. Haag Ltd. Partnership, 929 P.2d 42, 46 (Colo.App. 1996) (no basis for assertion of breach of implied covenant of good faith and fair dealing where promissory note contained a clause under which borrower consented in advance to modification of note, because borrower should have reasonably expected that lender might agree with co-makers to extend or modify the note in the future).

36. See, e.g., Gray v. Zurich Ins. Co., 419 P.2d 168 (Cal. 1966); Atwater Creamery Co. v. Western Nat'l Mut. Ins. Co., 366 N.W.2d 271 (Minn. 1985); see generally Keeton, "Insurance Law Rights at Variance with Policy Provisions," 83 Harv. L. Rev. 961 (1970).

37. See, e.g., Jefferson v. Scariano, 949 P.2d 120 (Colo.App. 1997); Farmers Ins. Exch. v. Chacon, 939 P.2d 517, 522 (Colo.App. 1997); Spaur v. Allstate Ins. Co., 942 P.2d 1261, 1265 (Colo. App. 1996).

38. See, e.g., Spaur, supra, note 37 at 1265; Shean v. Farmers Ins. Exch., 934 P.2d 835, 841 (Colo.App. 1996); Shelter Mut. Ins. Co. v. Breit, 908 P.2d 1149, 1152 (Colo.App. 1995).

39. In Cafeteria Operators, supra, note 32, the Court of Appeals strongly suggested that a freely negotiated provision in a lease allowing the landlord the absolute right to withhold consent in its sole discretion would be upheld, though it did not address Amoco. Moreover, two other courts interpreting the same lease provisions at issue in Amoco have dismissed similar claims based on the implied covenant of good faith and fair dealing. See Wayman v. Amoco Oil Co., 923 F.Supp. 1322 (D.Kan. 1996); Abbott v. Amoco Oil Co., 619 N.E.2d 789 (Ill.App. 1993).

Column Ed.: David P. Steigerwald of Sparks Dix, P.C., in Colorado Springs--(719) 475-0097

This newsletter is prepared by the Business Law Section of the CBA to apprise members of the Bar of current information concerning substantive law. This month's article was written by E. Lee Reichert.

This article originally appeared in the June 1998 edition of The Colorado Lawyer, volume 27, number 6, and is reprinted with permission.