57 Cal. App. 4th 354, 66 Cal. Rptr. 2d 921 (Cal. Ct. App. 1997)
Locke v. Warner Bros., Inc.
When a contract grants one party broad discretion to approve or reject performance (here, a studio's discretion to accept or decline film projects under a development/first-look deal), does the implied covenant of good faith and fair dealing require the party to exercise that discretion in good faith—and can evidence of a blanket, pretextual refusal create triable issues precluding summary judgment?
Every contract in California contains an implied covenant of good faith and fair dealing, which prevents a party from doing anything to unfairly interfere with the right of the other to receive the benefits of the agreement. Where a contract confers one party with discretionary power affecting the other's rights, that discretion must be exercised in good faith and in accordance with fair dealing, even under subjective "satisfaction" or approval clauses. The implied covenant cannot contradict or vary express terms or impose obligations beyond the contract, but it does prohibit arbitrary, capricious, or pretextual exercises of discretion that frustrate the contract's purposes.
The appellate court reversed summary judgment in part, holding that triable issues of material fact existed as to whether Warner breached the implied covenant of good faith and fair dealing and committed promissory fraud by allegedly never intending to genuinely consider Locke's projects. The court affirmed that Warner did not breach any express contractual term, because the agreement gave Warner discretion to accept or reject projects and imposed no duty to produce a film.
Locke is widely taught for its clear articulation that discretionary contractual rights—common in entertainment, publishing, licensing, and financing—must be exercised in good faith. The case draws a careful boundary: courts will not use the implied covenant to rewrite deals or negate express approval rights, but they will police sham or pretextual exercises of discretion that deprive a counterparty of the contract's core benefits. It also underscores how circumstantial evidence (internal statements, structural incentives like third-party reimbursement, and patterns of refusal) can create triable issues on bad faith and promissory fraud, defeating summary judgment.