Contracts
57 Cal. App. 4th 354, 66 Cal. Rptr. 2d 921 (Cal. Ct. App. 1997)
Study notes for Locke v. Warner Bros., Inc.: professor notes, cold call prep, exam angles, and memory aids.
A party with broad discretion in a contract must exercise that discretion in good faith, and blanket refusals may constitute a breach of the implied covenant of good faith and fair dealing.
In this case, the court emphasizes the importance of the implied covenant of good faith and fair dealing in contractual relationships, particularly when one party retains broad discretion. The appellate court's ruling highlights that discretion must be exercised in good faith and that a blanket refusal without consideration can give rise to legal claims, such as breach of contract or promissory fraud. This case serves as a significant reminder of the limits of discretion in contract law and the necessity of good faith conduct beyond mere adherence to express terms.
Another key aspect is the court's distinction between the lack of obligation to produce a film and the expectation that Warner would genuinely consider the projects submitted by Locke. This tension raises important questions in contract interpretation and execution that are often present in negotiations where one party has significantly more power than the other. The case reinforces the notion that while discretion can be contractual, the exercise of that discretion remains bounded by the principles of fairness and integrity in performance.
DISCRETION: Discretion Must be Exercised in Good Faith to Ensure Genuineness.
| Case | Distinction |
|---|---|
| Fitzgerald v. Fahnestock & Co. | In Fitzgerald, the court focused on the specific performance terms of the contract, whereas Locke emphasizes the good faith aspect of exercising discretion. |
| Carma Developers, Inc. v. Marathon Development Calif., Inc. | Unlike Carma, which dealt primarily with competing express provisions, Locke underscores the breach of the implied covenant arising from an abuse of discretion. |
| Reed v. Town of Gilbert | Reed involved constitutional principles of fairness and speech, while Locke deals with contractual obligations and good faith in business dealings. |
The rule promotes fair dealing by discouraging one-sided actions that would undermine trust in contractual relationships, ensuring that discretion is not wielded capriciously.
Critics argue that enforcing good faith in the exercise of discretion can create uncertainty and inhibit the freedom to contract, potentially discouraging negotiable and flexible agreements.
Expect exam questions to focus on the implications of the implied covenant of good faith in contracts where one party has broad discretion, as well as the potential for claims of promissory fraud.