Drafting tip from the Supremes: Specify whether the duty of good faith and fair dealing applies

A rabbi walks into a bar joins an airline’s frequent-flyer program. He flies a lot, and achieves Platinum status. But he also complains to the airline a lot and gets them to give him compensation, vouchers, etc. Eventually, the airline boots him out of the frequent-flier program. He files a class-action lawsuit, claiming (among other things) that the airline breached the duty of good faith and fair dealing under applicable law, which was that of Minnesota.

The U.S. Supreme Court didn’t buy it: In an opinion by Justice Alito, the justices held, unanimously, that because Minnesota law did not permit the parties to contract out of the duty of good faith and fair dealing, it followed that the duty was a state-imposed obligation — and that, in turn, meant that the duty was preempted by the federal Airline Deregulation Act of 1978. The Court noted that if applicable law did allow parties to contract out of the duty of good faith and fair dealing, then the duty of good faith and fair dealing would not be preempted. Northwest, Inc. v. Ginsberg, __ U.S. __, No. 12-462, part III (Apr. 2, 2014).

With the latter possibility in mind, the Court suggested that airlines should specify in their frequent-flyer agreements that the duty of good faith and fair dealing does not apply; it said that “[w]hile the inclusion of such a provision may impose transaction costs and presumably would not enhance the attractiveness of the program, an airline can decide whether the benefits of such a provision are worth the potential costs.” Id.

Drafting lessons: Any time a contract states that a party has “discretion” to do something (or not do something):

• For clarity, consider stating whether the discretion is to be sole and unfettered discretion, or whether instead it is to be reasonable discretion; the former might convince a court not to look to a duty of good faith and fair dealing. See, e.g., Shoney’s LLC v. MAC East, LLC, 27  So.3d 1216, 1220-21 (Ala. 2009) (on certification from Eleventh Circuit; sole discretion means an absolute reservation of a right not mitigated by an implied covenant of good faith and fair dealing).
• Consider defining sole discretion with language such as that used in the Common Draft definitions section: “IF: This Agreement states that a party may take an action in its sole discretion (whether or not the term is capitalized); THEN: The party in question is free to take the action, in whatever manner it deems appropriate, or not to take the action, in any case with a view solely toward its own interests and desires; the party’s action or inaction is to be conclusively deemed to comply with any applicable duty of reasonableness, good faith, or fair dealing.” That might not fly in states like Minnesota that do not permit waiver of the duty, but it likely would have a better shot than an express statement of waiver of the duty.
  

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  See also (list is generated automatically):

  1. Business discretion: A defined term that might be more palatable than “sole and unfettered discretion” It can be jarring to read in a contract draft that the other side may do X “in its sole and unfettered discretion.” To soften...
  2. Contract clauses specifying “good faith” can result in greater discovery expenses in litigation In class yesterday we discussed a clause in a hypothetical escrow agreement that reads as follows: The Escrow Agent is not liable for any loss...
  3. Drafting tip: Define “will” as meaning “must” Yesterday the Supreme Court of Texas ruled that the term will, in context, did not establish a contractual obligation, but merely stated the intent of...
  4. Drafting tip: Exclude amounts due under the contract from a cap on damages In the IHR Security case, a customer of an accounting-software vendor stopped paying the vendor’s invoices because the software allegedly didn’t function as promised. The vendor...