Nearly one year ago, we wrote in general terms about how good faith is implied in New York contracts. This article, however, will focus on the underlying factors that New York’s courts will consider when applying this doctrine to non-solicitation agreements.

Fortunately, a hot-off-the-presses decision from New York State’s highest court offers some guidance – and some instructive language:

“Under New York common law, a seller has an “implied covenant” or “duty to refrain from soliciting former customers, which arises upon the sale of the ‘good will’ of an established business” (Mohawk Maintenance Co. v Kessler, 52 NY2d 276, 283 [1981]) … A seller’s “implied covenant” not to solicit his former customers is ‘a permanent one that is not subject to divestiture upon the passage of a reasonable period of time … This is so because “[t]he essence of [these types of] transaction[s] is, in effect, an attempt to transfer the loyalties of the business’ customers from the seller, who cultivated and created them, to the new proprietor” (id.) …

“Notwithstanding this “implied covenant,” a buyer assumes certain risks when he purchases an existing business and attempts to transfer the loyalties or “good will” of that business as his own. For example, the customers of the acquired business, “as a consequence of the change in ownership,” may choose to take their patronage elsewhere (id.). Indeed, “the occurrence of a certain amount of attrition is one of the risks that the purchaser must assume when he acquires an established business” (id.). Moreover, the seller of a business is free to subsequently compete with the purchaser and even “accept the trade of his former customers, provided that he does not actively solicit such trade …  [such as by] sending targeted mailings or making individualized telephone calls to his former customers informing them of his new business ventures … On the other hand … so long advertisements [are] general in nature — and not specifically aimed at the seller’s former customers — [they are] permissible under New York law.

“While the “implied covenant” places certain barriers on a seller’s conduct, it in no way prohibits a former customer or client from gathering information about that seller. In the free market, consumers of goods and services have the right to make informed choices …Thus, a seller of “good will” may answer the factual inquiries of a former client, so long as such responses do not go beyond the scope of the specific information sought …[but may not] explain, for example, why he believes his products or services are superior …

For additional information on this topic, please see “New York Court Clarifies Standard For “Improper Solicitation of Old Clients.”

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As you may know, under New York law, every contract carries an implied covenant (i.e., promise) of “good faith and fair dealing.” 511 West 232nd Owners Corp. v Jennifer Realty Co., 98 NY2d 144, 746 NYS2d 131, 773 NE2d 496.

But what on earth does that mean?

It’s actually rather tricky; in fact, New York’s courts have expressly acknowledged that there is an inherent conflict between the implied good faith in a contract on the one hand, and not allowing plaintiffs to use this implied promise as a sword to create new contractual responsibilities that completely negate the rights that were specifically established by the contract itself.

Perhaps the simplest way to explain this concept – which is concededly more than a bit vague – is that the implied covenant of good faith and fair dealing is breached when the defendant acts to prevent the plaintiff’s ability to perform his end of the contract, or to assure that the benefits of the contract are withheld from the plaintiff. To better illustrate the application of this concept, here’s a few examples from actual cases that were litigated in New York’s courts:

Case #1:         Where a landlord interfered with its tenant’s ability to meet its lease obligation to make repairs, a New York court properly held that the landlord has breached the implied covenant of good faith and fair dealing in their lease agreement. Chemical Bank v. Stahl, 272 AD2d 1, 712 NYS2d 452.

Case #2:           Likewise, in a wrongful termination and breach of contract case, where a consultant who performed work for a corporation in exchange for the option to purchase shares that were exercisable in installments and intrinsically linked to specific events and was then fired without cause, which caused her to forfeit her option (meaning she was not paid at all for her work), her breach of implied covenant of fair dealing was allowed to survive dismissal. Zuckerwise v. Sorceron Inc., 289 AD2d 114, 735 NYS2d 100.

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