Covenant of Good Faith and Fair Dealing

The Utah Supreme Court recently held that a manufacturer’s failure to provide a distributor with certain marketing materials was not a breach of the implied covenant of good faith and fair dealing, and did not excuse the distributor’s failure to meet performance guarantees set forth in its agreement with the manufacturer.

The agreement in question required the manufacturer to pay monthly minimum advance payments that would be offset by commission payments earned by the distributor. When the distributor failed to meet the agreement’s performance guarantees, the manufacturer sued for the difference between the advance payments it had made and the commissions actually earned by the distributor. In its defense, the distributor claimed that it had been induced to enter into the agreement by the manufacturer’s oral promises to provide a website and other marketing materials.

According to the Court, the purpose of the covenant of good faith and fair dealing is to prevent a party from taking actions that would intentionally destroy the other party’s right to receive the fruits of the contract. Here, the Court remarked, the distributor sought to impose on the manufacturer an affirmative duty to distribute marketing materials that was not found in the language of the integrated distributor agreement. Furthermore, such duty was not universally established through industry custom or the parties’ course of dealing. Thus, the Court held that the failure to provide marketing materials could not excuse the distributor’s breach of its agreement with the manufacturer.

Young Living Essential Oils, L.C. v. Marin, Utah Sup. Ct., No. 20090875, October 21, 2011.

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