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Mutual Waiver of Implied Covenant of Good Faith and Fair Dealing

Mutual Waiver of Implied Covenant of Good Faith and Fair Dealing

In Arizona, the covenant of good faith and fair dealing is implied in every contract.  For those interested in reading the relevant Arizona case law, see Wagenseller v. Scottsdale Memorial Hospital, 147 Ariz. 370, 710 P.2d 1025 (1985); Rawlings v. Apodaca, 151 Ariz. 149, 726 P.2d 565 (1986); Wells Fargo Bank v. Arizona Laborers, Teamsters and Cement Masons Local No. 395 Pension Trust Fund, et al., 201 Ariz. 474, 38 P.3d 12 (2002); Bike Fashion Corp. v. Kramer, et al., 46 P.3d 431, 373 Ariz. Adv. Rep. 12 (Ariz. Apps. 2002).

In my commercial leasing practice, I have seen a small number of leases include a mutual waiver of the implied covenant of good faith and fair dealing.  This sounds offensive at first.  Both parties unquestionably have an expectation that the other party will deal fairly and in good faith during the term of the agreement.  However, this duty to deal fairly and act in good faith is very ambiguous and difficult to enforce.  Courts do not have a definitive standard for evaluating this covenant, but instead assess claims on an individual, fact specific basis.  Further, Arizona courts have found there are circumstances when express terms of a written contract may be overridden by the implied covenant of good faith and fair dealing.

The intent behind this provision is for the contract to stand on its own.  The parties still can argue over the terms of contract, the intent of terms, and whether parol evidence should be allowed.  The parties also may be able to assert tort claims (e.g., fraud or negligence).  However, with a mutual waiver of this covenant, the parties cannot make claims that certain contract terms should be disregarded or overridden due to an implied covenant of good faith and fair dealing.

Acceptance of a mutual waiver assumes that both parties are sophisticated and have equal bargaining power.  In the commercial landlord-tenant context, this is rarely the case.  Except for major national retail tenants and other limited examples, most lease forms are generated by the landlord and are very landlord-friendly.  In the event of a contractual dispute, the lease language most likely will favor the landlord.  Accordingly, a mutual waiver of the implied covenant of good faith and fair dealing will favor the landlord in most instances.  A tenant should not agree to this mutual waiver unless the mutual waiver is a “deal breaker” for the landlord and the tenant fully negotiates every provision in the entire lease.  Also, most landlords will back down with enough pushing on this issue.

One final point is that this mutual waiver may be unenforceable.  No Arizona court has made a determination on whether parties may waive the implied covenant of good faith and fair dealing.

Prior to using any language or concepts from this blog entry, consult with an attorney.

Ryan Rosensteel is a real estate and construction attorney licensed in Arizona. You can contact him at ryan.rosensteel@azbar.org.

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