New Jersey Appellate Division Takes “Hands-Off” Approach to Contractual Breaches of the Duty of Good Faith and Fair Dealing

In Sun Pharmaceutical Industries v. Core Tech Solutions, New Jersey’s Appellate Division affirmed a Trial Court order dismissing plaintiff’s claims that defendants had breached their contractual duty of good faith and fair dealing. The decision is notable because it sheds light on the definition of “good faith” in the context of a preliminary agreement, an area where there is little New Jersey precedent.

By way of background, respondent Core Tech Solutions, Inc. (“Core Tech”) was a small, five-employee medical technology business that performed research and development for pharmaceutical companies. Appellant Sun Pharmaceutical Industries, Inc. (“Sun”) was a pharmaceutical company interested in bringing one of Core Tech’s proprietary products to market. The two parties signed a Letter of Intent, or “LOI,” which, in pertinent part, called for Sun to make a down payment of $150,000 and for the two parties to negotiate in good faith to reach a definitive agreement within 90 days of the LOI’s execution. As it turned out, no final agreement was reached.

Sun sued, seeking preliminary and permanent injunctive relief, alleging that Core Tech had violated the LOI’s implied covenant of good faith and fair dealing, having sought merely to pocket the $150,000 down payment it received. In support of its claim, Sun set forth thirteen examples of Core Tech’s supposed bad faith. The Trial Court credited certain of Sun’s allegations, but ultimately determined that they were insufficient to establish bad faith. Instead, they evidenced Core Tech’s frustration with Sun’s conduct during the negotiations.

A key issue on appeal was whether the Trial Court, in evaluating Sun’s good faith and fair dealing claim, relied on an overly narrow definition of bad faith articulated by the Seventh Circuit in A/S Apothekernes Laboratorium for Specialpraeparater v. I.M.C. Chem. Group, Inc.  The Seventh Circuit there defined the obligation to negotiate in good faith as “preventing one party from renouncing the deal, abandoning the negotiations, or insisting on conditions that do not conform to the preliminary agreement.” By contrast, Sun argued that the Trial Court should have adopted the broader definition of culpable conduct advanced by the Supreme Court of New Jersey in Brunswick Hills Racquet Club, Inc. v. Route 18 Shopping Center Associatesin considering its claim. The Court in Brunswick, quoting from the Restatement (Second) of Contracts, stated: “As a general rule, ‘[s]ubterfuges and evasions’ in the performance of a contract violate the covenant of good faith and fair dealing ‘even though the actor believes his conduct to be justified.’” According to Sun, Core Tech’s conduct amounted to the subterfuges and evasions found to violate the implied duty of good faith and fair dealing.

The Appellate Division rejected Sun’s argument, noting Brunswick’s observation that “good faith is a concept that defies precise definition,” and, therefore, that each case depends on its own facts. It then reconciled the standards in Apothekernes and Brunswick, finding that culpable conduct as defined in the former opinion is not significantly different from the “subterfuges and evasions” described in the latter. As a result, the Appellate Division held that the Trial Court did not err in relying on the Apothekernes decision and affirmed its finding that Sun’s allegations did not rise to the level of bad faith.

The decision in Sun Pharmaceutical Industries is notable insofar as the Appellate Division took a “hands-off” approach to finding violations of the implied duty to negotiate in good faith: “‘These experienced commercial parties,’ who only agreed to negotiate an agreement if mutually beneficial, can safely be left to ‘fend for themselves.’” The Court also made clear that it was “not eager to impose a set of morals on the marketplace.” Thus, absent clear indicia of bad faith, Sun Pharmaceutical Industries suggests that New Jersey courts may well be unsympathetic to a claim for breach of the implied covenant of good faith and fair dealing when a signed preliminary agreement fails to ripen into a binding contract.

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