Our previous article discussed ways in which New York courts treat causes of action for breach of the implied covenant of good faith and fair dealing in the face of contractual provisions permitting the defendant to act in its “sole discretion.” (See Alexander Drylewski, “‘’Sole Discretion’ Provisions and the Implied Covenant of Good Faith and Fair Dealing,” New York Law Journal (June 18, 2018), available at: https://www.law.com/newyorklawjournal/2018/06/19/062018ny_drylewski/). Specifically, we addressed three Appellate Division decisions holding that the implied covenant “cannot negate express provisions of the agreement, nor is it violated where the contract terms unambiguously afford [a party] the right to exercise its absolute discretion.” Transit Funding Assoc., LLC v. Cap. One Equip. Fin. Corp., 149 A.D.3d 23, 29 (1st Dept. 2017); see also Veneto Hotel & Casino, S.A. v. Ger. Am. Cap. Corp., 160 A.D.3d 451, 452 (1st Dept. 2018); ELBT Realty, LLC v. Mineola Garden City Co., 144 A.D.3d 1083, 1084 (2d Dept. 2016). These decisions follow the Court of Appeals’ reasoning in Moran v. Erk, 11 N.Y.3d 452 (2008), which held that a party’s contractual right to act with sole discretion cannot be limited by the implied covenant, even where the party is alleged to have exercised its right in bad faith.
‘Shatz’ and ‘Richbell’
The First Department’s recent decision in Shatz v. Chertok, 180 A.D.3d 609 (1st Dept. 2020), suggests that application of the above principle is less straightforward in cases where the parties owe fiduciary duties. In Shatz, an entrepreneur brought suit against an investment firm, alleging that the firm’s officers failed to pursue a previously-agreed upon investment opportunity and secretly diverted that opportunity to another entity in which they had an interest. The plaintiff asserted causes of action for breach of fiduciary duty and breach of the implied covenant of good faith and fair dealing (among others).
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