In Oregon, all contracts include an implied covenant of good faith and fair dealing. The law imposes this duty of good faith and fair dealing to facilitate performance and enforcement of contracts. According to the courts, however, the duties of good faith and fair dealing must be consistent with, and in furtherance of, the agreed-upon terms of the contract or effectuate the parties’ objectively reasonable expectations under the contract. The implied covenant of good faith and fair dealing cannot be used to vary the substantive terms of the contract or impose obligations inconsistent with the terms of the contract.
According to Oregon courts, the duty of good faith and fair dealing does not “provide a remedy for an unpleasantly motivated act that is permitted expressly by contract.” Contrary to popular belief, Oregon courts will not examine the motives of a party who exercises rights under a contract in order to escape its legal obligations. This somewhat startling result is probably best illustrated by the famous Oregon real estate case of Zygar v. Johnson. Click here for a copy of the case.
Zygar listed his property for sale and soon attracted the attention of Johnson, a young man who was soon to be married. Johnson, looking for a home for himself and his bride-to-be, liked the Zygar property and made an offer which Zygar accepted. The young, and some would say foolish, Johnson did not consult his bride-to-be on the purchase.
One of the provisions of the contract was that Johnson had the right to approve of a pest and dry rot inspection. Johnson ordered the inspection which showed some dry rot under the house caused by an unknown source of water leakage. About the time Johnson received the inspection report, his would be bride viewed the house and informed him she hated it. Accordingly, Johnson disapproved of the dry rot inspection in order to get out of the deal and save (at least temporarily) his marriage.
Rather than let it go at “my client disapproves of the dry rot report,” Johnson’s agent evidently told the listing broker that Johnson’s real motive was his fianc?’s dissatisfaction with the house. When Zygar learned this he sued, claiming Johnson’s disapproval was a pretext and, therefore, Johnson breached the implied covenant of good faith and fair dealing.
The Oregon Court of Appeals disagreed with Zygar’s understanding of good faith and fair dealing holding that “a purchaser does not breach his contractual duty in refusing to proceed with a real estate purchase when the purchase was conditioned on the purchaser obtaining a satisfactory dry rot report and the purchaser was not satisfied with the dry rot report, even though he may have had other reasons for repudiating the agreement.” According to the court, “whatever reasons the purchaser may have had for wanting out of the transaction were immaterial to the question of whether he, in fact, was dissatisfied with the dry rot report.” Johnson, the court held, had a reasonable basis for disapproving of the inspection report and, therefore, the contractual right to do so as long as there was some reasonable basis for the disapproval.
Zygar, and its progeny, should not be taken to stand for the proposition that “weasel” clauses are ok in Oregon. Other than in circumstance where one party has a clear right to avoid the contract under a contingency, Oregon courts frown on bad faith performance of contracts. For instance, a buyer who enters several contracts with the intent to perform only one is acting in bad faith. That is the case because the intent not to perform precedes any contractual right not to perform. Motive isn’t always irrelevant to good faith, it is just irrelevant when a separate legitimate right exists under the contract.
What all this means to a real estate agent is that extreme care must be taken when clients start asking about “getting out of the contract.” What the law requires is good faith and fair dealing to facilitate performance. That means not misleading or trying to trap the other party into a breach or trying to trick them into foregoing a contractual right. It means, in short, applying the same willingness to perform as promised at the beginning of the contract as at the end.
The implied covenant of good faith and fair dealing is not the kind of thing a real estate agent discusses in depth with their client. Instead, it is the kind of thing that can cause a good agent to advise their client to be cautious and seek legal advice before taking some action implicating contract performance. The law favors performance of contracts. It does not favor technicalities or arbitrary performance. Do not get pushed into discussions about getting out of contracts and never, under any circumstance, make predictions about what is or isn’t allowed under a contract. Real estate agents have no duty whatever to assist clients in avoiding legal obligations. If someone wants out of a contract or advice on enforcing one, they need to talk to a lawyer.
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