Council's Corner v106

GOOD FAITH & FAIR DEALING – TEXAS STYLE

The Janowitz Edmiston Family Living Trust entered into two contracts to sell Texas real estate to Rima Group, Inc. Both contracts contained a Seller Financing Addendum, under which Rima agreed to deliver credit reports to the Trust within five days after December 9, 2016.

Rima did not deliver the credit reports to the Trust by that date. The Trust terminated both contracts on the last day allowed for the Trust to do so.

Two weeks later, Rima filed a lawsuit against the Trust seeking specific performance.

The trial court rendered judgment for the Trust, declaring that the Trust properly terminated both contracts. Rima appealed.

The Court of Appeals started by reviewing the contracts. Both unconditionally obligated Rima to deliver credit reports; both gave the Trust unconditional authority to terminate if the reports were not timely delivered, or if the Trust determined from the reports that Rima’s credit was not satisfactory.

Both contracts were unambiguous on this point.

On appeal Rima argued that Rima’s President had been assured by the trustee of the Trust that the credit report was merely a formality, since Rima was paying 25% of the purchase price at closing. And regardless, that the trustee would obtain the required credit report from Dunn & Bradstreet so that Rima would be relieved of this duty.

Rima argued that based on the email where the trustee agreed to order the business credit report, Rima’s President understood that the condition of furnishing a credit report on Rima had been satisfied.

The trustee disputed Rima’s allegation that the trustee would obtain the reports and release Rima from that duty. The Appellate Court agreed with Rima that the trial court should not have dismissed Rima’s claims and that the parties had genuine issues of material fact as to whether the Trust relinquished the obligation of Rima to furnish credit reports.

Now on to our issue.

Rima also asserted that the Trust failed to terminate the contracts in good faith because the Trust used its discretion to determine that Rima’s performance was unsatisfactory.

Neither of the contracts contained any provisions requiring the Trust to act in good faith. Absent good faith provisions, the Trust had the right to take whatever action the Trust deemed appropriate if Rima failed to timely deliver a credit report.

Consequently, the Trust had the right to terminate the contracts based on Rima’s failure to timely deliver the reports. Further says the Appellate Court citing Texas Supreme Court authority: “Under Texas common law, contracts do not impose a general duty of good faith and fair dealing.”

The Trust wins the point that it had no duty to act in good faith. That obligation is not inherent in Texas contracts, and is only applicable when a Texas contract contains that specific language and in other unusual circumstances evidently not presented in this case.

See Rima Group, Inc. v. Janowitz Edmiston Family Living Trust; Texas Court of Appeals, 14th District, Cause Number 14-17-00466-CV; April 23, 2019: https://scholar.google.com/scholar_case?case=15478969053425728452&q=Rima+Group+v.+Janowitz&hl=en&as_sdt=6,44.

Lessons Learned / Questions Asked:

1. Many States have cases and laws that impose duties of good faith and fair dealing in real estate transactions. Texas does not.

2. Texas does, however, recognize such an obligation when the parties are in a “special relationship.” That issue does not appear to have been argued in this case.

3. One might only wonder if the outcome would have been different if Texas had imposed such a duty, or otherwise if the contracts had provisions to the same effect.

Stuart A. Lautin, Esq.*

* Board Certified, Commercial (1989) and Residential (1988) Real Estate Law,

Texas Board of Legal Specialization

Licensed in the States of Texas and New York

Higier Allen & Lautin, PC

2711 N. Haskell Avenue, Suite 2400

Dallas Texas 75204

P: 972.716.1888

E: slautin@higierallen.com

W: www.higierallen.com