- Which of the following is the best statement of the owner's obligation?
Answer: The owner is not obligated to continue because no second-year contract was formed, and the implied covenant cannot supply a missing essential term or force an agreement.
This question tests whether an "agreement to agree" can be enforceable, and what the implied covenant of good faith can—and cannot—do. Whenever you see a contract with a missing essential term that the parties promise to set later, ask: did they actually form a binding contract, or just an unenforceable agreement to negotiate?
Here, the first year's fee was fixed, but the second-year fee was left for future written agreement. No second-year contract was ever formed, and the fee is an essential term. The implied covenant of good faith and fair dealing does not empower a court to write a reasonable price for the parties or to force them to remain in a relationship they never actually agreed to continue on terms. So the owner is not obligated to continue the agreement.
The choice saying the owner must continue at a reasonable fee misreads the covenant as a gap-filler for essential terms—it only protects the spirit of terms the parties actually agreed on. The choice saying the owner must continue at the prior year's fee wrongly assumes that course of performance or an expired price can become a new price term; here, no renewal term was ever agreed. And the choice saying the owner must continue negotiating in good faith confuses a contractual duty to perform with a free-floating duty to bargain; the covenant does not require endless negotiations or prevent walking away when no deal is reached.
On exam day, remember: the implied covenant can prevent bad-faith performance, but it cannot create a contract where an essential term is missing.
- Which of the following best describes the caterer's recovery?
Answer: The caterer may recover the lost profit, but not damages for emotional distress or punitive damages, because a bad-faith breach of the implied covenant sounds in contract, not tort.
This question tests the boundary between contract and tort remedies. When you see a bad-faith breach of the implied covenant, remember that the covenant still sounds in contract—so the damages are contract damages, not tort damages.
The manufacturer knew the caterer expected $100,000 in profit from the June contract, so that lost profit was foreseeable consequential damage. Under the rule of Hadley v. Baxendale, the caterer may recover it.
But the caterer cannot recover damages for emotional distress or punitive damages. Emotional distress is generally unavailable for breach of contract, and punitive damages require an independent tort or statutory violation—not merely a bad-faith contract breach. The claim that the caterer may recover all three mistakes bad faith for a tort. The claim that only the difference between contract price and market price is recoverable is wrong because consequential damages are recoverable when foreseeable, and these were. The claim that punitive damages require a criminal statute is also too narrow: an independent tort could support punitives, but none exists here.
Strategy: on a contracts question, separate contract remedies from tort remedies. Ask whether the plaintiff has alleged an independent tort or only a broken promise. If only a broken promise, the recovery is expectation damages—not emotional distress or punishment.
- Which of the following is the best statement of the cereal maker's obligation?
Answer: The cereal maker need not accept the 200,000-bushel tender because a quantity that is unreasonably disproportionate to prior output, produced solely to exploit an above-market contract price, is not tendered in good faith.
Whenever you see an output or requirements contract, remember UCC § 2-306: quantity is measured by actual output/requirements, but the party must act in good faith, and the tendered quantity may not be "unreasonably disproportionate" to any stated estimate or normal prior output. This is the key frame for this question.
Here, the cereal maker's obligation does not extend to 200,000 bushels. The contract's historical yield of about 50,000 bushels per year supplied the baseline. Quadrupling output only because the market price fell below the contract price is classic bad faith—the farmer is not genuinely increasing output to serve the contract but is instead exploiting an above-market price. Therefore, the farmer's tender is unreasonably disproportionate, and the buyer need not accept it.
The answer that says the buyer "must accept all 200,000 bushels because an output contract obligates the buyer to take the seller's entire output" mistakes an output contract's general rule for an unlimited one; good faith and proportionality still limit quantity. The answer requiring the farmer to prove the corn came from the parcel and met quality standards misses the real issue: even perfect source and quality cannot cure a bad-faith quantity explosion. Finally, the answer invoking "the implied covenant requires buyers to deal fairly with sellers who increase output" inverts the doctrine—the seller's own opportunistic increase is the bad faith, so the buyer is not the party acting unfairly.
Study tip: on output/requirements questions, always ask whether the quantity change reflects legitimate business variation or opportunistic exploitation of the contract price. If the seller is merely chasing a favorable price, the buyer can refuse the excess.
- Which of the following is the best statement of the parties' rights?
Answer: The owner's withholding of access was a breach of the implied covenant, and the owner cannot rely on the no-damages clause or the time-is-of-the-essence provision to terminate for a delay it caused.
Whenever you see a "no-damages for delay" clause paired with a "time is of the essence" provision, your first move is to identify who caused the delay. These clauses protect a party from unforeseen or external delays, but they never shield a party from its own bad-faith conduct. Here, the owner denied access for three weeks specifically because the contractor refused to use cheaper paint. This is the textbook definition of a breach of the implied covenant of good faith and fair dealing—the owner interfered with the contractor's ability to perform. Because the owner caused the delay, the doctrine of prevention applies: the owner cannot rely on the no-damages clause (which bars damages for delays) to escape liability, nor can it invoke the time-is-of-the-essence provision to terminate for a delay it itself created. The contractor's performance is excused to the extent the owner prevented it. The choice stating that the owner's withholding was a breach and that the owner cannot rely on these clauses is correct. The choice claiming the contractor is liable because time is of the essence ignores the prevention doctrine—a party cannot benefit from its own obstruction. The quantum meruit choice is a trap because this is a valid contract case, not a quasi-contract case; the contractor can recover damages, and termination is ineffective. The choice limiting the contractor to an extension of time misreads the no-damages clause; such clauses generally do not apply to delays caused by the owner's active interference, and the owner's termination remains invalid.
- Which of the following is the best statement of the collector's liability?
Answer: The collector is not liable because where performance involves personal taste, honest dissatisfaction is enough, and the collector's dislike was genuine.
When you see a satisfaction clause, ask whether the contract concerns commercial usefulness or personal taste. For mechanical or commercial performance, dissatisfaction must be objectively reasonable; for aesthetic or subjective preferences, good-faith honest dissatisfaction is enough. A commissioned portrait of someone's dog is classic personal taste. Therefore the collector's genuine dislike—even if the painting is technically excellent—means the condition of satisfaction was not met, and no payment is due. The artist's "arbitrary rejection" argument fails because, in taste-based contracts, the buyer's subjective response is the very standard.
The wrong answers each distort that rule. Saying the collector is liable because dissatisfaction must be objectively reasonable imports the wrong standard; technical excellence does not equal the whimsical style the collector wanted. Saying satisfaction clauses govern only commercial goods, not commissioned works of art, is false—courts apply them to personal-service and artistic contracts too, but the test is subjective where taste is involved. Saying the collector is not liable only if he objected before substantial completion adds a timing requirement that does not exist; satisfaction can be assessed at delivery, and substantial completion relates to cure remedies, not to whether the condition was satisfied.
For the bar, remember: satisfaction plus personal taste means honest subjective dissatisfaction is enough; satisfaction plus commercial utility means objective reasonableness is required. Spot that distinction and you avoid the trap.
- Which of the following is the best statement regarding the modification?
Answer: The modification is unenforceable because the miller sought the price increase in bad faith, threatening to withhold promised performance without any legitimate commercial justification.
This question tests UCC modification rules. For contracts for the sale of goods, UCC § 2-209 makes a modification binding without new consideration, but the modification must still satisfy the obligation of good faith. Here, the miller had a contractual duty to make monthly deliveries at $0.50, and the market price had not changed. The miller exploited the bakery's urgent need to extract a higher price. That is bad-faith hold-up, not legitimate commercial modification, so the signed addendum is unenforceable and the bakery can recover the excess.
The answer saying the modification is enforceable because the signed addendum satisfies the statute of frauds and the UCC makes modifications binding without consideration mistakes the good-faith limitation: consideration is unnecessary, but bad faith invalidates the modification anyway. The answer claiming the miller's continued deliveries were new consideration is also wrong because delivering flour was a duty the miller already owed; performing an existing contractual obligation is not fresh consideration. The answer arguing the modification is invalid solely for lack of consideration reflects the common-law rule, but the UCC dispenses with consideration for modifications—lack of consideration is not the reason this modification fails.
Study tip: on a UCC modification question, check good faith first. If the only trigger is an opportunistic demand exploiting another party's vulnerability, the modification will not be enforced despite the UCC's no-consideration rule.
- Which of the following is the best statement of the distributor's liability?
Answer: The distributor is liable because an exclusive dealing arrangement obligates the distributor to use best efforts to promote the winery's wines, and deliberately favoring a competitor is a breach.
When you see an exclusive dealing contract, remember that UCC § 2-306(2) automatically implies a duty of best efforts—even if the contract is silent or vague on quantity. Here, the distributor's deliberate downgrading of shelf positions, halting tastings, and actively disparaging the wines to restaurants is not passive underperformance; it is active, bad-faith sabotage. Because the distributor holds exclusive rights, it cannot use that position to strangle the winery's sales while favoring a competitor. This conduct directly breaches the implied covenant of good faith and fair dealing, making the distributor liable.
Now examine the distractors. The choice stating "no minimum purchase amount... gives complete discretion" is wrong because discretion is limited by the implied best efforts duty—a missing minimum doesn't erase the obligation to promote. The option requiring "specific intent to destroy" is wrong because bad faith is judged objectively by conduct; deliberately favoring a competitor is sufficient, and intent can be inferred. The claim that liability requires an "express promise" to run tastings or maintain shelf space is wrong because best efforts is a flexible, enforceable standard implied by law, not too indefinite to be enforced.
Study tip: On bar exam contracts questions, when you see an exclusive dealing arrangement, immediately think "implied best efforts." Any act that actively undermines the other party's interest—like steering customers to a rival—is a red flag for bad faith, regardless of contract gaps.
- Which of the following is the best statement regarding the contractual disclaimer?
Answer: The disclaimer is ineffective because the obligation of good faith may not be disclaimed, although the parties may set reasonable standards to guide the wholesaler's performance.
Whenever you see a contract clause that attempts to waive an implied duty, remember that the implied covenant of good faith and fair dealing is a mandatory default rule—it is not a term the parties can simply delete. While parties are free to define reasonable standards for performance, they cannot completely strip away the obligation. Here, the contract explicitly disclaims that duty entirely, which is invalid. The retailer's claim survives because the wholesaler's choice of November 30, made solely to destroy the retailer's holiday sales and force a cancellation, is a textbook exercise of discretion in bad faith. The parties could have specified a date, or set a standard like "best efforts," but they cannot erase the duty itself.
Now look at the distractors. The choice claiming the disclaimer is "effective because parties are free to waive implied obligations" misunderstands the fundamental rule—this covenant is an implied-in-law term that protects the essence of the bargain and cannot be contracted away. Similarly, the option suggesting the disclaimer is "effective if the retailer knowingly and voluntarily waived its rights with counsel" is a trap: even an informed, attorney-assisted waiver fails, because the duty is not a waivable right like a warranty or remedy; it is an unwaivable obligation. The third wrong choice, saying the disclaimer is "ineffective only because enforcing it would be unconscionable," misstates the reason—while unconscionability might invalidate a term, it is not the only basis here; the disclaimer fails on its face regardless of bargaining power. The correct answer is that the disclaimer is ineffective because the obligation may not be disclaimed, though reasonable standards can be set. On the exam, when you see a clause attempting to waive good faith, mark it invalid immediately—look instead for whether the parties set permissible, reasonable standards for exercising discretion.
- Which of the following is the best statement of the builder's liability?
Answer: The builder is liable because the buyer's actual requirements continued unchanged and the buyer diverted them to a third party to escape a below-market contract price, which is not a good-faith exercise of a requirements contract.
When you see a requirements contract, think UCC 2-306(1): the quantity is the buyer's actual requirements, but both parties must act in good faith. That duty prevents the buyer from using the contract's flexibility to escape a bad deal.
Here, the builder's construction workload never changed, so its actual "requirements" for steel continued. The builder deliberately bought the same steel from a competitor at the lower market price instead of honoring the contract. That is not a permissible business judgment about its needs; it is bad-faith diversion to avoid a below-market contract price. Therefore, the builder is liable for breach.
The statement that the buyer "may choose to order nothing" misunderstands the contract: ordering nothing is allowed only if its real requirements legitimately drop to zero, not when needs remain but the buyer simply refuses to buy. The claim that requirements are measured by what the buyer is "willing to buy" makes the promise illusory; requirements are objective operational needs, not subjective desire, and a market price drop does not make the contract commercially unreasonable. Finally, liability does not require proving a deliberately misrepresented need; the builder's actual conduct—keeping demand while buying elsewhere—already shows bad faith. A buyer may have some discretion to adjust its operations, but it cannot use that discretion to injure the seller while eliminating its own obligation.
Your takeaway: in requirements contracts, spot whether the buyer's real business needs stayed constant. If so, a sudden switch to a third-party supplier is a classic bad-faith violation.
- Which of the following is the best statement regarding whether the utility's defense will succeed?
Answer: The defense fails because a party does not breach the implied covenant by refusing to renegotiate a price that the contract expressly fixed; the utility's refusal to perform is a breach.
When you see a question on the implied covenant of good faith and fair dealing, remember its core limit: it governs discretion and fills gaps, but it can never override an express, unambiguous term. Here, the contract expressly fixes the price at $50 per ton. The mine is simply enforcing that term. The implied covenant does not require a party to renegotiate a fixed price or sacrifice a bargained-for advantage just because market conditions change. Thus, the utility's defense fails, and its refusal to take deliveries is a straightforward breach of the express quantity term.
Now consider the wrong answers. The suggestion that a party cannot use the letter of a contract to take advantage of a fundamental change in market conditions that devastated the other party's business misstates the law; courts do not rewrite contracts for mere economic hardship, and a price drop does not destroy the contract's purpose. The argument that good faith requires the seller to share cost reductions with a long-term buyer because production costs fell invents a duty no court implies—a fixed price is fixed regardless of internal costs. Finally, the claim that the covenant requires the mine to accept the market price to avoid unjust enrichment misapplies the doctrine; enforcing a valid contract is not unjust enrichment, and the covenant cannot substitute a market price for the negotiated one.
Study tip: the implied covenant is a shield against abuse of discretionary powers, not a sword to rewrite express terms. If the contract spells out the result, the covenant defers.
- Which of the following is the best statement of the dealer's liability?
Answer: The dealer is not liable because the agreement expressly authorizes termination without cause, and the implied covenant does not override an express right to terminate.
Whenever you see a claim for breach of the implied covenant of good faith and fair dealing, the threshold question is whether the contract grants an express, unconditional right. The implied covenant cannot be used to override or nullify an express term—it fills gaps, it does not rewrite bargained‑for rights. Here, the dealership agreement expressly allows the dealer to terminate "at any time, for any reason or no reason" with thirty days' notice. That language is unambiguous: it gives the dealer absolute discretion to end the relationship. Even if the dealer's motive was retaliation, the express right to terminate without cause prevails, so the dealer is not liable. The implied covenant does not impose a duty to act "commercially reasonable" or to avoid harming the other party when the contract explicitly authorizes the conduct.
Now look at the wrong choices. The first—that the implied covenant prohibits exercising an express right to injure the other party—misstates the doctrine; the covenant only prohibits evading the spirit of the bargain, not exercising an expressly granted discretion. The second—that "for any reason or no reason" still requires commercial reasonableness—reads a reasonableness requirement into language that deliberately dispenses with cause. The final option—that the manufacturer's refusal to raise margins was itself a breach excusing the dealer—is a red herring; the manufacturer likely had no obligation to grant a larger margin, and even if it did, the dealer's termination is independently allowed by the contract.
Study tip: On the bar, when you see a claim of bad‑faith termination, first ask: does the contract give an unconditional right to terminate? If yes, the implied covenant yields.
- Which of the following is the best statement of the developer's claim?
Answer: The claim fails because the implied covenant arises only from an existing contract, and no contract was formed because the parties never resolved the annual rent.
Whenever you see a claim based on the implied covenant of good faith and fair dealing, remember that this covenant is a gap-filler for an existing contract—it does not create duties to form one. The core question is always: was a contract actually formed? Here, the parties never resolved the annual rent, a mandatory term for a ground lease, so no enforceable contract existed. Thus, the claim fails because the implied covenant arises only from an existing contract, and none was formed.
The choice saying "the claim succeeds because a party who invites another to spend money in reliance on assurances of a deal must negotiate the remaining terms in good faith" is a trap—it sounds like promissory estoppel or reliance, but the question specifically alleges a breach of the implied covenant, which requires a contract. Similarly, the claim that the covenant "applies to negotiating parties once they have agreed on the essential subject matter" is wrong because agreeing on subject matter alone does not create a contract if other essential terms (like rent) are missing. Finally, the choice about "failure to disclose the competing offer was a breach of the duty of honest dealing in negotiations" misstates the law—there is no general duty of honest dealing in pre-contractual negotiations absent a fiduciary relationship or a contract.
Your study tip: When you see "good faith and fair dealing" in a question, immediately check whether a valid contract exists. If the parties are still negotiating, the claim almost always fails—unless a separate theory like promissory estoppel is raised. On the bar exam, the implied covenant is a shield for existing contracts, not a sword for failed negotiations.
