Bar Exam (Next Generation) Quiz: Obligation Of Good Faith And Fair Dealing

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Obligation Of Good Faith And Fair DealingQuestion 1 of 12

A winery grants a distributor the exclusive right to sell its wines in a state for three years. The agreement says that the distributor 'will use best efforts to promote the winery's wines' but sets no minimum purchase amount. After a competing winery offers the distributor a higher margin, the distributor moves the winery's wines to poor shelf positions, stops conducting tastings, and tells restaurants that the competing label is superior. The winery's sales fall by 70 percent, and the winery sues for breach of the implied covenant of good faith and fair dealing.

Which of the following is the best statement of the distributor's liability?

The distributor is not liable because no minimum purchase amount is stated, and the contract therefore gives the distributor complete discretion over how much to promote.

The distributor is not liable unless the winery can prove that the distributor specifically intended to destroy the winery's business, because a breach of best efforts requires intentional misconduct.

The distributor is liable only if it expressly promised to run tastings or maintain shelf space, because best efforts is too indefinite to be enforced.

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.

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Bar Exam (Next Generation) Quiz

Bar Exam (Next Generation) Quiz: Obligation Of Good Faith And Fair Dealing

Practice Obligation Of Good Faith And Fair Dealing in Bar Exam (Next Generation) with focused quiz questions that help you check what you know, review explanations, and build confidence with test-style prompts.

What this quiz covers

This quiz focuses on Obligation Of Good Faith And Fair Dealing, giving you a quick way to practice the rules, question types, and explanations that matter most for Bar Exam (Next Generation).

How to use this quiz

Try each quiz question before looking at the correct answer. Use the explanations to review missed ideas, then come back to similar questions until the pattern feels familiar.

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Question 1

Which of the following is the best statement of the distributor's liability?

The distributor is not liable because no minimum purchase amount is stated, and the contract therefore gives the distributor complete discretion over how much to promote.
The distributor is not liable unless the winery can prove that the distributor specifically intended to destroy the winery's business, because a breach of best efforts requires intentional misconduct.
The distributor is liable only if it expressly promised to run tastings or maintain shelf space, because best efforts is too indefinite to be enforced.
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. (correct answer)

Explanation: 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.

Question 2

A wholesaler and a retailer sign a contract for the sale of 1,000 winter coats. The contract states: 'The wholesaler shall have no obligation of good faith and fair dealing in performing this contract, and the retailer waives any claim for breach of that obligation.' The contract gives the wholesaler the right to select the shipping date between November 1 and November 30. When demand for coats rises sharply, the wholesaler chooses November 30 solely to delay the retailer's holiday sales and pressure the retailer into canceling so that the wholesaler can resell the coats at a higher market price. The retailer does not cancel and sues when the coats arrive too late for the holiday season.

Which of the following is the best statement regarding the contractual disclaimer?

The disclaimer is effective because parties to a contract are free to waive implied obligations, and the wholesaler's choice of shipping date is therefore its own business.
The disclaimer is effective if the retailer knowingly and voluntarily waived its rights with the benefit of counsel, because an informed waiver of the implied covenant is enforceable.
The disclaimer is ineffective only because enforcing it would be unconscionable given the wholesaler's stronger bargaining position and the retailer's lack of other suppliers.
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. (correct answer)

Explanation: 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.

Question 3

A manufacturer and a dealer sign a five-year dealership agreement containing this clause: 'The dealer may terminate this agreement at any time, for any reason or no reason, upon thirty days' written notice.' The dealer has spent heavily to build the manufacturer's brand. When the manufacturer refuses the dealer's request for a larger margin, the dealer, in retaliation, terminates the agreement ten days before the launch of the manufacturer's flagship product. The manufacturer sues, alleging that the dealer's termination was in bad faith and therefore breached the implied covenant of good faith and fair dealing.

Which of the following is the best statement of the dealer's liability?

The dealer is liable because the implied covenant prohibits a party from exercising an express contractual right for the purpose of injuring the other party.
The dealer is liable because the words 'for any reason or no reason' still require the terminating party's decision to be commercially reasonable.
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. (correct answer)
The dealer is not liable because the manufacturer's refusal to grant a larger margin was itself a breach of the implied covenant, excusing the dealer's termination.

Explanation: 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.

Question 4

A book collector commissions a well-known artist to paint a portrait of the collector's dog, agreeing to pay $10,000 on delivery 'if the collector is satisfied with the portrait.' The artist delivers the portrait. The collector genuinely dislikes it, because he expected a more whimsical style, but admits that the painting is technically excellent. He refuses to pay. The artist sues, arguing that the rejection was arbitrary and therefore a breach of the obligation of good faith and fair dealing.

Which of the following is the best statement of the collector's liability?

The collector is liable because his dissatisfaction must be objectively reasonable, and by his own admission the portrait is technically excellent.
The collector is not liable because where performance involves personal taste, honest dissatisfaction is enough, and the collector's dislike was genuine. (correct answer)
The collector is liable because the doctrine of satisfaction governs only contracts for commercial goods, not commissioned works of art.
The collector is not liable only if he expressed his dissatisfaction before the artist had substantially completed the work, so that the artist could adjust the portrait.

Explanation: 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.

Question 5

A restaurant owner contracts with a general contractor to renovate the restaurant. The contract states that 'time is of the essence' and that 'the owner shall provide the contractor access to the premises each weekday from 8 a.m. to 6 p.m.' The contract also contains a clause barring 'damages for delay regardless of cause.' In May, angry that the contractor refused to use a cheaper paint, the owner denies access for three weeks. The contractor finishes on June 15 instead of May 20. The owner terminates for the delay and refuses to pay. The contractor sues for breach of contract and of the implied covenant of good faith and fair dealing.

Which of the following is the best statement of the parties' rights?

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. (correct answer)
The contractor is liable for the delay because 'time is of the essence' makes timely completion an absolute condition, and the no-damages clause bars any claim arising from the delay.
The owner's termination is effective, but the contractor may recover for the work it actually performed in quantum meruit because the owner received a substantial benefit.
The owner breached by withholding access, but the no-damages clause limits the contractor to an extension of time rather than damages, so the owner may still terminate if the delay exceeded a reasonable time.

Explanation: 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.

Question 6

A manufacturer agrees to build and install a custom oven for a caterer, promising delivery by May 1. The manufacturer knows the caterer needs the oven to perform a June catering contract on which the caterer expects to earn $100,000 in profit. When a competitor offers the manufacturer a more profitable order, the manufacturer deliberately delays the caterer's job and does not deliver until June 15. The caterer loses the June contract and suffers anxiety and sleeplessness. The caterer sues for breach of the implied covenant of good faith and fair dealing, seeking the $100,000 expected profit, damages for emotional distress, and punitive damages.

Which of the following best describes the caterer's recovery?

The caterer may recover the lost profit, the emotional distress damages, and punitive damages because the manufacturer's deliberate delay was a bad-faith breach.
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. (correct answer)
The caterer may recover only the difference between the contract price and the market price of the oven because consequential damages are not recoverable for a breach of the implied covenant.
The caterer may recover punitive damages only if the manufacturer's delay also violated a criminal statute, and may otherwise recover only the lost profit.

Explanation: 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.

Question 7

A hotel owner and a management company sign a five-year hotel management agreement. The agreement states that the management fee for the first year is $100,000 and that 'the annual fee for each subsequent year shall be agreed upon in writing by the parties before December 1 of the preceding year.' The parties cannot agree on the second-year fee. The management company demands that the owner continue using its services at a reasonable fee, arguing that it trained the owner's staff in reliance on the contract and that the owner's refusal to agree is a breach of the implied covenant of good faith and fair dealing.

Which of the following is the best statement of the owner's obligation?

The owner must continue the agreement at a reasonable fee because the implied covenant of good faith fills gaps the parties failed to close.
The owner must continue the agreement at the prior year's fee because the parties' course of performance established a price term for renewal years.
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. (correct answer)
The owner must continue negotiating in good faith and cannot walk away from the relationship while negotiations over the fee are still pending.

Explanation: 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.

Question 8

A bakery contracts in writing to buy 10,000 pounds of flour from a miller at $0.50 per pound, with monthly deliveries over one year. The market price of flour is unchanged four months later. Knowing that the bakery has a large urgent order, the miller refuses to make the next monthly delivery unless the bakery agrees to pay $0.60 per pound. The bakery signs a written addendum under protest and pays the higher price for the remaining deliveries. The bakery then sues to recover the excess.

Which of the following is the best statement regarding the modification?

The modification is enforceable because the signed addendum satisfies the statute of frauds and the UCC makes modifications binding without consideration.
The modification is unenforceable because the miller sought the price increase in bad faith, threatening to withhold promised performance without any legitimate commercial justification. (correct answer)
The modification is enforceable because the miller's continued deliveries of flour were new consideration for the bakery's promise to pay the higher price.
The modification is unenforceable because the bakery received no new consideration for its promise to pay the higher price, and a modification lacking consideration is invalid.

Explanation: 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.

Question 9

A utility company contracts with a coal mine to buy 500,000 tons of coal annually for ten years at $50 per ton. In year three, a new extraction technology causes the market price of coal to fall to $30 per ton. The utility, which can now buy cheaper coal elsewhere, demands that the mine cut its price to $30. The mine refuses. The utility stops taking deliveries and buys from another supplier. The mine sues. The utility defends on the ground that the mine's insistence on the original price breaches the implied covenant of good faith and fair dealing.

Which of the following is the best statement regarding whether the utility's defense will succeed?

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. (correct answer)
The defense succeeds because a party may not use the letter of a contract to take advantage of a fundamental change in market conditions that devastated the other party's business.
The defense succeeds only if the utility can prove that the mine's production costs also fell, because good faith requires a seller to share cost reductions with a long-term buyer.
The defense succeeds because the implied covenant requires the mine to accept the market price, since enforcing a contract at a price far above market would unjustly enrich the mine.

Explanation: 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.

Question 10

A farmer agrees to sell 'all of the corn produced on the farmer's 100-acre parcel' to a cereal maker for $9 per bushel for five years. The parcel has historically yielded about 50,000 bushels per year. In year two, the market price of corn falls to $5 per bushel. Seeking to profit from the above-market contract price, the farmer plants fence row to fence row, abandons crop rotation, and applies intensive fertilizer, quadrupling output to 200,000 bushels. The cereal maker refuses to accept more than 50,000 bushels. The farmer sues.

Which of the following is the best statement of the cereal maker's obligation?

The cereal maker must accept all 200,000 bushels because an output contract obligates the buyer to take the seller's entire output, and the stated estimate is not a promise.
The cereal maker must accept up to 200,000 bushels only if the farmer can prove the corn was grown on the parcel and meets the contract's quality standards.
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. (correct answer)
The cereal maker must accept all 200,000 bushels because the implied covenant requires buyers to deal fairly with sellers who increase output to meet their contractual commitments.

Explanation: 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.

Question 11

Over eight months, a landowner and a developer negotiate a long-term ground lease. The landowner repeatedly tells the developer 'we have a deal,' permits the developer to spend $200,000 on site studies, and never mentions that a competing developer has offered more favorable terms. When the landowner signs with the competitor, the developer sues, claiming that the landowner breached the implied covenant of good faith and fair dealing by negotiating in bad faith. No lease was ever signed, and the parties never resolved the annual rent.

Which of the following is the best statement of the developer's claim?

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. (correct answer)
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.
The claim succeeds because the implied covenant of good faith applies to negotiating parties once they have agreed on the essential subject matter of the lease.
The claim succeeds because the landowner's failure to disclose the competing offer was a breach of the duty of honest dealing in negotiations.

Explanation: 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.

Question 12

A manufacturer agrees to sell, and a builder agrees to buy, 'all of the builder's requirements for structural steel' for three years at $800 per ton. After one year, the market price of structural steel falls to $600 per ton. The builder's construction workload is unchanged, but during the next six months the builder buys all of the steel it needs from a different supplier at the market price and makes no purchases from the manufacturer. The manufacturer sues for breach of contract.

Which of the following is the best statement of the builder's liability?

The builder is not liable because a requirements contract obligates the seller to supply quantities the buyer actually orders, and the buyer may choose to order nothing.
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. (correct answer)
The builder is not liable because the buyer's requirements are measured by what it is willing to buy at the contract price, and the fallen market price made the contract price commercially unreasonable.
The builder is liable only if the manufacturer can prove that the builder deliberately misrepresented its needs, because a requirements buyer is free to decide how much steel it needs at any given time.

Explanation: 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.