After plaintiffs sold their brokerage firms to defendant in exchange for defendant stock, management positions, and profit proceeds, defendant failed to perform as plaintiffs expected and ultimately terminated them. Plaintiffs sued for breach of good faith and the court dismissed for failure to state a claim.
Rules of law
The parole evidence rule applies to evidence presented to alter or supplement a contract, not to the implied covenant of good faith. Good faith may involve factors such as unequal bargaining power, frustration of purpose, the drafting party, the discretion of the parties, and a standard of commercial reasonableness.
The trial judge dismissed for failure to state a claim, arguing that parole evidence barred the bad faith allegations and that the parties did not have unequal bargaining power or inequity in drafting power.
The court held that bad faith can contemplate oral agreements without violating the parole evidence rule as well as the exercise of discretionary performance, so it should not have been dismissed.