The Covenant Of Good Faith And Fair Dealing Can Turn A Small Case Into A Big One.

Most non-lawyers understand the basics of a breach of contract claim. The two sides make a deal, and if one side does not honor his obligations, the other side can sue for damages.

The problem with a contract claim, from a practical point of view, is that the damages are limited. Basically, you can get what you lost based on the contemplation of the parties at the time the contract was formed. For instance, if you contract to provide a service, you provide it, and the other side does not pay, you can sue for the value of those services. Depending on the contract, you might get interest on that money, and you might get back some or all of your attorney’s fees.

But that’s it. If the contract provides for future exchanges of services for money, which are now lost to you, you might or might not get something for that. You don’t get money for pain and suffering. You don’t get damages for the ripple effect that runs through your business. You can’t get punitive damages, even if the other side’s conduct was particularly egregious. Sometimes, the result of all this is that, from a cost-benefit point of view, it doesn’t make sense to file your lawsuit. The attorney’s fees and costs may even exceed what you stand to win.

However, most non-lawyers do not know about another legal concept that arises in a contract setting. Every contract includes an implied term – in other words, not an express term of the contract – requiring compliance with the covenant of good faith and fair dealing. The covenant says that neither side can do anything, whether expressly prohibited in the contract or not, which destroys the other side’s fundamental reason for entering the contract.

For instance, we are doing a case right now regarding an employment-type contract gone bad. A ran a series of stores offering a service. A wanted to open a new store. So A entered a 2-year contract with B under which, if B made the new store successful, B would get a 49% interest after two years. The store was successful. But after one year, A terminated the contract with B. The termination was arguably permitted by the express terms of the contract, which required no reason for termination. But the effect of the termination was to deprive B of his main reason for entering the contract, namely, getting the vested ownership interest after two years. This amounts, potentially, to a breach of the covenant of good faith and fair dealing, even though permitted by the express terms of the contract.

The real significance of the resulting claim for breach of the covenant is that, increasingly under Arizona law, B can now claim not just contract damages, but what are called tort damages. In other words, he can claim future lost profits, pain and suffering, and even punitive damages. Suddenly, a lawsuit that might not have been worth bringing becomes more than worth it.

This is not something that laymen would know about. But both A and B would have benefitted by going to see an attorney specializing in fraud or business litigation at the very outset. There, they would have learned about the covenant, which may end up determining the outcome of this case.



Who bears the burden when an employee is working out-of-town and gets in trouble in some way? If the employee commits an intentional tort of some kind – for instance, an assault – he is on his own. But what about something less egregious, like a car accident?
In one fairly recent case, a DPS officer who normally worked in Phoenix, was assigned to work for a period of time in Douglas. The distance required him to live in a Douglas motel. After work, he asked for a restaurant recommendation, and left for dinner with his temporary supervisor. On the way, he negligently ran into the plaintiff, causing injuries. The officer made a motion to get himself out of the case, saying he was working for the State when it happened, and that any liability should fall on the State, not him. The trial court granted his motion, and the Court of Appeals agreed.
The Court of Appeals held that the employee was acting for the employer if, at the time of the accident, he was “doing any reasonable thing which his employment expressly or impliedly authorizes him to do or which may reasonably be said to have been contemplated by that employment as necessarily or probably incidental to the employment.” The court listed three factors to consider when deciding whether the employee was acting for his employer.

  • Was the activity the kind the employee was authorized to perform?
  • Did it occur substantially within the authorized time and space limits?
  • Was the employee acting for the purpose of serving the employer?

The Court held that going for a meal on an out-of-town assignment was expected and incidental to the assignment. The Court also held that, if the trip was for the dual purpose of serving the employer and the employee, the employee would still be protected. But the Court also held that, if the employee had already eaten but was then making a second trip to a bar for entertainment, there would be no protection.

What does this mean for you?

For the employee, this means that she needs to remember this distinction between expected actions within the assignment (e.g., meals) and those which serve just the employee (e.g., the bar). Of course, the distinction is not always clear. For instance, what if the employee is a salesperson and is going to the bar, at least in part, to drum up customers?
For the employer, this means that your employee manual should clearly delineate what activities are considered authorized by the assignment and which are not.


This is the second blog offering five points which most employers and employees do not know which might keep them out of the court if they do.

“In my interviewing, as long as I’m asking the same questions of the white guy and the black guy and the Asian guy, it does not matter what I ask about.”  Wrong.  The general rule of thumb should be “If you don’t need to know, don’t ask.”  For instance, if you ask about present or past illnesses or disabilities, you may be engaging in disability discrimination.

“I know that if I fire an employee, I have to pay her what I owe her in 3 days.”  Not anymore.  If she was fired, you have 7 days to pay her.  If she quit, you can wait until her next paycheck.  But remember that the pay must include any non-discretionary benefits (like vacation or bonuses, as long as they were expected by the employee and not discretionary to the owner).

“Under the Constitution, what I have on my work computer is my business, not the employer’s.”  Wrong.  All communications and stored matter on and through your computer belong to the employer, not the employee, not matter how sensitive and personal.

“If an employee needs to care for a family member, I have no choice but to give them unpaid leave under the Family Medical Leave Act.”  Not true.  First, it is not just any family member: cannot be an in-law or even a step parent.  Also, the FMLA only applies to your company under certain situations, including over 50 employees.  The Act also applies to employees only under certain circumstances, including the requirement that the employee have worked 1250 hours of actual time (i.e., not PTO) during a prior 12-month period.  And the employer can require medical documentation of the condition’s seriousness before granting the leave.

I don’t have to put up with an employee who is constantly complaining outside of the company about discrimination.”  Think hard before letting that person go.  Both Arizona and federal law make retaliation against a whistleblower illegal.  For instance, the EEOC reports that almost 40% of its cases are brought against employers who retaliated against their whistleblowing employees.



Here are five points relating to the employer-employee relationship which very few employers and employees know about.  Hopefully, they will help you avoid unnecessary and expensive problems.

“I know that I can be liable under the Arizona Workers Act if I have an illegal employee, but most of my work is done with independent contractors.” Under the Arizona law, you are also liable for using independent contractors if you know they are illegal.

“We treat our female employee fairly, and let her off when she has a baby, but now I have a couple men wanting time off when their wives have babies.”  You are not required to give maternity leave or paternity leave, but if you give either one, you have to give both.

“If I don’t want to do drug testing, I don’t have to.”  In most cases, that is true.  However, If you comply with the provisions of the Drug Testing of Employees Act, you will enjoy protection against litigation involving employees using drugs.  The same goes for the Blacklisting laws: you don’t have to use them, but doing so can give you protection against liability in connection with referrals.

“I get those ads from people selling the laminated posters for federal and Arizona requirements.  The ads say I have to get them, but I don’t want to pay, and besides they’re space-consuming and ugly.”  The posters which apply to your business must go up, and it is in your interest to put them up.  For instance, if a worker gets hurt on the job, you want her under workers comp, not the court system.  But if the workers comp poster was not up, she will be able to jump to the courts and sue you for much more.

“Employees getting garnished is an unnecessary expense imposed on my administrative people.”  That may be, but know that it is illegal to take action against an employee because he is getting garnished.

More tips next time. . .


LITIGATION: If I Hire A Lawyer and Bring a Lawsuit, What Will Happen?

Most people have never hired an attorney or gone to court for anything more serious than a traffic ticket. The process of litigation looks as mysterious to most people as fixing a car or coaching a chess team looks to me. Maybe this will help a little.


A civil case usually has six main stages: (1) pre-litigation negotiation; (2) the filing of initial pleadings; (3) disclosure and discovery; (4) dispositive motions; (5) trial; and (6) appeal. This process can be stopped if the parties settle which, statistically, happens more often than not.
Pre-litigation Negotiation
Because litigation is burdensome, not only financially but in other ways as well, most lawyers will attempt to negotiate a settlement before filing the lawsuit. In my experience, these attempts succeed well under 50% of the time, generally because both parties are still emotionally upset about what was “done to them”. I will sometimes forego this step in those instances where the other side seems to be a bully or a conman: those parties generally have to be punched with a lawsuit before they will take my client seriously.
Initial Pleadings
The plaintiff (the party which initiates the lawsuit) files a Complaint stating why the court has jurisdiction, alleging the key facts underlying the dispute, and the legal claims those facts give rise to.
The defendant (the other party) must then file an Answer which answers the statements made in plaintiff’s Complaint. The defendant may, at the same time, allege any claims he has against the plaintiff. Because you know the facts, you will have to work with your lawyer during the pleading period.
Disclosure and Discovery
A little over a month after the pleadings are completed, both sides have to file their mandatory disclosure. This is a process pretty much unique to Arizona. Both sides are required to state their legal claims, describe their factual position, state their position with respect to damages, identify their witnesses (lay and expert) and any witness statements, and produce all relevant documents. Again, you will have to work closely with your lawyer with respect to the disclosure.
Then, the parties enter the discovery period during which both sides use various discovery tools – interrogatories, requests for admission, requests for documents, request to inspect, depositions – to gain evidence for their own case and to force the other side to expose its case before trial. This period can be lengthy as the two sides fight over what they have to produce. This period can also get expensive if there are numerous depositions, especially if those depositions involve expert witnesses.
Dispositive Motions
In most cases that have gone this far, one or both sides will file a motion – usually a motion for summary judgment – which basically asks that Court to hold that the evidence so favors the moving party’s case that there is no point in letting the case go to the jury. This might be because the evidence is overwhelmingly one-sided or because some point of law prohibits the other side from winning under the facts that have surfaced during discovery. Many times, these motions end the case (except for appeal), even though most judges are reluctant to take a case away from the jury.
This is when you get to see the samurai in your lawyer. I have done trials as short as a few hours and as long as two months. By the time you get out of discovery, your lawyer will have a good idea how long trial will go, but it is impossible to tell now with any certainty. The keys to that trial will probably be your lawyer’s preparation (I find I spend 3-5 hours on preparation for every hour in trial) and the relationship you establish with the jury (do they like, trust, and believe you?).
If you lose at trial or in summary judgment, your attorney will discuss with you your prospects on appeal. There are many bases for appeal, so we cannot generalize now. Depending on the case and the complexity of the issues, it could take quite a while before you get a ruling on your appeal.

Increasingly, courts are ordering mandatory settlement conferences after a certain number of days have passed since the pleading stage. This is not bad: you are not forced to settle, and the settlement judges are often very experienced and qualified. Sometimes, the parties will on their own, especially early in the case, seek out mediation before an experienced lawyer or retired judge at which the mediator will take turns talking to the parties and their lawyers in an effort to settle the case. We have had a lot of good experience with mediation.

LITIGATION: What Court Do I Bring My Lawsuit In?

By Jesse Cook

Sometimes, where you bring your lawsuit can affect the outcome more than any other  factor.  You may not have a choice where you can file your suit, but sometimes you do.
Generally speaking, you can bring a civil lawsuit in Small Claims Court, Justice Court, or Superior Court.  Each of these venues is set up to handle different types of cases.


Small Claims Court
If the amount in controversy is $2,500 or less, you can go to Small Claims Court.  The good things about this?  Because procedures are simple, it is not hard to represent yourself, and lawyers are not allowed.  This is often a good thing because it would be very difficult for a lawyer to keep her fees much below $2500.


For a small claim, you do not have to stay in Small Claims Court.  For instance, if you want a lawyer, you can have the case transferred to Justice Court.  (If you win, you might get your attorney’s fees reimbursed to you.)  Remember that the other side has the same right to transfer to Justice Court.


Justice Court
Generally, Justice Courts have exclusive jurisdiction over all civil cases involving amounts of $2,500 to 5,000.  Also, if your matter is worth between $5,000 and $10,000 (not including attorney’s fees and costs), you have a choice whether to bring the matter in Justice Court or Superior Court.
The good thing about bringing such a case in Justice Court is that the procedures are simpler and, therefore, less expensive than those in Superior court. You will also get to trial faster in Justice Court.  Also, the filing fees are lower in Justice Court ($93) than in Superior Court ($301).  The bad thing is that, because Justices of the Peace are not required to be trained in the law, most are not.  This can be a problem if your case involves any relatively complex legal issues.


Superior Court
This is where all claims of $10,000 or more must be filed.  There is no ceiling on what you can claim.  Because you will have to strictly adhere to all of the rules of civil procedure, few try to go it alone without a lawyer.  You are permitted to do so, but keep in mind that you will get no special breaks because you are a layman.


Note that there are a few other factors affecting jurisdiction.  For those, you should contact an attorney.


The Civil Rights Act of 1964 provided protection against discrimination on the basis of sex.  But it turned out that that category was too general to protect one group of people, namely, pregnant women.  So in 1978, the Civil Rights Act was amended by the passage of the Pregnancy Discrimination Act to include pregnancy in the prohibition against sexual discrimination.


What does that mean for pregnant women?  Basically, they are entitled to the same protections that apply with respect to age and disablement discrimination.


Pregnant women cannot be denied what they would be entitled to if not pregnant with respect to hiring, firing, pay, job assignments, promotion, layoffs, training, fringe benefits (like leave and health insurance), or any other term of condition of employment.  If she experiences any medical condition related to pregnancy or childbirth, she is entitled to the same special dispensations that any other temporarily disabled employee would get, like light duty, alternative assignments, or disability leave.  The PDA also makes it illegal to harass a woman about her pregnancy to the point that the work environment becomes hostile or offensive.  It is also illegal to make an adverse employment decision (e.g., demotion or termination) on the basis of the pregnant condition.


Pregnant women are also protected under the Americans with Disabilities Act, which requires that the employer make reasonable accommodations for the pregnant woman, unless this puts the employer to an undue burden.  Also, the Family & Medical Leave Act permits the pregnant woman to take a 12 week (unpaid) leave of absence to have her baby (provided the employer has more than 50 workers and the woman has 12 months tenure).


You cannot file an action in court for pregnancy discrimination until you have first made a claim to the Equal Employment Opportunity Commission, and it has rejected your claim (which it almost always does).


This is not an action you’re going to be able to handle yourself.  You need to seek counsel from an employment lawyer.  The best advice is to seek counsel at the first sign of the discrimination.




A few days ago, I advised employees terminated or threatened with termination for discriminatory reasons (race, gender, sexual orientation, national origin, age, disability, religion, pregnancy) on how to protect themselves.  (Employment Law: Do You Have Any Protection Against Wrongful Termination By Your Employer?)  But there is also the other side.  What does a small or medium sized business do to defend itself against an employee who is being fired for destructive or incompetent behavior but is claiming wrongful termination on the basis of illegal discrimination?


What Is The Problem You Face?

The large corporation is protected in two ways that you – the smaller, growing business – is not: first, the large corporation has contract attorneys or business litigation attorneys on retainer or in-house who can be contacted at any time a problem arises, and second, those corporations can budget for the inevitable litigation at the beginning of the fiscal year.  As a practical matter, few if any of you will put an employment attorney or business litigation lawyer on retainer, and none of you can budget for litigation disaster.


Why haven’t you had to deal with this problem?  Because the people you fire are, like most people, afraid of litigation, short on money, and unaware of their rights.  But relying on this is pure gambling because there are people who do have the emotional and financial wherewithal to fight, and there are contract and business litigation attorneys who will take their cases on partial or full contingency.  And unlike the big corporations, a successful wrongful termination case against you will probably close your doors.


How Do You Protect Yourself?  By Setting Up The Right System.
Like mine and most other growing businesses, you and your staff constitute a sort of family.  The idea of treating family or friends like they may some day grow fangs and threaten you and your business is beyond most of us.  But an employee that turns on you poses a substantial threat to your business.  I have had that experience.  So the way around this dilemma is to set up a system which you apply to everyone from the outset.


What Does The System Need To Include?
Each business owner has her own style, and the system she sets up will reflect that style.  But I believe that system should include the following components:

1.    Make a record of the initial interview.  I have had a big problem with employment prospects making representations about themselves at the initial interview  and then turning out to be quite the opposite.  Record the content of the interview, ideally by tape recorder (which the interviewee knows is present) or at least by written record immediately after the interview.  A subsequent claim of discrimination will deflate in the face of evidence that the employee misrepresented herself from the outset.

2.    Write a short disciplinary manual.  At first glance, it may seem that this would constrict you, but in fact it will give you freedom if the employee problem arises.  Include in it a list of which infractions warrant a second chance and a list of which ones are subject to immediate termination at the owner’s discretion.  Have the new employee countersign the manual so there is no question about disclosure.  And then – and this is important – abide by your own manual.  This will provide you with protection as to all but the worst incidents.

3.    Create personnel files and use them.  There are lots of reasons why we owners might not keep documentation that could later become critical.  You might feel strange about taping people.  You might feel a little guilty about having to correct an employee with whom you feel close.  But a system that applies to everyone will immunize you from those feelings.  “It’s not personal: we do this with everyone.”  And if there is a dispute down the road, written and taped material carries ten times the weight of oral testimony from memory.

4.    Make A Record Or Have A Witness For All Disciplinary Meetings.  You would be amazed how creative memory can become over time, so never leave the important moments to oral testimony based on memory. Or at least make sure there is someone else there to remember the moment the way you do.  I believe disciplinary meetings, and especially termination meetings, should be taped.  At a minimum, have a witness there.  Or both.
5.    Consult An Employment Lawyer.  The time to consult a contract lawyer or business litigation attorney is when you are putting together your system in the first place.  But if for budgetary or other reasons you don’t want to do that, make sure you consult an employment lawyer when the problem starts to arise with the employee, especially if that employee falls within one of the discriminatory classifications.  Your consulting a litigation attorney before things get too bad could save you tens of thousands of dollars.


We are currently prosecuting a discrimination case against a decent sized company that did not do any of the above and is paying over $50,000 for the defense.  If the company loses, the loss will be three or four times that amount.  But even if the company wins, it will have lost.  Counsel for the company could or should have prevented this.






There are many forms of illegal discrimination.  But the one that is popular today among employers is age discrimination (and its cousin, disability discrimination).  Why?  A store manager who has been on the job for 40 years is, by virtue of his tenure, making more money than a younger store manager, and if the older manager is nearing retirement age, the company may also be paying her a pension soon.  Replacing the older manager with a younger one represents a substantial savings for the company.  (In recent years, Walmart has shown a profit in most quarters not because revenue has been increasing but because it has laid off so many employees.)

But the company which is trying to get rid of its older employees is never going to admit that it is doing so.  The reason given might be insubordination, which upon closer scrutiny amounts to no more than the supervisor’s dislike for the older employee.  The claim might be one of incompetence even though the employee’s record was, until recently, spotless.  The employee, who over time has probably developed a strong loyalty to the company, may be slow to recognize what is happening to her.  But when she does see it, she is sometimes shocked, hurt and degraded so that it is difficult to stand up for herself.

But for the employee that wants to fight what is happening, she does have some weapons.  (At this very moment, we have a client who is testifying in binding arbitration after being made the victim of age discrimination, and he stands a decent chance of winning.)

If the worker is over 40, she is eligible to make an age discrimination claim.  She must satisfy certain requirements.  She must show that she is an employee rather than an independent contractor.  The employer must have 15 employees or more.  And she must show that a younger person replaced her.  And the employer can defend by showing that youth is a “bona fide occupational qualification” for the job.  (This is a fuzzy area that generates a fair amount of litigation.)

If you think you are a target, there are some things you should do.  As with all imminent litigation, stop communicating orally, but rather do everything in writing to the extent possible.  Otherwise, the court action becomes a “he said, she said” battle.  Save evidence that suggests you “more likely than not” are being run out because of your age: for instance, time cards that show you arrived to work on time, positive employee performance reviews, indications that the company is not following its own procedures for disciplinary action, or recorded testimony from co-workers explaining how you were a good worker. Get these things now rather than later.  Memories fade and documents tend to disappear.

And most important, get to an Arizona contract lawyer or business litigation lawyer as soon as possible.



Do You Have Any Protection…


          It is happening to a lot of people.  They have worked for their employer for a long time, and maybe because we like to feel good about whatever we have committed to, most of us believe in our company and work hard for it.

But the unavoidable truth is that many, if not most, companies, faced with the need to cut costs wherever possible, have found that the most effective way to do that is to cut employees.  So many who have worked for their companies are finding themselves out of work, or perhaps are still employed but see the dark cloud on the horizon. And who will these companies look to cut?  Mostly, it is those who for one reason or another are not as productive as others, or those who because of their time on the job, are making more than others in a similar position or are headed for a pension.  Sometimes, it is just the people whom the supervisor does not like.

Is there any protection?  Here are three possible areas that could provide you with some defense:

1.   The company violates an employment contract with you.  A few upper level employees may have actual contracts.  More often, the contract may be the company’s employee manual, which you are deemed to have agreed to by virtue of working at the company.  We are in a hotly-contested employment arbitration right now where the breach of contract claim is based on such a manual.

2.   Sometimes, the termination can be challenged because the company has failed to comply with its own published policies and procedure for discipline.  In most instances, the procedure is an oral warning for the first infraction, followed by a written warning for the second infraction, followed by termination after the third infraction. Companies have various ways of arguing that they are not subject to their own procedures.  Does that make sense?

3.   The company cannot discriminate on the basis of gender, religion, sexual orientation, national origin, race, disability or age.  It is the last two that show up in our office most often for the reason described above.  Companies will try to get rid of the senior manager who because of his tenure is getting paid more than a younger worker doing the same work.  And the company, by getting rid of the older worker, can also avoid the upcoming pension.  This sort of motivation is not always easy to prove, but it is illegal.

There is no question that it is tough going for employees in Arizona in the best of circumstances, and the situation is often made worse by the fact that the termination has put the employee in a difficult financial situation.  This is why most employment lawyers work for employers, not employees.

But you do have rights, and you need to see an Arizona Contract Lawyer or Business Litigation lawyer to get a clear picture of your options.