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. . .



They’re Everywhere

If you ae a normally active adult, then you sign a document containing an arbitration clause at least once a week, and probably more often than that.  Virtually every time you sign a business’ form contract, it is pretty safe to guess that the boilerplate on the back, which you never read, includes an arbitration clause.  If you are a small businessperson, it is a pretty safe guess that all your contracts with your suppliers and servicers included an arbitration clause.

So What?

“So I sign them all the time. I admit I didn’t know that, but what’s the difference?”  In most cases, it makes no difference.  Few transactions get out of control.  Even where there is a problem with what we buy, it’s often not enough of a problem for us to make a fuss, and the seller, using good business sense, will often correct the problem.  But not always: sometimes the problem is expensive and sometimes the seller isn’t willing to just make it right.  So you want to fight for your rights.  And that’s when you run smack into the arbitration clause.

They’re Deadly

You’re thinking, “I’ll just go to court and get a judgment from my peers and get compensated.”  But not if you signed an arbitration clause. First of all, the arbitration clause is mandatory: if you signed, you don’t have a choice between court and arbitration . . . you must go to arbitration.  And unlike court, there is no right to appeal from arbitration: if the arbitrator is biased, too bad.  And most importantly, to my mind, you give up your basic constitutional right to a jury.

What do you get in place of a jury?  A professional arbitrator who is agreed on by the parties.  Most of them are former lawyers or judges with considerable legal experience.  That’s good.  The problem is that arbitration is their living.  They will not make a living on your case alone.  Rather, they must have continuing business. You’re going to be in arbitration once in your life.  The company will be in arbitration repeatedly and, therefore, represents the possibility of ongoing business for the arbitrator.  Conversely, if the arbitrator holds for you against that company, do you think that company will ever allow that arbitrator to work again in their arbitrations?  It is for that reason that the little guy in the arbitration — maybe a consumer, maybe a small business — so rarely wins.

How did this happen?

Very simply, many large corporations decided they just could not entrust lawsuits to juries because juries kept holding for victims, and sometimes in large amounts.  They tried many things to cut back on these verdicts.  They instituted what they called Tort Reform, which their media associates said was to cut down on “frivolous” lawsuits – i.e., lawsuits against business.  In some states, they put huge amounts of money into electing sympathetic members of the Supreme Courts, who would in turn cut down on those verdicts.  But the best way to cut down on the problem was to keep victims out of court altogether.  So they instituted arbitration clauses, claiming that those clauses were an improvement over “expensive” litigation in courts.  And this last strategy has succeeded remarkably well.

So what do we do?

The long-run soluton is for all of us to stop believing what we hear.  Everything we see on the internet or in the media is not true.  Remember who owns the media and what is in their interest.

For the present, look at the boilerplate on the documents you sign, rathe than just signing blindly.  The arbitration clause will not be set out to attract your attention, but it will be labeled “Arbitration”.  My suggestion is to draw a big X through the clause and put your initials in the margin.  “That doesn’t sound like lawyer advice.”  Well, it is.  When the issue of the clause’s enforceability is litigated, the company can never argue the fairness of the clause; so they argue that there was a “meeting of the minds” about the arbitration clause (even though you did not know it was there), and you are therefore bound.  The Xing out which I recommend raises serious questions – legally – about that meeting of the minds.

There may be other ways to contest the applicability of the clause, depending on the particular facts.  That is the reason you need to see a qualified and experienced lawyer as soon as possible.

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.


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.



Let me tell you about two of my past clients.

Romero was a legal immigrant who had pulled himself up by his bootstraps to a place where he was ready to buy his first apartment house.  But he had three problems.  First, he spoke a little English, but not a lot.  Second, because he had done well, he thought he was smarter than his problems and the people he was dealing with.  Third, as a result of number two, he negotiated the contract himself.  Three  months later, the deal fell through because the other side had defrauded him and the language of the contract had taken away his protection. Within another month, he was involved in litigation which lasted two years and forced him to pay the firm I worked at over $200,000.


George was an astute businessman and a veteran of past litigation. He wanted to buy a struggling company and turn it around, but he had to deal with an ornery seller who, it seemed, would rather see the company go down than make a deal which would fill his pockets. George did not try to handle the problem himself.  He knew he needed an Arizona Business Litigation lawyer, so he came to us.  We developed a number of strategies to determine just how difficult the seller would be. We found out that there could be no deal without George making sacrifices that destroyed the attraction of the company.  So he walked away, probably saving himself hundreds of thousands of dollars chasing after the company, and paying us less than $10,000.

The first scenario brought the firm a lot of money. The second was far more satisfying for the client and for us.

The message is clear. When you sense a problem ahead, see an Arizona Contract Lawyer or Business Litigation Lawyer. You don’t have to commit. You can take the time to decide what is best for you . But at least you will know your options and, perhaps, avoid a much larger problem.