• August 19, 2019

Update (August 19, 2019): This past week U.S. District Court Judge Patrick J. Schiltz (D. Minn.) weighed in on the somewhat confusing doctrine of good faith and fair dealing in Minnesota in the context of an insurance coverage dispute, a doctrine that we discussed in the original post below.

As we discussed in the post below, the “doctrine of good faith and fair dealing” applies to every contract in Minnesota just so long as you define “every contract” to mean “not every contract.”

But we can all agree that the doctrine plainly applies in Minnesota to insurance contracts.

As important as when the doctrine applies is the follow-up: what does it mean? This is the question that Judge Schiltz addressed this past week.

The doctrine applies when (1) “when a party to a contract unjustifiably hinder the other party’s performance of the contract,” or (2) “when a party to a contract acts honestly, maliciously, or otherwise in subjective bad faith in exercising unqualified discretion that is given to that party in the contract.” (See here at p. 3.)

Judge Schiltz found that neither of these scenarios applied in Selective Insurance v. Sela, the case that Judge Schiltz is presiding over. Nevertheless, at the urging of the insured’s lawyers, Judge Schiltz analyzed whether the doctrine apply more broadly, when insurers fail to act “reasonably” or “properly” in denying insurance coverage.

The doctrine does not apply in this vague and broader context, Judge Schiltz ruled. This is not a difficult question superficially but Judge Schiltz nevertheless took the time to analyze the issue to try to clear up Minnesota case law, muddled by an unpublished Minnesota court of appeals case: Western National Mutual Insurance Company v. Prospect Foundry, No. A17‐0992, 2018 WL 1787687 (Minn. Ct. App. Apr. 16, 2018) (see here at p.8 et seq.)

To cut to the chase, Judge Schiltz, “with due respect,” pointed out the myriad infirmities in the Prospect Foundrey case and rejected its analysis.

Practice pointer: Sue insurance companies for unreasonable claims handling through Minn. Stat. § 604.18, “Minnesota’s first-party bad faith statute,” not based on the covenant of good faith and fair dealing.

Update (June 25, 2018): In the discussion in our original post below, we quoted a U.S. federal district court (D. Minn.), quoting a 1995 Minnesota Supreme Court decision (quoting a 1984 Minnesota Supreme Court decision) for the following proposition (at page 15): “Under Minnesota law, every contract includes an implied covenant of good faith and fair dealing…”

It has been a while since we have construed the word, “every,” but it seems all-inclusive, does it not? It seems synonymous with “all possible,” or “the entire set of,” right?

On the other hand, a recent decision in the U.S. federal district court (D. Minn.), quotes a 1986 Minnesota Supreme Court decision in support of the proposition that Minnesota courts “have not read an implied covenant of good faith and fair dealing into employment contracts.”

So, in Minnesota, apparently “every contract” means “every contract except employment contracts.”

Let’s use the shorthand, “common decency” for this idea of “the implied covenant of good faith and fair dealing.” Why would Minnesota courts require that all contracts are built on a foundation of “common decency” except employment contracts? Doesn’t it seem strange that employers, of all actors in commercial and personal lives, should be “off the hook” when it comes to “common decency”?

There is an easy answer to this question.

The “implied covenant” carve-out for “employment contracts” has been applied to termination of employment-at-will contracts. In an at-will employment state like Minnesota, “[A]n employee can quit for any reason; an employer can fire any employee for any reason as long as that reason is not illegal, such as discrimination based on race, creed, color, sex, national origin, ancestry, religion, age, disability, sexual orientation or marital status.”

An employee can “quit for any reason” and an employer can fire any employee “for any reason” (except for an unlawful discriminatory reason); it follows that an employee and employer in an employment-at-will relationship can terminate the relationship “for no reason.” This, in turn, seems in tension with the concept that there is some sort of unwritten term in employment contracts requiring “common decency.”

This foundational concept of at-will employment means that employees/employers might lawfully quit/fire out of spite or based on a flippant caprice.

The concern is that injecting an implied covenant, injecting “into each employment contract a duty [of “good faith” or “common decency”,] would seem to subject each discharge to judicial incursions into the[se] amorphous concepts…”

Thus, what appears, at first to make no sense, or worse, is comprehensible. That is not to say that this carve-out for at-will employment contracts is the best policy; but it is neither arbitrary nor nonsensical.

(And, finally, in light of the above analysis, we think Sr. U.S. District Court Judge Donovan W. Frank (D. Minn.) got it right when he held that the agreement at issue in the case was certainly an agreement between an employer and employee in one sense, a question remained as to whether it falls under the rubric of an “employment agreement,” not entitled to the protections of an underlying covenant of good faith and fair dealing.)

Update (August 28, 2017): Hypothetical: A Co. contracts to sell B Inc. lumber. A knew of B’s plan to chop this wood and sell it as firewood after the transaction. However, the contract only references price and quantity, not suitability as firewood. The lumber sold is “green” (unsuitable as firewood for 2 years) and B feels that A deceived B.

It might be difficult to prove fraud or intentional deceit. A could argue that it was unaware that B wanted to chop and sell the firewood right away. Or A could argue that B should have specified “fire-ready” if it required it.

Could B Inc. attack A Co. from a different angle with a claim of breach of the covenant of good faith and fair dealing? Could B argue, in effect, that A knew B was buying the lumber for firewood and had an implicit duty to disclose that the lumber sold was unsuitable for firewood for two years?

This question is not easily answered. Minnesota law on what constitutes a breach of the covenant of good faith and fair dealing is unclear.

Take the recent description of the covenant in Nat. Union Fire Ins. Co. v. Donaldson (an insurance coverage dispute that has gone on for several years (discussed below). (The dispute does not appear to have gone very well for the insured, Donaldson Company, a Minnesota based “filtration” company.) 

Under Minnesota law, every contract includes an implied covenant of good faith and fair dealing requiring that one party not ‘unjustifiably hinder’ the other party’s performance of the contract….In other words, the covenant of good faith and fair dealing ‘requires a party in a contractual relationship to refrain from arbitrary and unreasonable conduct that has the effect of preventing the other party to the contract from receiving the fruits of the contract.’

What we find interesting and ambiguous about this passage is the linking clause, “In other words….” Normally the clause functions as an “equal sign.” The two statements on either side of the clause are supposed to have the same meaning. Here, though, they don’t.

Going back to our lumber example, there is no doubt that A Co. did not “hinder B’s performance of the contract.”

On the other hand, A’s conduct, in theory, might be considered “unreasonable” and having “the effect of preventing B from receiving the fruits of the contract.”

The bottom line is that there is some “play in the joints” in the covenant of good faith and fair dealing — some uncertainty as to when it applies and how it applies. This is frustrating for lawyers and, even moreso for their clients, who pay loads of money clarification of legal uncertainty. But, on the other hand, application of such amorphous values “good faith” and “fairness” will never be clear-cut.

Original Post (May 10, 2013) (under the headline: Thoughts About Relevance & A Rare Deviation from the “Extreme Deference” Given to A Magistrate Judge’s Discovery Ruling?): Imagine for a moment that you are a trial lawyer and under the rules in United States courts (state and federal), you are entitled to get documents from your adversary to prove your client’s case or to help with your client’s defense.

(a) Would you knowingly seek irrelevant documents from your adversary?

Imagine for a moment that you are trial lawyer, you represent a client, and your adversary requests documents from your client that seem irrelevant to you and your client.

(b) Assuming the documents were readily available and not particularly voluminous, would you fight (and that means PAY MONEY (it means that to your client, anyhow)) to keep from producing these pointless documents?

I would respectfully suggest the answers to those questions may be: (a) No. and (b) No.

As extremely common as these standard objections to discovery are — “irrelevance” and “not reasonably calculated to lead to the discovery of admissible evidence” — they are also in a sense extremely odd.

One must ask oneself why the  party is seeking the discovery if it is, in fact, irrelevant or not reasonably calculated to lead to the discovery of admissible evidence.

Absent some indication that the discovery is sought to harass or, alternately, that it has some overwrought logical attenuation – in other words if the request is “hare-brained” or an impermissible “fishing expedition” – I would suggest common practice, the case law, and the rules of civil procedure make clear that these objections based on “irrelevance” are normally weak at best.

This is one reason why this week’s ruling by U.S. District Court Judge John R. Tunheim (D. Minn.) overruling a discovery order by U.S. Mag. Judge Arthur J. Boylan and finding a discovery request to have been seeking “irrelevant” documents was surprising.

In an insurance coverage dispute, Judge Tunheim ruled that discovery sought by Donaldson Co. (the insured) (who happens to be represented by extremely capable lawyers with considerable expertise in insurance law) from plaintiff insurers was “irrelevant.”

This is all the more surprising in that Judge Tunheim, to reach that result, had to reverse Mag. Judge Boylan, where review, under the rules and case law, as all Minnesota litigators know, is said to be “extremely deferential.”

The take-away from the order would appear to be this:  if you are litigating in a complex subject matter such that you might serve a discovery request that, on its face, is not very clearly related to claims and defenses in the case — that is, the antithesis of a defendant in a personal injury case requesting medical records of the injured plaintiff — for example, if you are seeking insurance underwriting files to investigate intent with regard to the inclusion of a Batch Clause Endorsement in an umbrella insurance policy — you may need to walk the Court very carefully through your logic for why this discovery matters, why it is relevant.

“Why would I ask for it if it is irrelevant?” holds no persuasive force.  “Why, if it is so irrelevant, won’t the resisting party just hand it over?” holds no persuasive force.  And, it seems, substantially more is may be required in such circumstances.  (To be clear, Donaldson’s counsel did not rely on such ipse dixit arguments, of course.)

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