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VOLUME 4 | NUMBER 1 | SPRING 2016

Can the Implied Covenant of Good Faith Be Altered by Bargained for Discretion? A Historical Analysis and Modern Application

Jordan Matthews

Jordan-Matthews-portrait Jordan Matthews is a second-year law student at Pepperdine University School of Law where he focuses on the areas of entertainment and intellectual property law. He is the CEO of Quantum Media Fund, LLC and was previously a film finance executive for eight years. He can be reached at jordan@quantummediafund.com.

I. INTRODUCTION
In contract law, there is a general assumption that the parties to a given agreement will “act in good faith and deal fairly without breaking their word, using shifty means to avoid obligations, or [deny] what the other party obviously understood.”[1] Under California law, the covenant of good faith and fair dealing is inherent within every legal arrangement between parties.[2] Ultimately, this implied promise establishes an affirmative obligation on the contracting party whereby “each party will not do anything to unfairly interfere with the right of any other party to receive the benefits of the contract.”[3] However, California law is ultimately unclear on the issue of whether or not the implied covenant of good faith and fair dealing can be altered when one party is given discretionary power.

 

Although parties to an agreement may negotiate for sole and absolute discretion, or some derivative form of decision-making authority, it is unreasonable to infer that such a term effectively destroys the implied covenant of good faith and fair dealing because the purpose of entering into an agreement is to achieve an objective.  If one party has the ability to act against the interests of the other individual by proceeding in bad faith by potentially negating the actual execution of the objective, then, from a policy point of view alone, it would be unreasonable to enter into any agreement that allows for sole and absolute discretion.  Yet, there may be legitimate business purposes for negotiating such decision-making authority because one party may be an expert in a given field of trade and thus, it would be more efficient to provide them with the ability to have sole authority over business decisions without acquiring approval from a novice business partner.  Essentially, the novice business partner is no different than a passive investor in a public corporation who has no authority over managerial decision.  Regardless, California law should clarify this issue in order to avoid costly misunderstandings.  A recent case addressing this issue pertains to a lawsuit between Emmet/Furla Oasis Films and Morgan Creek Productions over a casting decision in the biopic of rapper Tupac Shakur.[4]

II. BACKGROUND

A. Carma Developers

The California Supreme Court first addressed this issue in Carma Developers (Cal.), Inc,. v. Marathon Developers. Cal., Inc.[5] There, the Court found that the recapture of a lease pursuant to a negotiated provision within the agreement, which expressly permitted the termination of the lease in the event of alienation, was not a violation of the implied covenant of good faith and fair dealing.[6] Ultimately, the Court determined that, “[t]he covenant of good faith and fair dealing finds particular application in circumstances where one party is invested with a discretionary power affecting the right of another.”[7] Three prior cases have addressed this issue in the context of the film industry.[8]

B. Third Story Music

In Third Story Music. v. Waits, a music company brought suit against a performer and corporation, which acquired rights to musical output from the performer based upon a breach of the implied covenant of good faith and fair dealing with regards to the marketing of the singer’s music.[9] There, the court determined that, the company’s promise to market recordings, or election not to do so was not conditioned upon an exercise of the implied covenant of good faith because the company had not given the artist reasonable consideration.[10]

C. Locke

In Locke v. Warner Bros., a prospective director brought suit against a film studio for breach of the implied covenant of good faith and fair dealing when the studio categorically refused to work with her.[11] There, Locke was an actress who appeared in the movie The Outlaw of Josey Wales, which was directed by Clint Eastwood.[12] Moreover, Locke developed a romantic relationship with Eastwood, which was subsequently dissolved after a twelve years.[13]

As a part of the settlement between Locke and Eastwood, Eastwood secured a development deal for her with Warner Bros.[14] Locke would receive “$250,000 per year for three years for a ‘non-exclusive first look deal,’”[15] pursuant to the agreement.[16] A second term to the agreement was a $750,000 “pay or play”[17] arrangement, which amounted to an aggregate financial benefit to Locke of $1.5 million.[18]

The court noted that, “where a contract confers on one party a discretionary power affecting the rights of the other, a duty is imposed to exercise that discretion in good faith and in accordance with fair dealing.”[19] Specifically, the court noted that, “[i]f Warner acted in bad faith by categorically rejecting Locke’s work and refusing to work with her, irrespective of the merits of her proposal, such conduct is not beyond the reach of the law.”[20]

Thus, although Warner provided Locke with consideration and although Warner argued that its election to not work with Locke was merely creative discretion, such refusal was found to be a violation of the implied covenant of good faith and fair dealing because it frustrated Locke’s ability to realize the purpose of the contract.  Here, her ultimate objective was to direct a film with Warner, which was not given good faith consideration, potentially because of the conflict of interest between Warner, Eastwood and Locke.

D. Cussler

In Cussler v. Crusader Entertainment, LLC, Cussler, an author of a series of novels revolving around the character Dirk Pitt, brought action against Crusader, a production company, for breach of contract and the producer cross-complained for breach of the implied covenant of good faith and fair dealing.[21] The parties entered into an agreement whereby Crusader had an option to purchase the literary rights to material used to make the movie Sahara.[22] The agreement obligated Crusader to make an aggregate payment of $20 million in seven installments.[23] Moreover, the arrangement provided that Cussler was prohibited from disseminating any news stories or publicity about the project and Crusader would not alter the screenplay “without Cussler’s written approval exercisable in his sole and absolute discretion.”[24] 

After the exercise of the option, the relationship between the parties became tenuous.[25] Cussler asserted that Crusader made unapproved changes to the screenplay while Crusader claimed that Cussler breached the contract by publicly disparaging the film, which was not a commercial success upon theatrical release.[26] Ultimately, the court determined that there was no bad faith on behalf of Cussler because there was no covenant of good faith and fair dealing where Cussler was given sole and absolute discretion.[27]

E. Emmet/Furla Oasis

In a recent dispute, implied covenant of good faith has been at issue where discretion has been granted.  Largely due to the recent box office success of the summer 2015 hit Straight Outta Compton, the producers of a biopic of rapper Tupac Shakur have been given a significant reason to actually commence production.  However, Emmet/Furla Oasis filed a lawsuit asserting $10 million in damages against Morgan Creek Productions in October 2015 over a breach of the co-production agreement between the two parties due to setting a lead actor and production schedule without Emmet/Furla’s approval.[28]

Here, the terms of the agreement encompassed a production budget, which would not exceed $30 million.[29] Additionally, the companies would have mutual approval over the production schedule and distribution and sales agreements, while Emmit/Furla maintained sole approval over the actor selected to play the title role of Tupac Shakur and over the choice of the director.[30]

Moreover, Emmet/Furla claimed that, one month after the release of Straight Outta Compton, Morgan Creek insisted that Emmet/Furla provide immediate evidence that they could finance fifty percent of the production budget and that Emmet/Furla would adhere to new and groundless terms not established in the original arrangement or lose participation in the project.[31] Morgan Creek then allegedly supplied a budget exceeding $34 million and Emmet/Furla refused to comply.[32] Most importantly, Morgan Creek then allegedly breached the co-production agreement by “engag[ing] an actor for the title role of Tupac Shakur without disclosing his identity,” which is arguably a potential violation over Emmt/Furla’s sole discretion over selection of the lead actor.

Thus, here, there is an interesting set of circumstances surrounding the potential breach of the implied covenant of good faith and fair dealing when there is discretion.  In Cussler, Crusader Entertainment argued that there was a breach of the implied covenant of good faith and fair dealing when Cussler had sole and absolute discretion over changes to the screenplay, but he refused to work in good faith with the production over suggested revisions.  There, the court determined that there was no violation of the implied covenant of good faith because Cussler was given sole and absolute discretion.[33] Conversely, in Locke, the court determined that Warner did violate the implied covenant of good faith when it categorically refused to work with the actress, despite paying her $1.5 million in consideration, because their refusal frustrated the purpose of the contract.[34]

Here, Morgan Creek has argued that there is no violation due to the casting choice because, although Emmet/Furla has sole discretion over selection of the lead actor, Emmet/Furla has allegedly failed to provide funding assurances.  However, the original agreement required mutual approval over the production schedule.  Thus, Morgan Creek’s sudden assertion that Emmet/Furla needed to immediately provide funding assurance seems to be in contravention to the mutual approval requirement over the production schedule.  If the funding timeline was uncertain, then the production schedule was uncertain and Emmet/Furla was not required to provide such an assurance unless it was expressly included in the original co-production agreement.  Thus, although Emmet/Furla seems to clearly have discretion over the selection of the lead actor, the primary question is whether or not Emmet/Furla breached the contract first by not providing adequate funding assurances according to Morgan Creek’s demand.  If Emmet/Furla breached the contract first, then perhaps the contract was then void and thus, Emmet/Furla no longer had sole discretion over casting.

Interestingly, this case would be more akin to Cussler if Emmet/Furla had made a unique casting choice in its sole discretion and without and input from Morgan Creek, which disagreed with the choice but was still responsible for providing fifty percent of the production budget.  Then, there would be a question as to whether Emmet/Furla’s sole discretion over casting needed to be exercised in good faith.  However, there is still an issue here in terms of the court defining a bright-line rule over situations where there is explicit discretion within a contract.  The question here becomes whether or not Emmet/Furla’s sole discretion means that Morgan Creek has no ability to move forward with production by casting a lead actor if Emmet/Furla is actually unable to perform and Morgan Creek is able to commence production with or without another co-production partner.  Again, this situation offers a potential opportunity for the court to determine the actual guidelines for this issue in a clearer doctrine, as this case is another example of the misunderstandings that can arise when the law is unsettled.

III. Conclusion

Ultimately, while it appears unreasonable to assume that the implied covenant of good faith and fair dealing can be contractually altered by bargaining for discretion in an agreement, the Court should define this rule so that costly misunderstandings can be avoided, particularly in the entertainment industry.



[1] Implied covenant of good faith and fair dealing, law.com, http://dictionary.law.com/Default.aspx?selected=906 (last visited Feb. 28, 2016).

[2] 325. Breach of Covenant of Good Faith and Fair Dealing – Essential Factual Elements, justia, https://www.justia.com/trials-litigation/docs/caci/300/325.html (last visited Feb. 28, 2016).

[3] Id.

[4] See infra note 28.

[5] Carma Developers v. Marathon Dev Cal., 826 P.2d 710 (Cal. 1992).

[6] Id. at 350.

[7] Id. at 372.

[8] Third Story Music. v. Waits, 41 Cal.App.4th 798 (1996); Locke v. Warner Bros., 57 Cal.App.4th 354 (1997); and Cussler v. Crusader Entertainment, 212 Cal.App.4th 356 (2013).

[9] Third Story, at 809.

[10] Id.

[11] Locke, at 357.

[12] Id. at 359.

[13] Id.

[14] Id.

[15] A first look deal is a term agreement, typically between a motion picture studio and a production company, whereby either entity may have the right to a first look at any of the alternative party’s projects. Types of Deals To Know, destination Hollywood, http://destinationhwood.blogspot.com/2010/02/types-of-deals-to-know.html (last visited March 5, 2016).

[16] Locke, at 359.

[17] In terms of an agreement with an actor, a pay or play deal means that the talent will be paid, regardless of whether or not they are used for their acting services. Matt Galsor and Jesse Saivar, Legal Ease: So…What Exactly is “Pay Or Play’?, film independent, http://www.filmindependent.org/news-and-blog/so-what-exactly-is-pay-or-play/#.Vtuw7mWyPdQ (2011).

[18] Locke, at 359.

[19] Id at 363.

[20] Id. at 364.

[21] Cussler, at 359.

[22] Id.

[23] Id.

[24] Id.

[25] Id.

[26] Id.

[27] Id.

[28] Austin Siegemund-Broka, Tupac Biopic Producer Brings $10M Lawsuit Over Secret Star Casting, the Hollywood Reporter (Oct. 28, 2015), http://www.hollywoodreporter.com/thr-esq/tupac-biopic-producer-brings-10m-835336.

[29] Id.

[30] Id.

[31] Id.

[32] Id.

[33] Cussler, supra note 21.

[34] Locke, supra note 15.


                                                                                                                                                                         
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