In Skanska USA Building, Inc. v. Regeneron Pharmaceuticals, Inc., 2024 WL 3214731 (S.D.N.Y. Jul. 1, 2024), the Southern District of New York distinguished between master services agreements that contemplate future statements of work (“SOW”) and those that require them. Under the former, refusal to negotiate future SOWs does not give rise to a claim for breach of the duty of good faith and fair dealing, since the contract itself allows for the possibility that the parties will not enter into SOWs.
Skanska USA Building Inc. (“Plaintiff”), a construction management company, contracted with Regeneron Pharmaceuticals, Inc. (“Defendant”) to build a campus for Defendant in New Jersey (the “Project”). The Project was divided into two phases: preconstruction and construction. Plaintiff and Defendant executed a Master Service Agreement (“MSA”) but left for separate negotiations any SOWs addressing the particulars for both phases of work. Template SOWs were appended to the MSA as exhibits. While the parties entered into a preconstruction-phase SOW, Plaintiff alleged that Defendant refused to negotiate in good faith on a construction-phase SOW and then sought bids from new companies for the construction-phase work.
Plaintiff sued, alleging, among other things, that Defendant breached the duty of good faith and fair dealing by refusing to negotiate in good faith a construction-phase SOW. Reviewing Defendant’s motion to dismiss, the court began with the well-established principle under New York law that “[i]mplicit in all contracts is a covenant of good faith and fair dealing in the course of contract performance.” Critically, however, the implied duty cannot enlarge or create new substantive rights between the parties. As the court succinctly put it: “Practically, a breach of the implied covenant of good faith and fair dealing requires the pleader to identify an obligation which supports the written terms of the agreement itself but is not [in such words] contained therein.”
While the relevant provisions of the MSA “prepare[d] the parties for the possibility” of negotiating future SOWs, the court concluded that the MSA did “not require the parties to do so.” The court observed that the MSA existed as a standalone contract and that no aspect of it was conditioned on the negotiation of future agreements. Thus, the failure to negotiate a construction-phrase SOW had no impact on the parties’ performance under the MSA. Accordingly, the court dismissed Plaintiff’s claim for breach of the duty of good faith and fair dealing.
The Skanska decision serves as a reminder of the limits of the implied covenant of good faith and fair dealing. While the implied covenant fills gaps in contractual language to facilitate the parties’ intentions, it does not create substantive rights or obligations beyond those reflected in the parties’ written agreement.
If you have any questions about claims for breach of the duty of good faith and fair dealing, please contact Michael C. Rakower or Daniel F. Gilpin.
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