Waiving Good Faith: A Natural Language Processing Approach

Abstract

In Northwest, Inc. v. Ginsberg, the Supreme Court recognized that some states impose contractual good faith performance obligations and others do not. States that impose the duty are said to deploy the doctrine to ensure that contractual partners adhere to community standards of decency, fairness, and reasonableness. By contrast, states that let the parties decide for themselves are said to protect the parties’ reasonable expectations and give full latitude to their contractual intentions. As noted in Ginsberg, these distinct approaches reflect the two leading theories of contractual good faith performance. One theory, the Excluder Thesis, asserts that good faith is an open-ended standard that excludes bad faith. The other, known as the Recapture Thesis, asserts that good faith is more like a closed-ended rule that prohibits parties from recapturing opportunities that are implicitly sacrificed when making promises to a contractual partner.

Through Natural Language Processing of more than 20,000 contractual good faith cases, this Article presents the first exhaustive empirical study of the entire body of contractual good faith case law. The analysis reveals that courts, in the main, adhere to the Excluder Thesis, and deploy good faith as an open-ended standard in order to exclude community-based definitions of bad faith. Use of the Recapture Thesis for supplying good faith relief is scarce. This is true even in jurisdictions that permit parties to waive obligations of good faith. The empirical analysis further demonstrates, counter-intuitively, that states which permit waiver, and that are said to focus on party intentions, more often use good faith to police community standards of decency.

Taken together, the empirical findings vindicate the Excluder Thesis and suggest the decline of waiver. Abating waiver, however, would be a mistake. Waiver of the duty to perform contractual obligations in good faith should be understood in terms of degree. After all, permission to waive is established by law, and is presumably sanctioned by the will of the community. An important example is federal preemption of state-based good faith claims, which can be understood as a form of imposed waiver. Another example is state-imposed exemptions of good faith duties in employment contracts. In both cases, an alternative public policy is prioritized over community standards of decency, fairness, and reasonableness between contractual partners.

Parties who waive good faith obligations reject today’s community standards. Otherwise they would not waive. A subtler and more meaningful observation is that they reject the unknown community standards of tomorrow. Inasmuch as good faith is deployed as an open-ended standard that relies on fluid community norms, good faith is a doctrine that evolves over time and presents unknown risks. Waiver states allow contractual partners to mitigate those risks. While waiver may disadvantage weaker contractual parties, the empirical analysis suggests that it is rarely used in that manner, and as noted in Ginsberg, competition and federal regulation can be expected to suppress its egregious and undesirable use. Authorized waiver should be expanded.

Keywords: Contract, Good Faith, Waiver, Excluder Thesis, Recapture Thesis