ARIZONA SUPREME COURT EXPANDS DUTY OF GOOD FAITH IN CONTRACTS

In the late 1980's, a developer approached a bank to seek financing for the project. The bank agreed to provide construction financing as long as there was a permanent loan commitment in place. A permanent loan commitment was obtained from various pension funds. Under the permanent loan commitment, the pension funds could decline to close on the loan if the developer failed to pay its debts as they became due, or defaulted on any other loan obligations. At the bank's request, the developer, the pension funds, and the bank entered into a tri-party agreement. Under the tri-party agreement, the bank was authorized to volunteer information regarding developer's well-being to the pension funds, but the bank was not obligated to provide this financial information. As the construction on the Mercado was completed, developer's real estate ventures and general financial condition deteriorated. Neither developer nor the bank disclosed this deterioration to the pensions funds. It was alleged in the lawsuit that the bank knew developer was providing false information to the pension funds and that by not disclosing the deteriorating financial condition, the bank actually helped developer defraud the pension funds. In proceedings before the trial court, the bank argued that under its contract and common law it was not obligated to provide the pension funds with any information regarding developer's finances. The trial court agreed and dismissed the pension funds' claims. The Arizona Court of Appeals also agreed with this position and affirmed the trial court's action. The case was then brought to the Supreme Court. The Arizona Supreme Court disagreed, holding that the allegations in the complaint stated a claim for: (1) aiding and abetting a fraudulent act; (2) breaching the implied covenant of good faith and fair dealing; (3) interfering with contractual relations; and (4) fraudulently concealing material information. The Arizona Supreme Court ruled that the pension funds were entitled to present these claims to a jury. Notably, in ruling on the implied covenant of good faith and fair dealing, the Arizona Supreme Court expanded prior-existing doctrine.