Paralegal Certification PrepContracts and Business LawMedium
A small publishing house, 'Literary Lights,' enters into a contract with an author for a new novel. The contract states that the author will receive 10% of the net profits from book sales. After the book is published, 'Literary Lights' informs the author that due to higher-than-expected marketing costs, there are no net profits, despite significant gross sales. The author believes the publisher is manipulating accounting to avoid paying royalties. Which contractual principle is most relevant to the author's claim?
- AUnconscionability
- BMutual mistake
- CPromissory estoppel
- DImplied covenant of good faith and fair dealing
Show answer & explanationAnswer & explanation
Correct answer: D. Implied covenant of good faith and fair dealing
The implied covenant of good faith and fair dealing requires parties to a contract not to act in a way that deprives the other party of the benefits of the contract. Manipulating accounting to avoid paying royalties, despite significant sales, would be a strong argument for a breach of this implied duty.
Why the other options are wrong
- A. Unconscionability relates to contracts that are so unfair or one-sided as to be oppressive, usually at the time of formation, not typically about post-formation accounting practices.
- B. Mutual mistake occurs when both parties have a fundamental misunderstanding about a material fact at the time of contract formation, which is not the issue here.
- C. Promissory estoppel applies when there's a promise relied upon to one's detriment, not directly to the interpretation of profit calculations in an existing contract.
Implied Covenant of Good Faith and Fair Dealing
A legal principle, present in most contracts, requiring parties to act honestly and not to do anything that would deprive the other party of their right to receive the benefits of the agreement.
- Applies to all contracts (common law and UCC).
- Prevents opportunistic behavior and evasion of the spirit of the contract.
- Often invoked when one party uses discretion to unfairly benefit themselves.
Memory trick: Contracts need 'H.O.N.E.S.T.' intentions for 'Good Faith'.