Unreasonable Behavior: I Know It When I See It!

A great way to figure out whether someone’s behavior in connection with a contract or agreement is reasonable is to look at how courts view such things when resolving disputes. A recent disagreement over an easement provides such a perspective, and has application to many other types of commercial transactions. The case* in question illustrated what sort of conduct is reasonable and what is not.

As a general rule, all parties are required to behave reasonably and in good faith in performing any agreement or contract. As an attorney representing banks, lenders, parties in financing transactions, real estate purchasers and property owners in real estate matters in San Jose, Silicon Valley and all around California, I often am exposed to situations in which a question arises about whether someone’s conduct is out of line, so this sort of “temperature check” is useful.

A Refusal To Sign Perfunctory Paperwork

In the case at hand, Party D (plaintiff Dolnikov) owned land but accessing it required use of a driveway easement across the land of Party E (defendant Elizian). The easement had been granted in the 1940s and had been an encumbrance on E’s land ever since. D was in the process of building homes on two lots and each could only be accessed using the easement. As part of the project, D needed to excavate and build a small retaining wall on the existing easement to keep it clear of rock debris and improve the surface. These items were required as a condition to granting certificates of occupancy for the new homes and were in the approved building plans. The local authorities (Los Angeles) had a perfunctory requirement that Party E, who also had an interest in the property, needed to acknowledge a community driveway covenant and the retaining wall permit before they would issue the construction permit for the easement work. The problem? Party E (over whose land the easement ran) refused to sign. E tried to extract up to $200,000 from D as his condition to signing the required paperwork, which D viewed as extortion as she had been and going forward was only going to use the easement for its intended purpose and needed the signatures only to meet the local government requirements. At that point the project came grinding to a halt.

The Court: E’s Refusal To Sign Papers Interfered with D’s Use of the Easement .

A court reviewed the situation and determined that the work on the easement did not change its character or place any material burden on E, that E’s failure to sign two documents required by the city to allow construction to go forward was an unreasonable interference with D’s right to the easement, and ordered E to sign the two documents required under the local ordinances so D could obtain necessary permits to continue the construction.

The Requirement of Good Faith and Fair Dealing Extends to All Agreements .

An interesting aspect of the case is the focus on the covenant of good faith and fair dealing that runs through all contracts, including loan documents and purchase and sale agreements. The court noted that “defendants are also subject to the rule of reasonableness and mutual accommodation,” and “there was no evidence the signatures [being required] imposed a needless burden on defendants…” In other words, a party to an agreement has an affirmative obligation to cooperate in furthering the main objectives of the agreement. The specific context of this case was easements and the court concluded that the covenant of good faith and fair dealing does apply to them, which was not entirely clear before this ruling. Once making that determination, the court treated the analysis as it would any other modern commercial transaction. Commentators note that this case also is representative of a larger trend in terms of the application of the covenant of good faith and fair dealing to most commercial transactions. As such, it serves as a lesson about acceptable conduct for parties in any deal.

*Dolnikov v. Elizian, 222 Cal.App.4 th 419 (2013).

The information appearing in this blog does not constitue legal advice or opinion. Such advice and opinion are provided by the firm only upon engagement with respect to specific factual situations. Specific questions relating to this article should be addressed directly to Strategy Law, LLP.