Tymshare v. Covell
Citation and Court
Tymshare, Inc. v. Covell, 727 F.2d 1145 (D.C. Cir. 1984) (Scalia, J.)
Facts
Covell was a sales representative for Tymshare whose compensation was based on a commission plan that gave Tymshare the contractual right to change the commission rates and quotas. Tymshare exercised this discretion in ways that substantially reduced Covell’s commissions, effectively rewriting the compensation formula after Covell had already made sales. Covell sued, arguing the company had exercised its discretion in bad faith.
Issue
Whether an employer’s contractual discretion to modify a commission plan is limited by the implied covenant of good faith and fair dealing, such that arbitrary or opportunistic changes in the commission formula may constitute breach.
Holding
Judge Scalia held that the implied covenant of good faith and fair dealing limits the exercise of contractual discretion; while Tymshare had the right to adjust commissions, that discretion could not be exercised arbitrarily or in a manner that denied Covell the fruits of his bargain.
Rule / Doctrine
When a contract grants one party discretion over terms affecting the other party’s compensation or rights, the implied covenant of good faith and fair dealing prohibits the exercise of that discretion in a manner that is arbitrary, capricious, or inconsistent with the reasonable expectations of the parties. The covenant does not add new obligations but limits the manner in which existing discretion is exercised.
Significance
An influential opinion by then-Judge Scalia articulating the role of good faith in policing discretionary contract terms. Widely cited for the proposition that contractual discretion is not unlimited and must be exercised in good faith. Pairs with Fortune v. National Cash Register and City of Midland v. O’Bryant in discussions of good faith in employment and commission agreements.