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Badie v. Bank Of America11/3/1998
the result in Perdue turned on the customer's agreement to be bound by "present and future rules" (italics added) rather than on his agreement to be bound by present and future charges, the Bank implies that Perdue authorizes financial institutions to add entirely new terms or conditions to existing contracts with their customers, even if the new terms pertain to subject matters not addressed in the original account agreements. In fact, the Purdue court was not faced with having to determine the validity of that type of modification, or of a modification premised on a customer's agreement to be bound by the bank's present and future "rules" or "practices"-words that are arguably analogous to the word "terms" in the change of terms provision here. Rather, the Perdue court was simply required to determine whether NSF charges were authorized by the signature card. Since present and future charges were expressly listed among the matters Crocker's customers agreed to by signing the card, increasing the fee for NSF checks did not add a radically new and unanticipated term to the contracts between Crocker and its customers. Here, on the other hand, by sending out the "bill stuffers," the Bank sought to add an entirely new kind of term to the original account agreements, which did not include any provision regarding the method or forum for resolving disputes. Perdue did not involve that type of modification and, contrary to the Bank's claim that the Perdue court "unanimously approved the Bank's method for modifying its account terms," the Perdue opinion sheds little direct light on the meaning and scope of the change of terms provision here.
Perdue does, however, underscore the importance of the duty imposed on one having the discretionary power to affect the rights of the other party to exercise that power in a manner consistent with the covenant of good faith and fair dealing. (Perdue, supra, 38 Cal.3d at p. 923.) Abuse of the power to specify terms is one of the judicially-recognized types of bad faith. (Rest.2d., Contracts (1979) ยง 205, com. d.) While Purdue indicated that the bank's increase in NSF check fees was to be evaluated under the ". . . duty of good faith and fair dealing in setting or varying such charges" (38 Cal.3d at pp. 924), other cases make it clear that the exercise of discretionary powers conferred on a party by contract must also be evaluated under the implied covenant to assure that the promises of the contract are effective and in accordance with the parties' legitimate expectations. (See Carma Developers (Cal.), Inc. v. Marathon Development California, Inc. (1992) 2 Cal.4th 342, 371-272; Cal. Lettuce Growers v. Union Sugar Co. (1955) 45 Cal.2d 474, 484 ["where a contract confers on one party a discretionary power affecting the rights of the other, a duty is imposed to exercise that discretion in good faith and in accordance with fair dealing"].) Thus, the trial court's Conclusion that the Bank's modification of the account agreements satisfied the covenant of good faith and fair dealing because " he ADR clause does not operate to deprive the customer of expected or bargained-for benefits of his or her agreement" does not withstand scrutiny. The court's focus on the ADR clause, standing alone, was misplaced: it is the Bank's exercise of its discretionary right to change the agreement, not the ADR clause in and of itself, which must first be analyzed in terms of the implied covenant. If the Bank's performance under the change of terms provision was not consonant with the duty of good faith and fair dealing, then whether the ADR clause, considered in isolation, satisfies the implied covenant makes no difference.
"The essence of the good faith covenant is objectively reasonable conduct
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