Storek & Storek, Inc. v. Citicorp Real Estate, Inc

In Storek & Storek, Inc. v. Citicorp Real Estate, Inc. (2002) 100 Cal.App.4th 44, Citicorp entered into an agreement to provide financing for completion of plaintiff's construction project. The agreement included a provision that Citicorp could withhold funds if it was not satisfied that the project budget was "in balance." Ultimately, Citicorp made that determination and withheld funds. Plaintiff sued, alleging that Citicorp's determination violated the covenant of good faith and fair dealing. The Court of Appeal rejected that contention, noting that the covenant of good faith and fair dealing can never be interpreted to prevent a party from doing what the contract expressly allows. But the court then turned to the issue of whether Citicorp's contractual right to claim "dissatisfaction" with the project budget was to be evaluated on a subjective basis or an objective basis. It acknowledged two different lines of cases: One line holds that "satisfaction" is a purely subjective decision which is governed by a good faith standard, and the other holds that the decision must be evaluated in accordance with an objective standard of reasonableness. The court explained the difference between the standards: "In this context, reasonableness and good faith are distinct concepts. A decision is unreasonable when it is arbitrary, capricious, or lacking in evidentiary support. A lack of good faith, on the other hand, suggests a moral quality, such as dishonesty, deceit, or unfaithfulness to duty. When the promisor has the power to make a purely subjective decision, that decision must be made in good faith, but the courts will not examine its reasonableness. Conversely, when the promisor's satisfaction is evaluated under the objective test, the validity of the promisor's decision of satisfaction or dissatisfaction rests only on the reasonableness of the decision; the courts will not examine good faith." (. Storek & Storek, Inc. v. Citicorp Real Estate, Inc., supra, 100 Cal.App.4th at p. 59.) The court then noted "the choice of objective or subjective test to evaluate a promisor's satisfaction depends upon the intent of the parties, as expressed in the language of the contract. In the absence of a specific expression in the contract or one implied from the subject matter, the preference of the law is for the less arbitrary reasonable person standard." (. Storek & Storek, Inc. v. Citicorp Real Estate, Inc., supra, 100 Cal.App.4th at p. 59.) Consequently, because the contract in that case did not express any standard, the Storek court applied the objective standard, and clearly distinguished it from "good faith": "Citicorp had no duty to act in good faith in determining whether the condition precedent to its performance had been fulfilled. Citicorp was required only to act reasonably." ( Id. at p. 62.)