On March 27, 2025, in Kircher v. Boyne USA, Inc., the Michigan Supreme Court unanimously reaffirmed the implied covenant of good faith and fair dealing in contracts under Michigan law and also provided guidance on the unilateral discretion necessary to trigger a breach of contract for violation of the covenant.
Kircher and Boyne USA (“Boyne”) entered into 2014 and 2019 settlement agreements governing a stock redemption. The 2014 agreement set a formula for redemption price (based on EBITDA minus debt), while the 2019 agreement left the 2019 price “to be determined” using the same formula. In 2018, Boyne borrowed $300 million to purchase real estate it had previously leased. This acquisition and accompanying loan significantly increased Boyne’s debt and caused Kircher’s 2019 redemption price under the formula to become negative.
Lower Court Decisions
Kircher sued asserting a claim for breach of the parties’ 2014 settlement agreement by entering into the 2018 loan transaction in bad faith, thereby destroying the contracted-for right to redemption and value of Kircher’s shares. Boyne moved for summary disposition under MCR 2.116(C)(8), arguing that the 2014 settlement agreement did not limit its ability to acquire assets or incur debt. The trial court disagreed, finding questions of fact concerning whether plaintiff could prevail on a theory of the implied covenant of good faith and fair dealing.
On leave granted, the Michigan Court of Appeals affirmed. In an opinion authored by Judge Douglas Shapiro, the Court of Appeals recognized that “[t]he covenant of good faith and fair dealing is an implied promise contained in every contract that neither party shall do anything which will have the effect of destroying or injuring the right of the other party to receive the fruits of the contract.”
While not a standalone cause of action, the Court of Appeals “conclude[d] that when a contract confers discretion on a party, a breach-of-contract action will lie for an alleged bad-faith exercise of that discretion.” The Court found such discretion conferred on Boyne by the parties’ agreement to calculate the per-share redemption price using the formula, “unless otherwise agreed by the Parties.” Accepting plaintiff’s allegations as true, her “reasonable expectation that she would be able to redeem her shares had been frustrated, yet defendants refused to consider an alternative method to calculate the redemption price, as expressly permitted by the 2014 settlement.” Under these facts, the Court of Appeals “agree[d] with plaintiff that she has sufficiently stated a breach-of-contract claim on the basis of defendants’ alleged bad-faith decision to not utilize a different formula to calculate her redemption price.”
The Michigan Supreme Court reverses
The Michigan Supreme Court held that a contractual provision stating “unless otherwise agreed by the Parties” did not grant Boyne the unilateral discretion to alter the redemption formula or trigger a duty for Boyne to negotiate an alternative valuation formula. Instead, the “unless otherwise agreed by the Parties” simply preserved mutual modification rights which never occurred. The Supreme Court also cited earlier Court of Appeals cases holding that where a contract makes the manner of performance a matter of one party’s own discretion, the covenant of good faith and fair dealing applies to the exercise of that unilateral discretion. However, since the phrase “unless otherwise agreed by the Parties” created no such unilateral discretion, there was no breach of contract by Boyne.
The Kircher decision reaffirms the viability of the implied covenant of good faith and fair dealing under Michigan law, as well as its limitations. It also reminds counsel that if the parties intend to impose specific good faith requirements (e.g., renegotiation mandates), the parties must include express language to that effect.