Master California Court of Appeal decision holding that even where a contract grants one party broad discretion, that discretion must be exercised in good faith. with this comprehensive case brief.
Locke v. Warner Bros. sits at the intersection of Hollywood development deals and foundational contract doctrine. The case addresses whether a party with ostensibly unfettered contractual discretion can exercise that discretion in a way that deprives the counterparty of the agreement’s benefits. In doing so, it clarifies that the implied covenant of good faith and fair dealing meaningfully cabins discretionary power—even in industries where subjective judgment (e.g., creative development) is central.
For law students, the decision is a critical counterpoint to cases emphasizing that the implied covenant cannot override express contractual rights. Locke teaches that while courts will not rewrite a contract to impose duties the parties did not bargain for, they will insist that discretion be exercised honestly and not as a pretext to sabotage the deal. The opinion draws a line between permissible business judgment and bad-faith conduct designed to frustrate the agreement’s fruits.
Locke v. Warner Bros., Inc., 57 Cal. App. 4th 354, 66 Cal. Rptr. 2d 921 (Cal. Ct. App. 1997)
After ending a long-term relationship with actor-director Clint Eastwood, Sondra Locke sued him; the dispute ultimately culminated in a settlement arrangement that included a development deal for Locke at Warner Bros. Under the written agreement, Warner agreed to provide Locke with a "first look" development opportunity for her directing projects, pay her compensation and overhead, and consider projects she submitted; Warner, however, retained sole discretion whether to develop or produce any of her projects. Unknown to Locke at the time, Eastwood and Warner had a side arrangement under which Eastwood reimbursed Warner for the costs of Locke’s deal, effectively insulating the studio from financial risk tied to her projects. Over the life of the deal, Locke submitted numerous (reportedly dozens of) projects for consideration. Warner rejected all of them, and Locke presented evidence that Warner executives had been instructed not to work with her and that the deal was a sham intended to resolve Eastwood’s dispute rather than to genuinely consider her proposals. Locke sued Warner, alleging, among other claims, breach of contract and breach of the implied covenant of good faith and fair dealing. The trial court granted summary judgment for Warner, reasoning that Warner had unfettered discretion to reject any project. Locke appealed.
When a contract grants a studio sole discretion to accept or reject proposed projects, does the implied covenant of good faith and fair dealing nevertheless require the studio to exercise that discretion honestly and in good faith—i.e., to genuinely consider submissions rather than reject them for pretextual or bad-faith reasons?
Every contract in California includes an implied covenant of good faith and fair dealing, which prevents a party from acting in a way that deprives the other of the benefits of the agreement. While the implied covenant cannot prohibit conduct expressly permitted by the contract or impose duties contrary to the parties’ express terms, it does restrain a party’s exercise of discretionary power, requiring that discretion be exercised in good faith and in accordance with the contract’s purposes. Where a party’s performance consists largely of evaluating and exercising judgment over submissions, the covenant requires at least honest, good-faith consideration; a concealed intent never to perform or a sham exercise of discretion can constitute a breach.
Reversing in part, the Court of Appeal held that triable issues of fact existed as to whether Warner breached the implied covenant of good faith and fair dealing by failing to genuinely consider Locke’s submissions and by operating under a sham arrangement. Although Warner retained discretion to accept or reject projects, the implied covenant required that it exercise that discretion in good faith. Summary judgment on the implied covenant claim was improper; however, to the extent Locke’s claims sought to impose an obligation on Warner to actually produce or develop a project, summary adjudication was proper because the contract did not require production.
The court began by reaffirming that the implied covenant cannot negate express contractual rights or obligations. Warner’s agreement clearly gave it discretion to accept or reject projects; thus, the court would not impose an affirmative duty to develop or produce any particular film. That said, the implied covenant applies with particular force when one party’s contractual obligations are discretionary and involve subjective judgment. In such circumstances, California law requires that discretion be exercised honestly and in good faith so as not to frustrate the other party’s right to the contract’s benefits. The court distinguished cases like Third Story Music, Inc. v. Waits, which declined to impose an implied duty to market where the agreement expressly permitted the label to refrain from marketing altogether. Here, the essence of Warner’s promise was not to produce a film, but to give Locke a genuine first look and to consider her submissions in good faith. Locke’s evidence—including the side arrangement under which Eastwood reimbursed Warner for all costs of her deal, statements from Warner personnel indicating an institutional decision not to work with her regardless of quality, and the blanket rejection of numerous projects with indications of perfunctory review—created a reasonable inference that Warner never intended to, and did not, honestly exercise its discretion. If a jury credited that evidence, it could find Warner’s conduct a bad-faith subversion of the deal’s benefits. The court also cited Carma Developers (Cal.), recognizing that the covenant cannot bar conduct expressly permitted; however, Carma likewise acknowledges that discretionary powers are subject to good-faith limits. The line, the court explained, is between a legitimate exercise of business judgment (e.g., deciding a particular project is not commercially viable) and a sham or pretextual exercise of discretion driven by external arrangements or animus that nullify the contract’s intended value. Because Locke’s showing supported the latter inference, summary judgment was reversed on the implied covenant claim.
Locke is a leading California authority on the implied covenant’s role in discretionary contracts—especially entertainment industry development deals. It underscores that a counterparty cannot hide behind a “sole discretion” clause to engage in pretextual nonperformance. The decision is frequently cited for two propositions: (1) a party with discretionary power must exercise it in good faith and cannot sabotage the bargain, and (2) the covenant cannot be used to impose duties the parties expressly declined, such as a duty to develop or produce a work. For law students, Locke provides a nuanced framework for analyzing the interplay between express discretion, subjective judgment, and the covenant’s limits.
No. While a sole discretion clause preserves the right to say no, the implied covenant still requires that the discretion be exercised honestly and for reasons consistent with the contract’s purposes. The covenant cannot require a party to do what the contract says it need not do (such as produce a film), but it does forbid sham or pretextual exercises of discretion designed to deprive the other party of the agreement’s benefits.
Evidence that the decision-maker never intended to perform the promised evaluative function, or that decisions were made for reasons extraneous to the contract’s purpose, can suffice. In Locke, this included a side arrangement reimbursing the studio’s costs, employee statements that the studio would not work with the plaintiff regardless of merit, and a pattern of perfunctory rejection of numerous submissions. Such evidence supports an inference of pretext or sham, defeating summary judgment.
Third Story and Carma emphasize that the implied covenant cannot override express rights; if a contract expressly permits a party to refrain from performance, courts will not impose an implied duty to perform. Locke is consistent with that principle but adds that when performance involves discretionary evaluation (e.g., first-look development), the covenant requires honest consideration. Locke does not force production; it requires good-faith exercise of the discretion to accept or reject.
Parties should define the scope of discretion and the evaluative process. Studios may state that no duty to produce exists, while acknowledging an obligation to consider submissions in good faith within a specified process (timelines, feedback, etc.). Counterparties may seek explicit language requiring good-faith consideration and documentation of reviews. Clear drafting reduces disputes and clarifies expectations about how discretion will be exercised.
Not necessarily. The covenant does not guarantee success or acceptance; it mandates honest, good-faith consideration. A party may reject every submission if done for legitimate business reasons consistent with the contract’s purpose. Breach arises when the rejections are pretextual, the decision-maker never truly considered the submissions, or external arrangements predetermine the outcome.
Locke does not impose a categorical duty to provide reasons or feedback unless the contract so provides. However, in litigation, contemporaneous documentation of genuine consideration (notes, coverage, analyses, meeting records) can be critical evidence of good faith. The absence of any evaluative record, coupled with other evidence, can support an inference of bad faith.
Locke v. Warner Bros. clarifies that contractual discretion—no matter how broad—is not a license for bad faith. In industries where subjective judgment predominates, courts will not rewrite agreements to require performance the parties declined to promise, but they will police sham exercises of discretion that render the bargain illusory.
For law students and practitioners, the case offers a practical template for analyzing discretionary clauses: identify the contract’s express grants and limits, then assess whether the challenged conduct frustrates the agreement’s benefits through pretext or collusion. Properly understood, Locke harmonizes party autonomy in drafting with the implied covenant’s core function of preserving the contract’s legitimate fruits.