What are the facts?
Centronics (the seller) and Genicom (the buyer) entered into a written agreement for the sale of a business unit. As part of the transaction, the parties established an escrow (or holdback) consisting of a portion of the purchase price to secure Centronics' indemnity obligations. The agreement provided a defined claims period during which Genicom could assert indemnity claims against the escrow and required that any claims be specified with "reasonable detail." The contract further provided that release of any remaining escrow funds would occur after the claims period, but required joint instructions (or otherwise resolution of claims) before the escrow agent would disburse. After closing, Genicom timely submitted claims against the escrow, describing categories of alleged losses and breaches that, in its view, fell within the indemnity provisions. Centronics disputed liability and demanded release of all or most of the escrow, contending that Genicom's submissions were insufficiently detailed and that Genicom was withholding consent to release in bad faith to retain leverage. Centronics sued, asserting breach of the implied covenant of good faith and fair dealing and seeking to compel release of the escrow; Genicom responded that it was acting within the contract's express procedures and protections. The trial court granted relief to Centronics in part, but the New Hampshire Supreme Court took the case to address the scope of the good-faith covenant in the context of an escrow governed by clear contractual terms.
What is the legal issue?
Does the implied covenant of good faith and fair dealing require a buyer to authorize release of escrowed funds notwithstanding unresolved, timely asserted indemnity claims made with reasonable detail under the parties' contract; or, put differently, may the covenant be used to limit rights the contract expressly confers?
What rule applies?
New Hampshire law implies a covenant of good faith and fair dealing in every contract. The covenant protects the parties' justified expectations by requiring that discretionary contractual power be exercised honestly and in a manner consistent with the agreement's purposes, not arbitrarily, capriciously, or to destroy the other party's right to the fruits of the contract. However, the covenant is not an independent source of duties divorced from the contract and cannot be invoked to rewrite, negate, or add to unambiguous terms to which the parties agreed. Its content and operation depend on the particular contractual context, including whether the contract confers discretion and the extent to which the parties have specified procedures and conditions.
What did the court hold?
No breach of the implied covenant occurred. Because the contract expressly permitted Genicom to assert indemnity claims against the escrow during the claims period and to withhold authorization for release pending resolution of those claims—provided the claims were timely and described with reasonable detail—Genicom's refusal to release funds was within its contractual rights. The implied covenant did not impose additional duties that would contradict these clear terms.
What is the reasoning?
The court began by reaffirming that every contract in New Hampshire carries an implied obligation of good faith and fair dealing, but emphasized that the covenant has different doctrinal roles depending on context (e.g., limiting discretion in performance, informing termination standards in certain relationships, and supplementing UCC obligations). In the commercial performance context, the covenant polices the exercise of discretion to prevent one party from depriving the other of the contract's expected benefits. Yet the duty operates to effectuate the agreement actually made; it is not a tool to modify or override explicit allocations of risk and procedure. Applying these principles, the court examined the escrow and indemnity provisions. The parties deliberately allocated risk by creating a holdback and specifying a defined period and method for asserting claims. Genicom's rights were not open-ended; it could assert claims only within the claims window and had to describe them with reasonable detail. Those requirements supplied an objective check on opportunistic withholding. The record showed that Genicom submitted claims within the allowed period and provided descriptions sufficient to identify the categories and bases of alleged indemnified losses. Although Centronics disputed the merits, the contract did not require Genicom to prove its claims before maintaining its holdback position; it required timely notice with reasonable detail and left the resolution to negotiation, proof, or adjudication. Requiring immediate release upon Centronics' demand would contradict the bargain to secure potential indemnity through the escrow. The court also rejected the notion that the implied covenant created a free-standing tort or equitable claim to compel release absent contractual breach. Invoking good faith to require release would add a substantive condition—proof or concession of claim validity before withholding—that the parties did not include. Because Genicom acted within the contract's express procedures and not arbitrarily or for an improper purpose alien to the agreement, there was no breach of the implied covenant.
Why is this case significant?
Centronics is a leading case on the implied covenant of good faith and fair dealing. It teaches that: (1) the covenant is universal but contextual; (2) it polices the exercise of contractual discretion to protect justified expectations; and (3) it cannot be used to rewrite unambiguous terms or to undo deliberate risk allocations such as escrows and indemnities. For law students, the case is a blueprint for exam and practice analysis: identify whether the contract confers discretion, determine the contractual checks on that discretion, and assess whether the challenged conduct is arbitrary or inconsistent with the contract's purpose—without contradicting clear text. The opinion is also a reminder that remedies for alleged bad faith are ordinarily contractual, not tort-based, in commercial settings.
What is the implied covenant of good faith and fair dealing, and how did Centronics clarify it?
The implied covenant requires parties to perform and enforce contracts in a way that preserves the other party's justified expectations. Centronics clarified that the covenant's content depends on context—especially where one party has discretion—and that it prevents arbitrary or opportunistic conduct. Crucially, the covenant cannot contradict or add to clear contract terms; it serves the bargain rather than remakes it.
Did the court recognize a separate tort claim for bad faith in this commercial context?
No. The court treated the implied covenant as part of contract law, not as an independent tort in ordinary commercial settings. Absent a special relationship (such as insurer–insured) or statutory authorization, remedies for breach of the covenant are contractual and constrained by the parties' agreement.
Why didn't Genicom's refusal to release the escrow constitute bad faith?
Because the contract expressly allowed Genicom to assert timely indemnity claims described with reasonable detail and to withhold release pending their resolution. Genicom complied with those procedures. The covenant did not require Genicom to prove its claims before maintaining the holdback, and imposing such a requirement would contradict the escrow's risk-allocation purpose.
How should students analyze good-faith issues on exams using Centronics?
Follow a three-step approach: (1) Parse the contract's text to identify any express procedures and allocations of risk, including discretionary rights. (2) Ask whether the challenged conduct is within the contract's express grant and whether any conditions (timing, notice, detail) were satisfied. (3) If discretion exists, evaluate whether the conduct is arbitrary or undermines the contract's purpose; if the text is clear and the party complied, do not use good faith to override the bargain.
Does Centronics apply outside escrow and indemnity contexts?
Yes. While arising from an escrow dispute, Centronics is broadly cited for its framework. It applies whenever contracts confer discretionary power—e.g., approval rights, satisfaction clauses, earn-outs, and termination options—reminding courts to police for arbitrariness while respecting unambiguous terms and risk allocations.