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The Implied Covenant of Good Faith and Fair Dealing in Healthcare: Insights from the Supreme Court of New Jersey
Thursday, June 20, 2024

The Supreme Court of New Jersey recently issued its decision in Comprehensive Neurosurgical, P.C. v. Valley Hospital, vacating a $24.3 million award to a neurosurgery practice.

The Court’s opinion offers valuable insight regarding the scope of implied contractual obligations under New Jersey law, particularly in the hospital industry.

The underlying dispute involved Valley Hospital’s grant of exclusive privileges to a new group of neurosurgeons, which effectively revoked the longstanding privileges held by plaintiffs. These privileges included the right to use specialized medical equipment and treat “unassigned” emergency room patients, an essential part of plaintiffs’ practice. The plaintiffs alleged that Valley’s actions were retaliatory, prompted by plaintiffs’ association with a newly opened nearby hospital. As a result, plaintiffs filed suit against Valley, claiming the hospital’s decision violated public policy and the hospital’s medical staff bylaws. Valley argued that it made a valid administrative healthcare decision because plaintiffs were diverting patients to the newly opened hospital.

After a lengthy trial, the jury found that Valley Hospital breached the implied covenant of good faith and fair dealing and awarded plaintiffs $24.3 million in damages. This verdict was later affirmed on appeal to the New Jersey Appellate Division. The Supreme Court unanimously reversed the Appellate Division and vacated the $24.3 million award. While the Court identified several trial court errors that had an aggregate effect of depriving Valley Hospital of a fair trial, the opinion specifies that the “main issue in this case is the viability of plaintiffs’ claim for breach of the implied covenant of good faith and fair dealing” and “whether there is a contractual basis for plaintiffs to claim that their reasonable expectations were left unmet due to Valley’s alleged unfair dealing.”

At the outset, the Court established that a hospital’s medical staff bylaws do not constitute a traditional contract that can support a breach of the implied covenant claim. The Court explained that while medical staff bylaws establish reciprocal legal obligations, they do not meet the essential elements of contract formation—mutual assent, offer and acceptance, and consideration. Therefore, the Court held that “medical staff bylaws cannot serve as an underlying contract to support an alleged breach of an implied covenant of good faith and fair dealing claim, nor can a violation of those bylaws support an independent claim for money damages.”

The Court then addressed plaintiffs’ argument that their longstanding relationship and collaborative efforts with Valley Hospital suggested an implied agreement. The Court found sufficient evidence in the record that “the parties had a special relationship—rooted in part in their course of dealings for more than a decade—that gave plaintiffs specific rights and obligations beyond the Bylaws.” In other words, there was sufficient evidence to establish the existence of an implied-in-fact contract, which, like any other contract, contains an implied covenant of good faith and fair dealing that could provide a proper basis for money damages.

Although the Court determined that plaintiffs’ breach of the implied covenant claim properly reached the jury, “there were significant problems in the jury instructions and verdict sheet that call into question the jury’s verdict on that claim.” In particular, the trial court incorrectly omitted any discussion of contract formation from “the count for which it was indispensable—the breach of covenant claim.” According to the Court, this error was compounded “by the jury sheet’s instruction that if damages are granted for breach of the Bylaws, then the jury need not consider the breach of covenant claim.” As a result of these errors, the Court held that it had “no way of reasonably knowing on appeal what purported ‘contract’ or ‘contracts’ the jurors regarded as the foundation for their damages award.” The Court ultimately found that the culmination of these errors, among others, warranted a new trial.

The Supreme Court’s decision underscores the broad scope of the implied covenant of good faith and fair dealing in contractual relationships. This decision also emphasizes the importance of having clear, well-defined business relationships—especially in the healthcare setting. Parties that maintain business relationships through a well-established course of dealing, including hospitals and doctors, must be mindful that their conduct may still be subject to the implied covenant of good faith and fair dealing, even in the absence of an express contract. 

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