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  • Writer's pictureReza Yassi

Exploring Good Faith Covenant in Law: The Battle for Medallions between Taxis and Ride-Sharing Apps

Two Taxi cabs with the backdrop of a metropolitan area
Two Taxi cabs

In the bustling streets of New York City, a legal battle has been brewing between traditional yellow taxis and modern ride-sharing apps like Uber and Lyft. This clash, recently brought before the New York Court of Appeals, offers a fascinating look at how the law is grappling with the disruptive impact of technology on established industries.

The Backstory

In November 2013, the plaintiffs, entities that purchased an aggregate of 14 wheelchair-accessible taxi medallions from the Taxi and Limousine Commission (TLC) at an auction, paid an average winning bid of $1.34 million per medallion. These medallions, essentially licenses to operate yellow cabs in the city, were seen as a valuable investment.

However, four years later, the value of these medallions had approximately quartered. The plaintiffs attributed this drastic drop in value to the rise of ride-sharing apps like Uber and Lyft, which they claimed were operating in the city without proper authorization.

The Legal Allegations

The plaintiffs commenced action against TLC and the City of New York, alleging that TLC had misrepresented the value of yellow taxi medallions in the materials distributed to bidders ahead of the auction. They further claimed that after the auction, TLC authorized app-based companies to operate black car base stations in the city, even though these companies had not submitted any documentation proving they were owned as a franchise or a cooperative.

This influx of what the plaintiffs termed as 'illegal black cars' competed with their taxis and significantly diminished the value of their medallions. Based on these allegations, the plaintiffs asserted causes of action against the defendants for violation of General Business Law § 349 and breach of the implied covenant of good faith and fair dealing.

Understanding the Implied Covenant of Good Faith

The implied covenant of good faith and fair dealing is a fundamental principle in New York contract law. It essentially means that neither party to a contract should do anything that would destroy or injure the other party's right to receive the benefits of the contract. However, this covenant has its limits.

Courts will only imply an obligation of good faith to aid and further the terms of the agreement made by the parties. The covenant cannot be used to imply obligations inconsistent with other terms of the contractual relationship. It only encompasses promises that a reasonable person in the position of the promisee would understand were included. A party asserting the existence of an implied-in-fact covenant bears a heavy burden to prove that the unexpressed promise sought to be enforced is implicit in the agreement viewed as a whole.

The Court's Application of the Law

In this case, the Court had to determine whether a reasonable person in the plaintiffs’ position would have understood the contracts to include a promise that TLC would enforce existing black car licensing requirements against app-based companies following the auction to protect the value of plaintiffs’ investment.

The Court found that the bid forms included disclaimers incompatible with such a promise. Firstly, the plaintiffs acknowledged in the bid forms that defendants made no representations or warranties “as to the present or future value of a taxicab medallion.” Secondly, the plaintiffs acknowledged that defendants made no representations or warranties “as to the present or future application or provisions of the rules of the [TLC] or applicable law.”

These disclaimers put the plaintiffs on notice that they bore the risk that either TLC’s rules or its “application” thereof might change after the sale of the medallions. The Court concluded that the plaintiffs could not justifiably have expected that defendants were contractually committing themselves to enforce those rules for plaintiffs’ benefit.

The Plaintiff’s Consumer Protection Claim

The Court also held that the government’s issuance of a taxicab license was not a consumer-oriented transaction protected by section 349 of the General Business law, which it had previously held “is directed at wrongs against the consuming public” and not “complex or unique arrangements in which each side was knowledgeable and received expert representation and advice.”

This case underscores the importance of understanding the legal implications of disruptive technologies and the evolving regulatory landscape. Whether you're a tech entrepreneur, a traditional business owner, or a consumer, staying informed about such legal developments is crucial.

Yassi law is committed to helping clients navigate the complexities of the legal system. Yassi Law has the expertise to advise on a wide range of issues, including contractual issues and consumer rights, and business practices. If you need legal advice or representation, don't hesitate to reach out.


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