## Facts

- William J. Covell worked as a sales representative for Tymshare, Inc. under a written compensation plan formed through Tymshare’s Virginia office.
- The plan provided a base salary plus commissions for sales exceeding quota, with commissions calculated monthly against subdivided monthly quotas.
- Because yearly performance was not known until year-end, the plan allowed Tymshare to place certain incentives in a reserve account to be settled at year-end.
- The plan stated it could be modified or terminated “within the sole discretion of the Division VP.”
- Covell’s sales included federal agency accounts; the dispute centered on his U.S. Postal Service-related sales.
- After Covell’s sales increased, Tymshare raised his quota retroactively, which eliminated commission amounts Covell believed had accrued under the prior quota structure.
- Covell claimed Tymshare used its discretionary authority in bad faith to deprive him of commissions and later terminated him.

## Issues

1. Whether a contractual grant of “sole discretion” to modify quotas is limited by an implied duty of good faith under Virginia law.
2. Whether the record permitted judgment as a matter of law that Tymshare acted in bad faith by retroactively increasing Covell’s quota.
3. Whether Covell was entitled to prejudgment interest on any commissions wrongfully withheld.

## Decision

- The court held that, under Virginia law, even discretion labeled “sole discretion” is constrained by an implied duty of good faith performance.
- The court reversed the district court’s summary judgment for Covell on liability because the evidence permitted competing inferences about Tymshare’s motives and the legitimacy of the quota change.
- The court remanded for further proceedings on the contract claim.
- The court affirmed the district court’s denial of prejudgment interest.

## Legal Principles

- A contract’s grant of unilateral decision-making authority does not permit arbitrary or opportunistic conduct; the discretion must be exercised in good faith.
- The implied duty of good faith limits discretion to actions consistent with the contract’s purposes and the other party’s justified expectations, while not authorizing courts to second-guess ordinary business judgments.
- Bad faith in exercising contractual discretion is generally fact-dependent; where intent and business justification are disputed, summary judgment is inappropriate.
- Under applicable state law, prejudgment interest may be discretionary and may be denied where liability and the amount owed are genuinely contested.

## Conclusion

The D.C. Circuit recognized that Virginia contract law imposes a good-faith constraint on contract provisions granting one party “sole discretion,” but it required trial-level factfinding on whether Tymshare’s retroactive quota increase was a legitimate business decision or a bad-faith attempt to deny Covell expected commissions, and it left undisturbed the denial of prejudgment interest.


Tymshare, Inc. v. Covell, 727 F.2d 1145 (D.C. Cir. 1984)