Baker v. Bailey

The Baileys (defendants) lived on land carved out for them from property they sold to the Bakers (plaintiffs), and the parties signed a Water Well Use Agreement giving the Baileys water access for as long as they occupied the land, while giving the Bakers a right of first refusal on the property. Although the Agreement's text benefited only the Baileys, the Baileys believed the Bakers would informally extend water access to any future buyer the Bakers found acceptable. When the Baileys later tried to sell, the Bakers refused to extend water rights to any successor buyer, forcing the Baileys to sell for far less than the property would have fetched with water rights, after which the Bakers exercised their right of first refusal and bought the property themselves at that reduced price. The Baileys countersued for breach of the implied covenant of good faith and fair dealing when the Bakers sued them for unpaid expenses, and the trial court found a breach; the Bakers appealed.