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Employer Prevails In Breach Of Contract Case For Failure To Pay Bonus

Every contract in Tennessee has an implied duty of good faith which applies to both parties to the contract. A recent case from the Tennessee Court of Appeals illustrates well the point that the implied duty of good faith will not override an unambiguous, express contract term. Here are the pertinent facts of that case:

• The Plaintiff in the case was a doctor
• The Plaintiff was an employee of a pain management clinic with offices in Hermitage, Tennessee and Brentwood, Tennessee
• The Plaintiff physician’s employment contract provided that the “Company (the Defendant) in its sole discretion, may pay to Physician an annual performance bonus….”
• The employment contract stated: “The bonus is calculated as a percentage of the amount of total actual collections received…for the Physician’s services over $500,000.00….”
• The employment contract further stated: “This bonus shall be 30% of net collections beyond $500,000.00 for the first year and will be increased to 40% of net collections beyond $500,000.00 for the years thereafter.”
• Tensions between the doctor that owned the clinic and the Plaintiff doctor developed which ultimately led to the resignation of the Plaintiff
• The Plaintiff was not paid a bonus for his second year of employment
• The proof was that, in the Plaintiff’s second year of employment, his net collections were $684,593.13 which, under the formula in the employment contract, would have resulted in a bonus of $73,837.26 if a bonus had been paid
The Plaintiff filed suit for breach of contract alleging that the Defendant clinic breached the terms of the employment contract by failing to pay him a bonus for his second year of employment. Because the employment contract did not contain a provision expressly requiring the Plaintiff to be paid a bonus, the Plaintiff relied on the argument that the Defendant had breached the implied duty of good faith in the employment contract by failing to pay the bonus.

The Tennessee Court of Appeals decided against the Plaintiff. It upheld the trial court’s decision that the Defendant clinic did not breach the implied duty of good faith by failing to pay the bonus. The Court stated that “performance of a contract according to its terms cannot be characterized as bad faith.” To the Tennessee Court of Appeals, the duty of good faith could not get the Plaintiff around the employment contract language that the annual performance bonus was a matter for the “sole discretion” of the Defendant clinic.

So, when can the implied duty of good faith make a difference for a plaintiff? I had a case several years ago in which the implied duty of good faith was crucial in our success in the case. In that case, a business broker had agreed to help a sole shareholder sell his business for a commission. The contract between the broker and the seller stated that the broker was only entitled to his fee if the closing of the sale of the business occurred by a certain date. I represented the broker.

My broker client found a potential buyer, and introduced it to the seller. Thereafter, the buyer and the seller had to engage in months of due diligence because of the complexity and size of the seller’s business. Lo and behold, the sale of the business closed, but not until after the deadline set forth in the contract between the broker and the seller. The seller took the position that he was not required to pay any commission to the broker.

There was evidence in the case that the seller had delayed and prolonged the due diligence process. There was nothing in the contract between the broker and the seller that obligated the seller to act diligently to ensure that the closing would occur as soon as practical, but we argued that the seller had an implied duty of good faith to do just that since the seller was aware of the deadline that affected the broker.

The implied duty of good faith can be a very effective tool to have in a breach of contract case. It just has to be a case with the right facts for the tool.