In a breach of contract case recently decided by the Supreme Court of Tennessee, Dick Broadcasting v. Oak Ridge FM, Inc., the Court held that the implied duty of good faith and fair dealing applied to a contract provision which allowed a party to assign it rights under the contract at issue to another party. The plaintiff (“Plaintiff”) and defendant (“Defendant”) entered into an agreement giving the Plaintiff a right of first refusal to purchase certain assets of the Defendant.
The Right-of-First Refusal Agreement (“Agreement”) provided that the Plaintiff could assign it rights under the Agreement, but that it had to have the prior written consent of the Defendant to do so. Unlike many other contracts that are entered into in Tennessee and in other jurisdictions, the Agreement did not provide any explanation of the conditions under which the Defendant could withhold consent. For example, many agreements with assignment clauses provide that the contract cannot be assigned without the written consent of the non-assigning party, but provide that the non-assigning party’s consent “shall not be unreasonably withheld.”
The Defendant refused to give Plaintiff permission to assign the Agreement. The Plaintiff filed suit in a Tennessee Chancery Court for breach of contract. The Plaintiff’s theory was that the implied duty of good faith and fair dealing, which has been consistently held by Tennessee courts to apply to all contracts governed by Tennessee law, applied to the assignment clause in that case. The Defendant argued that the consent clause, which was silent as to the conditions under which it could withhold consent, allowed it unfettered discretion in deciding whether to give consent.
The trial court held in favor of the Defendant. The Court of Appeals of Tennessee disagreed with the trial court, and held that the implied duty of good faith and fair dealing applied to the assignment clause. The Court of Appeals held that whether or not the Defendant was liable for breach of contract was a question of fact for the jury. The exact question of fact to be put to the jury was: Did the Defendant breach its implied duty of good faith and fair dealing in refusing to consent to the assignment?
The Supreme Court of Tennessee upheld the decision of the Court of Appeals. Specifically, it held: “When the agreement does not specify the standard of conduct for withholding consent, a party’s decision to refuse consent must be made in good faith and in a commercially reasonable manner.” In reaching its decision, the Supreme Court noted that the implied duty of good faith and fair dealing was firmly imbedded in Tennessee law, and that, therefore, it would be incongruent with existing Tennessee law to hold that it applied generally to contracts, but not to an assignment clause within a contract.
The implied duty of good faith and fair dealing, as the above case demonstrates, is a powerful tool for a breach of contract lawyer. There is a lengthy discussion of the parameters of that implied duty in the Court’s opinion.
Parties and lawyers must remember that the implied duty of good faith and fair dealing cannot be used to contradict or to circumvent specific contract terms, or to create new contractual rights. This is a critical point often not understood and overlooked by commercial litigators. If, for example, a contract requires that “time is of the essence,” a party generally cannot avoid that term by arguing that, under the circumstances, the duty of good faith and fair dealing obligates the other party to give it more time than agreed upon to complete its performance.
In the above case, the Defendant argued that, by implying a contractual obligation that it could not withhold consent unless, in doing so, it acted in good faith and in a commercially reasonable manner, the Court was creating a new contractual right for the Plaintiff. The Court explained that it was not creating a new contractual right because all that was being asked by the parties was for the Court “to infer a standard of conduct anticipated by the parties..”