Implied Covenant of Good Faith in Assignment Agreements: Establishing Reasonableness in Consent

Introduction

In the landmark case DICK BROADCASTING COMPANY, INC. OF TENNESSEE v. OAK RIDGE FM, INC. (395 S.W.3d 653), the Supreme Court of Tennessee addressed a pivotal issue in contract law concerning the assignment of contractual agreements and the application of the implied covenant of good faith and fair dealing. The dispute arose when Dick Broadcasting Company (DBC) sought to assign its rights under a Right–of–First–Refusal Agreement to Citadel Broadcasting Company (Citadel) without obtaining consent from Oak Ridge FM, Inc. (“Oak Ridge FM”). The crux of the case centered on whether the implicit duty of good faith required Oak Ridge FM to act reasonably and in good faith when withholding consent for the assignment, despite the contract being silent on the standard of conduct for such refusals.

Summary of the Judgment

The Supreme Court of Tennessee held that when a contract includes a clause permitting assignment only with the consent of the non-assigning party, and does not specify the standard for withholding consent, the implied covenant of good faith and fair dealing applies. This covenant mandates that the non-assigning party must act in good faith and in a commercially reasonable manner when deciding whether to grant or withhold consent for the assignment. The Court affirmed the decision of the Court of Appeals, which had vacated the trial court’s summary judgment in favor of the defendants, thereby remanding the case for further proceedings to determine if Oak Ridge FM had unreasonably withheld consent.

Analysis

Precedents Cited

The judgment extensively reviewed Tennessee’s common law principles, particularly the duty of good faith and fair dealing as codified in section 205 of the Restatement (Second) of Contracts, which states that every contract imposes such a duty upon each party. Key precedents include:

• WALLACE v. NATIONAL BANK OF COMMERCE: Established the imposition of a duty of good faith in contract performance.
• Robeson & WEAVER v. RAMSEY: Highlighted that contractual terms should be interpreted reasonably, preventing capricious interpretations.
• GERMAN v. FORD: Emphasized that contractual obligations should be tempered by a reasonableness standard.
• Planters Gin Co. v. Federal Compress & Warehouse Co.: Reinforced that ambiguous contract terms should be construed to reflect the parties’ intent reasonably.
• Numerous cases from other jurisdictions, such as Prince v. Elm Investment Co. and HENDRICKSON v. FREERICKS, were cited to show a trend towards requiring reasonableness in consent clauses.

These precedents collectively support the Court’s interpretation that silent consent clauses cannot be used to withhold consent arbitrarily.

Legal Reasoning

The Court began by interpreting the Right–of–First–Refusal Agreement, which required DBC to seek Oak Ridge FM’s written consent before assigning its rights. Since the agreement did not specify the standard for withholding consent, the Court applied the implied covenant of good faith and fair dealing. It reasoned that such a covenant is inherently part of every contract under Tennessee law and requires parties to act reasonably and in good faith to uphold their contractual obligations.

The Court examined the contract language and determined that the parties did not intend for consent to be withheld arbitrarily. Instead, they anticipated a standard of reasonableness, as is common in many contractual relationships. By applying this standard, the Court prevented Oak Ridge FM from using the consent clause as an unfettered veto, thereby protecting the contractual and commercial expectations of DBC.

Impact

This judgment has significant implications for contract drafting and enforcement in Tennessee and potentially other jurisdictions following similar legal principles. It establishes that:

• Assignment clauses requiring consent implicitly require the consenting party to act reasonably and in good faith if the contract language is silent on the standard.
• Parties must be explicit if they intend to allow unilateral discretion in withholding consent; otherwise, courts will infer a reasonableness requirement.
• Business and commercial contracts are subject to interpretation through the lens of good faith, ensuring that one party cannot unduly restrict another through vague or silent clauses.

This fosters greater fairness in contractual relationships and encourages clearer drafting of assignment provisions to avoid ambiguity and potential litigation.

Complex Concepts Simplified

1. Implied Covenant of Good Faith and Fair Dealing

This is an unwritten duty present in every contract, requiring parties to act honestly and not undermine the contract's purpose. It ensures that neither party will seek to cheat or harm the other.

2. Silent Consent Clause

A contractual provision that requires one party’s consent to an assignment but does not detail how that consent should be given or withheld. In such cases, courts may infer standards based on general contract principles.

3. Reasonableness Standard

A legal benchmark that courts use to assess whether a party’s actions are fair and just under the circumstances. It prevents parties from making arbitrary or capricious decisions that could harm contractual expectations.

4. Summary Judgment

A procedural device used by courts to decide a case without a full trial when there are no genuine disputes of material fact and one party is entitled to judgment as a matter of law.

Conclusion