Applying the Duty of Good Faith and Commercial Reasonableness to Silent Consent Clauses

There are two things wrong with this post.  First, it is not directly about tort law – it is about contract law.  And this is supposed to be a blog about tort law.  So perhaps this post shouldn’t be here.

Second, this post is about a victory our firm had in the Tennessee Court of Appeals on October 19, 2011.  Regular readers know that I typically don’t write about our firm’s cases on this blog.

That aside, I know that many of my fellow tort lawyers handle commercial litigation cases from time to time.  I have done so for most of my career and enjoy the work.  Thus, I thought that many readers could benefit from knowing about this new appellate court decision, particularly the readers from Tennessee.  

The facts are long and sorted, but the bottom line is that our client had a contractual relationship with the defendant set forth in several contracts.  Our client wanted to assign the contracts.  One of the contacts had what is known as a "silent consent" to assignment clause.  Stated differently, the contract required permission to assign the contract, but the contract did not specify the standard upon which consent could be withheld.  Did the general contractual duty of good faith and fair dealing apply?   Or could the defendant withhold consent  to assignment for any reason whatsoever?

 We lost the case on summary judgment, the chancellor deciding that the general duty of good faith and fair dealing did not apply to an assignment provision in this type of contract.

On October 19, 2011, the Tennessee Court of Appeals reversed, holding that "under a silent consent clause in an anti-assignment provision, a party may not withhold consent without a good faith and commercially reasonable basis for objecting to the assignment. This obligation arises from the duty of good faith and fair dealing, and a breach of the obligation is a breach of contract."

This is the rule in a large number of jurisdictions that have considered the question in modern times.  The opinion does an excellent job of marshaling the law on the subject.  For example, the court pointed to  "Julian v. Christopher, 575 A.2d 735 (Md. 1990), [where] the Maryland appellate court “recognized that in a lease, as well as in other contracts, “there exists an implied covenant that each of the parties thereto will act in good faith and deal fairly with the others.” . . . [I]f the lease does not spell out any standard for withholding consent, then the implied covenant of good faith and fair dealing should imply a reasonableness standard.” Id. at 739 (internal citations omitted).

Of course, the implied duty of good faith and fair dealing has been the law of Tennessee for many decades.  But this case is the first time that the Tennessee appellate courts have addressed the issue of whether  this duty applies to a silent consent clause.  And when faced with the issue, they ruled the right way.

Why did they rule correctly?  Put it this way: how can we say say that there is a duty of good faith and fair dealing implied in every contract in Tennessee, but it doesn’t apply to certain provisions in the contract?  In my  opinion, that should not be the law.

This case isn’t over.  The Tennessee Supreme Court may be asked to take a look at the decision, and it might accept review of the case.  And a jury still has to rule on a host of issues in the case.  But, on this important issue of first impression, the Tennessee Court of Appeals has adopted a rule that is consistent with the previously articulated public policy of this state, and that is good stuff.

You can read the entire opinion in Dick Broadcasting Co., Inc. of Tennessee v. Oak Ridge FM, Inc., No. E2010-01685-COA-R3-CV  (Oct. 19, 2011) here

By the way, Brandon Bass and Burke Keaty of our office did an excellent job working on this matter. We faced very well-prepared, skilled lawyers representing the defendant, and both Brandon and Burke gave invaluable assistance presenting the court with authority from around the nation.