Tennessee Supreme Court Rules Good Faith Implied in Assignment Consent Agreements

January 17, 2013

The Tennessee Supreme Court ruled that where contracting parties have agreed to allow assignment of a contract with the consent of the non-assigning party, and the agreement is silent regarding the anticipated standard of conduct in withholding consent, an implied covenant of good faith and fair dealing requires the non-assigning party to act with good faith and in a commercially reasonable manner in deciding whether to consent to the assignment.

In 1997, Dick Broadcasting Co. (DBC) and Oak Ridge FM, Inc., (ORFM) entered into three contracts, one of which was an agreement giving DBC a right of first refusal to buy ORFM’s assets used to operate the radio station WOKI-FM. In 2000, DBC sold its radio station assets to Citadel Broadcasting Company. As part of the deal with Citadel, DBC attempted to assign its right of first refusal agreement, but ORFM’s president, John W. Pirkle, refused to consent to the assignment.

DBC sued ORFM and Mr. Pirkle, alleging that they breached an implied covenant of good faith and fair dealing by failing to act in a commercially reasonable manner in refusing to consent to the assignment. The trial court held that the implied covenant of good faith and fair dealing did not apply to the right of first refusal agreement and granted the defendants summary judgment.

Today, Justice Sharon G. Lee delivered the Opinion of a unanimous Tennessee Supreme Court, which ruled that the duty of good faith and fair dealing applied to the right of first refusal agreement. Because the Supreme Court found genuine issues of material fact to be tried by a jury, the Court vacated summary judgment and remanded the case for a trial on the merits regarding the issue of whether the defendants acted in a commercially reasonable manner in refusing to consent to the assignment of the agreement.

Justice William C. Koch, Jr. concurred in the result reached by the majority, but wrote separately in order to express his view on the scope of the implied duty of good faith and fair dealing in the context of arm's length commercial transactions.

To read the Dick Broadcasting Company, Inc. v. Oak Ridge FM, Inc. opinion authored by Justice Sharon G. Lee and separate concurring opinion authored by Justice William C. Koch, Jr., visit the Opinions section of TNCourts.gov