Dick Broadcasting Company, Inc. of Tennessee v. Oak Ridge FM, Inc.
2013 Tenn. LEXIS 13, 395 S.W.3d 653, 2013 WL 175491 (2013)
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Rule of Law:
Where a contract requires a party's consent for an assignment but is silent on the standard for withholding that consent, an implied covenant of good faith and fair dealing requires the non-assigning party to act in a commercially reasonable manner.
Facts:
- On June 23, 1997, Dick Broadcasting Company (DBC) and Oak Ridge FM, Inc. entered into a Right-of-First-Refusal Agreement, which gave DBC the right to purchase Oak Ridge FM's radio station assets.
- The agreement stipulated that neither party could assign its rights without the "prior written consent of the other party" but did not specify a standard for withholding that consent.
- DBC also entered into two related agreements with Oak Ridge FM and its affiliate, ComCon Consultants: a Time Brokerage Agreement and a Consulting Agreement, both of which were assignable without requiring consent.
- On April 30, 2000, DBC contracted with Citadel Broadcasting Company to sell most of its radio station assets, a deal which included the assignment of the three agreements with Oak Ridge FM.
- DBC requested that John W. Pirkle, president of Oak Ridge FM, consent to the assignment of the Right-of-First-Refusal Agreement to Citadel.
- Pirkle, on behalf of Oak Ridge FM, refused to consent to the assignment, acknowledging he did so to negotiate a "separate and more profitable agreement with Citadel."
- Despite DBC's offer to guarantee Citadel's obligations under the agreements, Pirkle continued to withhold consent.
- As a result, DBC finalized its deal with Citadel without the assignment of the Oak Ridge FM agreements, which led to a $10,000,000 reduction in the sales price.
Procedural Posture:
- DBC sued Oak Ridge FM, ComCon, and John Pirkle in the Chancery Court for Knox County (trial court), alleging breach of contract and seeking a declaratory judgment.
- Both parties filed cross-motions for summary judgment.
- The trial court granted summary judgment to the defendants (Oak Ridge FM et al.), holding that the implied covenant of good faith and fair dealing was not applicable to the Right-of-First-Refusal Agreement.
- DBC, as appellant, appealed the decision to the Tennessee Court of Appeals.
- The Court of Appeals vacated the trial court's summary judgment, holding that the implied covenant did apply and that genuine issues of material fact existed.
- Both parties subsequently sought and were granted permission to appeal to the Supreme Court of Tennessee.
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Issue:
Does the implied covenant of good faith and fair dealing apply to require a non-assigning party to act with good faith and in a commercially reasonable manner when refusing to consent to an assignment, where the contract's assignment clause requires consent but is silent on the standard for withholding it?
Opinions:
Majority - Justice Lee
Yes. Where a contractual provision requiring consent to an assignment is silent regarding the standard for withholding consent, the implied covenant of good faith and fair dealing requires the non-assigning party's decision to be made in good faith and in a commercially reasonable manner. Tennessee common law, consistent with the Restatement (Second) of Contracts § 205, implies a duty of good faith in every contract. This holding aligns with the modern majority of jurisdictions, which have rejected the older rule that allowed for arbitrary refusal of consent. Applying this standard does not create a new contractual term but rather supplies a reasonable standard of conduct that the parties are presumed to have contemplated. Parties are free to contract for an absolute right to withhold consent, but they must do so with explicit language, such as granting discretion "in its sole and absolute discretion."
Concurring - Justice Koch, Jr.
Yes, I concur with the majority's decision but write separately to caution that the implied duty of good faith and fair dealing in arm's-length commercial transactions should be narrowly construed. In the commercial context, good faith is best understood as the absence of bad faith, which requires more than bad judgment or negligence; it involves a dishonest purpose, fraudulent intent, or ill will. Parties in commercial transactions are expected to pursue their own self-interest, and such pursuit is not a breach of the implied duty unless the conduct falls outside of accepted commercial practices or is motivated by a dishonest purpose. Because the record is undeveloped as to whether either party's actions rose to this level, summary judgment is inappropriate.
Analysis:
This decision officially aligns Tennessee with the modern majority of states that import a reasonableness standard into silent consent-to-assign clauses. It solidifies the principle that the implied covenant of good faith and fair dealing acts as a default rule, preventing parties from using contractual discretion to opportunistically extract concessions not originally bargained for. For future cases and contract drafting, this ruling creates a clear directive: if a party desires the unfettered, absolute right to withhold consent, it must be explicitly and unambiguously stated in the contract. The absence of such language will subject the party's discretion to judicial review for commercial reasonableness and good faith.
