AMI 2426 Implied Covenant of Good Faith and Fair Dealing

Because there is no cause of action in tort or contract for breach of the implied covenant of good faith and fair dealing, this instruction should only be given where there is evidence that one party's (or both parties') conduct prevented, hindered, delayed or impeded the performance of the express obligations under the contract.

Use the first bracketed paragraph of the instruction when there is evidence that the defendant prevented, hindered, or delayed the performance of the contract.

Use the second bracketed paragraph of the instruction when there is evidence that plaintiff prevented, hindered, or delayed the performance of the contract.

Use both bracketed paragraphs if each party presents evidence that the other prevented, hindered, or delayed the performance of the contract.

The specific term of the contract that was allegedly breached may be inserted in the bracketed paragraph(s), or the general “breach of the contract” may be inserted in an appropriate case.

In Cantrell-Waind & Associates, Inc. v. Guillaume Motorsports, Inc., 62 Ark. App. 66, 72, 968 S.W.2d 72, 75 (1998), the court cited the Restatement (Second) of Contracts § 205 (1981) in holding that “[e]very contract imposes upon each party a duty of good faith and fair dealing in its performance and its enforcement.”

In Country Corner Food & Drug, Inc. v. First State Bank & Trust Co. of Conway, Arkansas, 332 Ark. 645, 655, 966 S.W.2d 894, 899 (1998), the court recognized that every contract imposes an obligation to act in good faith. However, the court declined to recognize a new tort for failure to act in good faith. Id. at 655–656, 966 S.W.2d at 898–99. See also Preston v. Stoops, 373 Ark. 591, 595, 285 S.W.3d 606, 610 (2008) (refusing to recognize a cause of action in tort for breach of the implied covenant of good faith). In Arkansas Research Medical Testing, LLC v. Osborne, 2011 Ark. 158, at 7, the court held that Arkansas does not recognize any separate cause of action, “be it in tort or contract,” for a breach of the covenant of good faith and fair dealing. Instead, “a breach of the implied covenant of good faith and fair dealing remains nothing more than evidence of a possible breach of a contract between parties.” Id.

The implied covenant of good faith and fair dealing has been applied in Arkansas to excuse a condition precedent to a defendant's performance under a contract where the defendant prevented the fulfillment of the condition. Cantrell-Waind Assocs., Inc. v. Guillaume Motorsports, Inc., 62 Ark. App. 66, 968 S.W.2d 72 (1998). In Cantrell-Waind, a real estate commission due the plaintiff agent from the sale of the defendant's property was conditioned on the closing of the property before August 1, 1996. The defendant allegedly attempted to entice the buyer to delay the closing until after August 1, 1996, and, upon the buyer's refusal, the defendant made himself unavailable to complete the closing until after August 1. Id. at 68, 968 S.W.2d at 73. Citing the Restatement (Second) of Contracts, the court reasoned that “the non-occurrence of a condition of a duty … ‘may be excused by prevention or hindrance of its occurrence through a breach of the duty of good faith and fair dealing.’” Id. at 71–72, 968 S.W.2d at 75. If non-occurrence of a condition is excused, then “the condition need no longer occur in order for performance of the duty to become due.” Id., 968 S.W.2d at 75. The appellate court held that, as a result of the implied covenant of good faith and fair dealing, the defendant “was obligated to not deliberately avoid closing the transaction before August 1.” Id. at 72, 968 S.W.2d at 75.

The implied covenant of good faith and fair dealing did not limit either party's contractual right to terminate an insurance agency agreement without cause on three months written notice in Gunn v. Farmers Insurance Exchange, 2010 Ark. 434. In Gunn, the agent alleged that the insurance company had violated the implied covenant by terminating the agreement in bad faith. The supreme court found no evidence of bad faith and affirmed the trial court's entry of summary judgment for the insurance company. Id. at 5–6. The supreme court held that the contract clearly allowed termination on three months written notice without cause, “and an implied covenant should not be used to limit an expressly bargained-for term.” Id. at 6 (citing Yarborough v. DeVilbiss Air Power, Inc., 321 F.3d 728 (8th Cir. 2003)). In Yarborough, the Eighth Circuit Court of Appeals affirmed a summary judgment dismissing a claim under Arkansas law for breach of the implied covenant of good faith and fair dealing in connection with the performance of an earn-out provision in a contract for the sale of a business. 321 F.3d at 733. The buyer of the business was obligated to make earn-out payments based on sales to certain customers for a period of three years. However, the contract provided that the buyer had the right “in its sole discretion” to determine the terms and conditions of sales, including the decision “to make or not make sales.” The court reasoned that the purpose of an implied covenant is to effectuate the parties intentions and that an implied covenant should not foreclose the benefits of the bargain that was struck in the agreement. Id. at 732–33. The court held that “in no situation can the implied covenant of good faith and fair dealing limit the way in which a party exercises its discretion when the aggrieved party has specifically disavowed any limitations on that discretion, and the exercise of that discretion (and its consequences) are easily foreseeable.” Id. at 733.

Although Arkansas courts have provided minimal guidance on the issue, courts in other jurisdictions have expressly held that the implied covenant of good faith and fair dealing concerns only the performance of the contract, and it does not extend to issues of contract formation. See, e.g., Hill v. Galaxy Telecom, L.P., 176 F. Supp. 2d 636, 642 (N.D. Miss. 2001); Restatement (Second) of Contracts § 205, cmt. c (1981) (noting that the good faith obligation “does not deal with good faith in the formation of a contract”).