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Valparaiso Univ. Law School

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Monday, April 25, 2011

No Independent Cause of Action for Breach of Good Faith and Fair Dealing in Arkansas

Arkansas Quarter On April 14, 2011, the Supreme Court of Arkansas issued its opinion in Arkansas Research Medical Testing, LLC v. Osborne.  William Jennings B. Osborne and Marie E. Osborne owned Arkansas Research Medical Testing Center, Inc., which performed tests for the pharmaceuticals industry.  They sold it to defendants in 2004, who re-established the business as Arkansas Research Medical Testing, LLC (ARMT).  Under the terms of the agreement, the Osbornes were to be paid $3 million per year for three years, so long as ARMT had gross revenues in excess of $7.5 million in each year.  They got their $3 million payment in 2004, but ARMT failed to meet the gross revenue target in 2005 and 2006, so the Osbornes got nothing for those years.  

They sued on every conceivable ground, but the jury awarded them $3 million in damages based only on a finding of breach of the duty of good faith and fair dealing.  The jury found for the defendants on the Osbornes' breach of contract claim.  The Supreme Court decided a pure issue of law: does Arkansas recognize an independent cause of action for a breach of the duty of good faith and fair dealing.  The Supreme Court ruled that it does not.  Accordingly, it reversed the verdict and remanded the case to the circuit court to set aside the judgment.

This seems a bit of an odd result, and perhaps it is just a matter of faulty pleading and jury instructions.  The Supreme Court cites to Arkansas cases that seem to adopt R.2d s. 205, which considers the covenant of good faith and fair dealing an implied term in every contract. Thus while it is true that Arkansas law does not recognize an independent cause of action for breach of the duty of good faith and fair dealing, if the jury finds that such a breach has occurred, then it has found a breach of contract, its verdict to the contrary on the breach of contract claim notwithstanding.  This is so even though, as the Supreme Court notes, there is no separate cause of action -- whether in contract or in tort -- for breach of the duty of good faith and fair dealing.  The most likely reading of the jury verdict is that it found no breach of contract other than the breach of the duty of good faith and fair dealing.  But that should have been breach enough.

[JT]

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