Contract Law—No Faith in Arkansas’s approach to the Implied Duty of Good Faith. Arkansas Research Medical Testing, LLC v. Osborne, 2011 Ark. 158, 2011 WL 1423993.

University of Arkansas at Little Rock Law Review Volume 36 | Issue 4 Article 5 2014 Contract Law—No Faith in Arkansas’s approach to the Implied Duty of Good Faith. Arkansas Research Medical Testing, LLC v. Osborne, 2011 Ark. 158, 2011 WL 1423993. Kathleen Lestage Follow this and additional works at: http://lawrepository.ualr.edu/lawreview Part of the Contracts Commons, and the Health Law and Policy Commons Recommended Citation Kathleen Lestage, Contract Law—No Faith in Arkansas’s approach to the Implied Duty of Good Faith. Arkansas Research Medical Testing, LLC v. Osborne, 2011 Ark. 158, 2011 WL 1423993., 36 U. Ark. Little Rock L. Rev. 653 (2014). Available at: http://lawrepository.ualr.edu/lawreview/vol36/iss4/5 This Note is brought to you for free and open access by Bowen Law Repository: Scholarship & Archives. It has been accepted for inclusion in University of Arkansas at Little Rock Law Review by an authorized administrator of Bowen Law Repository: Scholarship & Archives. For more information, please contact . CONTRACT LAW—NO FAITH IN ARKANSAS’S APPROACH TO THE IMPLIED DUTY OF GOOD FAITH. ARK. RESEARCH MED. TESTING, LLC V. OSBORNE, 2011 ARK. 158, 2011 WL 1423993. I. INTRODUCTION Imagine you have the opportunity to earn an extra $3 million this year. Your contract hinges upon your employer reaching certain minimum profits. But the company failed to reach the threshold this year due to gross mismanagement and unwillingness to heed your warnings as an advisor, although you owned and operated the company profitably until last year. To your dismay, you learn that a court will not provide a remedy because there was no breach of any written terms of the contract. Because you did not explicitly contract regarding the company’s performance in reaching the profits, you are at the company’s mercy with no redress. Just such a case occurred in Arkansas, Ark. Research Med. Testing, LLC v. Osborne,1 in which the Arkansas Supreme Court declined to recognize an independent cause of action in contract for the breach of the implied covenant of good faith.2 This holding is not particularly provocative given that many courts have minimized the role of the doctrine of good faith in contract law.3 But these restrictions implicate some of “the most controversial [questions] relating to the duty of good faith.”4 Most notable is whether a breach of good faith can exist without a breach of an express contract term.5 Arkansas has now joined many jurisdictions that answer “no.”6 The court confined the duty of good faith to a factor used in determining whether a breach of contract occurred, rather than giving it any meaning 1. Ark. Research Med. Testing LLC v. Osborne, 2011 Ark. 158, at 1, 2011 WL 1423993, at *1. 2. This note is confined to the discussion of a cause of action based in contract law. The Arkansas Supreme Court has already ruled that there is no cause of action for the breach of good faith in tort. See id.; see also discussion infra Part IV.A. 3. See discussion infra Part III.A.1. 4. Teri J. Dobbins, Losing Faith: Extracting the Implied Covenant of Good Faith from (Some) Contracts, 84 OR. L. REV. 227, 265 (2005). The duty of good faith remains controversial despite extensive academic coverage. Harold Dubroff, The Implied Covenant of Good Faith in Contract Interpretation and Gap-Filling: Reviling a Revered Relic, 80 ST. JOHN’S L. REV. 559, 615–16 (2006). As one scholar noted, good faith is “the subject of a small avalanche of law review articles seeking to define its meaning, role, and scope.” Id. 5. Dobbins, supra note 4, at 265. 6. Ark. Research Med. Testing, LLC v. Osborne, 2011 Ark. 158, at 3, 2011 WL 1423993, at *6. 653 654 UALR LAW REVIEW [Vol. 36 outside the express agreement.7 In ruling that no cause of action exists, the court reversed the jury’s finding that the company breached its duty of good faith because the jury did not also find breach of the written contract.8 This interpretation leaves without remedy situations in which there is no breach of an express term but there is breach of the “spirit” of contract.9 In light of these insufficiencies, Arkansas should recognize a cause of action in contract for the breach of the implied covenant of good faith in order to both effectuate the equitable purpose of the doctrine of good faith and to provide a remedy when the duty of good faith is violated without a breach of an express term of the contract. This note begins with an overview of the origins of the implied duty of good faith.10 Specifically, this includes an exploration into its roots as an equitable doctrine, created to supplement existing rules and promote fairness and justice in contract interpretation. Next, it discusses the current frameworks for the application of good faith.11 There are two—formalism, which emphasizes the strict construction of express terms of a contract over implied terms, and contextualism, which emphasizes the importance of the context of the agreement to determine the parties’ intentions. Then, the note shows how Ark. Research Med. Testing, LLC v. Osborne illustrates Arkansas’s formalist approach to the duty of good faith.12 With that, this note contends that the formalist approach, due to its emphasis on express terms, fails on two fronts. First, it fails to effectuate the intended equitable purpose of the covenant of good faith.13 Second, it fails to provide a remedy for parties such as the Osbornes, who suffered a breach of the “spirit” of their deal with the company without any violation of the written agreement.14 Finally, this note argues that Arkansas should adopt a more contextualist approach to the duty of good faith and fair dealing in order to give it more substantive meaning.15 7. Id. at 6, 2011 WL 1423993, at *3 (The breach of the covenant of good faith is “nothing more than evidence of a possible breach of a contract between parties.”). 8. Id. at 3, 2011 WL 1423993, at *2. 9. See, e.g., Chamison v. HealthTrust, Inc. Hosp. Co., 735 A.2d 912, 920 (Del. Ch. 1999) (“This implied covenant is a judicial convention designed to protect the spirit of an agreement when, without violating an express term of the agreement, one side uses oppressive or underhanded tactics to deny the other side the fruits of the parties’ bargain.”). 10. See discussion infra Part II.A. 11. See discussion infra Part III.A. 12. See discussion infra Part III.C. 13. See discussion infra Part IV.A. 14. See discussion infra Part IV.B. 15. See discussion infra Part IV.C. 2014] CONTRACT LAW 655 II. BACKGROUND The implied duty of good faith and fair dealing is an equitable doctrine that allows courts to promote fairness by considering the circumstances surrounding a contract. As such, the duty’s early champions envisioned good faith as a means to protect the intentions of the parties, even when those intentions are not included in the written agreement.16 As an implied duty, it is designed to fill gaps in and help interpret the parties’ contr (...truncated)