Opinion ID: 170014
Heading Depth: 2
Heading Rank: 4

Heading: Good Faith and Fair Dealing in Contract

Text: The Hospital also sued Healthcare Realty for breach of its contractual duty of good faith and fair dealing based on conduct subsequent to the formation of the contract. The Hospital alleges that, after the agreement was signed, Healthcare Realty concealed the building's unprofitability and its own errors in the original estimates by nondisclosure and by misleading responses to direct inquiries by the Hospital. The Hospital's evidence reveals a dispute sufficient to survive summary judgment. Tennessee common law implies in every contract a duty of good faith and fair dealing in its performance and enforcement. Wallace v. Nat'l Bank of Commerce, 938 S.W.2d 684, 686 (Tenn. 1996) (citing Restatement (Second) of Contracts § 205). Because this obligation is implied in the contract itself, it does not extend beyond the agreed upon terms of the contract and the reasonable contractual expectations of the parties. Id. at 687. The duty of good faith is a specific obligation to live up to one's promises, not a general duty of care. However, to prove that a party has violated its duty of good faith, one need not necessarily show a specific breach of the contract. A party may not, in bad faith, stop the other party from receiv[ing] the benefits of the agreement they entered into. Goot v. Metro. Gov't of Nashville & Davidson County, No. M2003-02013-COA-R3-CV, 2005 WL 3031638, at  (Tenn.Ct.App. Nov.9, 2005). The Hospital alleges that Healthcare Realty concealed and misrepresented financial information about the project after the agreement was signed, in violation of its duty of good faith. Its most important piece of evidence in support of this claim is a 2002 exchange between the Hospital and Healthcare Realty. In February, the Hospital requested information from Healthcare Realty about its losses and why they were so much larger than originally estimated. As Memorial Hospital has now discovered, Healthcare Realty employee Doug Whitman drafted a memorandum that was later edited twice to portray a rosier financial picture. The memorandum predicted a 3.5% annual rate increase in market rents. The original Assessment of Building Vacancy, as we have discussed, predicted a rent increase for the building of only 2.5% per year. In the first draft of the memo, Doug Whitman disclosed that he had intentionally pushed the figure up to 3.5% to help boost revenues in Healthcare Realty's estimates. App. 648. Any admission that the 3.5% growth figure had been optimistic, however, was removed from the second and third drafts of the memo. Id. at 653, 658. The subsequent drafts of the memo also increased the estimated distributable cash flow by over $30,000 in a section describing a mobilization allowance. Id. at 648, 658. No evidence in the record explains this change. Finally, in the original draft, Mr. Whitman wrote that I wish the numbers were something different. It just makes me sick that the previous analysis was so off-base. Id. at 648. That comment was also eliminated from the final draft. All of these changes made the assessment Healthcare Realty provided to Memorial Hospital rosier than Mr. Whitman's original memo suggests was realistic. The Hospital offered further circumstantial evidence to suggest that Healthcare Realty concealed information. One July 2002 internal email from a Healthcare Realty analyst assessed changed economic conditions and concluded that the Hospital's shortfall would be $750,000 per year, even with the building 100% full. The email warned: do not present this to anyone. Id. at 663. Healthcare Realty also did not share an October 2002 pro forma which concluded that, with 85% occupancy, Memorial Hospital would still owe Healthcare Realty between $590,000 and $817,000 every year at least until 2020 (when the chart stopped). Id. at 672. These figures were very different from those provided in the assessments provided before the contract was signed. The fact that Healthcare Realty did not disclose any of this information to the Hospital provides further evidence from which a jury could infer that Healthcare Realty was not executing its contractual duties in good faith. The district court dismissed this claim as a matter of law because it concluded that the Hospital needed to show a breach of contract to succeed on its good faith claim, and it found no breach here. As the court put it, [i]nstead of establishing a genuine issue that it was deprived of a benefit of the contract, including all amendments thereto, [the Hospital] essentially argues that it should not be required to pay more than it expected for those benefits. Id. at 750. We view both the duty of good faith and the contract slightly differently than the district court did. To establish a good faith claim, the Hospital needs to show that Healthcare Realty's conduct had the effect of destroying or injuring the right of the [Hospital] to receive the fruits of the contract. Winfree v. Educators Credit Union, 900 S.W.2d 285, 289 (Tenn.Ct.App. 1995). If Healthcare Realty's bad faith forced the Hospital to pay substantially more under the Agreement than it otherwise would have been required to, then a jury could find that the Hospital's right to enjoy the fruits of the contract had been harmed. Here, if the Hospital had known what Healthcare Realty concealed, it might not have amended the Property Operating Agreement, might have brought this suit earlier, or might otherwise have mitigated its losses from the deal. Moreover, the Hospital might have made substantially different leasing and management decisions with the authority given to it by the POA. Furthermore, the Operating Agreement contains terms that directly govern Healthcare Realty's obligations to truthfully disclose information to the Hospital. The Agreement obligates Healthcare Realty to establish a relationship with respect to the Property that is geared toward the success of [the Hospital] and the contribution of the Property to that success, App. 94, as well as to facilitate the coordination of the operations of the Property with the operations of the Medical Facility, which coordination is intended to further the best interests of [Healthcare Realty and Memorial Hospital], App. 93. Most significantly, Healthcare Realty promised to provide such . . . information as may be reasonably requested by [Memorial Hospital] from time to time with respect to the financial . . . condition of the property. Id. These two obligationsto manage the operation of the building in the joint best interests of the parties, and to provide information when reasonably requested create some obligation of honest disclosure. Intentionally overstating financial returns and concealing from a party its potential indebtedness are not consistent with this obligation. From the edited emails and other nondisclosures, we think that a reasonable jury could conclude that Healthcare Realty did not perform its part of the contract in good faith. Healthcare Realty argues that the Hospital is estopped from asserting any breach-of-contract claim by an amendment both parties later signed to the Operating Agreement. That amendment said that [e]ach party represents that the other is not in default under the terms of the POA, and no event has occurred or situation exists which would, with the passage of time or the giving of notice, constitute a default on the part of either party under the POA. App. 194. The amendment does not block the Hospital's claims. The fairer construction of the amendment is that each party warrants that they do not know of any breach committed by either party. It seems highly unlikely that the amendment was intended to ratify any secret breaches that either party had so far kept secret from the other. Because the Hospital did not discover that it was being given sanitized information until later, the amendment did not waive its right to sue for conduct of which was not yet aware. Furthermore, alleging a violation of the contractual duty of good faith does not require the Hospital to prove that Healthcare Realty was in technical breach. If Healthcare Realty wasin bad faithobstructing the Hospital from receiving the benefits of the agreement, i.e., the information it reasonably requested, then it is liable. See Goot, 2005 WL 3031638, at .