No Duty Of Good Faith And Fair Dealing In The Employment Context

August 15, 2000

Texas Employers received good news from the state’s highest civil court regarding the continued strength of the employment at–will doctrine in this state. On June 15, 2000, the Texas Supreme Court, in City of Midland v. O’Bryant, held for the first time that there is no cause of action in Texas based on a duty of good faith and fair dealing in the context of the employer/employee relationship.

Generally, the duty of good faith and fair dealing is defined as a duty that is implied in some contractual relationships, requiring the parties to deal with each other fairly, so that neither prohibits the other from realizing the agreements’ benefits. In 1987, the Texas Supreme Court recognized a duty of good faith and fair dealing only when there is a special relationship, such as that between an insured and his or her insurance carrier. This duty was imposed because of the special relationship that exists in the insurance context because of the parties’ unequal bargaining power and the nature of insurance contracts which would allow unscrupulous insurers to take advantage of their insureds’ misfortunes in bargaining for settlement or resolution of claims.

The Court concluded that without a cause of action for breach of duty of good faith and fair dealing, insurers could arbitrarily deny coverage and delay payment of a claim and that an insurer has exclusive control over the evaluation, processing, and denial of claims. However, as the Court makes clear in O’Bryant, the elements which make the relationship between an insurer and an insured a special one are absent in the relationship between an employer and its employees. First, in Texas the employment relationship is generally at-will unless the parties enter into an express agreement that provides otherwise. Second, insurance contracts are typically more restrictive than employment agreements. If an insured suffers a loss, he cannot simply contract with another insurance company to cover that loss. By contrast, an employee who has been demoted, transferred or discharged may seek alternative employment.

In holding that there is no duty of good faith and fair dealing in the employment context, the Court made clear that it perceived no distinction between government or private employers. Moreover, the Court stated that there is no reason to distinguish between employment at-will and employment governed by an express agreement. The Court reasoned that a court-created duty of good faith and fair dealing would completely alter the nature of the at-will employment relationship, which generally can be terminated by either party for any reason or no reason at all.

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