Missouri courts distinguish breach
of the implied covenant of good faith and fair dealing, a contract-based claim,
from the tort of bad faith.[1] Rock
Port continues to emphasize this distinction.[2] The court allowed a claim for breach of the
implied covenant of good faith and fair dealing but did not recognize the tort
of bad faith in a new context: commercial contracts.[3] This was because there was no fiduciary
relationship between the parties.[4] While recognizing the breach of implied
covenant of good faith and fair dealing in commercial contracts might
discourage unethical business practices, the tort makes it difficult to
estimate potential damages when entering into a contract and discourages an economically
efficient breach of contract.[5]
I.
Facts and Holding
In 1999, Rock
Port, a grocery store in Rock Port, Missouri, became a member of Affiliated
Foods, a Nebraska cooperative.[6] To become a member of Affiliated Foods, Rock
Port paid an initial fee and weekly membership fees.[7] In exchange, Rock Port was able to buy
cheaper grocery products from Affiliated Foods, and Affiliated Foods agreed not
to damage Rock Port’s business by supporting a non-member competitor.[8]
In 2008,
Richard York, a representative of Affiliated Foods, began discussing opening a
new grocery store, FC Food Country, in Rock Port.[9] Before FC Food Country was a member of the
cooperative, Affiliated Foods gave it logo designs and information about sales
projections, insurance, margins, store labor, and other benefits free of charge.[10] Rock Port was concerned that the town would
not be able to support two grocery stores, so it asked Affiliated Foods to give
an opinion about the possibility of sustaining grocery stores.[11] Affiliated Foods stated that “[i]n my
opinion, and my opinion only, it would be most beneficial to have only one
grocery retail outlet in the community. . . . It would be a challenge for two
retail outlets to survive in this community. Not impossible but not probable.”[12] Affiliated Foods was aware that Rock Port
would see its support of FC Food Country as undermining Rock Port’s business,
but Affiliated Foods continued to support FC Food Country because it thought FC
Food Country would purchase more groceries.[13] Rock Port closed in 2009 because “the playing
field was not going to be equal,” and FC Food Country became a member of
Affiliated Foods in 2010.[14]
Rock Port sued
Affiliated Foods for a breach of the implied covenant of good faith and fair
dealing of the membership agreement.[15] The first jury found for Affiliated Foods.[16] However, the judge granted Rock Port a new
trial, and the second jury awarded Rock Port $370,000 in actual damages and
$500,000 in punitive damages.[17] On appeal, the Missouri Court of Appeals, Western
District, reversed the award of punitive damages because punitive damages are
not proper for a claim based in contract and the tort of bad faith is not
proper when there is no fiduciary relationship.[18]
II. Legal
Background
In Missouri, the covenant of good faith
and fair dealing is implied in every contract.[19] A breach of the covenant occurs when a party “exercises
a judgment conferred by the express terms of the agreement in a manner that
evades the spirit of the agreement and denies the other party the expected
benefit of the agreement.”[20] It is a contract action, and punitive damages
are not available in contract actions.[21]
Punitive damages are available for the
tort of bad faith.[22] The tort is independent from a claim for
breach of the covenant of good faith and fair dealing.[23] A bad faith claim requires a fiduciary
relationship between the parties.[24] The elements of a fiduciary relationship are:
(1) as
between the parties, one must be subservient to the dominant mind and will of
the other as a result of age, state of health, illiteracy, mental disability,
or ignorance; (2) things of value such as land, monies, a business, or other
things of value which are the property of the subservient person must be
possessed or managed by the dominant party; (3) there must be a surrender of
independence by the subservient party to the dominant party; (4) there must be
an automatic or habitual manipulation of the actions of the subservient party by
the dominant party; and (5) there must be a showing that the subservient party
places a trust and confidence in the dominant party.[25]
Missouri courts typically recognize both the tort and the contract
claim in the context of insurance contracts.[26] In insurance contracts, the claim is
generally for bad faith refusal to settle.[27] Other jurisdictions have indicated that the
tort of bad faith might be appropriate in a broad range of contexts, including
employer-employee relations,[28] landlord-tenant relations,[29] attorney-client
relations,[30]
banking and financial relations,[31] and even some commercial
contracts.[32] The fundamental question is whether the
parties have a fiduciary relationship.[33]
III. Instant
Decision
In Rock Port, the Missouri Court of Appeals,
Western District, held that Rock Port could not recover punitive damages because
the breach of the covenant of good faith and fair dealing was a contract action
and the tort of bad faith did not apply because the parties were not in a
fiduciary relationship.[34]
The jury found
that Affiliated Foods breached the implied covenant by supporting a competitor
when the competitor was not a member of the cooperative.[35] The Western District upheld the jury’s verdict
as to the finding of the breach of the implied covenant and the award of
compensatory damages.[36] The court did not uphold
the jury’s award of punitive damages because breach of the implied covenant is
a contract action where punitive damages are not available.[37] Rock Port argued that it had a tort claim to
sustain the award of punitive damages because “it had a special relationship or
status with Affiliated Foods as a member of the food cooperative.”[38] However, the court reasoned that the parties
were in a business relationship, and a business relationship “does not give
rise to a fiduciary relationship, nor [to] a presumption of such a
relationship.”[39] Further, Rock Port did not prove that it “was
subservient to the dominance of Affiliated Foods in their food cooperative
business relationship.”[40] The court reversed the jury’s award of
punitive damages because the allegations did not give rise to the independent
tort of bad faith since there was not a fiduciary relationship between the
parties.[41]
IV. Comment
Rock
Port declined to extend the tort of bad
faith outside the insurance context.[42] While
there are a few good reasons to extend the tort to commercial contracts, like
the contract in Rock Port, there are
better reasons for limiting the tort to insurance contracts and other contracts
that involve fiduciary relationships.
One reason for extending the tort to ordinary commercial contracts is
that, as a matter of public policy and morality, acting in bad faith should be
punished more severely than ordinary contract breaches.[43] The potential for punitive damages might make
a business think twice before engaging in unethical business practices.[44]
Although there are reasons to extend
the tort to all contracts, there are better reasons for limiting it to certain
contexts. First, insurance contracts are
different from ordinary commercial contracts.
In insurance contracts, the insurer often has the right to control
third-party claims against the insured.[45] Additionally, the insurer holds itself out as
a fiduciary and the insurer holds most of the power in the relationship.[46] Most commercial contracts do not involve a
fiduciary relationship.
Second, the possibility of punitive
damages in contract cases would make it difficult for parties to a contract to
anticipate possible damages.[47] This could cause more hesitancy in deciding
whether to contract and whether to defend a breach of contract lawsuit.[48] Third, punitive damages discourage companies
from breaching the contract when it is economically efficient to do so because the
breach might be construed as bad faith.[49] Finally, a party to a contract is not left
without a remedy if the tort of bad faith does not apply to the situation;
instead, the injured party is still entitled to compensatory damages.[50] Rock
Port appropriately declined to extend the tort of bad faith to the
commercial contract at issue because it did not involve a fiduciary
relationship.[51]
- Ariel Kiefer
[2] Id. at
*6.
[3] Id.
[4] Id.
[5] See infra Part IV.
[7] Id. at *3.
[8] Id. at *1.
[9] Id.
[10] Id. at
*7.
[11] Id. at
*2.
[12] Id.
[13] Id.
[14] Id.
[15] Id. Rock Port also sued Affiliated Foods for
fraudulent misrepresentation and sued York for breach of contract. Id.
A jury found for Affiliated Foods on the fraudulent misrepresentation
claim, and, in a motion for summary judgment, the trial court ruled in favor of
York on the breach of contract claim. Id. Rock Port did not appeal either of those
claims. Id.
[16] Id.
[17] Id. at *3.
[18] Id.
[19] Id. at *5.
[20] Id. (quoting Glenn v. HealthLink HMO, Inc., 360 S.W.3d 866, 877 (Mo. Ct. App.
2012)).
[25] Kratky v. Musil, 969 S.W.2d
371, 377 (Mo. Ct. App. 1998) (quoting Chmieleski
v. City Products Corp., 660 S.W.2d 275, 294 (Mo. Ct. App.
1983)).
[26] See
generally Scottsdale Ins. Co. v. Addison Ins. Co., 448 S.W.3d 818 (Mo. 2014) (en banc); Zumwalt
v. Util. Ins. Co., 228 S.W.2d 750
(1950); Freeman v. Leader Nat. Ins. Co., 58 S.W.3d 590 (Mo. Ct. App. 2001).
[27] E.g., Scottsdale Ins. Co., 448
S.W.3d at 821; Zumwalt, 228 S.W.2d at
751; Freeman, 58 S.W.3d at 598.
[28] Tameny
v. Atl. Richfield Co., 610 P.2d 1330,
1337 n.12 (Cal. 1980).
[W]e believe it is unnecessary to determine whether a tort
recovery would additionally be available under these circumstances on the
theory that [plaintiff’s] discharge constituted a breach of the implied-at-law
covenant of good faith and fair dealing inherent in every contract. We do note
in this regard, however, that authorities in other jurisdictions have on
occasion found an employer's discharge of an at-will employee violative of the
employer's “good faith and fair dealing” obligations [] and past California
cases have held that a breach of this implied-at-law covenant sounds in tort as
well as in contract.
Id. (citing Fortune v. Nat’l Cash Register Co., 364 N.E.2d 1251, 1257 (Mass. 1977)).
[29] Cohen v. Ratinoff, 195 Cal.
Rptr. 84, 89 (Cal. Dist. Ct. App. 1983) (holding that the lessee sufficiently
pled a tort claim for bad faith breach of contract when the lessor arbitrarily
refused to allow the lessee to assign the lease).
[30] Morse v. Espeland, 696 P.2d
428, 430–31 (Mont. 1985) (holding that that there is a fiduciary relationship
during fee negotiations because the attorney is in a superior position to the
client).
[31] Tribby v. Nw. Bank of Great
Falls, 704 P.2d 409, 419 (Mont. 1985) (holding that the district court did not
err in allowing the plaintiff to recover punitive damages in tort for a bank’s
breach of the covenant of good faith and fair dealing because the bank was in a
superior position).
[32] Seaman's Direct Buying
Serv., Inc. v. Standard Oil Co., 686 P.2d 1158 (Cal. 1984) (stating that
“[t]his is not to say that tort remedies have no place in such a commercial
context, but that it is wise to proceed with caution in determining their scope
and application” but refusing to extend the tort to the situation at issue), overruled by Freeman & Mills,
Inc. v. Belcher Oil Co., 900 P.2d
669, 769 (Cal. 1995).
[33] Rock Port
Market, Inc. v. Affiliated Foods Midwest Cooperative, Inc., WD 79518, 2017 WL
3136402, at *5 (Mo. Ct. App.), transfer
denied (Mo. Sept. 5, 2017).
[35] Id. at *5.
[36] Id. at *6.
[37] Id. at *5.
Another reason the court did not uphold the punitive damage award was that
Rock Port did not plead and prove punitive damages with respect to its claim
for beach of the covenant of good faith and fair dealing. Id.
[39] Id. (alteration in original) (quoting Kratky v. Musil, 969 S.W.2d 371, 377
(Mo. Ct. App. 1998) (internal quotation marks omitted)).
[40] Id. at *6.
[41] Id.
[42] See id.
at *6.
[43] Matthew J.
Barrett, “Contort”: Tortious Breach of
the Implied Covenant of Good Faith and Fair Dealing in Noninsurance, Commercial
Contracts – Its Existence and Desirability, 60 Notre Dame L. Rev. 510, 522–23 (1985).
[44] Id. at
523.
[47]
Barrett, supra note 43, at 527
(citing Quigley v. Pet, Inc.,
162 Cal. App. 3d 223, 239, 208 (1984)).
[48] Id.
[49] Id.
[50] See Rock Port Market, Inc. v. Affiliated
Foods Midwest Cooperative, Inc., WD 79518, 2017 WL 3136402, at *6 (Mo. Ct.
App.), transfer denied (Mo. Sept. 5,
2017).
