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Breach of Implied Covenant of Good Faith and Fair Dealing Tort

Breach of Implied Covenant of Good Faith and Fair Dealing: Tort

Elements

special relationships exist characterized by elements of public interest, adhesion, and fiduciary responsibility, or reliance
a plaintiff can assert a contractual claim and also one for fraud based on the facts surrounding the contract’s execution and performance.
the aggrieving party was in the superior or entrusted position
the aggrieving party has engaged in grievous and perfidious misconduct
Great American Ins. v. General Builders, 113 Nev. 346, 934 P.2d 257 (1997).

Example Cases

Proof

Only in special relationships

“Although every contract contains an implied covenant of good faith and fair dealing, an action in tort for breach of the covenant arises only “in rare and exceptional cases” when there is a special relationship between the victim and tortfeasor.” Insurance Co. of the West v. Gibson Tile Co., Inc., 122 Nev. 455, 462, 134 P.3d 698, 702 (2006) (citing K Mart Corp. v. Ponsock, 103 Nev. 39, 49, 732 P.2d 1364, 1370 (1987)).

A special relationship is “characterized by elements of public interest, adhesion, and fiduciary responsibility.” Great American Ins. v. General Builders, 113 Nev. 346, 355, 934 P.2d 257, 263 (1997). Examples of special relationships include those between insurers and insureds, partners of partnerships, and franchisees and franchisers. See Aluevich v. Harrah’s, 99 Nev. 215, 217, 660 P.2d 986, 987 (1983) (observing that there is “a cause of action in tort for the breach of an implied covenant of good faith and fair dealing where an insurer fails to deal fairly and in good faith with its insured by refusing, without proper cause, to compensate its insured for a loss covered by the policy.”). Each of these relationships shares “a special element of reliance” common to partnership, insurance, and franchise agreements.Id. We have recognized that in these situations involving an element of reliance, there is a need to “protect the weak from the insults of the stronger” that is not adequately met by ordinary contract damages. K Mart Corp. v. Ponsock, 103 Nev. 39, 49, 732 P.2d 1364, 1371 (1987). In addition, we have extended the tort remedy to certain situations in which one party holds “vastly superior bargaining power.” Aluevich, 99 Nev. at 217, 660 P.2d at 987.

Insurance Co. of the West v. Gibson Tile Co., Inc., 122 Nev. 455, 462, 134 P.3d 698, 702 (2006).

Superior position and perfidious deeds

Tort liability for breach of the implied covenant of good faith and fair dealing is appropriate where “‘the party in the superior or entrusted position’ has engaged in ‘grievous and perfidious misconduct.’”
State, University and Community College System v. Sutton, 120 Nev. 972, 989, 103 P.3d 8, 19 (2004).

Question of fact

This court has held that good faith is a question of fact.
Consolidated Generator-Nevada, Inc. v. Cummins Engine Co., Inc., 114 Nev. 1304, 971 P.2d 1251 (1998) (citing Mitchell v. Bailey & Selover, Inc., 96 Nev. 147, 150, 605 P.2d 1138, 1139 (1980)).

Rational for sounding in tort

One of the underlying rationales for extending tort liability in the described kinds of cases is that ordinary contract damages do not adequately compensate the victim because they do not require the party in the superior or entrusted position, such as the insurer, the partner, or the franchiser, to account adequately for grievous and perfidious misconduct; and contract damages do not make the aggrieved, weaker, “trusting” party “whole.”

K Mart Corp. v. Ponsock, 103 Nev. 39, 49, 732 P.2d 1364, 1371 (Nev. 1987) (overruled on other grounds by Ingersoll-Rand Co. v. McClendon, 498 U.S. 133, 111 S.Ct. 478 (1990)).

Damages

Emotional damages

However, a breach of this duty does not give rise to tort liability unless there is a special relationship between the tort-victim and the tortfeasor. Furthermore, a successful plaintiff is entitled to compensation for all of the natural and probable consequences of the wrong, including injury to the feelings from humiliation, indignity and disgrace to the person
SeeState, University and Community College System v. Sutton, 120 Nev. 972, 990, 103 P.3d 8, 20 (2004).

“Finally, we conclude that the jury award was within a range justified by Jordan’s claims. Damages need not be determined with mathematical certainty. SeeBader v. Cerri, 96 Nev. 352, 357, 609 P.2d 314, 318 (1980). The costs Jordan incurred in paying Perry’s salary constitute reliance damages recoverable when Perry failed to perform. Furthermore, costs incurred in covering monthly operating losses could be attributed to Perry’s breach and labeled consequential damages which, combined with other damages, total nearly $100,000.00 at the very least. Indeed, because Jordan paid for the clothing store in cash, it is possible that the jury could have awarded a much greater amount. We also note that Jordan was entitled to recover any losses resulting from a breach of the implied covenant of good faith and fair dealing as well. See Hilton, 107 Nev. at 233-34, 808 P.2d at 923-24. Recovery of this amount under these theories of liability compensates Jordan for her loss (that is, sums Jordan paid), not strictly for the benefit conferred upon Perry. Jordan’s recovery was not, therefore, restitutional in nature.

“In addition, the jury was entitled to draw all reasonable inferences from the evidence to determine that Jordan trusted Perry to establish an appropriate sale price for the clothing store. Although it is true that Jordan does not allege fraud, Perry held a duty to act with the utmost good faith, based on her confidential relationship with Jordan. This duty requires affirmative disclosure and avoidance of self dealing. SeeNorthern Nev. Mobile Home v. Penrod, 96 Nev. 394, 398, 610 P.2d 724, 727 (1980). We conclude that the jury could have reasonably inferred that Perry’s previous attempt to sell the clothing store at a significantly lower price should have been affirmatively disclosed, and that sale at a higher price constituted self dealing. The jury could have therefore awarded the $100,000.00 difference in sale price and an additional $5,000.00 for the computer which Jordan purchased twice.”
Perry v. Jordan, 111 Nev. 943, 948-949, 900 P.2d 335 (Nev. 1995).

Defenses

No pre-contract breach

A party cannot breach the covenant of good faith and fair dealing before a contract is formed.
Larson v. Homecomings Financial, LLC, 680 F.Supp.2d 1230, 1236-37 (D.Nev.,2009).

Special relationship/Emotional damages.

However, a breach of this duty does not give rise to tort liability unless there is a special relationship between the tort-victim and the tortfeasor. Furthermore, a successful plaintiff is entitled to compensation for all of the natural and probable consequences of the wrong, including injury to the feelings from humiliation, indignity and disgrace to the person.
State, University and Community College System v. Sutton, 120 Nev. 972, 989, 103 P.3d 8, 19 (Nev. 2004).

Tort is rare/special relationship/reliance/vastly superior bargaining power

Although every contract contains an implied covenant of good faith and fair dealing, an action in tort for breach of the covenant arises only “in rare and exceptional cases” when there is a special relationship between the victim and tortfeasor. A special relationship is “characterized by elements of public interest, adhesion, and fiduciary responsibility.” Examples of special relationships include those between insurers and insureds, partners of partnerships, and franchisees and franchisers. Each of these relationships shares “a special element of reliance” common to partnership, insurance, and franchise agreements. We have recognized that in these situations involving an element of reliance, there is a need to “protect the weak from the insults of the stronger” that is not adequately met by ordinary contract damages. In addition, we have extended the tort remedy to certain situations in which one party holds “vastly superior bargaining power.”
Insurance Co. of the West v. Gibson Tile Co., Inc., 122 Nev. 455, 462, 134 P.3d 698 (Nev. 2006).

No for sureties

We have declined to extend tort liability to a surety for the breach of the good-faith covenant. In Great American Insurance v. General Builders, we reasoned that the facts of the case did not raise the “same public policy concerns implicated where an insurance company refuses to compensate a policyholder for losses covered by the policy.” The principal did not take out an insurance policy with the surety in order to be protected against property damage or losses. Rather, the owner of the project required the bonds posted for its own security. Further, “the parties [were] both experienced commercial entities represented in the … transaction by … experienced agents” and thus stood in equal bargaining positions.
Insurance Co. of the West v. Gibson Tile Co., Inc., 122 Nev. 455, 462, 134 P.3d 698 (Nev. 2006)(quoting Great American Insurance v. General Builders, 113 Nev. 346, 355, 934 P.2d 257, 263 (1997)).

Not for at-will employees

[B]reach of contract and bad faith discharge are not applicable to at-will employment.
Martin v. Sears, Roebuck and Co., 111 Nev. 923, 899, 929 P.2d 551, 555 (Nev., 1995).

No breach after rescission

“[W] here there has been a valid rescission of the contract, there is no longer any contract to enforce and, therefore, no longer a cause of action for breach”
Awada v. Shuffle Master, Inc., 123 Nev. Adv. Op. 57 – Nev: Supreme Court 2007>

Misc

Special Relationships

[Editor’s note: There exists a question as what a “special relationship” entails. The following cases explore the term. Please note that some of these use the term “special relationship” in a context other than a tortious bad faith claim, and thus may be distinguishable]
General description

the breach of an implied covenant of good faith and fair dealing where an insurer fails to deal fairly and in good faith with its insured by refusing, without proper cause, to compensate its insured for a loss covered by the policy.”). Each of these relationships shares “a special element of reliance” common to partnership, insurance, and franchise agreements.Id. We have recognized that in these situations involving an element of reliance, there is a need to “protect the weak from the insults of the stronger” that is not adequately met by ordinary contract damages. K Mart Corp. v. Ponsock, 103 Nev. 39, 49, 732 P.2d 1364, 1371 (1987). In addition, we have extended the tort remedy to certain situations in which one party holds “vastly superior bargaining power.” Aluevich, 99 Nev. at 217, 660 P.2d at 987.

Insurance Co. of the West v. Gibson Tile Co., Inc., 122 Nev. 455, 462, 134 P.3d 698, 702 (2006).

Superior position and perfidious deeds

Tort liability for breach of the implied covenant of good faith and fair dealing is appropriate where “‘the party in the superior or entrusted position’ has engaged in ‘grievous and perfidious misconduct.’”
State, University and Community College System v. Sutton, 120 Nev. 972, 989, 103 P.3d 8, 19 (2004).

Question of fact

This court has held that good faith is a question of fact.
Consolidated Generator-Nevada, Inc. v. Cummins Engine Co., Inc., 114 Nev. 1304, 971 P.2d 1251 (1998) (citing Mitchell v. Bailey & Selover, Inc., 96 Nev. 147, 150, 605 P.2d 1138, 1139 (1980)).

Rational for sounding in tort

K Mart Corp. v. Ponsock, 103 Nev. 39, 49, 732 P.2d 1364, 1371 (Nev. 1987) (overruled on other grounds by Ingersoll-Rand Co. v. McClendon, 498 U.S. 133, 111 S.Ct. 478 (1990)).

Damages

Emotional damages

Defenses

No pre-contract breach

A party cannot breach the covenant of good faith and fair dealing before a contract is formed.
Larson v. Homecomings Financial, LLC, 680 F.Supp.2d 1230, 1236-37 (D.Nev.,2009).

Special relationship/Emotional damages.

However, a breach of this duty does not give rise to tort liability unless there is a special relationship between the tort-victim and the tortfeasor. Furthermore, a successful plaintiff is entitled to compensation for all of the natural and probable consequences of the wrong, including injury to the feelings from humiliation, indignity and disgrace to the person.
State, University and Community College System v. Sutton, 120 Nev. 972, 989, 103 P.3d 8, 19 (Nev. 2004).

Tort is rare/special relationship/reliance/vastly superior bargaining power

No for sureties

We have declined to extend tort liability to a surety for the breach of the good-faith covenant. In Great American Insurance v. General Builders, we reasoned that the facts of the case did not raise the “same public policy concerns implicated where an insurance company refuses to compensate a policyholder for losses covered by the policy.” The principal did not take out an insurance policy with the surety in order to be protected against property damage or losses. Rather, the owner of the project required the bonds posted for its own security. Further, “the parties [were] both experienced commercial entities represented in the … transaction by … experienced agents” and thus stood in equal bargaining positions.
Insurance Co. of the West v. Gibson Tile Co., Inc., 122 Nev. 455, 462, 134 P.3d 698 (Nev. 2006)(quoting Great American Insurance v. General Builders, 113 Nev. 346, 355, 934 P.2d 257, 263 (1997)).

Not for at-will employees

[B]reach of contract and bad faith discharge are not applicable to at-will employment.
Martin v. Sears, Roebuck and Co., 111 Nev. 923, 899, 929 P.2d 551, 555 (Nev., 1995).

No breach after rescission

“[W] here there has been a valid rescission of the contract, there is no longer any contract to enforce and, therefore, no longer a cause of action for breach”
Awada v. Shuffle Master, Inc., 123 Nev. Adv. Op. 57 – Nev: Supreme Court 2007

Misc

Special Relationships

[Editor’s note: There exists a question as what a “special relationship” entails. The following cases explore the term. Please note that some of these use the term “special relationship” in a context other than a tortious bad faith claim, and thus may be distinguishable]
General description

A special relationship is “characterized by elements of public interest, adhesion, and fiduciary responsibility.” Great American Ins. v. General Builders, 113 Nev. 346, 355, 934 P.2d 257, 263 (1997). Examples of special relationships include those between insurers and insureds, partners of partnerships, and franchisees and franchisers. See Aluevich v. Harrah’s, 99 Nev. 215, 217, 660 P.2d 986, 987 (1983) (observing that there is “a cause of action in tort for the breach of an implied covenant of good faith and fair dealing where an insurer fails to deal fairly and in good faith with its insured by refusing, without proper cause, to compensate its insured for a loss covered by the policy.”). Each of these relationships shares “a special element of reliance” common to partnership, insurance, and franchise agreements.Id. We have recognized that in these situations involving an element of reliance, there is a need to “protect the weak from the insults of the stronger” that is not adequately met by ordinary contract damages. K Mart Corp. v. Ponsock, 103 Nev. 39, 49, 732 P.2d 1364, 1371 (1987). In addition, we have extended the tort remedy to certain situations in which one party holds “vastly superior bargaining power.” Aluevich, 99 Nev. at 217, 660 P.2d at 987.
Insurance Co. of the West v. Gibson Tile Co., Inc., 122 Nev. 455, 462, 134 P.3d 698, 702 (2006).

Further description of special relationship in tortious bad faith

This duty to adequately inform an insured arises from the special relationship between the insured and the insurer, which is similar to a fiduciary relationship. Ainsworth v. Combined Ins. Co., 104 Nev. 587, 592, 763 P.2d 673, 676 (1988) (describing the insurer-insured relationship as one of “special confidence”); Love v. Fire Ins. Exchange, 221 Cal. App. 3d 1136, 271 Cal. Rptr. 246, 251-52 (Ct. App. 1990) (refusing to characterize the insurer-insured relationship as fiduciary but acknowledging it is a “fiduciary-type” [*326] relationship). Although this court has refused to adopt a standard where an insurance company must place the insured’s interests over the company’s interests, the nature of the relationship requires [**15] that the insurer adequately protect the insured’s interest. Powers v. United Servs. Auto. Ass’n, 114 Nev. 690, 701-02, 962 P.2d 596, 603 (1998), modified on other grounds,Powers v. United Servs. Auto. Ass’n, 115 Nev. 38, 979 P.2d 1286 (1999). Thus, at a minimum, an insurer must equally consider the insured’s interests and its own. Love, 271 Cal. Rptr. at 253.

Allstate Ins. Co. v. Miller, 212 P.3d 318, 326 (Nev. 2009).

Coroner has no special relationship with family of the deceased, but the mortuary does

Unlike the duty of a county coroner, which we discuss in the next section, a mortuary voluntarily undertakes a duty to competently prepare the decedent’s body for the benefit of the bereaved. See Christensen, 820 P.2d at 193. [*8] While we must limit liability at some point, and thus conclude that a mortuary’s duty does not run to all persons potentially affected by the decedent’s passing, such as close friends and distant relatives, we cannot conclude that a mortuary only owes a duty to the person with the right to dispose of the body.
…….
The county coroner does not create a special relationship nor does he or she undertake any particular duty to the bereaved to prepare the deceased’s body for funeral services. 6 Rather, [**15] the county coroner’s duty is to investigate the cause of death and, so performing its duty, there may be instances where a county coroner needs to examine the body or its parts.

Boorman v. Nev. Mem. Cremation Soc’y, Inc., 236 P.3d 4, 9 (Nev. 2010)

No special relationship in a surety relationship

We have declined to extend tort liability to a surety for the breach of the good-faith covenant. 11 In Great American Insurance v. General Builders, we reasoned that the facts of the case did not raise the “same public policy concerns implicated where an insurance company refuses to compensate a policyholder for losses covered by the policy.” 12 The principal did not take out an insurance policy with the surety in order to be protected against property damage or losses. Rather, the owner of the project required the bonds posted for its own security. Further, “the parties [were] both experienced commercial entities represented in the . . . transaction by . . . experienced agents” and thus stood in equal bargaining positions.

Insurance Co. of the West v. Gibson Tile Co., Inc., 122 Nev. 455, 462, 134 P.3d 698, 702 (2006).

Special relationships in regards to privilege

Privileges relating to confidential communications, such as those between attorney and client, between doctor and [***19] patient, and between spouses, shield the confidentiality of communications within special relationships and are not designed or intended to assist the fact-finding process or to uphold its integrity. See John W. Strong,McCormick on Evidence, § 72, at 268-69 (4th ed. 1992). These privileges are justified by the public’s interest in encouraging socially useful communications and by certain notions of legitimate privacy expectations. See generally Developments in the Law Privileged Communications, 98 Harv. L. Rev. 1450 (1985)(examining the evolution of evidentiary privileges in American law)[hereinafter Privileged Communications]. Accordingly, confidential communications made between persons in certain special relationships are privileged from compelled disclosure. Nevada’s legislature has expressly recognized such privileges. See NRS 49.095 (attorney-client privilege); NRS 49.185 (accountant-client privilege); NRS 49.209 (psychologist-patient privilege); NRS 49.225 (doctor-patient privilege); NRS 49.247 (therapist-patient privilege); NRS 49.252 (social worker-client privilege); NRS 49.295 (spousal privilege). Generally, privileges [*99] relating to special [***20] relationships can be waived by the source of the confidential information, whose identity is usually known. See Carl C. Monk,Evidentiary Privilege for Journalists’ Sources: Theory and Statutory Protection, 51 Mo. L. Rev. 1, 49 (1986)(examining the reporter’s privilege in state and federal jurisprudence)[hereinafter Evidentiary Privilege]

Diaz v. Eighth Judicial Dist. Court, 116 Nev. 88, 98, 993 P.2d 50, 59 (Nev. 2000).

Special relationships in regards to affirmative duty to protect

In Nevada, as under the common law, strangers are generally under no duty to aid those in peril. See Sims v. General Telephone & Electric, 107 Nev. 516, 525, 815 P.2d 151, 157 (1991). This court, however, has stated that, HN4where a special relationship exists between the parties, such as with an innkeeper-guest, teacher-student or employer-employee, an affirmative duty to aid others in peril is imposed by law. See id. at 526, 815 P.2d at 157-58 (citing Keeton et al., § 56, at 376). Likewise, we have held that a party who is in “‘control of the premises’ is required [***8] to take reasonable affirmative steps to aid the party in peril.” Id. at 526, 815 P.2d at 158 (quoting Keeton et al., § 56, at 376). Finally, while this court has not so held, other jurisdictions have expressly stated that restaurant owners and their employees owe an affirmative duty to come to the aid of patrons who become ill or are otherwise in need of medical attention. See Breaux v. Gino’s, Inc., 153 Cal. App. 3d 379, 200 Cal. Rptr. 260, 261 (Ct. App. 1984) (“It is well established that [*296] restaurants have a legal duty to come to the assistance of their customers who become ill or need medical attention . . . .”); Drew v. LeJay’s Sportsmen’s Cafe, Inc., 806 P.2d 301, 306 (Wyo. 1991) (“A restaurant whose employees are reasonably on notice that a customer is in distress and in need of emergency medical attention has a legal duty to come to the assistance of that customer.”).

Lee v. GNLV Corp., 117 Nev. 291, 296, 22 P.3d 209, 212 (Nev. 2001).

General

Every contract

It is well settled in Nevada that “every contract imposes upon the contracting parties the duty of good faith and fair dealing.”
State, University and Community College System v. Sutton, 120 Nev. 972, 989, 103 P.3d 8, 19 (Nev.,2004)(quoting Hilton Hotels v. Butch Lewis Productions, 109 Nev. 1043, 1046, 862 P.2d 1207, 1209 (1993)).

Insurers

[there exists] a cause of action in tort for the breach of an implied covenant of good faith and fair dealing where an insurer fails to deal fairly and in good faith with its insured by refusing, without proper cause, to compensate its insured for a loss covered by the policy”.
Aluevich v. Harrah’s, 99 Nev. 215, 217, 660 P.2d 986, 987 (1983).

Examples of special relationships

Examples of special relationships include those between insurers and insureds, partners of partnerships, and franchisees and franchisers
Insurance Co. of the West v. Gibson Tile Co., Inc., 122 Nev. 455, 134 P.3d 698 (Nev. 2006).

Breach of Implied Covenant of Good Faith and Fair Dealing Tort