Breach of Implied Warranty of Fitness For a Particular Purpose

Elements

Where:the seller at the time of contracting has reason to know any particular purpose for which the goods are required and that the buyer is relying on the seller’s skill or judgment to select or furnish suitable goods, there is unless excluded or modified under the next section an implied warranty that the goods shall be fit for such purpose.

NRS 104.2315

Example Cases

Proof

Damages

Defenses

Misc

Breach of the Implied Warranty of Merchantability

Elements

NRS 104.2314 Implied warranty: Merchantability; usage of trade.

1. Unless excluded or modified (NRS 104.2316), a warranty that the goods shall be merchantable is implied in a contract for their sale if the seller is a merchant with respect to goods of that kind. Under this section the serving for value of food or drink to be consumed either on the premises or elsewhere is a sale.
2. Goods to be merchantable must be at least such as:

(a) Pass without objection in the trade under the contract description; and

(b) In the case of fungible goods, are of fair average quality within the description; and

(c) Are fit for the ordinary purposes for which such goods are used; and

(d) Run, within the variations permitted by the agreement, of even kind, quality and quantity within each unit and among all units involved; and

(e) Are adequately contained, packaged and labeled as the agreement may require; and

(f) Conform to the promises or affirmations of fact made on the container or label if any.

1. Unless excluded or modified (NRS 104.2316) other implied warranties may arise from course of dealing or usage of trade.

(Added to NRS by 1965, 793)

Example Cases

Supreme Judicial Court of Massachusetts, Suffolk.

Priscilla D. WEBSTER v. BLUE SHIP TEA ROOM, INC.

Proof

Damages

Defenses

Misc

• "[L]ack of privity between the buyer and manufacturer does not preclude an action against the manufacturer for the recovery of economic losses caused by breach of warranties." Hiles Co. v. Johnston Pump Co., 93 Nev. 73, 79, 560 P.2d 154, 157 (1977) (citations omitted).

Breach of the Warranty of title and against infringement

Breach of the Warranty of Title and against Infringement

Elements

NRS 104.2312 Warranty of title and against infringement; buyer’s obligation against infringement.

1. Subject to subsection 2 there is in a contract for sale a warranty by the seller that:

(a) The title conveyed shall be good, and its transfer rightful; and

(b) The goods shall be delivered free from any security interest or other lien or encumbrance of which the buyer at the time of contracting has no knowledge.

2. A warranty under subsection 1 will be excluded or modified only by specific language or by circumstances which give the buyer reason to know that the person selling does not claim title in himself or that he is purporting to sell only such right or title as he or a third person may have.

3. Unless otherwise agreed a seller who is a merchant regularly dealing in goods of the kind warrants that the goods shall be delivered free of the rightful claim of any third person by way of infringement or the like but a buyer who furnishes specifications to the seller must hold the seller harmless against any such claim which arises out of compliance with the specifications.

NRS 104.2312

Example Cases

Proof

Damages

Defenses

Misc

Breach of Implied Warranty of Habitability

Elements

NRS 118A.290 and NRS 118A.355 set forth the definition of "habitability" and the remedy if the landlord breaches. Below is an excerpt of those statutes. Please refer to the entire statute for a more complete rendition of the requirement.

Also, Radaker v. Scott, 109 Nev. 653, 855 P.2d 1037 (1993) applied the duty of the implied warranty of habitability to a real estate developer.

Requirements of the Defendant

• The landlord shall at all times during the tenancy maintain the dwelling unit in a habitable condition. A dwelling unit is not habitable if it violates provisions of housing or health codes concerning the health, safety, sanitation or fitness for habitation of the dwelling unit or if it substantially lacks:
  • Effective waterproofing and weather protection of the roof and exterior walls, including windows and doors.
  • Plumbing facilities which conformed to applicable law when installed and which are maintained in good working order.
  • A water supply approved under applicable law, which is:
    • Under the control of the tenant or landlord and is capable of producing hot and cold running water;
    • Furnished to appropriate fixtures; and
    • Connected to a sewage disposal system approved under applicable law and maintained in good working order to the extent that the system can be controlled by the landlord.
  • Adequate heating facilities which conformed to applicable law when installed and are maintained in good working order.
  • Electrical lighting, outlets, wiring and electrical equipment which conformed to applicable law when installed and are maintained in good working order.
  • An adequate number of appropriate receptacles for garbage and rubbish in clean condition and good repair at the commencement of the tenancy. The landlord shall arrange for the removal of garbage and rubbish from the premises unless the parties by written agreement provide otherwise.
  • Building, grounds, appurtenances and all other areas under the landlord’s control at the time of the commencement of the tenancy in every part clean, sanitary and reasonably free from all accumulations of debris, filth, rubbish, garbage, rodents, insects and vermin.
  • Floors, walls, ceilings, stairways and railings maintained in good repair.
  • Ventilating, air-conditioning and other facilities and appliances, including elevators, maintained in good repair if supplied or required to be supplied by the landlord.

Remedy

• Except as otherwise provided in this chapter, if a landlord fails to maintain a dwelling unit in a habitable condition as required by this chapter, the tenant shall deliver a written notice to the landlord specifying each failure by the landlord to maintain the dwelling unit in a habitable condition and requesting that the landlord remedy the failures. If a failure is remediable and the landlord adequately remedies the failure or uses his best efforts to remedy the failure within 14 days after receipt of the notice, the tenant may not proceed under this section. If the landlord fails to remedy a material failure to maintain the dwelling unit in a habitable condition or to make a reasonable effort to do so within the prescribed time, the tenant may:
  • Terminate the rental agreement immediately.
  • Recover actual damages.
  • Apply to the court for such relief as the court deems proper under the circumstances.
  • Withhold any rent that becomes due without incurring late fees, charges for notice or any other charge or fee authorized by this chapter or the rental agreement until the landlord has remedied, or has attempted in good faith to remedy, the failure.

NRS 118A.355

Example Cases

Proof

Damages

Defenses

Misc

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

Elements

[Editor's Note: The Nevada Supreme Court has not been consistent in its language when addressing insurance bad faith. Thus, the following are various iterations of the Court's standards, in random order]

Standard One

To establish a prima facie case of bad-faith refusal to pay an insurance claim, the plaintiff must establish that

(1) the insurer refuses a claim without proper cause, and

(2) the claim was for a loss covered by the policy.

Estate of Lomastro ex rel. Lomastro v. Am. Family Ins. Group, 195 P.3d 339, 351 (Nev. 2008); Pemberton v. Farmers Ins. Exch., 109 Nev. 789, 793, 858 P.2d 380, 382 (1993); U. S. Fid. & Guar. Co. v. Peterson, 91 Nev. 617, 619, 540 P.2d 1070, 1071 (1975).

Standard Two

(1) the insurer acts unreasonably and

(2) with knowledge that there is no reasonable basis for its conduct.

Albert H. Wohlers & Co. v. Bartgis, 114 Nev. 1249, 1258, 969 P.2d 949, 956 (1998); Guar. Nat’l Ins. Co. v. Potter, 112 Nev. 199, 206, 912 P.2d 267, 272 (1996); American Excess Ins. Co. v. MGM Grand Hotels, Inc., 102 Nev. 601, 605, 729 P.2d 1352, 1354–55 (1986).

Standard Three

(1) the insurer had no reasonable basis for disputing coverage, and

(2) the insurer knew or recklessly disregarded the fact that there was no reasonable basis for disputing coverage.

Powers v. United Servs. Auto. Ass’n, 114 Nev. 690, 702–703, 962 P.2d 596, 604 (1998); Falline v. GNLV Corp., 107 Nev. 1004, 823 P.2d 888 (1991).

Example Cases

"It is well settled in Nevada that 'every contract imposes upon the contracting parties the duty of good faith and fair dealing.' Hilton Hotels Corp. v. Butch Lewis Productions, Inc., 109 Nev. 1043, 1046, 862 P.2d 1207, 1209 (1993). As we explained in Ainsworth v. Combined Insurance Co., 104 Nev. 587, 592, 763 P.2d 673, 676 (1988), '[t]he relationship of an insured to an insurer is one of special confidence. A consumer buys insurance for security, protection, and peace of mind.' (footnote added). While an insured assumes various duties under an insurance contract—such as the timely payment of premiums—the insurer assumes the concomitant duty 'to negotiate with its insureds in good faith and to deal with them fairly.' Id."

Albert H. Wohlers & Co. v. Bartgis, 114 Nev. 1249, 1258, 969 P.2d 949, 956 (1998).

Proof

Damages

"When a prevailing plaintiff's compensatory damages exceeds $100,000.00, punitive damages are capped by statute to three times the amount of the compensatory damages. See NRS 42.005(1)(a). When the plaintiff recovers less than $100,000.00 in compensatory damages, punitive damages must be limited to a maximum of $300,000.00. See NRS 42.005(1)(b). Significantly, the foregoing statutory caps on punitive damages do not apply to '[a]n insurer who acts in bad faith regarding its obligations to provide insurance coverage.' NRS 42.005(2)(b)."

Albert H. Wohlers & Co. v. Bartgis, 114 Nev. 1249, 1267, 969 P.2d 949, 961 (1998).

"Punitive damages are legally excessive when the amount of damages awarded is clearly disproportionate to the degree of blameworthiness and harmfulness inherent in the oppressive, fraudulent or malicious misconduct of the tortfeasor under the circumstances of a given case. If the awarding jury or judge assesses more in punitive damages than is reasonably necessary and fairly deserved in order to punish the offender and deter others from similar conduct, then the award must be set aside as excessive."

Guaranty National Insurance Co. v. Potter, 112 Nev. 199, 208, 912 P.2d 267, 273 (1996) (quoting Ace Truck & Equipment Rentals, Inc. v. Kahn, 103 Nev. 503, 509, 746 P.2d 132, 136-37 (1987)).

"In determining whether a punitive damages award is excessive pursuant to this standard, we will consider a variety of factors including 'the financial position of the defendant, culpability and blameworthiness of the tortfeasor, vulnerability and injury suffered by the offended party, the extent to which the punished conduct offends the public's sense of justice and propriety, and the means which are judged necessary to deter future misconduct of this kind.'"

Albert H. Wohlers & Co. v. Bartgis, 114 Nev. 1249, 1267–68, 969 P.2d 949, 961–62 (1998) (quoting Guaranty National Insurance Co. v. Potter, 112 Nev. 199, 208, 912 P.2d 267, 273–74 (1996) and Ace Truck & Equipment Rentals, Inc. v. Kahn, 103 Nev. 503, 510, 746 P.2d 132, 137 (1987)).

Defenses

Misc

The Ninth Circuit Court of Appeals held that FRCP 26(b)(3) permitted discovery of attorney work product in a bad-faith suit against an insurance company, where the insurance company’s adjusters prepared estimates valuing the insured’s claim, the insurance company’s intent was the pivotal issue and the party seeking the valuation demonstrated a compelling need for the material because the information was not otherwise available.

See Holmgren v. State Farm Mutual Automobile Insurance Co., 976 F.2d 573, 577 (9th Cir.1992).

"[T]he rule adhered to by a vast majority of jurisdictions is that a plaintiff need not establish that it is entitled to a directed verdict on the contract claim in order to establish a prima facie bad faith claim. See William M. Shernoff et al., Insurance Bad Faith Litigation § 5.02[3], at 5’21 (1998). We believe that the majority rule represents the more reasoned approach and, thus, we decline to adopt the directed verdict rule."

Albert H. Wohlers & Co. v. Bartgis, 114 Nev. 1249, 1257, 969 P.2d 949, 955 (1998).

Generally, this court has addressed an insurer's breach of the implied covenant of good faith and fair dealing as the unreasonable denial or delay in payment of a valid claim. See, e.g.,Pemberton v. Farmers Ins. Exch., 109 Nev. 789, 793, 858 P.2d 380, 382 (1993); Falline v. GNLV Corp., 107 Nev. 1004, 823 P.2d 888, 891 (1991). This, however, does not mean that the tort of bad faith is limited to such cases.

Guaranty Nat'l Ins. CO. v. Potter, 912 P.2d 267 (Nev. 1996).

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

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

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: Contract

Elements

• Common Law

Where the terms of a contract are literally complied with but one party to the contract deliberately countervenes the intention and spirit of the contract, that party can incur liability for breach of the implied covenant of good faith and fair dealing.
Hilton Hotels Corp. v. Butch Lewis Prods., Inc., 107 Nev. 226, 808 P.2d 919, 923 (1991).

[W]hen one party performs a contract in a manner that is unfaithful to the purpose of the contract and the justified expectations of the other party are thus denied, damages may be awarded against the party who does not act in good faith.
Hilton Hotels Corp. v. Butch Lewis Prods., Inc., 107 Nev. 226, 808 P.2d 919, 923 (1991).

• Statute (UCC)

• Obligation of good faith. Every contract or duty within the Uniform Commercial Code imposes an obligation of good faith in its performance and enforcement.
  NRS 104.1304
• "Good faith," except as otherwise provided in Article 5, means honesty in fact and the observance of reasonable commercial standards of fair dealing.
  NRS 104.1201(t)

Example Cases

Nelson v. Heer, 123 Nev. 217, 163 P.3d 420 (2007).

University & Cmty. Coll. Sys. v. Sutton, 120 Nev. 972, 989, 103 P.3d 8, 19 (2004).

Frantz v. Johnson, 116 Nev. 455, 465 n. 4, 999 P.2d 351, 358 n. 4 (2000).

Consolidated Generator-Nevada v. Cummins Engine, 114 Nev. 1304, 1311, 971 P.2d 1251, 1256 (1998).

Hilton Hotels Corp. v. Butch Lewis Prods., Inc., 107 Nev. 226, 808 P.2d 919, 923 (1991).

A.C. Shaw Const., Inc. v. Washoe County, 105 Nev. 913, 784 P.2d 9 (1989).

Proof

• 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 (Nev. 1998) (citing Mitchell v. Bailey & Selover, Inc., 96 Nev. 147, 150, 605 P.2d 1138, 1139 (1980)).

Damages

"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. SeeHilton, 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, 900 P.2d 335 (Nev. 1995).

Defenses

• No breach prior to contract

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).

Misc

• GFFD in 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).

Breach of Fiduciary Duty

Elements

• Elements

1. existence of a fiduciary duty;
2. breach of the duty; and
3. the breach proximately caused the damages.

• Existence of a fiduciary relationship

• A helpful California definition of fiduciary:
• any relation existing between parties to a transaction
• wherein the vulnerability of one party to the other
• results in the empowerment of the stronger party by the weaker
• which empowerment has been solicited or accepted by the stronger party and
• prevents the weaker party from effectively protecting itself."

Example Cases

Proof

• Must show financial loss to bring breach of fiduciary duty claim under ERISA

Damages

Defenses

• Predicate breach of fiduciary duty (preparation to breach in the future) is not a tort

• Majority shareholder's fiduciary duty regarding tender offers

Misc

• Fiduciary duties to partners

• LLC members owe fiduciary duties to each other, but these may be contractually eliminated

• Directors/managers of an insolvent firm owe a fiduciary duty to the firm's creditors.

• Breaching a fiduciary duty and not disclosing the breach is fraud

• Breaching fiduciary duty is not de facto fraud

• Partners have a fiduciary duty

• Fiduciary duty of a majority shareholder

• Minority shareholder must plead what type of fiduciary duty was breached

• Lenders are generally not fiduciaries of borrowers

• In some closely-held corporations, a minority shareholder might have a direct [non-derivative] cause of action against majority shareholder [please read the whole case to fully understand]

• Lenders do not owe borrowers fiduciary duties

• Trustee of deed of trust is the fiduciary of the beneficiary and trustor

• Empoyees owe fiduciary duties to employers

• Cemeteries are not fiduciaries of their customers

• Licensee has common law fiduciary duties regardless of NRS 645.251

• [4] A similar definition, but one which makes clear the nondispositive nature of the particular context in which confidence is reposed and accepted, was provided by United States Supreme Court Justice William J. Brennan, Jr., when he was a member of the Appellate Division of the Superior Court of New Jersey: "A confidential relation is not confined to any specific association of the parties. `Its essentials are a reposed confidence and the dominant and controlling position of the beneficiary of the transaction.' [Citation.] `It is clear that the dominance must be of the mind, and the dependence must be upon the mind rather than upon the hands and feet of the donee.' [Citation.] It exists when the circumstances make it certain that the parties do not deal on equal terms, but on the one side there is an overmastering influence, or, on the other, weakness, dependence or trust, justifiably reposed." (In re Stroming's Will (1951) 12 N.J.Super 217, 224, 79 A.2d 492, 495.)

Breach of Confidential Relationship