“He’s not negotiating in good faith”, one often hears. This may be heard in connection with an absurdly low offer made to purchase an asset, such as a commercial office building, single family residence, or an automobile, or when parties are attempting to settle a claim. The law in Kansas regarding good faith and fair dealing is well settled and may not apply how some may have envisioned; working knowledge of the concept is important for attorneys and other advisors when advising on real estate disputes and/or advising on business disputes and breaches of contract, among other possible scenarios.
According to the Restatement (Second) of Contracts § 205 (1979), “[e]very contract imposes upon each party a duty of good faith and fair dealing in its performance and its enforcement.” Morriss v. Coleman Co., 241 Kan. 501, 514, 738 P.2d 841, 849 (Kan. 1987). It is hard to deny that such a requirement seems appropriate. After all, what kind of society would desire the opposite imposition, a duty of bad faith and unfair dealing? That would be antithetical to American jurisprudence and violative of community standards.
Some have asked this author over the years whether the duty of good faith and fair dealing is akin to some sort of general expectation of integrity between contracting parties or if it is something that could lead to a legitimate lawsuit being brought by the “good guy” against the “bad guy”. In Kansas, the duty of good faith and fair dealing “is implied in a contract, and conduct departing from that duty is a breach of a contractual obligation.” Pizza Mgmt., Inc. v. Pizza Hut, Inc., 737 F. Supp. 1154, 1167 (D. Kan. 1990). The duty of good faith and fair dealing, therefore, is a contractual obligation, the breach of which entitles the plaintiff to bring an action in contract. A breach of this duty “occurs when a party’s actions are commercially unreasonable.” Id. at 1179 (citing Larese v. Creamland Dairies, Inc., 767 F.2d 716, 717-18 (10th Cir. 1985)). “Parties shall not ‘intentionally and purposely do anything to prevent the other party from carrying out his part of the agreement, or do anything which will have the effect of destroying or injuring the right of the other party to receive the fruits of the contract.’” Daniels v. Army National Bank, 249 Kan. 654, 658, 822 P.2d 39, 43 (Kan. 1991) (quoting Bonanza, Inc. v. McLean, 242 Kan. 209, 222, 747 P.2d 792 (1987)).
We know that the breach of the duty of good faith and fair dealing entitles the plaintiff to bring an action in contract. Does an action in contract mean an action for breach of contract or a separate claim for the breach of duty of good faith and fair dealing? Perhaps surprisingly, “[b]reach of the implied covenant of good faith and fair dealing is not a separate claim, but rather a ‘legal argument related to a breach-of-contract claim.’” H&C Animal Health, LLC v. Ceva Animal Health, LLC, 499 F. Supp. 3d 920, 940 (D. Kan. 2020) (quoting Classico, LLC v. United Fire & Cas. Co., 386 P.3d 529, 2016 WL 7324451, *5 (Kan. Ct. App. Dec. 16, 2016)). For a plaintiff to prevail on an implied duty of good faith and fair dealing theory under Kansas law, it must plead a cause of action for breach of contract, not a separate cause of action for breach of duty of good faith. Wayman v. Amoco Oil Co., 923 F. Supp. 1322, 1359 (D. Kan. 1996)). “[N]o separate and independent cause of action for breach of the implied duty of good faith and fair dealing exists under Kansas law.” Id. The purpose of the duty is to “‘protect the reasonable expectations of the parties.’” Flight Concepts Ltd. P’ship v. Boeing Co., 38 F.3d 1152, 1157 (10th Cir. 1994) (quoting Big Horn Coal Co. v. Commonwealth Edison Co., 852 F.2d 1259, 1267 (10th Cir. 1988)).
The breadth of the duty’s applicability is impressive. With the exception of employment-at-will contracts, the duty of good faith and fair dealing is recognized in every contract in the state of Kansas. Estate of Draper v. Bank of Am., N.A., 288 Kan. 510, 205 P.3d 698, 710 (Kan. 2009). This almost-universal applicability of the concept in Kansas makes its understanding a sine qua non. In the context of business law, specifically limited liability companies (LLCs), there is an explicit reference to the implied contractual covenant of good faith and fair dealing:
To the extent that, at law or in equity, a member or manager or other person has duties, including fiduciary duties, to a limited liability company or to another member or manager or to another person that is a party to or is otherwise bound by an operating agreement, the member’s or manager’s or other person’s duties may be expanded or restricted or eliminated by provisions in the operating agreement, except that the operating agreement may not eliminate the implied contractual covenant of good faith and fair dealing.
K.S.A. § 17-76,134(c). This is significant. The flexibility endowed upon drafters of Kansas LLC operating agreements is notably constrained as it relates to the covenant of good faith and fair dealing. This implies that the legislature values such covenant and, by extension, further implies concerns about what operating agreements might look like or permit their constituent members and managers to do in the absence of what the covenant requires. If repetition is a sign of intentionality, the Kansas legislature made clear that the covenant of good faith and fair dealing cannot be done away with:
An operating agreement may provide for the limitation or elimination of any and all liabilities for breach of contract and breach of duties, including fiduciary duties, of a member, manager or other person to a limited liability company or to another member or manager or to another person that is a party to or is otherwise bound by an operating agreement, except that an operating agreement may not limit or eliminate liability for any act or omission that constitutes a bad faith violation of the implied contractual covenant of good faith and fair dealing.
K.S.A. § 17-76,134(e). The wording within this particular subsection is different from the aforestated subsection, but its impression is equal. The Kansas legislature does not want limited liability company owners, or their lawyers, trying to undermine the application of the covenant of good faith and fair dealing. This information should be taken into account when forming LLCs, among other activities.
One particular case in Kansas, Bonanza, Inc. v. McLean, 242 Kan. 209, 222, 747 P.2d 792, 801 (Kan. 1987), quotes a lengthy section from a legal encyclopedia about the implication of good faith and fair dealing in contracts:
Every contract implies good faith and fair dealing between the parties to it, and a duty of co-operation on the part of both parties. Accordingly, whenever the co-operation of the promisee is necessary for the performance of the promise, there is a condition implied that the co-operation will be given. Indeed, it may be said that contracts impose on the parties thereto a duty to do everything necessary to carry them out. When one undertakes to accomplish a certain result he agrees by implication to do everything to accomplish the result intended by the parties. If the giving of notice is requisite to the proper execution of a contract, a promise to give such notice will be inferred. Moreover, there is an implied undertaking in every contract on the part of each party that he will not intentionally and purposely do anything to prevent the other party from carrying out his part of the agreement, or do anything which will have the effect of destroying or injuring the right of the other party to receive the fruits of the contract. Ordinarily if one exacts a promise from another to perform an act, the law implies a counterpromise against arbitrary or unreasonable conduct on the part of the promisee. However, essential terms of a contract on which the minds of the parties have not met cannot be supplied by the implication of good faith and fair dealing.
Id. (quoting 17 Am. Jur. 2d, Contracts § 256, pp. 653-654). The Bonanza court did not quote such a lengthy section of the legal encyclopedia aimlessly. It did so because it was relevant to its decision. Specifically, the court appeared to focus on the “necessary” aspect of the encyclopedia citation, i.e., that contracts impose on the parties thereto a duty to do everything necessary to carry them out, as well as the “prevent” aspect of the encyclopedia citation, i.e., that there is an implied undertaking on the part of each party that he will not intentionally and purposely do anything to prevent the other party from carrying out his part of the agreement. See id. (“McLean was obligated, not only to take the steps necessary to further that development, but to avoid preventing that use.”).
The concept of good faith and fair dealing is indelible from civil procedure. Whether the duty of good faith and fair dealing has been breached presents a question of fact. Waste Connections of Kan, Inc. v. Ritchie Corp., 296 Kan. 943, 965, 298 P.3d 250, 265 (citing Hill v. Perrone, 30 Kan. App. 2d 432, 437, 42 P.3d 210 (2002)). Stated differently, it is for a trier of fact, i.e., a jury in a trial by jury or a judge in a bench (non-jury) trial, to decide whether or not the duty of good faith and fair dealing has been violated. This is significant for a few reasons. One of them is that cases involving the breach of the duty of good faith and fair dealing are unlikely to be resolved via summary judgment. See id. at 974, 271 (stating that “the fact question of the existence of good or bad faith is peculiarly inappropriate for summary judgment.” (citing 88 C.J.S. Trial § 358)). Another is that it will likely be more difficult to overturn verdicts for breach of the duty of good faith and fair dealing than if it were considered a question of law, making case outcomes stickier. Questions of law, of course, are inherently different from questions of fact. Questions of law are subject to unlimited review. State v. Moyer, 306 Kan. 342, 359, 410 P.3d 71, 85 (Kan. 2017). The question of whether the duty of good faith and fair dealing has been breached, being one of fact, perhaps decreases the attractiveness of an appeal due to the deference the appellate court would afford to the decisions of the district court.
The duty of good faith and fair dealing is implied in contracts in Kansas. It can also make its way expressly, at least in part, into all sorts of private agreements, including the Kansas City Regional Association of Realtors standard residential real estate sale contract. This contract (which is probably better called a form) is used by the vast majority of Realtors, and, in an ancillary way, attorneys practicing in real estate law, who assist their clients with purchasing or selling real estate in the Kansas City metropolitan area. The following is the first sentence of the dispute resolution paragraph of the form: “If a dispute arises relating to this Contract prior to or after closing between BUYER and SELLER, or between BUYER or SELLER and a Brokerage Firm or its licensee assisting in the transaction, and the parties to such dispute or claim are unable to resolve the dispute, BUYER and SELLER agree in good faith to attempt to settle such dispute through the dispute resolution process using a professional mediator.” The relevance of this excerpt, of course, is the demonstration of the express “good faith” language with respect to a contractual agreement to attempt to settle a dispute using a professional mediator. Other examples of how “good faith” is expressly integrated into contracts can be found without much effort. Whether an express contractual duty of good faith and/or good faith and fair dealing imposes any duties beyond those read into contracts by the implied duty of good faith and fair dealing seems improbable but may be worth exploring.
Knowledge of contracts in Kansas is essential to competently doing business, avoiding disputes, and resolving disputes. Engaging an experienced attorney with respect to contract law matters (whether concerning the implied duty of good faith and fair dealing or something else) is often a step in the right direction. This law firm, owned by attorney Matthew T. Kincaid, has many years of experience writing, reviewing, interpreting, and enforcing contracts in Kansas and Missouri. Please contact us at 913-735-7707 or conveniently schedule with us here if legal counsel is desired for a contractual matter. Other pages on this law firm’s website relating to contract law may also be of interest, such as drafting or reviewing business contracts or implied contract terms in Kansas.
Matthew T. Kincaid