Opinion ID: 1404309
Heading Depth: 2
Heading Rank: 3

Heading: Tort Damages for Breach of the Implied Covenant of Good Faith and Fair Dealing

Text: Burkons argued that the trial court erred in granting Ticor's motion to dismiss the count of the complaint that sought damages for bad faith breach of the escrow contract for failure to state a claim. We have previously held that the covenant of good faith and fair dealing is legally implied in every contract. See Rawlings v. Apodaca, 151 Ariz. 149, 153, 726 P.2d 565, 569 (1986); Wagenseller v. Scottsdale Memorial Hosp., 147 Ariz. 370, 383, 710 P.2d 1025, 1038 (1985). Again, the covenant forbids a party to a contract from doing anything denying the right of the other to receive the benefits that flow from the contract. Rawlings, 151 Ariz. at 153-54, 726 P.2d at 569-70. Undoubtedly, given the nature of the contractual relationship between an escrow agent and its principal, the covenant of good faith and fair dealing recognizes a fiduciary relationship and requires the escrow agent to act with the utmost honesty and fairness. D'Ascoli, 94 Ariz. at 234, 383 P.2d at 121-22. As the court of appeals noted, the remedy for breach of this implied covenant is ordinarily by action on the contract, but in certain circumstances, the breach of the implied covenant may provide the basis for imposing tort damages. See Wagenseller, 147 Ariz. at 383, 710 P.2d at 1038. These principles are not confined to insurance contracts but apply to contracts in which there is a special relationship between the parties arising from elements of public interest, adhesion, and fiduciary responsibility. Rawlings, 151 Ariz. at 158-59, 726 P.2d at 574-75; Dodge v. Fidelity & Deposit Co., 161 Ariz. 344, 346, 778 P.2d 1240, 1242 (1989); see also Mitsui Mfrs. Bank v. Superior Court, 212 Cal. App.3d 726, 728-29, 260 Cal. Rptr. 793, 795-96 (1989). Among the special relationships in which such tort damages for breach of contract may be available are those undertaken for something more than or other than commercial advantage, such as the procurement of service, professional help, security, or other intangibles. Rawlings, 151 Ariz. at 159, 726 P.2d at 575. Also, the assessment of tort damages for breach of contract is a device most often allowed in situations in which the rule restricting recovery to contract damages would promote breach of the contract rather than its performance. See Rawlings, 151 Ariz. at 159-60 and n. 4, 726 P.2d at 575-76 and n. 4; Mitsui, 212 Cal. App.3d at 729, 260 Cal. Rptr. at 796. With these principles in mind, we turn to the facts of this case. Burkons makes no argument, and we can conceive of none, why the traditional contract damage rule would not provide adequate compensation under the facts of this case. [7] The bad faith theory evidently arises from Burkons' contention that Ticor failed to restore his deed of trust to first lien position. At oral argument, Burkons advanced the rationale that the bad faith breach in this case was Ticor's refusal of his request that Ticor acquire and forgive the Tower loan or make an agreement nullifying the subordination. This is equivalent, we believe, to saying that Ticor is liable for tort damages because it failed to pay the contractual damages on demand. We do not believe that the law recognizes the imposition of tort damages on a bad faith theory because a party who breached a contract fails to accede to the other party's demand for payment of contract damages. The situation might well be different if Ticor had the ability to refuse to consummate the transaction, and had been requested to do so, but nevertheless subordinated Burkons' lien and disbursed the Tower loan in violation of its own internal policies and without reasonable grounds. In the final analysis, Burkons bargained to sell his property for $135,000, of which $25,000 was to be paid down and the remainder, at interest, over a period of years. Nothing is alleged that would support the conclusion that the contract measure of damages imposed on Ticor, which was not liable on the note at all, is not sufficient to both compensate Burkons and deter escrow agents from breaching their duties. Whatever the applicability of bad faith breach of contract theory to agreements between an escrow agent and the parties to the escrow, an issue we need not determine now, the facts of this case do not support such a theory. See Donnelly Constr. Co. v. Oberg, 139 Ariz. 184, 186, 677 P.2d 1292, 1294 (1984). We conclude therefore that in light of the contentions advanced by Burkons and the facts on this record, the trial judge did not err in dismissing the bad faith count.