Court Opinion

ID: 9553129
Source: CourtListenerOpinion
Date Created: 2023-08-07 19:22:45.982894+00
Date Added: 2024-06-11T15:29:46.698299
License: Public Domain

Holmes, J.
dissenting: I respectfully dissent. The critical issue in this case is whether United, having reserved under the subcontract a discretionary right to make additions to or omissions from the hauling to be performed by Meier’s, was entitled to terminate the subcontract after instigating the KDOT change order under which United itself later hauled and acquired all rights to the same excavated material.
“A majority of American jurisdictions, the Restatement (Second) of Contracts, and the Uniform Commercial Code (U.C.C.) now recognize the duty to perform a contract in good faith as a general principle of contract law.” Burton, Breach of Contract and the Common Law Duty to Perform in Good Faith, 94 Harv. L. Rev. 369 (1980).
We have recognized and applied the principles of good faith in a variety of situations. See Iola State Bank v. Bolan, 235 Kan. 175, 183, 679 P.2d 720 (1984); Baker v. Ratzlaff, 1 Kan. App. 2d 285, 289, 564 P.2d 153 (1977). Every contract imposes upon each party a duty of good faith and fair dealing in its performance and enforcement. K.S.A. 84-1-203; Restatement (Second) of Contracts § 205 (1979); 17 Am. Jur. 2d, Contracts § 256. There is an implied undertaking on the part of each party that he will not intentionally or purposely do anything which will destroy or injure the other party’s right to receive the fruits of the contract. 17 Am. Jur. 2d, Contracts § 256. “Good faith” means honesty in fact in the conduct or transaction concerned (K.S.A. 84-l-201[19]), fair dealing and a duty of cooperation on the part of both parties (17 Am. Jur. 2d, Contracts § 256). The majority’s holding United’s actions were consistent with the implied obligation of good faith eviscerates that obligation.
Good faith, as it applies to contractual obligations, has been defined and described in various ways.
“The phrase ‘good faith’ is used in a variety of contexts, and its meaning varies somewhat with the context. Good faith performance or enforcement of a contract *700emphasizes faithfulness to an agreed common purpose and consistency with the justified expectations of the other party; it excludes a variety of types of conduct characterized as involving ‘bad faith’ because they violate community standards of decency, fairness or reasonableness.” Restatement (Second) of Contracts § 205, Comment a.
“Bad faith” includes “a neglect or refusal to fulfill some duty or some contractual obligation, not prompted by an honest mistake as to one’s rights or duties, but by some interested or sinister motive.” Black’s Law Dictionary 176 (4th ed. rev. 1968).
“Subterfuges and evasions violate the obligation of good faith in performance even though the actor believes his conduct to be justified. But the obligation goes further: bad faith may be overt or consist of inaction, and fair dealing may require more than honesty. A complete catalogue of the types of bad faith is impossible, but the following types are among those which have been recognized in judicial decisions: evasion of the spirit of the bargain, . . . abuse of a power to specify terms, and interference with or failure to cooperate in the other party’s performance.” Restatement (Second) of Contracts § 205, Comment d.
The majority places great emphasis on various provisions of the subcontract reserving to United the right to make additions to or omissions from the hauling to be performed by Meier’s. But even where a party possesses discretionary power in the performance of a contract the law implies an obligation on that party to use honest judgment and faithful performance in exercising that discretion. Heckard v. Park, 164 Kan. 216, Syl. ¶ 5, 188 P.2d 926 (1948). Meier’s subcontract was conditional in the sense full performance by both parties was conditioned on KDOT issuing no change orders concerning the scheduled hauling. True, where under the terms of a contract the occurrence of an event terminates an obligor’s duty of immediate performance, that duty is discharged if the event occurs. Restatement (Second) of Contracts § 230(1) (1979). However, the obligor’s duty is not discharged if occurrence of the event is the result of a breach by the obligor of his duty of good faith and fair dealing. Restatement (Second) of Contracts § 230(2)(a).
Where a contract is to be performed upon the occurrence of a future event, there is an implied agreement that the obligor will place no obstacle in the way of the occurrence of such event, and if he himself is the cause of the failure of the condition to occur he cannot rely on such failure to defeat his liability. Cowden Mfg. Co., Inc. v. Systems Equip. Lessors, 608 S.W.2d 58 (Ky. App. 1980). The converse of that rule applies in this case: where *701performance of a contract is premised on the nonoccurrence of a future event (here, the issuance of a KDOT change order eliminating the hauling to be done) there is an implied agreement that the obligor (defendant) will not promote or foster the happening of such event, and if the obligor is the cause of the occurrence of that event it cannot rely on that event or condition to defeat its liability for breach of the contract by reason of nonperformance.
The obligation of good faith in the exercise of discretionary powers under a contract is thoroughly discussed by Professor Burton in the article previously cited. In part, Professor Burton says:
“The good faith performance doctrine establishes a standard for contract interpretation and a convenant that is implied in every contract. . . . [E]xpress contract terms alone are insufficient to determine a party’s good faith in performance.
“. . . . Good faith limits the exercise of discretion in performance conferred on one party by the contract. When a discretion-exercising party may determine aspects of the contract, such as quantity, price, or time, it controls the other’s anticipated benefits. Such a party may deprive the other of these anticipated benefits for a legitimate (or good faith) reason. The same act will be a breach of the contract if undertaken for an illegitimate (or bad faith) reason. . . .
“Bad faith performance occurs precisely when discretion is used to recapture opportunities forgone upon contracting — when the discretion-exercising party refuses to pay the expected cost of performance. Good faith performance, in turn, occurs when a party’s discretion is exercised for any purpose within the reasonable contemplation of the parties at the time of formation — to capture opportunites that were preserved upon entering the contract, interpreted objectively. The good faith performance doctrine therefore directs attention to the opportunities forgone by a discretion-exercising party at formation, and to that party’s reasons for exercising discretion during performance.

“B. Breach of Contract by Failing to Perform in Good Faith

”1. Good Faith: The Reasonable Contemplation of the Parties— . . . . The good faith performance doctrine may be said to permit the exercise of discretion for any purpose — including ordinary business purposes —• reasonably within the contemplation of the parties. A contract thus would be breached by a failure to perform in good faith if a party uses its discretion for a reason outside the contemplated range — a reason beyond the risks assumed by the party claiming a breach.
“2. Bad Faith: Recapturing Forgone Opportunities — Bad faith performance consists of an exercise of discretion in performance to recapture opportunities forgone at formation. The dependent promisee’s expectations encompass both the subject matter to be received under a contract, and the expected costs of *702performance by the other party. A recapture by one party of forgone opportunities necessarily harms the other. A reasonable person accordingly would enter a contract that confers discretion on the other party only on the belief that the discretion will not be used to recapture forgone opportunities.
“The question whether a party used its discretion in order to recapture forgone opportunities is one of subjective intent, and is a question of fact for the jury.” Burton, 94 Harv. L. Rev. at 371, 372-73, 385-87, 389.
With the foregoing basic principles in mind, did the evidence in this case warrant summary judgment as a matter of law? I think not. The evidence in this case shows a pattern of repeated efforts by United to oust Meier’s from the project. The “substantial shortfall” between the estimated amount of material to be excavated and the actual quantities was a discrepancy perceived only in the minds of United’s officers, without any basis in fact. Four times United attempted to persuade KDOT this shortfall existed, and four times KDOT investigated the matter and found it to be untrue. In its last letter KDOT advised United that if it wished to pui'sue this claim it would have to px'oduce supporting data and computations. None was produced and between KDOT and United the issue was dropped. Only after this matter had been resolved against United’s contentions did United then inform Meier’s Trucking the hauling was to be discontinued due to the state’s “pi’oblems” and discrepancies.
Was there in fact a shortfall between the estimated and actual amounts of excavated material? Consistent with the majority’s stated preference for plaintiff s recitation of the facts, further consideration of plaintiff s brief is justified:
“A comparison of the quantities of excavation to be hauled by Meier’s Trucking according to the subcontract and the quantities ultimately hauled or wasted under the change order solicited by United further shows that there was no discrepancy in the amount of excavation to be hauled. No basis existed for United’s representation to Meier’s that such discrepancies existed, either in April of 1980 or as finally determined. Under the terms of the subcontract the original estimated quantity of hauling was a total of 562,100 cubic yards. According to the evidence introduced at trial, Meier’s Trucking actually hauled 136,607 cubic yards of excavation, leaving a difference between what was originally estimated and what was actually hauled by Meier’s of 425,493 cubic yards. After Meier’s initially hauled 72,503 cubic yards of material, progress was halted by order of United. At this point change order 13-F was sent directing that 489,597 cubic yards which would have been hauled by Meier’s Trucking under the subcontract was to be wasted on the job by United rather than being placed in the stockpile. Subsequently, change order 18-T removed an estimated quantity of 65,000 yards *703from the ‘waste’ category under change order 13-F and added it to the contract as ‘excavation special (stockpile)’. Meier’s Trucking subsequently hauled 64,104 cubic yards pursuant to this change. If the amount of 64,104 cubic yards of excavation material hauled by Meier’s Trucking is subtracted from the 489,597 cubic yards to be wasted under change order 13-F, the quantity actually wasted on the job, according to the state’s figures, would be 425,493 cubic yards. This is the exact amount shown on the final change order as ‘Excavation Special’ which was to be ‘wasted’ by United. Obviously, no 100,000 cubic yard discrepancy existed as claimed by United in the early part of 1980.”
The meeting between Eugene Meier and United officials on May 2, 1980, concluded without any agreement on the proposed termination of the subcontract. The only United official who “believed” Meier had accepted the offer of termination was United’s president, James Supica. Eugene Meier’s testimony that he neither accepted nor rejected the offer was corroborated by the deposition testimony of T. C. Schmidt, a United vice president who also attended the meeting. In this light Supica’s subsequent “confirmation” letter is merely another instance of United’s attempts to avoid its obligations under the subcontract.
The important points about Supica’s involvement in the dispute between Clarkson and KDOT are these. First, as the majority recognizes, the K-12 and 1-435 projects were physically and contractually independent. The evidence is clear that regardless of Supica’s supposed concerns over its impact, the dispute between Clarkson and KDOT would not have affected United’s contract on the 1-435 project. Second, the majority is simply in error when it states, “We do not have a situation where the general contractor took over the work previously subcontracted to another.” That statement is flatly contradicted by plaintiff s version of the evidence, which the majority recites and purports to accept as true. Change order 13-F, the idea for which had originated with United, eliminated the long-distance hauling for which Meier’s Trucking had been employed and gave to United the new short-distance hauling of the same excavated material as well as ownership of the material itself. There was no change in the amount of material to be hauled, only in the manner of its disposition. United took over the identical work, on somewhat different terms, that it had previously hired Meier’s to do. Based upon the evidence a jury could find that it was done for the sole purpose of eliminating the Meier’s contract and increasing United’s profits, all at the expense of Meier’s. The *704quantity of work was reduced by change order 13-F to eliminate Meier’s and then the identical amount was restored as an “excavation special” to be performed by United.
What we do have is a situation in which United, through its president, voluntarily involved itself in a third-party dispute having no impact on the 1-435 project, United’s contract, or Meier’s hauling subcontract. Supica acted knowing full well the compromise he encouraged and later agreed to would work to United’s own financial advantage while eliminating Meier’s subcontract. In these circumstances the highly touted $1 million savings to the state is irrelevant to the rights and obligations of the parties to this suit. Supica exploited the entire situation to reap a financial bonanza for United, sacrificing nothing itself for the “public good.” Under these circumstances I am not impressed with defendant’s grandstanding about the public benefit resulting from its actions. In this connection it would be interesting to know how much KDOT paid for dirt, rock and other material used in the construction of the “Maltese Cross” interchange which would not have been necessary if the material had not been “wasted” to United under its scheme to eliminate Meier’s from its contract.
The majority recognizes that the implied obligation of good faith applies to the parties’ subcontract notwithstanding United’s discretionary right to modify or omit the work to be done, but then goes on to find plaintiff s evidence insufficient as a matter of law to constitute bad faith. I suggest the facts of this case, showing repeated attempts by United to avoid its obligations under the subcontract by misrepresenting the existence of a “discrepancy” in the amount of excavation to be hauled and manipulating the resolution of the Clarkson dispute to its own substantial financial advantage at the expense of Meier’s subcontract, constitutes sufficient, if not abundant, evidence to support Meier’s claims of bad faith. Indicative of United’s bad faith is its attempt to terminate the contract with Meier’s by withholding payment of $24,029.43 admittedly owed for work already done. On November 6, 1981, United wrote to Meier’s acknowledging it owed the money but requiring an affidavit which would terminate the contract with no further obligations by United. United officers obviously had reservations about change order 13-F which they had secured nearly a year before. It *705appears that the amount justly owed Meier’s was still not paid at the time of the directed verdict on January 19, 1984.
A number of common threads run throughout the myriad definitions of good faith. That duty includes an obligation of honesty in fact, violated in this case by United’s misrepresentations about the state’s “discrepancy” in the work to be performed, and by its representation to Meier’s that the change order was an “omission” of the hauling work when in practical effect the change order was a transfer of the hauling work to United. Good faith includes fair dealing and a duty of cooperation, obligations which ran to plaintiff Meier’s, not to KDOT and Clarkson. Good faith encompasses faithfulness to an agreed common purpose and restraint from unconscientious acts destroying plaintiff s right to receive the fruits of the subcontract, obligations which, if not violated by United’s voluntary agreement to a nonessential modification of the 1-435 project, were certainly violated when that- action was undertaken with the knowledge United would financially benefit from the modification at Meier’s expense. Finally, good faith also means that a discretionary power to specify terms or quantities will be exercised only in a manner faithful to and consistent with the purposes of a contract. That obligation was violated in this case when defendant eliminated Meier’s subcontract for United’s own pecuniary benefit, a patent abuse of defendant’s discretionary power under the subcontract.
Professor Burton’s commentary suggests the critical question in cases of this type is whether defendant exercised its discretion for a purpose within the reasonable contemplation of the parties to capture an opportunity preserved upon formation of the contract, interpreted objectively. Clearly, United’s opportunity to perform the hauling work itself was forgone by subcontracting the work to Meier’s. Further, interpreting the subcontract objectively, no one can seriously contend that at the time of its formation the parties reasonably contemplated United retained the right to unilaterally terminate the subcontract and perform the hauling work itself. Under such a construction, United would not have been bound to any performance under the contract which it might later desire to avoid. I do not believe that forbidden and unjust result should now be permitted simply *706because defendant acted under the guise of a KDOT change order which United itself authored.
I suggest that far from being “insufficient as a matter of law” plaintiff s evidence establishes a prima facie case of bad faith, not because United enmeshed itself in the Clarkson dispute but because it did so with the obvious intent of eliminating Meier’s Trucking from the 1-435 project, thereby reaping a substantial financial advantage for itself. The majority’s contrary conclusion strikes me as a de facto abandonment of the implied obligation of good faith because future plaintiffs will rarely be able to satisfy the stringent burden of proof now established.
The majority concludes its opinion by stating it would be poor public policy to penalize a general contractor for suggesting to the owner a possible means of saving money by changing construction plans. Under other circumstances it would be hard to disagree with that proposition, but as the sole justification for the majority’s present holding it avoids the real issues involved in this case. It is even poorer public policy to adopt, as the majority now has, a rule encouraging illusory subcontracts which can be terminated with impunity by general contractors serving not the public good but their own financial self-interest.
I would reverse the directed verdicts and remand the case for a new trial on the second and third counts of plaintiff s petition.
Lockett, J., joins the foregoing dissent.