Contorts for Busted Business Deals
| Publication year | 2003 |
| Pages | 24-33 |
72 J. Kan. Bar Assn. 3, 24-33 (2003). Contorts for Busted Business Deals
72 J. Kan. Bar Assn. 3, 24-33 (2003)
Introduction
When hastily negotiated and sloppily memorialized business deals fail because one of the parties' assurances has not panned out, occasionally courts look to nonconsensual notions from tort law to fill the gaps in the contract and to measure the consequential losses. Serious commentators have coined the word "contort"[1] to signify this result-oriented manipulation of existing legal concepts from the once separate fields of contract and tort.[2]
Professor William Lloyd Prosser described the resulting theoretical quagmire as "the borderland of tort and contract" where "the nature and limitations of the tort action arising out of the breach of contract are poorly defined."[3] This blurring of the border is at its greatest when, after hearing the facts of a case, fraud or bad faith is difficult to discern, but a nagging sense of unfairness leads the court to conclude that the party who offered the failed assurance should have used greater care before it spoke or should have disclosed information it would have preferred to keep under wraps. The problem, according to Professor Peter Linzer, is "how to decide if an obligation exists when there is not a negotiated and well-drafted contract, nor an explicit promise that was foreseeably relied upon nor a clearly unjust act that enriched the defendant at the plaintiff's expense."[4] Untidy facts that balance a case on the thin boundary line that separates contract from tort can yield contorts that seem to work in light of the specifics of the case, but provide little guidance in other cases at the border of contract and tort.
Contorts such as promissory fraud, negligent misrepresentation, and civil conspiracy to procure or induce a breach of contract serve the basest desire of a nonbreaching party in a busted business deal to exact a measure of restitution, and perhaps retribution, from the promisor not available in contract. Expanded recovery of consequential damages, compensation for emotional distress, and, the always popular, punitive damages may await the successful plaintiff.[5]
This article examines when under Kansas law it is possible to sue in tort for breach of contract. This article does not address special relationships involving professionals, fiduciaries, bailees, or insurors when it is plain that the relationship imposes a duty of care, regardless of any similar contractual duties.[6] This article does not address situations involving implied contracts in which tort concepts such as promissory estoppel and reliance are used as a sword to establish liability or as a shield in response to an affirmative defense of no consideration.[7] Finally, this article does not address situations involving letters of intent or agreements to agree when the real issue is whether the parties had a contract at all.[8]
II. Contracts Are Contracts and Torts Are Torts
Despite a wave of scholarly writing urging a middle category between negotiated contracts and injuries done willfully or negligently, Kansas courts, for the most part, aren't buying it. Generally speaking, a contract is a contract and a tort is a tort, or so Kansas courts say.[9]
In deciding the fate of a tort claim when a contract explicitly defines the parties' rights and responsibilities, courts have good reasons for a strict adherence to contract law. Chief among these reasons is the principle of freedom of contract and the notions inherent therein - consent, freewill, and individuality.[10] According to this view rights and duties of contracting parties are created through the free-will and independence of persons to bind themselves legally through promises and express agreement.[11] Professor Linzer describes this right of self-determination as a matter of liberty:
There are plenty of legal issues involved in truly negotiated contracts, but the basis of liability isn't one of them. The parties should be bound because it is a basic component of free-will to be able to bind yourself legally, and the promise of the person binding himself is rendered valuable precisely because it can be enforced by the legal system. Enforcement against you of a truly negotiated contract is a matter of your liberty.[12]
Tort also involves liberty. Professor Linzer writes that tort "is part of the security of all people that they and their property should be protected against injury . . . [w]ithout the state's protection of individuals against physical and dignitary injury it's hard for me, at least, to see how they can be called free."[13] However, this liberty reflects the ideology of fault based on the rhetoric of reasonableness, rather than on negotiated rights and responsibilities.[14]
The Kansas Supreme Court's 1985 decision in Ford Motor Credit Co. v. Suburban Ford[15] examined the fundamental distinction between contract and tort and how the source of the duty determines the type of action. Suburban Ford held that when parties have entered into a contract defining their respective rights and duties, extra-contractual tort duties concerning the same subject matter are precluded.[16] For its rationale the Court adopted the Tenth Circuit Court of Appeals' analysis in the 1984 case of Isler v. Texas Oil & Gas Corp.[17] The Court placed particular emphasis on the following passage from Isler:
The very notion of contract is the consensual formation of relationships with bargained-for duties. An essential corollary of the concept of bargained-for duties is bargained-for liabilities for failure to perform them. Important to the vitality of contract is the capacity voluntarily to define the consequences of the breach of duty before assuming the duty.
The effect of confusing the concept of contractual duties, which are voluntarily bargained for, with the concept of tort duties, which are largely imposed by law, would be to nullify a substantial part of what the parties expressly bargained for - limited liability. Unless such bargains are against public policy . . . there is no reason in law or fact to undermine them.
In tort, the legislatures and the courts have set the parameters of social policy and imposed them on individual members of society without their consent. The social policy in the field of contract has been left to the parties themselves to determine with judicial and legislative intervention tolerated only in the most extreme cases.
[I]t should not matter whether the breach of a bargained-for duty arises from inattention, a disagreement over the existence of the duty, a dispute over the nature of the duty, or a simple unwillingness to perform the duty. The parties by contract . . . have themselves defined the consequences of the breach. In the marketplace of contract, a breach is a breach is a breach - unless the parties choose to specify otherwise.[18]
Isler's neat distinction between contract and tort is occasionally murdered by a "brutal gang of facts."[19] In common usage the word "contract" brings to mind a carefully drafted agreement between sophisticated business persons of equal bargaining power. But the reality is more of a continuum of contracts, ranging from carefully drafted agreements to printed forms and boilerplate contracts to a casual exchange of letters.[20] As courts work through less carefully negotiated transactions between parties of varying levels of sophistication courts occasionally take a hard look at merging contract and tort principles.[21] The reason is that in these situations traditional contract damages are deemed inadequate to force the breaching party to bear the full costs of a breach or to deter future breaches.[22] Other reasons, discussed below, include the following: 1) the foreseeability rule as applied to contracts places greater limits on the recovery of consequential damages than the foreseeability rule as applied to torts; 2) damages for emotional distress are not generally available in contract; and 3) punitive damages cannot be sought in contract absent an independent tort and additional damages caused by the tort.[23]
Foreseeability limits consequential damages in both contract and tort, but there is a marked difference in the application of the rule.[24] Foreseeability in tort law looks backwards from the time of the injury. With the benefit of hindsight consequential damages in tort are denied only if "there is nothing in the situation to suggest to the most cautious mind" that the consequences could occur.[25]
Foreseeability in contract law, on the other hand, looks forward from the time of the contract. Only those consequential damages "as may reasonably be supposed to have been in the contemplation of both parties, at the time they made the contract, as the probable result of the breach of it"[26] may be recovered. This is the often quoted rule from the famous case of Hadley v. Baxendale.[27] Hadley is still followed by Kansas courts.[28]
The limitations imposed by the foreseeability requirement in contract law are well illustrated by the 1997 Court of Appeals' decision in MLK, Inc. v. University of Kansas.[29] A contractor sued the University for wrongful termination of a construction contract because of the contractor's failure to have the project substantially completed by a certain date. The contractor sought the unpaid balance of the contract plus consequential damages for loss of bonding capacity and loss of profits. It argued that its experience with the University had lowered its esteem in the construction community and had destroyed its ability to obtain future surety bonds. The Court of Appeals deftly rejected the contractor's claim.[30] Loss of esteem, loss of bonding capacity, and failure of the contractor's business itself, noted the...
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