Francis v. Lee Enterprises, Inc.

Opinion of the Court by

Plaintiff-appellant Russ Francis filed an action in the first circuit court against defendant-appellee Lee Enterprises, Inc., dba KGMB [hereinafter, KGMB], in which he asserted, inter alia, a claim for tortious breach of an employment contract. After removing the action to the United States District Court for the District of Hawai'i, KGMB moved to dismiss Francis’s tortious breach of contract claim, arguing that Ha-wai'i law does not recognize tortious breach of contract in the “employment context.” Francis countered that Hawai'i law recognizes tortious breach of contract whenever any contract is breached in a willful, wanton, or reckless manner.

The federal district court initially granted KGMB’s motion to dismiss. Thereafter, Francis filed a motion for reconsideration, or in the alternative, for certification of this question to the Hawai'i Supreme Court. The federal district court concluded that there was no clear, controlling precedent in Hawai'i law and, therefore, certified the following question to this court:

Does Hawai'i law recognize a tortious breach of contract cause of action in the employment context?

Although, in the past, this court has recognized a cause of action for tortious breach of contract in certain circumstances, we believe that such a rule unnecessarily blurs the distinction between—and undermines the discrete theories of recovery relevant to—tort and contract law. Based on our reexamination of the rule announced in Dold v. Outrigger Hotel, 54 Haw. 18, 501 P.2d 368 (1972), we now hold that Hawai'i law will not allow tort recovery in the absence of conduct that (1) violates a duty that is independently recognized by principles of tort law and (2) transcends the breach of the contract. Consistent with this rule, emotional distress damages 1 will only be recoverable where the parties specifically provide for them in the contract or where the nature of the contract clearly indicates that such damages were within the contemplation or expectation of the parties. Therefore, in answer to the certified question, Hawai'i law does not recognize tortious breach of contract actions in the employment context.

I. BACKGROUND

The following relevant facts are undisputed. KGMB is the local affiliate of the CBS television network. Francis, a well-known local sports figure, played football for four *236 teen years in the National Football League. On January 18, 1996, Francis and KGMB entered into a written employment contract under which Francis worked for KGMB as its sports director until he was terminated on January 20, 1997.

After he was terminated, Francis filed suit in the first circuit court. Francis’s complaint contained five claims for relief, including: breach of contract (Count I); tortious breach of contract (Count II); promissory estoppel (Count III); wrongful termination in violation of public policy (Count IV); and punitive damages (Count V). In connection with Count II, the tortious breach of contract claim, Francis alleged that KGMB acted “wilfully, wantonly, recklessly and/or in bad faith” in breaching the written employment contract.

As previously stated, KGMB removed the case to the United States District Court for the District of Hawaii and, on December 29, 1997, moved to dismiss Count II. Noting that Hawaii courts had not expressly recognized tortious breach of contract in the employment context, the federal district court, on March 10, 1998, granted KGMB’s motion to dismiss Count II of Francis’s complaint. On March 20, 1998, Francis filed a motion for reconsideration or, in the alternative, for certification of this question to the Hawaii Supreme Court. On April 24, 1998, the federal district court withdrew its order dismissing Count II of the complaint and granted Francis’s motion for certification pursuant to Hawaii Rules of Appellate Procedure (HRAP) 13(a).

II. STANDARD OF REVIEW

The issue presented by the certified question, i.e., whether Hawaii recognizes tortious breach of contract in the employment context, is a question of law. “Questions of law are reviewable de novo under the right/ wrong standard of review.” Best Place, Inc. v. Penn America Ins. Co., 82 Hawaii 120, 123, 920 P.2d 334, 337 (1996) (citation omitted).

III. DISCUSSION

Francis argues that the “well-settled rule that a wanton or reckless breach of contract is actionable in tort” applies, without exception, to written employment contracts. Francis makes this argument because he seeks traditional tort damages due to KGMB’s alleged breach of the employment contract at issue. Although Francis correctly states the rule relating to tortious breach of contract announced in Dold v. Outrigger Hotel, 54 Haw. 18, 501 P.2d 368 (1972), we believe, for the reasons discussed infra, that the rule was improvidently created, and today we abolish it.

A. Stare Decisis

Before examining the theories of recovery relevant to tort and contract law, we briefly review certain well-established principles governing the deference we generally accord prior decisions of this court. As a general rule,

we do not lightly disregard precedent; we subscribe to the view that great consideration should always be accorded precedent, especially one of long standing and general acceptance. Yet, it does not necessarily follow that a rule established by precedent is infallible. If unintended injury would result by following the previous decision, corrective action is in order; for we cannot be unmindful of the lessons furnished by our own consciousness, as well as by judicial history, of the liability to error and the advantages of review.

Espaniola v. Cawdrey Mars Joint Venture, 68 Haw. 171, 182-83, 707 P.2d 365, 373 (1985). As this court has long recognized, “[w]e not only have the right but are entrusted with a duty to examine the former decisions of this court and[,] when reconciliation is impossible, to discard our former errors.” Koike v. Board of Water Supply, 44 Haw. 100, 117-18, 352 P.2d 835, 845, reh’g denied, 44 Haw. 146, 352 P.2d 835 (1960); see also Parke v. Parke, 25 Haw. 397, 401 (1920) (“It is generally better to establish a new rule than to follow a bad precedent.”).

B. The Dold Rule And Its Progeny

With these principles in mind, we address the rule announced in Dold. In that case, the plaintiffs, tourists from the mainland, ar *237 ranged for hotel accommodations at the Outrigger Hotel. Upon arriving at the hotel, the Outrigger refused to accommodate them and instead transferred them to another hotel of lesser quality because the Outrigger lacked available space. Thereafter, the Dolds sued for actual and punitive damages based, inter alia, on the Outrigger’s alleged breach of contract.

The trial court permitted an instruction on the issue of damages for emotional distress, but refused to allow an instruction on the issue of punitive damages. The jury found in favor of the Dolds and awarded them $600. Although the judgment was favorable to them, the Dolds appealed to this court on the issue of punitive damages. In affirming the judgment and upholding the trial judge’s decision to refuse the punitive damages instruction, this court established the rule that, “where a contract is breached in a wanton or reckless manner [so] as to result in a tortious injury, the aggrieved person is entitled to recover in tort. Thus, in addition to damages for out-of-pocket losses, the jury was properly instructed on the issue of damages for emotional distress....” Dold, 54 Haw. at 22-23, 501 P.2d at 872.

This court later reaffirmed the Dold rule in the commercial contract setting. In Chung v. Kaonohi Center Co., 62 Haw. 594, 618 P.2d 283 (1980), the Chungs were prospective lessees of concession space for a fast-food restaurant. Although the contract to lease the property to the Chungs had been signed, Kaonohi Center continued to negotiate a lease for the same space with three additional parties, giving a right of first refusal to one of these negotiating parties. Although Kaonohi Center was aware of the effort and funds the Chungs had expended in reliance on the lease, it allowed the Chungs to continue to believe that they had secured the lease. Moreover, when a newspaper reported that the space would be leased to another party, Kaonohi Center flatly denied it.

Based on these facts, the trial court gave an instruction that allowed the jury to award “reasonable compensation for emotional distress and disappointment.” The jury awarded, among other things, $50,000 in damages for emotional distress. Kaonohi Center appealed the jury’s award, arguing, in part, that this court should limit the Dold rule to “personal” contracts, such as contracts of marriage, burial, and delivery of personal messages. However, rather than adopt Kaonohi Center’s proposed limitation, this court extended the Dold rule to the commercial contract setting, stating: “We do not think that the dispositive factor in allowing damages for emotional distress is the nature of the contract. The dispositive factor is, rather, the wanton or reckless nature of the breach.” Chung, 62 Haw. at 602, 618 P.2d at 289 [hereinafter, the Dold-Chung rule].

C. Distinguishing the Dold-Chung Rule From the Tort of Bad Faith

Preliminarily, we note that our decision today does not affect this court’s prior decisions recognizing the tort of bad faith in the first-party insurance context. Count II of Francis’s complaint alleges that KGMB “acted wilfully, wantonly, recklessly and/or in bad faith.” (Emphasis added.) However, Francis expressly states in his opening brief that “Count II of the complaint states a claim for tortious breach of contract, not ‘bad faith.’ ... As a result, the issue whether a bad faith cause of action lies for the termination of a written employment contract is not before the court.” (Emphases added.)

In Best Place, Inc. v. Penn America Insurance Co., 82 Hawai'i 120, 920 P.2d 334 (1996), an insured brought suit against a fire insurer for breach of contract and tortious breach of the implied covenant of good faith and fair dealing after the insurer denied him coverage. The insurer argued that, in the first-party insurance context, Hawaii does not recognize the tort of bad faith. The primary issue before this court on appeal was thus “whether Hawaii recognizes the tort of bad faith refusal to pay a valid claim submitted by an insured under a policy of insurance.” Id. at 122, 920 P.2d at 336. Rejecting the insurer’s arguments, we answered the question in the affirmative. See generally id. at 127, 920 P.2d at 341.

In so holding, we grounded our decision on the “atypical” relationship existing between *238 the insured and the insurer. Id. at 132, 920 P.2d at 346. Moreover, we recognized that

the adhesionary aspects of an insurance contract further justify the availability of a tort recovery.... [A] bad faith cause of action in tort will provide the necessary compensation to the insured for all damage suffered as a result of insurer misconduct. Without the threat of a tort action, insurance companies have little incentive to promptly pay proceeds rightfully due to their insureds, as they stand to lose very little by delaying payment.

Id. We further explained that an action for the tort of “bad faith” will lie, for example, when an insurance company unreasonably handles or denies payment of a claim.

Other jurisdictions recognizing the tort of bad faith similarly limit such claims to the insurance context or situations involving special relationships characterized by elements of fiduciary responsibility, public interest, and adhesion. See, e.g., Great American Ins. Co. v. General Builders, Inc., 113 Nev. 346, 934 P.2d 257, 263 (Nev.1997) (refusing to extend bad faith tort to action by contractor against surety); Buzzard v. Farmers Ins. Co., Inc., 824 P.2d 1105, 1109 (Okla.1991) (explaining tort of bad faith in insurance context and noting prior refusal to extend the tort to commercial loan setting); ARCO Alaska, Inc. v. Akers, 753 P.2d 1150, 1153 (Alaska 1988) (holding that punitive damages are not recoverable for breach of implied covenant of good faith and fair dealing in employment context); Foley v. Interactive Data Corp., 47 Cal.3d 654, 254 Cal.Rptr. 211, 765 P.2d 373, 374 (Cal.1988) (holding that there is no cause of action in tort for breach of an implied covenant of good faith and fair dealing in an employment contract); Wagenseller v. Scottsdale Mem’l Hosp., 147 Ariz. 370, 710 P.2d 1025, 1040-41 (Ariz.1985) (expressly refusing to extend the bad faith recovery available in actions on insurance contracts to the employment contract context); Martin v. Federal Life Ins. Co., 109 Ill.App.3d 596, 65 Ill.Dec. 143, 440 N.E.2d 998, 1006 (Ill.App.Ct.1982) (“Care must be taken to prevent the transmutation of every breach of contract into an independent tort action through the bootstrapping of the general contract principle of good faith and fair dealing.”). 2

Moreover, in recognizing the tort of bad faith in the first-party insurance context, we were careful to distinguish claims for tortious breach of contract under the Dold-Chung rule. As we explained in Best Place,

the tort of bad faith is not a tortious breach of contract, but rather a separate and distinct wrong which results from the breach of a duty imposed as a consequence of the relationship established by contract. Therefore, the tort of bad faith allows an insured to recover even if the insurer performs the express covenant to pay claims. As such, an insurer could be liable for the tort of bad faith for certain conduct where it would not be liable for a tortious breach of contract.

Id. at 131, 920 P.2d at 345 (internal quotation marks and citation omitted) (emphasis added). Thus, we agree with Francis that the issue whether a bad faith cause of action lies for the termination of a written employment contract is not before the court.

Finally, we note that, although most of the courts that recognize the “tort of bad faith” do not expressly distinguish between such actions and actions for “tortious breach of contract,” they nonetheless explain that traditional tort damages are not available outside the bad faith tort context, absent conduct that independently establishes a tort. See, e.g., Story v. City of Bozeman, 242 Mont. 436, 791 P.2d 767, 775-76 (Mont.1990) (Limiting the tort of bad faith to exceptional circumstances, the court noted that tort-type damages are only available in tort actions, such as fraud, fraudulent inducement, and tortious interference with contract.); ARCO Alaska, Inc., 753 P.2d at 1153 (refusing to *239 allow punitive damages “unless the conduct constituting the breach is also a tort for which punitive damages are recoverable”); Anderson v. Continental Ins. Co., 85 Wis.2d 675, 271 N.W.2d 368, 374 (Wis.1978) (Noting that it is “confusing and inappropriate” to use the terms “tortious breach of contract” to describe the “tort of bad faith,” the court explained that punitive damages are recoverable for the “tort of bad faith” because that action sounds in tort, not contract.).

Thus, although not expressly addressing claims for “tortious breach of contract,” the manner in which the foregoing courts have distinguished the “tort of bad faith” from other claims arising out of a contractual relation strongly suggests that they would not allow tort-type damages for a wilful, wanton, or reckless breach of contract. See, e.g., Motorists Mut. Ins. Co. v. Said, 63 Ohio St.3d 690, 590 N.E.2d 1228, 1232 (Ohio 1992) (recognizing tort of bad faith in insurance context, the court stated that “[t]he tort of bad faith is not a tortious breach of contract, for no matter how willful or malicious the breach, it is no tort to breach a contract” (emphasis added)), overruled on other grounds, Zoppo v. Homestead Ins. Co., 71 Ohio St.3d 552, 644 N.E.2d 397 (Ohio 1994). Consequently, the Dold-Chung rule represents an aberration in the fabric of American law. The rule has not gathered support in other jurisdictions in the years since Dold and Chung were decided, and it would represent an even greater departure from generally accepted law were we to extend it to the employment context. See Gaglidari v. Denny’s Restaurants, Inc., 117 Wash.2d 426, 815 P.2d 1362, 1370 (Wash.1991) (“Our research indicates [that,] ... [s]ince the adoption of Restatement (Second) of Contracts in 1981, all states considering the question, except Colorado, have adhered to the long-standing rule which denies emotional distress damages in breach of employment contract cases.”).

D. Justification For Abolishing the Dold-Chung Rule

Francis correctly argues that, if Dold and Chung apply, a wilful, wanton, or reckless breach of any contract—including an employment contract—would support the award of traditional tort damages. However, for the reasons stated infra, we decline to recognize, the rule any longer, much less to apply it to employment contracts. We do not reach this result lightly; however, we believe that: (1)the Dold-Chung rule does not accord with certain basic principles relevant to contract law; and (2) “unintended injury would result,” Espaniola, 68 Haw. at 182, 707 P.2d at 373, were we to prolong the life of the Dold-Chung rule and apply it to the employment context.

1. The Dold-Chung Rule Does Not Accord With Basic Principles of Contract Law.

As previously stated, the Dold-Chung rule unnecessarily blurs the distinction between— and undermines the discrete theories of recovery relevant to—tort and contract law. The Dold and Chung courts based their holdings on the bare observation that “certain situations are so disposed as to present a fusion of the doctrines of tort and contract.” Dold, 54 Haw. at 22, 501 P.2d at 372 (citation omitted); Chung, 62 Haw. at 602, 618 P.2d at 289. Both courts, however, failed adequately to consider the differing policy considerations and distinct theories of recovery relevant to tort and contract law.

The distinction between tort and contract law is well established in common law, and distinct objectives underlie the remedies created in each area. “In construing a contract, a court’s principal objective is to ascertain and effectuate the intention of the parties[,]” Brown v. KFC Nat’l Management Co., 82 Hawai'i 226, 240, 921 P.2d 146, 160, reconsideration denied, 82 Hawai'i 360, 922 P.2d 973 (1996) (emphasis added) (brackets omitted), whereas, tort law is primarily designed to vindicate social policy. See W. Page Keeton, et al., Prosser and Keeton on the Law of Torts § 1, at 5-6 (5th ed.1984).

Given these distinct purposes, courts have historically awarded different types of damages in tort and in contract. As Justice Mosk of the California Supreme Court recently stated, “[c]ontract damages are generally limited to those within the contemplation of the parties when the contract was entered into or at least reasonably foreseeable by *240 them at that time; consequential damages beyond the expectations of the parties are not recoverable.” Freeman & Mills, Inc. v. Belcher Oil Co., 11 Cal.4th 85, 44 Cal.Rptr.2d 420, 900 P.2d 669, 682 (Cal.1995) (citation omitted) (Mosk., J., concurring and dissenting) (the majority overruled previous ease law recognizing tort of bad faith denial of contract, explaining that tort damages are inappropriate in breach of contract actions); see Amfac, Inc. v. Waikiki Beachcomber Inv. Co., 74 Haw. 85, 120 n. 11, 839 P.2d 10, 29 n. 11 (reaffirming “the rule that approves the awarding of contract damages that are foreseeable i.e., ‘such as may reasonably be supposed to have been in the contemplation of the parties at the time the contract was entered into’” (citations omitted) (emphasis in original)), reconsideration denied, 74 Haw. 650, 843 P.2d 144 (1992); see also Silva v. Albuquerque Assembly & Distribution Freeport Warehouse Corp., 106 N.M. 19, 738 P.2d 513, 514 (N.M.1987) (no recovery for emotional distress in breach of employment contract action absent showing that such damages were within contemplation of parties when they entered the contract). Thus, damages for emotional distress and mental suffering, as well as punitive damages, are generally not recoverable in contract. See Applied Equipment Corp. v. Litton Saudi Arabia Ltd., 7 Cal.4th 503, 28 Cal.Rptr.2d 475, 869 P.2d 454, 464 (Cal.1994) (holding that a contracting party may not be held liable in tort for conspiring with another to interfere with his own contract).

Consistent with this opinion, however, courts may still award damages for emotional distress arising out of a breach of contract in two exceptional situations. In the first situation, the emotional distress will usually accompany a bodily injury. “In such cases[,] the action may nearly always be regarded as one in tort, although most jurisdictions do not require the plaintiff to specify the nature of the wrong on which his action is based[.]” Restatement (Second) of Contracts § 353 comment a (1979). Actions that fall into this category include medical malpractice cases growing out of relationships and duties that originate in contract. See, e.g., Leong v. Kaiser Foundation Hospitals, 71 Haw. 240, 788 P.2d 164 (1990) (Although not addressing the issue of damages, the court recognized the plaintiffs’ medical malpractice action, stating that “it is only under the contract that the [plaintiffs] were entitled to and received the medical services from [defendant-hospital.]”). The rule we announce today would similarly not affect recovery under circumstances where emotional distress accompanies bodily injury and the action may be regarded as one in tort.

In the second situation where courts allow damages for emotional distress, the contract is of such a kind that serious emotional disturbance is a particularly foreseeable result of a breach occurs. See, e.g., Brown v. Bannister, 14 Haw. 34, 36-37 (1902) (noting that, in estimating the amount of the verdict in an action for breach of a promise to marry, it was proper for the jury to consider “the humiliation and the physical pain suffered by [the plaintiff] in consequence of the seduction” and “the conduct of the parties toward each other”); Wilson v. Houston Funeral Home, 42 Cal.App.4th 1124, 50 Cal.Rptr.2d 169, 173 (Cal.Ct.App.1996) (“A contract whereby a mortician agrees to prepare a body for burial is one in which it is reasonably foreseeable that breach may cause mental anguish to the decedent’s bereaved relatives.” (Citation and internal quotation marks omitted.)).

Nothing in this opinion should be construed as necessarily precluding plaintiffs in contract actions from recovering damages for emotional distress. Rather, in deciding whether such damages are recoverable, we shift the focus of the inquiry away from the manner of the breach and to the nature of the contract. Thus, damages for emotional distress may be recoverable, but only where the parties specifically provide for them in the contract or where the nature of the contract clearly indicates that such damages are within the contemplation or expectation of the parties. Unlike the Dold-Chung rule, the rule we announce today accords with compensatory objectives relevant to contract law and eschews the imposition of damages for emotional distress to vindicate “social policy” in the setting of private contracts.

*241 In addition to compensating parties in accordance with their expectations, contract law serves other broader functions as well— for example, predictability in contractual relations. “[P]redictability about the cost of contractual relationships plays an important role in our commercial system.” Foley, 254 Cal.Rptr. 211, 765 P.2d at 389 (citation omitted). Predictability in contractual relations enables parties to estimate the financial risks and rewards of doing business and thereby encourages commercial activity. See California Federal Sav. and Loan Ass’n v. Bell, 6 Haw.App. 597, 606, 735 P.2d 499, 506 (1987) (noting that, in real estate context, “predictability of the legal consequences attending ... contracts is essential to the maintenance of the level of economic activity necessary to the state’s continued prosperity”).

Other jurisdictions likewise recognize that, “[i]f tort and contract remedies were allowed to overlap, certainty and predictability in allocating risk would decrease and impede future business activity.” Berschauer/Phillips Const. Co. v. Seattle School Dist. No. 1, 124 Wash.2d 816, 881 P.2d 986, 992 (Wash.1994); see also Freeman, 44 Cal.Rptr.2d 420, 900 P.2d at 674 (limiting contract breach damages to those that are reasonably foreseeable by the parties “serves to encourage contractual relations and commercial activity”).

Our concerns about the need for predictability in contractual relations and the compensatory objectives of breach-of-contract law apply with special force in the employment context. Parties to an employment contract primarily exchange services for salary and benefits. Although people may attach great personal and emotional significance to their employment, employment contracts principally serve an economic purpose. As the Michigan Supreme Court has noted:

An employment contract will indeed often have a personal element. Employment is an important aspect of most persons’ lives, and the breach of an employment contract may result in emotional distress. The primary purpose in forming such contracts, however, is economic and not to secure the protection of personal interests. The psychic satisfaction of the employment is secondary.

Valentine v. General American Credit, Inc., 420 Mich. 256, 362 N.W.2d 628, 631 (Mich.1985) (holding that employee could not recover damages for mental distress for breach of employment contract). Thus, contracts for employment differ materially from the contracts for marriage and burial services discussed sup ra, where courts have historically deemed damages for emotional distress to be within the contemplation or expectation of the parties.

With respect to punitive damages, we agree with those courts that have refused to allow such damages in contract actions “unless the conduct constituting the breach is also a tort for which punitive damages are recoverable.” ARCO Alaska, Inc., 753 P.2d at 1153. Traditionally, damages for breach of contract have been awarded “to compensate the aggrieved party rather than to punish the breaching party.” Foley, 254 Cal.Rptr. 211, 765 P.2d at 389; see also Hi Kai Inv., Ltd. v. Aloha Futons Beds & Waterbeds, Inc., 84 Hawaii 75, 80-81,