Kentucky Court of Appeals Addresses First Breach Doctrine, Implied Covenant of Good Faith and Fair Dealing, But the Case Is Really About Finality and Appealability

Kentucky Court of Appeals Addresses First Breach Doctrine, Implied Covenant of Good Faith and Fair Dealing, But the Case Is Really About Finality and Appealability

      A recent decision from the Kentucky Court of Appeals is focused upon whether a decision of the trial court was final and appealable. Still, in the course of the decision of the court referenced both the first breach doctrine and the obligation of good faith and fair dealing. Market Plus Wine, LLC v. Walker Properties of Central Kentucky, LLC, No. 2017-CA-001265-MR, 2019 WL 911046 (Ky. App. February 22, 2019).

      This dispute arose out of a lease dispute, that for the National Provisions restaurant/bakery/grocery that formerly operated in Lexington. Apparently the tenant was often late in making its rent payments. However, in turn, Walker accepted those payments. Eventually the tenant sought Walker’s consent to an assignment of the lease, but Walker refused and evicted Market Plus from the premises. Walker asserted that he only evicted the tenant after the tenant violated the lease by effectively vacating the premises (and being insolvent)

      The trial court held that, consequent to the First Breach Doctrine, the tenant’s claims against Walker would fail.

“Walker could not be held liable on either claim because Market breached the contract first. It held that because Market had breached first and had consequently forfeited the lease, Market had lost any right to insist upon Walker’s consent to any subsequent assignment of the lease or to complain about being evicted from the leased premises.” Id., *2.

      The trial court did not, however, resolve the tenant’s liability for its breach of the lease. While the fact of the breach was determined, the amount of damages was not. Specifically, Walker could not be liable for any breach under the lease, in this instance with respect to failure to consent to its assignment, because the tenant had already breach the lease. Therefore, with respect to the tenants claim for breach of the lease and interference with prospective contractual relationship with the proposed new tenant:

      In addition, Market had asserted a claim against Walker for breach of the implied covenant of good faith and fair dealing. In a footnote, the court wrote that “Kentucky recognizes that every contract contains an implied covenant of good faith and fair dealing.“ The court went down to observe that:

However, Kentucky has only ever recognized a breach of the implied covenant of good faith and fair dealing as tortious (e.g., as a violation of a general duty owed independently of a contract) where the situation has involved parties in a special relationship not found in ordinary commercial settings, such as between an insurer and an insured, where distinct elements are present such as unequal bargaining power, vulnerability and trust among the parties. See Hulda Schoening Family Tr. v. Powertel/Kentucky, Inc., 275 F. Supp. 2d 793, 797-98 (W.D. Ky. 2004) (citing Ennes v. H & R Block E. Tax Serv., Inc., Civ. A. No. 3:01CV-447-H, Not Reported in F. Supp. 2d, 2002 WL 226345, at *2-*3 (W.D. Ky. Jan. 11, 2002) ). Here, even if Walker had breached the implied covenant of good faith in the lease, no such special relationship between Walker and the appellants was present under the circumstances of this case, nor is one even alleged to have existed. Therefore, any alleged violation by Walker of the implied covenant of good faith and fair dealing could not have served as the basis of any claim apart from breach of contract.

      In the end, however, the court determined that no final determination could be given by the Court of Appeals because the trial court had not yet finished its work with respect to Walker’s claim against Market Plus.