IN THE SUPREME COURT OF THE STATE OF KANSAS
No. 77,912
BRUCE R. HAWKINSON, d/b/a
COMMUNICATIONS WORLD OF KANSAS CITY/LAWRENCE/TOPEKA,
Appellee,
v.
ROBERT E. BENNETT and LINDA K. BENNETT,
Appellants.
SYLLABUS BY THE COURT
1. It is a general rule that attorney fees and expenses of litigation, other than court costs, are not recoverable as an item of compensatory damage, in the same or subsequent action, and are not chargeable as costs against the defeated party, in the absence of a clear and specific statute authorizing such recovery.
2. However, an exception to the rule set out in Syl. ¶ 1 has been recognized in Kansas where the plaintiff has been forced to litigate against a third party because of some tortious conduct of the defendant. The recognized exception is stated as follows: If one's property is taken, injured or put in jeopardy by another's neglect of duty imposed by contract, or by wrongful act, any necessary expense incurred for its recovery, repair, or protection is an element of the injury. It is often the legal duty of the injured party to incur such expense to prevent or limit the damages, and if it is judicious and made in good faith, it is recoverable.
3. It is the duty of the trial court to properly instruct the jury upon a party's theory of the case. Errors regarding jury instructions will not demand reversal unless they result in prejudice to the appealing party. Instructions in any particular action are to be considered together and read as a whole, and where they fairly instruct the jury on the law governing the case, error in an isolated instruction may be disregarded as harmless. If the instructions are substantially correct, and the jury could not reasonably be misled by them, the instructions will be approved on appeal.
4. The term "fiduciary relationship" refers to any relationship of blood, business, friendship, or association in which one of the parties places special trust and confidence in the other. It exists in cases where there has been a special confidence placed in one who, in equity and good conscience, is bound to act in good faith and with due regard to the interest of the one placing the confidence. A fiduciary has the duty to act in good faith and with due regard to the interests of the party placing confidence in the fiduciary.
5. No party may assign as error the giving or failure to give an instruction unless he or she objects thereto before the jury retires to consider its verdict stating distinctly the matter to which he or she objects and the grounds of his or her objection unless the instruction is clearly erroneous. Opportunity shall be given to make the objections out of the hearing of the jury. K.S.A. 60-251(b). An instruction is clearly erroneous when the reviewing court reaches a firm conviction that if the trial error had not occurred there is a real possibility that the jury would have returned a different verdict.
6. If a verdict is attacked on the grounds that it is contrary to the evidence, it is not the function of this court on appeal to weigh the evidence or to pass on the credibility of the witnesses. If the evidence, with all reasonable inferences to be drawn therefrom, when considered in the light most favorable to the successful party, will support the verdict, this court will not intervene.
7. Under Kansas law, collateral estoppel may be invoked where the following is shown: (1) A prior judgment on the merits has determined the rights and liabilities of the parties on the issue based upon ultimate facts as disclosed by the pleadings and judgment, (2) the parties are the same or in privity, and (3) the issue litigated has been determined and necessary to support the judgment.
8. Whether a witness, expert or layman, is qualified to testify as to his or her opinion is to be determined by the trial court in the exercise of its discretion. That discretion is not subject to review except for abuse.
9. Loss of profits to an established business occasioned by the wrongful act of another is compensable and may be awarded in the amount proved by the evidence. Such loss of profits may be awarded as damages when they are proved with reasonable certainty and may reasonably be considered to have been within the contemplation of the parties. Absolute certainty in proving loss of future profits is not required. What is required is that the jury be guided by some rational standard.
10. A person not a party to an express contract may bring an action on the contract if the parties to the agreement intended to benefit the nonparty, provided that the benefit claimed is a direct and not merely an incidental benefit of the contract. While the intent to benefit the nonparty need not be expressly recited in the contract, the intent must be apparent from the terms of the agreement, the surrounding circumstances, or both.
11. Allegations of judicial misconduct during trial must be decided on the particular facts and circumstances surrounding such alleged misconduct. In order to warrant or require the granting of a new trial, it must affirmatively appear that the conduct was of such a nature that it prejudiced the substantial rights of the complaining party. A mere possibility of prejudice from a remark of the judge is not sufficient to overturn a verdict or judgment. If a proper and reasonable construction will render the remark unobjectionable, the remark is not prejudicial.
12. After the jury has retired for deliberation, if it desires further information as to any part of the law or evidence pertaining to the case, it may communicate its request through the bailiff to the court in the manner directed by the court, following which the court, after notice to counsel for the parties, may consider and make such provision for a response to the request of the jury as the court finds to be required under the circumstances. In instances in which the facts were fully disclosed and all that was communicated by the judge to the jury was set forth in the record, and it affirmatively appeared no prejudice resulted from the communication, the irregularity will not be reversible error.
13. The trial judge should admonish the jury pursuant to K.S.A. 60-248(d), whenever the jury is permitted to separate during the trial, but prejudicial error will not be presumed from such failure in the absence of a showing of substantial prejudicial misconduct on the part of the jurors resulting from a failure to give the statutory admonishment. The party claiming prejudice has the burden of proof.
14. Where there has been a renunciation of an executory contract by one party, the other party has a right to elect between the following remedies: (1) to rescind the contract and pursue the remedies based on such a recision, (2) to treat the contract as still binding and wait until the time arrives for its performance and, at such time, to bring an action on the contract for breach, or (3) to treat the renunciation as an immediate breach and sue at once for any damages the party may have sustained.
15. Where the trial court has made findings of fact and conclusions of law, the function of an appellate court is to determine whether the findings are supported by substantial competent evidence and whether the findings are sufficient to support the trial court's conclusions of law. Substantial evidence is evidence which possesses both relevance and substance and which furnishes a substantial basis of fact from which the issues can reasonably be resolved. Stated in another way, substantial evidence is such legal and relevant evidence as a reasonable person might accept as being sufficient to support a conclusion.
Appeal from Johnson district court; GERALD T. ELLIOTT, judge. Opinion filed July 10, 1998. Affirmed.
Stephen J. Dennis, of Dennis, Stanton & Redlingshafer, L.L.C., of Kansas City, Missouri, argued the cause and was on the briefs for appellant Robert E. Bennett.
Gordon M. Rock, Jr., of Olathe, argued the cause and was on the briefs for appellant Linda K. Bennett.
Gordon E. Wells, Jr., of Lathrop & Gage, L.C., of Overland Park, argued the cause, and Marc K. Erickson, of the same firm, was with him on the brief for appellee.
The opinion of the court was delivered by
ABBOTT, J.: This is an appeal by Robert Bennett and Linda Bennett, husband and wife, from judgments entered against them and in favor of Bruce Hawkinson for a breach of a third-party beneficiary claim concerning the Master Franchise Agreement, as well as claims for tortious interference with Hawkinson's Sales Franchise Agreement, tortious interference with his prospective business relationships, breach of fiduciary duty, and punitive damages. There are at least 14 issues alleging, among others, claims of erroneous jury instructions, juror misconduct, sufficiency of evidence, and other evidentiary issues.
Communications World International, Inc., (CWI) is a Denver-based telephone interconnect company. Robert and Linda entered into sales franchise agreements with CWI in 1982 and a second sales franchise agreement in 1983. On March 1, 1986, CWI and Robert and Linda entered into an additional agreement called a "Master Franchise Agreement" (Agreement). The first page of this Agreement referred to CWI as "the Franchisor" and Robert Bennett as "the Master Franchisee." Both Robert and Linda signed this Agreement, however, as "the parties hereto," under the lines provided for the signatures for "Master Franchisee." Both Robert and Linda consistently signed correspondence for the Master Franchisee, as exemplified by a letter dated November 4, 1991, to David Hunt, Chairman of CWI. This letter, written by Robert, referred to himself and Linda acquiring the Master Franchise for Kansas City. Robert wrote another letter to Hunt, stating that "Linda and I have met the requirements for productivity, commitment in time, and ethical behavior in the operation of our franchises and Master Franchise."
In addition to operating as the Master Franchisee, Robert and Linda were also sales franchisees of CWI. Linda operated Communications World of Kansas City, Southwest, Inc. (Southwest), and Robert operated Communications World of Kansas City, West, Inc. (West). Two additional franchises were added in the Kansas City area after Robert and Linda began operating Southwest and West. Stormy Bennett, Robert's brother, operated Communications World of Kansas City, North, and Dennis McKee, a friend of Robert's, operated Communications World of Kansas City, Southeast.
Article 9(c) of the Master Franchise Agreement established between CWI and Robert and Linda provides:
"Master Franchisee shall be the exclusive selling party in the areas assigned to it. The Master Franchisee shall have the right to establish Sales Franchisees in the area assigned to it. . . . All payments and royalties will be made to the Master Franchisee and in turn the Master Franchisee will be responsible for making payments and royalties to the Franchisor. The franchise fee payable by the Sales Franchisee will be paid to the Master Franchisee and no royalties are due on receipt of that amount."
Section (9)(c) also states:
"The Master Franchisee is encouraged to recruit salespeople who can develop to become Sales Franchisees, but the activities of the salespeople must not detract from the results of the Sales Franchisees nor hinder the Sales Franchisees from generating sales for their own account. The Master Franchisee will be responsible for insuring that conflicts do not arise between expansion and the rights of the Sales Franchisees."
Article 7 of the Master Franchise Agreement also provides language pertinent to this case:
"Obligation of the Master Franchisee. The Master Franchisee agrees as follows:
a. The Master Franchisee agrees to supply customer training when necessary.
b. The Master Franchisee agrees to supervise the customer list and to assure good referrals.
c. The Master Franchisee agrees to maintain suitable office space for the Business Telephone Center (B.T.C.). The B.T.C. will provide administrative and marketing support for the Master Franchisee and for those Franchises that are established in the Master Franchise area. The function and workings of the B.T.C. are as laid out in the Franchisor's Policies and Procedures Manual, a copy of which the Master Franchisee receives at the signing of this agreement."
On June 1, 1988, Hawkinson and CWI entered into a Sales Franchise Agreement. Hawkinson paid $10,000 as an initial franchise fee. Article 5 of the Sales Franchise Agreement provides that "[i]n the event a Master Franchise is established incorporating the Franchisee's sales area, the Franchisee will order equipment through, and remit payments and reports to the Master Franchise but all of the Franchisees rights pursuant to this Agreement will continue to be upheld by the Franchisor." Article 7(c) of the Sales Franchise Agreement delineates that "[t]he Franchisee agrees to maintain a gross sales figure of Twenty Thousand Dollars ($20,000.00) per month, after the initial ninety (90) days of operation of the franchise." Article 7(f) and 7(g) further describe the relationship between Hawkinson, as sales franchisee, and Robert and Linda as Master Franchisees:
"f. The Franchisee will provide to the Franchisor a monthly accounting of all business transacted and will pay to Franchisor the royalty fee applicable to the previous month's cash receipts. The copies of the detailed accounting sheets and records accompanied by the royalty fee shall be received by the Franchisor by the 10th of the month following the month the receipts are collected. If a Master Franchise is established for the area in which the Franchise operates, the Franchisee will be responsible for supplying the Master Franchise the detailed account records and paying the Master Franchisee the royalty fee. . . .
"The Franchisee shall be responsible for paying for all equipment it purchases (orders) either to the Franchisor (or Master Franchisee if one is established). . . .
"g. The Franchisee will sell only products from suppliers or manufacturers approved by Franchisor. All products must be ordered and all installation work or service calls must be made through the Franchisor or the Master Franchisee, if one is established for the Franchisee's sales area."
On October 8, 1992, counsel for CWI wrote Hawkinson a letter which is critical to many issues of this appeal. The October 8 letter states in pertinent part:
"It has become apparent that there is a current impasse reached by all parties in attempting to resolve recurring problems encountered in the existing franchise relationships. This impasse makes it impossible for CWI to offer the opportunity to participate in the new franchise program in the Kansas City area at this time."
In the October 8 letter, CWI also informed Hawkinson that he was in default of his Agreement and
"[i]n accordance with Article 12 of the Agreement, CWI is entitled to terminate the Agreement twenty (20) days from your date of receipt of this letter. However, CWI will delay enforcing its contractual right to terminate the Agreement and will instead use the next thirty (30) day period, as stated above, to seek an alternative resolution to this matter."
Hawkinson ultimately brought suit against CWI when CWI would not offer him the opportunity to participate in a new franchise program offered to other Kansas City sales franchisees. CWI submitted the following policy in an annual report required under the Securities Exchange Act of 1934, and the arbitrator referred to the new franchise program during the arbitration proceedings:
"In August 1992, the company (CW) instituted a new Franchise program and Franchise Agreement. The company is offering the new Franchise program to all potential or future Franchisees and is offering each eligible existing Franchisee the opportunity to elect, without charge, to participate in the new program. Approximately 97% of the eligible Franchises under the Pre-1992 Franchise program have converted to the current program."
On February 18, 1994, the Johnson County District Court entered a journal entry confirming Hawkinson's arbitration award entered by the American Arbitration Association on November 10, 1993, against defendant CWI. Robert and Linda testified during this arbitration proceeding against CWI, but they were not named as parties to that proceeding.
On January 14, 1993, Hawkinson filed a petition in Johnson County District Court against CWI, Robert, Linda, Southwest, and West for damages and injunctive relief. The court granted Hawkinson's restraining order enjoining certain activities of CWI, Robert, Linda, Southwest, West, and any individual acting on their behalf. On May 31, 1994, the court granted Hawkinson leave to amend his petition to add a claim for punitive damages for breach of fiduciary duty (Count 6) and tortious interference (Count 7) as to defendants Robert and Linda.
In Hawkinson's suit against CWI et al., the court granted defendants' motion as to all claims against the corporate defendants West and Southwest. At the close of defendants' case, the trial judge noted that CWI "is no longer a party to this litigation. And I have made the determination that the evidence did not justify claims against Southwest and West and I dismissed those parties."
This left only Robert and Linda as defendants in the litigation. The trial court submitted Hawkinson's claims of tortious interference to the jury but included only three of the nine prospective business relationships. Thus, an instruction was submitted regarding whether the defendants tortiously interfered with Gilbert-McGill, Unimark, and Meadowbrook. The court ruled that there was insufficient evidence to go to the jury regarding tortious interference with Cub Foods, Pay-Rec Schools, Cintas, Garage Door, Hermes, and Ball's Food. The court, however, submitted all nine business relationships, or prospective business relationships, in the instruction relating to Robert and Linda's fiduciary duty to Hawkinson. Robert and Linda provide an inordinate amount of detail about each of their individual dealings or lack of contact with each separate business entity. They try to show that they did not interfere with at least one of the business relationships for which Hawkinson was awarded damages.
After an 8-day trial, the jury returned a verdict in Hawkinson's favor and against Robert and Linda on all claims submitted. The jury found contractual obligations were owed to Hawkinson as a third-party beneficiary of Robert and Linda's Master Franchise Agreement and awarded him damages in the amount of $66,500.00. The jury also found that Robert and Linda had both breached a fiduciary duty owed to Hawkinson, tortiously interfered with Hawkinson's existing contract with CWI, and interfered with his prospective business relationships. The jury awarded Hawkinson $20,500 in damages for these three findings, attributing $10,250 to Linda and $10,250 to Robert. The jury's verdict included a finding that both Robert and Linda were individually liable for punitive damages.
On January 29, 1996, the matter then proceeded for a determination of the amount of punitive damages to be awarded. The trial court first ruled that "[t]he award of punitive damages in favor of the plaintiff is to be against each defendant separately, not against both jointly and [severally]."
K.S.A. 60-3702 (b)(1) through (b)(7) provide the statutory elements used to determine the amount of punitive damages to be awarded. Under the fifth element of attitude and conduct of the defendants upon discovery of the misconduct, the judge found that
"the defendants Bennett were in fact in a superior position to the plaintiff Hawkinson and that the defendants Bennett intentionally manipulated the rules and their relationship with the franchisor CWI to accomplish their end of attempting to get rid of plaintiff Hawkinson. This is the type of attitude which the Court believes the legislature had in mind as being relevant to the assessment of punitive damages."
Ultimately, the trial court assessed punitive damages in the amount of $20,000, in favor of the plaintiff and against Robert, and punitive damages in the amount of $10,000 against Linda.
Robert and Linda timely appealed to the Court of Appeals. The case was transferred to this court pursuant to K.S.A. 20-3018(c).
I. ARBITRATION EXPENSES
Hawkinson's petition for damages and injunctive relief requested attorney fees and costs. In his affidavit, Hawkinson stated that in order to prevent termination of his sales franchise and to preserve his investment in his sales franchise, he was "forced to incur significant expenses since the date of a purported notice of default from Communications World International, Inc. dated October 8, 1992." He also maintained that since CWI's notice of his default, "I have incurred legal fees in excess of $94,000 in connection with arbitration and related proceedings and have incurred expenses for depositions, travel, arbitration fees, and other matters in an amount in excess of $18,000 in connection with my efforts to preserve my franchise."
Robert and Linda assert the trial court erred in submitting a $33,137.95 claim against them for Hawkinson's attorney fees, expenses, and lost time incurred in arbitration against CWI, because such damages are not recoverable as a matter of law. Linda contends that under the well-established general rule, attorney fees are not allowable as damages in the absence of a statute authorizing their recovery. She cites to Lines v. City of Topeka, 223 Kan. 772, 577 P.2d 42 (1978), as authority for this statement.
In Lines, this court affirmed the trial court's grant of summary judgment for plaintiff who had been terminated as a building inspector for the City of Topeka. The Lines court held that under the doctrine of equitable estoppel, the City was estopped from dismissing plaintiff from his position because the commissioners led plaintiff to believe that he would not lose his job due to a question of whether he was actually a Topeka resident, until the city attorney's office drafted an ordinance defining "residence." 223 Kan. at 774. Plaintiff contended that he should have been granted attorney fees as costs in the action he was forced to bring for his reinstatement.
The Lines court ruled that "[g]enerally, attorney's fees are not allowable as damages in the absence of a statute. (Will v. City of Herington, 205 Kan. 422, 424, 469 P.2d 256 [1970]; Barten v. Turkey Creek Watershed Joint District No. 32, 200 Kan. 489, 510, 438 P.2d 732 [1968)]; Ablah v. Eyman, 188 Kan. 665, 682, 365 P.2d 181 [1961].)" 223 Kan. at 782. She neglected, however, to include the next sentence of the paragraph she cited in support of the "well-established general rule," wherein the Lines court explained:
"Exercising its equity jurisdiction this court has on occasion taken exception to this rule. In Barten, this court approved an allowance of attorney's fees on the theory the District had acted in 'bad faith.' Plaintiff urges us to award fees here on the same theory. We have examined the record and conclude the case before us does not compare with Barten. The mere fact a party loses a lawsuit does not justify imposing attorney's fees upon him as costs. Likewise, there is no showing the city was totally unreasonable in its acts under all the circumstances. The district court was correct in denying attorney's fees." 223 Kan. at 782.
Barten v. Turkey Creek Watershed Joint District No. 32, 200 Kan. 489, 491, 438 P.2d 732 (1968), involved the question of whether a General Plan of financing, adopted by the board of directors of the Watershed District (the District), was lawful and whether it was proper for the trial court to allow attorney fees to the plaintiffs' attorneys. Plaintiffs included landowners in the District and the county attorney of Dickinson County. The appropriate percentage of District landowners filed a petition with the secretary of the board of directors of the District, in accordance with K.S.A. 24-1215. It thereby became the duty of the board to submit the question of adoption of the General Plan to the qualified voters of the District. The District, however, refused to call the election, and plaintiffs claimed this refusal forced them to bring a proceeding to enforce the District's compliance with the law. Therefore, plaintiffs requested judgment against the District and reasonable attorney fees for the prosecution of this action. The Barten court held:
"It is a general rule that attorneys' fees and expenses of litigation, other than court costs, are not recoverable as an item of compensatory damage, in the same or subsequent action, and are not chargeable as costs against the defeated party, in the absence of a clear and specific statute authorizing such recovery. (Ablah v. Eyman, 188 Kan. 665, 682, 365 P.2d 181, 90 A.L.R. 2d 766.)
"The provisions of 60-802 (c), supra, are substantially the same as G. S. 1949, 60-1710 in the old code of civil procedure, and its predecessor, L. 1909, ch. 182, § 723. Judge Gard, (Gard, Kansas Code of Civil Procedure Annotated, § 60-802c, p. 611) says this subsection is in keeping with the Kansas decisions and the law generally that on judgment for the plaintiff in a mandamus action, he may in the same proceeding recover such damages as he has actually sustained through the wrongdoing of the defendant. The damages recoverable are the injuries sustained as the natural and probable consequences of the wrongful refusal to comply, and the expense reasonably and necessarily incurred in compelling compliance, including reasonable attorneys' fees. [Citations omitted.]" 200 Kan. at 510.
Linda attempts to distinguish Barten from the case at hand. She asserts that the Barten court applied a historically recognized exception permitting recovery of attorney fees in mandamus proceedings to compel a public official or a public body that in bad faith refused to perform its duty. She insinuates the Lines court denied plaintiff's attorney fees because Lines was not a mandamus case.
The CWI/Hawkinson sales agreement did not make arbitration optional, such that Hawkinson "elected" to arbitrate instead of proceeding directly to district court. Article 15(h) of the CWI/Hawkinson's Sales Franchise Agreement made arbitration mandatory in the event of controversy.
The following cases recognize the exception to the general rule that attorney fees are not recoverable: McOsker v. Federal Insurance Co., 115 Kan. 626, 224 Pac. 53 (1924) (attorney fees incurred by plaintiffs insurance purchasers in defending actions brought against them by a third party on notes for insurance premium were recoverable against the insurance company in a subsequent action); First National Bank v. Williams, 62 Kan. 431, 63 Pac. 744 (1901) (bank which had brought an action against writer of a bad check was entitled to recover attorney fees the bank expended in a previous suit with a third party regarding the enforceability of the bad check); see Wilshire Oil Company of Texas v. Riffe, 409 F.2d 1277, 1285 (10th Cir. 1969); Safway Rental & Sales Co. v. Albina Engine & Machine Works, 343 F.2d 129, 133 (10th Cir. 1965).
The case of Duggan v. Rooney, 749 F. Supp. 234 (D. Kan. 1990), involved an appeal of a summary judgment motion, finding in favor of plaintiff and against Massachusetts Mutual Life Insurance Company. The plaintiff (Duggan) contended that Rooney's failure to be a licensed insurance agent in the state of Kansas, as provided under K.S.A. 40-244, when he solicited the decedent, constituted a breach of legal duty owed to Duggan. Plaintiff asserted that if Rooney had been properly licensed, she would not have been forced to sue on the conditional receipt to recover the insurance proceeds. The Duggan court stated:
"The general rule regarding recovery of attorneys' fees is that 'in the absence of any contractual or statutory liability therefor, counsel fees and related expenses are not recoverable as an element of damages.' Wilshire Oil Co. v. Riffe, 409 F.2d 1277, 1285 (10th Cir. 1969); Farmers Cas. Co. v. Green, 390 F.2d 188, 192 (10th Cir. 1968) ('under Kansas law and traditionally, attorneys' fees can be awarded only if provided for by contract or authorized by statute').
"However, an exception to this rule has been recognized in Kansas where the plaintiff has been forced to litigate against a third party because of some tortious conduct of the defendant. The recognized exception is stated as follows:
'If one's property is taken, injured or put in jeopardy by another's neglect of duty imposed by contract, or by his wrongful act, any necessary expense incurred for its recovery, repair or protection is an element of the injury. It is often the legal duty of the injured party to incur such expense to prevent or limit the damages; and if it is judicious and made in good faith, it is recoverable, though abortive.' [Citation omitted.]" 749 F. Supp. at 241.
The arbitration with CWI was a foreseeable, natural, and proximate consequence of Robert and Linda's conduct. Robert and Linda were CWI's largest producers and acted in concert with several other large producers, when they wrongfully withheld royalties for several months demanding that CWI terminate Hawkinson's franchise.
On October 8, 1992, CWI sent Hawkinson a letter, which Hawkinson deems a notice of default and termination letter. The letter excludes him from "the opportunity to participate in the new franchise program in the Kansas City area at this time." Other parts of this October 8 letter are important to this issue, as well as to Robert and Linda's assertion that the Agreement between Hawkinson and CWI was never actually breached. This letter also stated:
"[I]t is apparent that it is not in the best interest of any of the involved parties to attempt to maintain the franchise relationship as reflected by your current Agreement. If that relationship was working and if it was your desire to do so, CWI would continue to honor the Agreement. As you are aware, however, that relationship is not working, nor does it seem to be your desire to continue operating under that Agreement. Records show that you are not fulfilling your obligations under the Agreement in terms of deficiencies in meeting the stated productivity levels and deficiencies in payments owed to the Master F