Lead Opinion
Opinion
Can a contracting party be held liable in tort for conspiracy to interfere with its own contract? Following a line of appellate cases, the
Facts and Proceedings Below
Plaintiff Applied Equipment Corporation (Applied) entered into a subcontract with defendant Litton Saudi Arabia Limited (Litton) calling for Applied to procure and supply to Litton spare parts that Litton needed to perform Litton’s general contract to provide a military defense communication and control system to the Kingdom of Saudi Arabia. Applied was to be compensated under the subcontract on a commission basis—it wаs entitled to receive a 26 percent markup on the price of items purchased for Litton.
As part of its performance of the subcontract, Applied agreed to procure VA-145E electron tubes—custom-made products manufactured only by defendant Varían Associates Inc. (Varían). With Litton’s approval, Applied ordered from Vari an 11 VA-145E tubes at a price of $67,500 per unit. Applied issued a purchase order to Varían; Varían accepted and acknowledged the order.
Five months after Litton approved the purchase, two members of its finance department criticized the $190,000 markup earned by Applied on the tube purchase and recommended in an internal memorandum that “this situation be reviewed in order to determine how Litton might avoid payment of the $190,000.”
Litton subsequently contacted Varían directly and renegotiated the Applied/Varian purchase order, eventually obtaining Varían’s agreement to sell 12 tubes (rather than 11) at $62,500 each. Six tubes were sold to Applied (subject to the markup in the subcontract); the remaining six were sold directly to Litton (without the markup). The renegotiated purchase order, which resulted in a reduction in Applied’s commission, was presented to Applied by Varían as a fait accompli.
Applied sued Litton and Varían for breach of their respective contracts (i.e., the subcontract and the purchase order), and for tortious interference (including conspiracy to interfere) with those contracts. Applied claimed two items of damage: (1) the difference in lost markup, calculated at $81,250;
There was some confusion at trial regarding Applied’s conspiracy theory. Applied argued its conspiracy claim was based on a single conspiracy between Varían and Litton to interfere with each company’s contractual relations. Varían, however, maintained that there were in effect two separate conspiracy claims: one for conspiracy to interfere with the purchase order and another for conspiracy to interfere with the subcontract. Adopting Applied’s view, the court submitted five claims to the jury: (1) breach of the purchase order by Varían; (2) interference with the purchase order by Litton; (3) breach of the subcontract by Litton; (4) interference with the subcontract by Varían; and (5) conspiracy to interfere with undifferentiated “contractual relations.”
After a three-week trial and several days of deliberations, the jury returned a complex verdict. The trial court ultimately entered judgment in favor of Applied and against Varían and Litton for contract damages of $112,531.25 ($81,250 plus prejudgment interest) and tort damages of $2.5 million for conspiracy to interfere with contract. Litton was also assessed $12.5 million in punitive damages.
On appeal, the Court of Appeal affirmed the contract awards, but reversed the tort judgments for inconsistency in the jury’s verdicts. It rejected Variant argument that Varían could not, as a matter of law, be held liable for conspiring to interfere with its own contract.
In Wise v. Southern Pacific Co. (1963)
Wise has been uncritically accepted and applied in several subsequent appellate decisions. (Shapoff v. Scull (1990)
Our review leads us to reject the rule of Wise because: (1) it illogically expands the doctrine of civil conspiracy by imposing tort liability for an alleged wrong—interference with a contract—that the purported tortfeasor is legally incapable of committing; and (2) it obliterates vital and established distinctions between contract and tort theories of liability by effectively allowing the recovery of tort damages for an ordinary breach of contract. As explained more fully below, our conclusions in this regard are shared by the better-reasoned cases in other jurisdictions and supported by applicable policy considerations.
1. Conspiracy
Conspiracy is not a cause of action, but a legal doctrine that imposes liability on persons who, although not actually committing a tort themselves,
Standing alone, a conspiracy does no harm and engenders no tort liability. It must be activated by the commission of an actual tort. “ ‘A civil conspiracy, however atrocious, does not per se give rise to a cause of action unless a civil wrong has been committed resulting in damage.’ ” (Doctors’ Co. v. Superior Court (1989)
We have summarized the elements and significance of a civil conspiracy: “ ‘The elements of an action for civil conspiracy are the formation and operation of the conspiracy and damage resulting to plaintiff from an act or acts done in furtherance of the common design. ... In such an action the major significance of the conspiracy lies in the fact that it renders each participant in the wrongful act responsible as a joint tortfeasor for all damages ensuing from the wrong, irrespective of whether or not he was a direct actor and regardless of the degree of his activity.’ ” (Doctors’ Co., supra,
By its nature, tort liability arising from conspiracy presupposes that the coconspirator is legally capable of committing the tort, i.e., that he or she owes a duty to plaintiff recognized by law and is potentially subject to liability for breach of that duty. This follows from two distinct lines of conspiracy cases.
In Gruenberg v. Aetna Ins. Co. (1973)
In Doctors’ Co., supra, we followed Gruenberg in holding that an attorney and an expert witness could not be held liable as coconspirators with the insurer employing them for an alleged violation of statutory provisions prohibiting unfair insurance claims practices. (Ins. Code, § 790.03.) Although, as in Gruenberg, we relied in part on the agent’s immunity rule, we also emphasized that the statutory duties in question were owed solely by the insurer and therefore could not give rise to conspiracy liability against noninsurers. In this regard, we stated: “A cause of action for civil conspiracy may not arise, howеver, if the alleged conspirator, though a participant in the agreement •underlying the injury, was not personally bound by the duty violated by the wrongdoing . . . .” (Doctors’ Co., supra,
To illustrate the point, we referred with approval to Younan v. Equifax Inc. (1980)
In a second line of cases, our courts have employed similar reasoning in refusing to impose conspiracy liability on defendants who were legally incapable of committing the actual tort because of a statutorily created immunity from suit. In Hardy v. Vial (1957)
We initially concluded that the “school defendants” were absolutely immune from liability for malicious prosecution because they were performing official investigative duties. (Hardy v. Vial, supra, 48 Cal.2d at pp. 582-583.) In response to plaintiff’s argument that the school defendants were also liable as coconspirators with the nonschool defendants, we refused to subject the school defendants to liability for a tort they could not legally commit. As we observed: “The fact that the school defendants sought to attain their objective by acting in concert with other persons cannot properly be treated as destroying the immunity which they would have if each of them had acted individually and independently of any other person to secure the same result. The underlying theory of absolute immunity is equally applicable whether the employee acts by himself or with others who are not immune.” (Id. at pp. 583-584.)
Hardy was followed in a recent appellate case upholding the statutory immunity of persons reporting incidents of child abuse notwithstanding allegations of conspiracy with others. (McMartin v. Children’s Institute International (1989)
California recognizes a cause of action against noncontracting parties who interfere with the performance of a contract. “It has long been held that a stranger to a contract may be liable in tort for intentionally interfering with the performance of the contract.” (Pacific Gas & Electric Co. v. Bear
However, consistent with its underlying policy of protecting the expectations of contracting parties against frustration by outsiders who have no legitimate social or economic interest in the contractual relationship, the tort cause of action for interference with a contract does not lie against a party to the contract. (Shoemaker v. Myers, supra, 52 Cal.3d at pp. 24-25; Kelly v. General Telephone Co. (1982)
Applied’s conspiracy theory is fundamentally irreconcilable with the law of conspiracy and the tort of interference with contract as just discussed. One contracting party owes no general tort duty to another not to interfere with performance of the contract; its duty is simply to perform the contract according to its terms. The tort duty not to interfere with the contract falls only оn strangers—interlopers who have no legitimate interest in the scope or course of the contract’s performance.
The invocation of conspiracy does not alter this fundamental allocation of duty. Conspiracy is not an independent tort; it cannot create a duty or abrogate an immunity. It allows tort recovery only against a party who already owes the duty and is not immune from liability based on applicable substantive tort law principles. (Doctors’ Co., supra,
2. Contract and Tort
Contract and tort are different branches of law. Contract law exists to enforce legally binding agreements between parties; tort law is designed to vindicate social policy. (Foley v. Interactive Data Corp. (1988)
Conduct amounting to a breach of contract becomes tortious only when it also violates an independent duty arising from principles of tort law. “The law imposes the obligation that ‘every person is bound without contract to abstain from injuring the person or property of another, or infringing upon any of his rights.’ (Sec. 1708, Civ. Code.) This duty is independent of the contract .... ‘[A]n omission to perform a contract obligation is never a tort, unless that omission is also an omission of a legal duty.’ ” (Jones v. Kelly (1929)
The differences between contract and tort give rise to distinctions in assessing damages and in evaluating underlying motives for particular courses of conduct. Contract damages seek to approximate the agreed-upon performance. “[I]n the law of contracts the theory is that the party injured by breach should receive as nearly as possible the equivalent of the benefits of performance.” (1 Witkin, Summary of Cal. Law (9th ed. 1987) Contracts, § 813, p. 732; see also Peterson v. Larquier (1927)
Contract damages are generally limited to those within the contemplation of the parties when the contract was entered into or at least reasonably foreseeable by them at that time; consequential damages beyond the expectations of the parties are not recoverable. (Civ. Code, § 3300; Mitchell v. Clarke (1886)
Consistent with the distinctions just discussed, damages for mental suffering and emotional distress are generally not compensable in contract actions. (Sawyer v. Bank of America (1978)
Within the different spheres of contract and tort, motivations for conduct are also treated differently. In an intentional tort action, motives amounting to malice, oppression, or fraud may justify punitive damages. (Civ. Code, § 3294.) But the law generally does not distinguish between good and bad motives for breaching a contract. “[I]n traditional contract law, the motive of the breaching party generally has no bearing on the scope of damages that the injured party may recover for the breach of the implied covenant [of good faith and fair dealing]; the remedies are limited to contract damages.” (Foley v. Interactive Data Corp., supra,
The fundamental differences between contract and tort are obscured by the imposition of tort liability on a contracting party for conspiracy to interfere with the contract. Whether or not a stranger to the contract induces its breach, the essential character of a contracting party’s conduct remains
The imposition of tort liability in these circumstances also thwarts legal rules and policies limiting contract damages to those sums reasonably forseeable to the contracting parties. As a law review commentator observes: “While the imposition of liability in tort upon the non-party interferer may be justified in all cases for his intentional disruption of the contractual relation, the party who merely breaches his contract should in all cases be exposed only to contractual liability as he has not assumed the role of an intentional interferer. To impose tort liability upon the contract breaker bеcause of the involvement of a third person (when liability is limited to contract damages when the contract breaker is acting alone) undermines the policies which have developed limited contractual liability.” (Note, supra, 8 Loyola L.A. L.Rev. at p. 328.)
In its brief in this court, Applied acknowledges the vital commercial importance of foreseeability limitations on contract damages: “[Wjhen two parties make a contract, they agree upon the rules and regulations which will govern their relationship; the risks inherent in the agreement and the likelihood of its breach. The parties to the contract in essence create a mini-universe for themselves, in which each voluntarily chooses his contracting partner, each trusts the other’s willingness to keep his word and honor his commitments, and in which they define their respective obligations, rewards and risks. Under such a scenario, it is appropriate to enforce only such obligations as each party voluntarily assumed, and to give him only such benefits as he expected to receive; this is the function of contract law.”
We agree with Applied’s summary of contract law. In its contract with Applied, Varían assumed only the obligation to perform the contract or pay damages for breach. It did not assume the independent tort obligation not to
3. Other Jurisdictions
The Wise court noted a division in the non-California cases dealing with the issue now before us. (223 Cal.App.2d at pp. 71-72.) The cases cited by the parties, as well as those disclosed by our own researсh, reveal continuing disagreement without either a clear majority rule or a discernible trend. Over half the state appellate courts have not squarely considered and decided the issue; of the remainder, few have supplied any legal reasoning or analysis in support of their conclusions.
The New York cases consistently affirm that a party to a contract cannot be sued in tort for conspiracy to interfere with the contract. (See, e.g., Sharma v. Skaarup Ship Management Corp. (S.D.N.Y. 1988)
One federal court explained the reason for New York’s no-conspiracy-liability rule as follows: “The rationale is that, since plaintiffs damages can be recovered in an action for breach of contract, the contract action constitutes plaintiff’s entire grievance . . . , and plaintiff may not thus seek to add a claim in tort, the effect of which will be to enable recovery of punitive damages in a contract action, a result specifically precluded by New York statute.” (Savarin Corporation v. National Bank of Pakistan (S.D.N.Y. 1968)
Other federal and state courts have also refused to sustain claims for conspiracy to interfere with contractual relations brought against parties to
The out-of-state cases generally contain little reasoning or analysis; those few recognizing the ongoing split of authority appear simply to “take a side.” The New York rule, however, appears to be based on a statutory rule and policy we share in common with that state: Punitive damages are not recoverable except in actions for breach of obligations “not arising from contract.” (Civ. Code, § 3294, italics added; Savarin Corporation v. National Bank of Pakistan, supra,
As the Court of Appeal explained in Dryden v. Tri-Valley Growers, supra, in refusing to hold contracting parties directly liable for interference with contract: “It is obvious that if an action is brought for interference with contractual relationship by one party to a contract against another who is also a party to that same contract, the grievance of the plaintiff is, in essence, breach of contract; and, in such case, plaintiff is entitled to recover all damages flowing from the breach. In such an instance to allow the plaintiff to sue under the tort theory of wrongful interference with contractual rights would not only be superfluous, but would also enable him to recover tort damages (e.g., punitive damages, damages for mental suffering) to which he is not entitled under California law.” (
Like the New York courts, we decline to allow a conspiracy theory to accomplish an “end run” around the statutory rule that punitive damages are per se not recoverable in ordinary actions for breach of contract.
Applied advances several additional arguments in defense of Wise. It first contends that tort liability in this context is consistent with the general rule of conspiracy that “all who are involved in the common scheme аre jointly and severally responsible for the ensuing wrong.” (Wise, supra, 223 Cal.App.2d at pp. 71-72.) According to Applied’s argument, this is a case in which “the third party’s interference violates duties owed to the plaintiff entirely unrelated to the contract.” As we have observed in part 1, ante, however, the doctrine of conspiracy does not impose liability on persons who owe no duty to a plaintiff or who are otherwise immune from liability. A party to a contract owes no tort duty to a coparty not to interfere with the contract. Conspiracy cannot create such a duty.
Applied also maintains that the imposition of tort liability on contracting parties promotes essential stability in contractual relationships. We disagree. As a practical matter, it is difficult, if not impossible, for a third party to induce a breach of contract without communicating with the contracting party. Therefore, any and every induced breach creates a potentially triable conspiracy case against the contracting party. In this way, the potential consequences of any breach of contract—efficient or inefficient, socially desirable or undesirable—become uncertain and unpredictable. Tort liability may or may not follow, depending upon a myriad of imponderable factors. As a result, a business fearful of unfathomable tort exposure might lose the ability to respond flexibly to changing economic conditions or hesitate to enter into contracts at all in fast-moving aspects of commercial enterprise. (Cf. Foley v. Interactive Data Corp., supra, 47 Cal.3d at pp. 696-697 & fn. 33.) Another business, reasonably viewing the prospect of significant tort liability as remote, might not react at all. Tort liability in this context would more likely produce uncertainty, not stability, in commercial dealings.
A breaching party already has a legal incentive to perform—the likely prospect of liability for breach of contract. We perceive no additional value, and significant additional uncertainty, from the imposition of tort damages on a contracting party in this instance.
Finally, Applied correctly observes that this case involves not one contract but two—the Applied/Litton subcontract and the Applied/Varian purchase
Disposition
The judgment of the Court of Appeal is reversed. The case is remanded with instructions to direct further proceedings in the trial court in a manner consistent with this opinion.
Kennard, J., Arabian, J., Baxter, J., George, J., and Ramirez, J.,
Notes
We intimate no view as to the legal sufficiency of Applied’s claim for lost profits.
Contrary to Applied’s suggestion of procedural irregularity, Varían is not barred from raising the conspiracy issue in this court. Without objection by Applied, the issue was fully briefed, argued by the parties, and decided on its merits in the Court of Appeal. Accordingly, Applied has waived any purported procedural barriers to its presentation here. (See Schroeder v. Auto Driveway Co. (1974)
Litton did not petition for review; the judgment of the Court of Appeal is now final as to Litton. Although we have granted Litton leave to file a brief in this court as amicus curiae, we intimate no view regarding the effect of Litton’s failure to petition for review on its status in further proceedings in this case, e.g., in light of the doctrines of res judicata and law of the case.
The agent’s immunity rule emanates from a further holding in Wise that: “Agents and employees of a corporation cannot conspire with their corporate principal or employer where they act in their official capacities on behalf of the corporation and not as individuals for their individual advantage.” (Wise, supra,
To recover in tort for intentional interference with the performance of a contract, a plaintiff must prove: (1) a valid contract between plaintiff and another party; (2) defendant’s knowledge of the contract; (3) defendant’s intentional acts designed to induce a breach or disruption of the contractual relationship; (4) actual breach or disruption of the contractual relationship; and (5) resulting damage. (Ibid.) In this way, the “expectation that the parties will honor the terms of the contract is protected against officious intermeddlers.” (Id. at p. 1128.)
See, for example, White v. Land Clearance for Redevelopment Authority (Mo.Ct.App. 1992)
See, for example, Fox v. Deese (1987)
The tort of interference with сontract—which cannot be committed by a contracting party—is different in this respect from other kinds of business torts. Liability for deceit, for example, may be imposed on contracting parties as well as others: “One who willfully deceives another with intent to induce him to alter his position to his injury or risk, is liable for any damage which he thereby suffers.” (Civ. Code, § 1709.) We do not suggest that the doctrine of conspiracy cannot impose tort liability on a contracting party for fraud or other torts for which that party could, in the absence of a conspiracy, be held liable to a plaintiff.
The elimination or confinement of conspiracy theories in cases like this one may also have the salutary effect of simplifying complex trials. The complicated character of the special verdict forms in this case, resulting in part from the overlapping conspiracy theories, undoubtedly contributed to jury confusion and verdict inconsistency, mandating an expensive and difficult retrial.
We disapprove all prior cases to the extent they hold that a party to a contract can be held liable in tort based on a conspiracy to interfere with its own contract, including each of the following: Shapoff v. Scull, supra,
Presiding Justice, Court of Appeal, Fourth Appellate District, Division Two, assigned by the Acting Chairperson of the Judicial Council.
Dissenting Opinion
I dissent.
Justice Sullivan, later on this court, wrote for the Court of Appeal in Wise v. Southern Pacific Co. (1963)
A number of early cases have held a party to a contract liable for entering into a conspiracy with others to thwart the purposes of the contract. That one
A leading federal case declared: “If it be an actionable wrong for a third person to interfere in a contract and induce one of the parties thereto to break it to the injury of the other, can it be said it is not equally a wrong for one of the parties to the contract to invite a third party to unite with him and aid him in breaking the contrаct in such a way as possibly to escape liability in an action for nonperformance and, gaining his consent, to act together in consummating their agreement? There are many refinements in the law, necessarily so, but courts should be as astute in applying well-known principles of justice to remedy wrongs as the wrongdoers are in devising schemes to perpetrate them.” (Motley, Green & Co. v. Detroit Steel & Spring Co. (S.D.N.Y. 1908)
To the same effect is Luke v. DuPree (1924)
California followed the prevailing authorities in the country in Wise v. Southern Pacific Co., supra, 223 Cal.App.2d at pages 71-72: “We think that the better reasoned cases hold that an action for conspiracy to induce a breach of contract will lie against a party to the contract who is included among the defendant-conspiratоrs. Such cases, in our view, rest solidly on the principle that all who are involved in the common scheme are jointly and severally responsible for the ensuing wrong. This of course is the broad formative principle in the California cases on conspiracy. ... To hold the contracting party along with his confederates liable in tort seems to us not only to be within the compass of the above principle but also consonant with good morals. We perceive no fatal anomaly in the circumstance that the plaintiff may . . . seek relief in an independent cause of action on the
It would appear that until today the law was well settled in California on the liability of all parties to a conspiracy. No immunities have been recognized. No free conspiracies have been tolerated.
I realize, of course, that a denial of review by this court does not in and of itself constitute a precedent. However, when this court has consistently over a period of years denied review on a subject, certainly the bench and bar may, with reasonable confidence, rely on the law being well settled.
Shapoff v. Scull (1990)
Manor Investment Co. v. F. W. Woolworth Co. (1984)
Rosenfeld, Meyer & Susman v. Cohen (1983)
Owens v. Palos Verdes Monaco (1983)
Owens v. Foundation for Ocean Research (1980)
In none of the foregoing cases was a single justice’s vote cast for granting a hearing or review except my lone vote to grant in Owens v. Palos Verdes Monaco, supra. I find it difficult to justify permitting Courts of Appeal to prescribe the law on this subject for more than a decade and now to abruptly change the law merely to insulate some conspirators—here a contracting party—from liability.
I would affirm the judgment of the Court of Appeal.
Respondent’s petitions for a rehearing were denied June 23, 1994. Mosk, J., was of the opinion that the petitions should be granted.
There are other cases reaching the same conclusion, with no petition being made to this court, e.g., California Auto Court Assn. v. Cohn (1950)