*1 Aug. No. [L.A. 31588. 1984.] SERVICE,
SEAMAN’S DIRECT INC., BUYING
Plaintiff and Appellant,
STANDARD CALIFORNIA, OIL COMPANY OF
Defendant and Appellant.
Counsel
Janssen, Marchi, Malloy Janssen, & Lascher, R. Clayton Lascher &
Lascher & Wilner and Edward L. Lascher for Plaintiff and Appellant. Aitken,
Wylie A. Bashore, Glen T. Richard D. Edwin Train Bridgman,
Caldwell, Goff, Robert E. Victoria De Cartwright, Sanford John Gage,
Cardenal, Hobart, Levine, G. Dana Pollock, Harvey R. Edward I. Arne
Werchick, I. Amici Stephen and Leonard Sacks as Zetterberg Curiae on
behalf of Plaintiff and Appellant. Sutro,
Pillsbury, Madison & Brown, Noble Anthony K. P. Gregory,
William Mailliard, Jr., S. C. Mark Douglas Floyd, H. Penskar and Walter
R. Allan for Defendant and Appellant. Greines,
Horvitz & Ellis J. Horvitz and Gideon Kanner as Amici Curiae on
behalf of Defendant and Appellant.
Opinion
THE COURT.* case, This which arises out of a factual complex setting,
presents three issues for decision. the letter signed by Was agreement Service,
Seaman’s Direct California, Buying Inc. and Standard Oil of Inc.
sufficient to satisfy the statute of frauds? Is “intent” an element of a
cause of action for intentional interference contractual with relations? a recover in"'
May plaintiff tort for breach of an implied covenant noninsurance, faith and fair commercial contract? [a Bird, J., Mosk, J., Kaus, J., Broussard, J., J., Grodin, Reynoso,
*Before C. and J.
I. Plaintiff, Service, (Seaman’s), Seaman’s Direct is a close Buying Inc.
corporation the late composed three shareholders. 1960’s and During 1970’s,
early chandler, i.e., Seaman’s as a a dealer operated ship ship
supplies of Eureka Seaman’s equipment, City (City). By
business a encompassed number activities as a including acting “general vessels,
contractor” i.e., for their incoming refurbishing supplies, selling
tax-free use, goods offshore a small marine station managing fueling
as the consignee (Mobil). of Mobil Oil Company time,
Around this decided to waterfront City condemn decrepit
area where Seaman’s was located for into a modern marina. development end,
To this from sought funds the federal Economic Development Agen- (EDA).
cy Seaman’s saw the and mod- way as redevelopment expand
ernize its operations. with Accordingly, company approached City to lease a plan large of the new marina. Seaman’s to use portion planned
some of the area for its own and to sublet the remain- operations profitably
der.
In early Seaman’s an initial lease for a City signed relatively area,
small with the that the lease could be understanding renegotiated
include the area larger that Seaman’s con- wanted. The was renegotiation
ditioned on Seaman’s evidence of financial to both providing responsibility
the EDA and the City’s consultants. bonding
A element major Seaman’s and the planned key approval expansion, lease,
of the larger was Seaman’s of a marine fuel with dealership operation
modernized To such a fueling secure equipment. dealership,
opened negotiations with field several oil but soon narrowed the companies,
to Mobil here, and the (Standard). defendant Standard Oil of California
While with negotiations both were companies City progressing, began Seaman’s for
pressuring a final decision on the marina The City’s lease.
bonding consultants demanded written evidence of a binding agreement
an oil supplier before would area to Sea- they approve leasing larger
man’s. Standard,
Upon reaching tentative agreement with Seaman’s requested
evidence of that that would be on both agreement—“something binding par-
ties”—to show to In Standard sent a “letter of intent” City. response, However, forth the terms of
setting negotiation. the letter explicitly provid-
ed that the terms were not Since Seaman’s needed a com- binding. binding
mitment, it continued to with negotiate Mobil. Seaman’s and
Finally, Standard reached an on all agreement major points.
Upon Seaman’s for an repeated instrument requests evidencing binding
commitment, Standard, 11, 1972, on October wrote a letter forth the setting letter, (1)
terms of the In the Standard to a Chev- agreement. sign proposed
ron Marine Dealer term of 10 agreement years; with Seaman’s for an initial
(2) facilities, to advance Seaman’s the cost of the new fueling up
$75,000, which sum was to be amortized over the life of the agreement oil;
the rate of one cent a 4.5 cent discount per gallon provide per fuel; off the
gallon and an posted price agreement sign providing
for Standard’s to cure in Seaman’s. right case default by
The letter concluded on “this offer is to our mutual subject agreement drawn,
specific of contracts to be and/or wording by endorsement approval involved, offices of Seaman’s credit
governmental and continued approval effect.[1]
status at the time If are to into and agreements go approach meets with
proposal your your we would acknowl approval, appreciate edgement and terms and two acceptance by signing returning copies these final this letter. We of the drafting can then further with the proceed
of agreements (Italics added.) . . . .” letter agent was signed
Standard and—under the to the agree “we terms and legend, accept
conditions (Italics added.) stated herein”— an of Seaman’s. agent Seaman’s, oc-
According of this letter was a momentous signing “Well,
casion. One of have those shouldn’t we souvenir present suggested, here and I will the President a bill
pens signs as “when exchange pens,”
into law.” that it was to be “going Standard’s exclaimed representative business was a “feath-
great doing and that the agreement [Seaman’s]” declared,
er in his One of the “We have a contract” cap.” finally parties “we’re our way.” there- City shortly the letter immediately presented
after in the marina. signed 40-year sought lease for the entire area
Seaman’s also ended them that a informing with Mobil after negotiations
contract had been with Standard. signed
Conditions in the oil the end of By soon however. industry changed,
what had been a “seller’s market.” As market” had become a “buyer’s contemplated using nonapproval 1Internal memoranda of Seaman’s indicate that Standard agreement prove later justify nonperformance
credit as an excuse to should the terms unfavorable.
result, 1973, a “no new business” January adopted policy. Standard and
During dealership Standard Seaman’s marine signed temporary
agreement to with the fuel it needed while the designed Seaman’s supply
new marina was under marine con- construction. The dealership agreement 11, 1972, letter, however,
templated the October was never signed.
In November allocation of a federal mandating program
petroleum By went into effect. letter products among existing customers 20, 1973,
dated November new federal Standard told Seaman’s that the
“regulations sold suppliers they those to whom require supply purchasers base we did
during Our records disclose that period [the 1972]. diesel
supply you fuel to time 1972 . . . Under any during . [f]
circumstances, will we not be able with the we financing forward go been In the is withdrawn discussing. event the mandatory program
[have]
and would, course, our situation supply again we improves, pleased
discuss supplying your needs.”
In telephone Seaman’s, calls and indi- Standard personal meetings
cated that the new federal barrier to the contract. regulations only were it wasn’t for the . . would be willing
“[I]f . agency], [federal [Standard]
go ahead with the contract . . . .” the federal “If get [Seaman’s could]
government to that order change so that Standard could supply [Seaman’s]
with fuel would be even . . . .” Standard very supplied happy [Standard]
Seaman’s with the forms from to seek a authorization necessary supply
federal agency fill them helped out.
As a efforts, result of these order February was issued on supply
1974. Standard its contended responded changing position. company
now that no binding agreement with had ever been reached. Seaman’s
Therefore, Standard decided to order did not want appeal “[b]ecause [it]
to take on any new business.” When Seaman’s learned of appeal,
twice wrote to Standard an explanation. None was requesting forthcoming.
Standard’s federal appeal was Internal memoranda reveal Stan- successful.
dard’s reaction to this result: “We are to other “[g]reat!!” recommending follow they your example.”
divisions] was,
Seaman’s turn, then The new this decision reversed. appealed
decision that an order ob- provided “directing] to fulfill supply [Standard]
ligations Seaman’s” would be of a court copy issued upon filing
decree that a valid contract state existed between the under law. parties contract,
Seaman’s asked Standard to to the existence of a ex- stipulate time it could not continue in that a throughout operation
plaining said,
trial would In “See take. Standard’s reply, laughed representative in court.”
you Seaman’s testified that if Standard had cooperated,
would have borrowed until when the new funds to remain business
marina opened. thereafter,
Seaman’s in discontinued 1975. Soon operations early Standard, filed suit with breach of con-
company Standard against charging
tract, fraud, breach of the faith and fair dealing, covenant of implied good
and interference with City. Seaman’s contractual relationship
case on was tried before a which returned a verdict for Seaman’s all jury contract,
but the awarded fraud cause of action. For breach of the jury $397,050. cov- For tortious breach of the
compensatory damages implied $397,050
enant of faith and compensa- fair awarded dealing, they $11,058,810 and for intentional
tory damages Finally, punitive damages.
interference set com- with an business advantageous relationship, jury $1,588,200 $11,058,810. at
pensatory damages and punitive damages trial, alia,
Standard moved for new inter that the charging, damages
were excessive as a matter of The trial court conditionally granted law.
motion on unless Seaman’s consented to a reduction punitive damages $1 mil- $6 interference count to million on the faith count to reduction, ac-
lion. Seaman’s consented to was entered judgment filed Standard Seaman’s has a cross-
cordingly. from the appeals judgment.
appeal.
H. the October 11th The first issue this court must decide is whether the statute of satisfy
letter Seaman’s and is sufficient signed by Standard
frauds. 1624 of the Civil
California’s found at section general statute of frauds is its terms is not by
Code. That section agreement provides “[a]n “invalid, unless
be within from the thereof” is performed year making same, thereof, and sub- or is writing some note or memorandum
scribed or . . . .” to be his charged agent statute, such writing
It is well settled that to be enforceable under consummated agree
must “contain the essential elements of a specific, (Franklin
ment.” v. Hansen 59 Cal.2d “ stated, ‘details 386].) par 381 P.2d the essential terms must Only and its on the agreement
ticulars’ need not What is essential depends [be].
context (Rest.2d and also . . . .” parties conduct of the subsequent
Contracts, com. g, p. §
Standard letter is not sufficiently contends that the October 11th
precise, with to the terms respect parties, quantity, essential of price, Put well taken. pass muster. this contention is not simply,
The October 11th between the letter evidences agreement parties “Chevron,” i.e., Standard,
Seaman’s would become dealer. The price forth the letter as 4.5 agreed for fuel was set pay clearly
cents less than at the delivery. Standard’s wholesale time of posted price
Thus, both were with sufficient “parties” specific- established “price”
ity. Moreover, forth, no was set was although term none express quantity “
necessary here. An will not held deficient be ‘agreement [under
statute of for implied the failure to which is clearly express frauds]
when the writing is of the accordance with intentions interpreted
parties.’ (Seek 556, Foulks v. 25 Cal.App.3d [Citations.]” [102 170].)
Cal.Rptr. evidence The October 11th letter is of a dealership
arrangement. The obvious of such an is that the implication arrangement is,
wholesaler will as much fuel supply as the dealer That requires.
parties entered into a “requirements” contract. “ ‘
Such contracts “have been difficulty, enforced the courts little
where the indicate the of the surrounding circumstances approximate scope
promise.”’” (Fisher 829, v. Parsons 210], 104A, (3d 1957) quoting Williston Contracts ed. § 402.)
p. Since to be contracts are “requirements” sufficiently precise
enforceable, are they the statute sufficiently precise satisfy of frauds.
(See, infra, Anderson, 1982) (3d 2- Uniform Commercial Code ed. §
201:113, 70p. same issue Code [considering under Uniform Commercial
(UCC)].)
Thus, letter all contained the “essential terms” contract,
of the and is enforceable under Civil section Code 1624.2 argues 2Standard also that the letter insufficient statute of frauds because it was under the was ambiguous to which party option as had to renew contract and which get However, would the benefit of the 1 upon cent discount full it amortization loan. is far from parties clear that the agreement. considered these terms “essential” their Moreover, the fact that a interpretations term in a two susceptible contract is does
make the contract invalid under always the statute frauds. evidence is Extrinsic admissible Hansen, (Franklin to resolve ambiguities on the face of contract. Cal.2d at a v. p. 574.)
Since this contract a sale of goods, requirements contemplated Code, U. Com. (Cal.
of the statute frauds of the UCC must also be met. 2201.) statute, To be under must it signed, sufficient this writing
§ made, indicate
must that a contract has and must specify quantity been (U.C.C. (1964 ed.)
term. com. 23A Ann. Code West’s Cal. Com.
p.
Standard that the letter fails UCC’s stat argues again satisfy However, noted, as
ute of frauds not specified. because a term is quantity
the letter contract. is sufficient satisfy evidences This “requirements” UCC’s frauds. output statute of written “[S]ince [UCC], that a under it should follow writing requirements binding
is sufficient has been a ‘real transaction’ for the which indicates there Anderson, (2 Uniform
sale of or for the output purchase requirements.” omitted.) 2-201:113, (3d 1982)
Commercial fn. Code ed. § (R. F. Weaver view. overwhelming weight authority supports 1315; Assoc., 1978) 587 F.2d (D.C.
& Inc. Cir. Const. Inc. Asphalt 512 F.2d (5th 1975) Fiber
Riegel v. Anderson Co. Cir. Corp. Gin. *12 7; (N.D.Tex. Industries,
788 and fn. Frank Assoc. Rockland Inc. v. Kasmir Co.,
1979)
1176;
(1975)
Ferguson
470
R. L.
Cotton
Inc. v.
Kimsey
F.Supp.
360,
(1974)
[205 728; R (Miss. 725, J & Foods 1975)
Fab. Co. 310 So.2d Kubik v. 518]; (1978) City Inc. 282 Ore. P.2d Port Construction Oregon, 179 [577
Co., 896].)3 (1972) v. 48 639 Inc. Henderson So.2d Ala.App. [266 of the Stat
It is to important primary purpose remember “[t]he of the reliable evidence existence
ute is evidentiary, require [of frauds] of the fraud or through per
and terms contract and to prevent enforcement an pur contracts never in made Where
jury only evidentiary .... fact served, light is read in the of a memorandum is pose requirement there is charged; which of the to be arises and admissions
dispute (See Hosiery Doral “contrary” authority simply point. 3The cited is Standard (E.D.Pa. 1974) “requirement” or F.Supp. a Corporation Sav-A-Stop, v. Inc. 377 387 [not contract]; (1979) Ga.App. 150 “output” Caulking, Distributing etc. Co. Cox v. Brockett (1976) 51, [same]; Rogers Const. 69
424 S.E.2d Ace Concrete Prod. v. Chas. J. [258 52] 353, the memorandum quantity 610 term on Mich.App. space N.W.2d [245 354] [the blank; tunnels”]; Companies, Inc. Lowe’s only left said “concrete for was memorandum 81, (1973) any writing made reference Lipe N.C.App. 106 [201 [no v. S.E.2d 82] with various build quantity; plaintiff alleged only “agreed that he to furnish the Defendants (1976) materials”]; Wn.App. Mkg. England ing Fish New Fish Co. Alaska Ind. Ass’n. v. all; “requirement” or allegation no of a quantity P.2d written term at [548 348] [no contract].) “output" 131,
no need (Rest.2d Contracts, for evidence on not in points dispute.”4 § c,
com. added.) italics letter which con Standard signed
tained, terms, its own an this “offer” contract. Seaman’s “accepted”
offer—again terms are and returning letter Standard’s—by signing
one The evidence leaves doubt was copy. no a contract made. require
ments of the statute of frauds more met were than here. adequately
III. This court must next consider the role of “intent” or “motive” in the
tort of “intentional interference with relations.” According contractual
Standard, its “motive” with Seaman’s contract “purpose” interfering
with the contends, turn, is City critical finding liability.
that Standard’s is motive enough irrelevant—it Standard knew
interference with the contract was certain” to result from its “substantially
conduct. Both parties’ however, arguments, some confusion about betray
the function and meaning “intent” this tort.
Intentional interference with its contractual relations has roots in the
tort of breach of “inducing contract.” Both intentional are torts. As
court case, explained an early “The act of the breach inducing
must be an intentional If one. the actor had no existence knowledge breach,
of the contract or his actions were not he intended induce
cannot be held liable though actual breach results from his lawful and (Rest., Torts, e;
proper acts. [citations].)” sec. Ice (Imperial comment added;
Co. v. Rossier 631], Cal.2d italics P.2d Charles Chapman C. Building Co. Mart California
846, 853 830]; (1967) v. 256 Cal.Rptr. Springer Singleton Cal.App.2d [82
184, 770, 188 1220].) 27 Cal.Rptr. A.L.R.3d [63
The Restatement section cited the court “The essential explains, thing
is the purpose cause result. If the actor does not have this purpose,
his conduct does not him subject under this rule even it has liability if the unintended deterring third with person effect of from (Rest., Torts, 766, d, other." added.) com. italics It is enough §
the actor intended to the acts which she perform caused the result—he or
must have intended to cause the result itself. 4In regard, it worthy of note agent agree that even seemed to Standard’s
letter contained all big “essential” terms. When asked “the are forth at trial terms all set record, right?,” answered, are, po he negotiations yes.” “the terms of Standard’s sition at rely trial seemed to missing not on the fact that from essential terms were the letter/ contract, agreement but that a binding never had been reached.
766 has of contract” expanded
In recent the tort of breach years, “inducing induce a breach not literally where the defendant does permit
contract, “more expensive of the contract but makes plaintiff’s performance 55 (1961) Dist. Sch. Elementary
or burdensome” v. Brisbane (Lipman 97, interferes with the 224, 465]), or
Cal.2d 232 359 P.2d Cal.Rptr. [11 (Buckaloo v. Johnson of a economic prospective relationship
formation 865]). The re- 815, 745, 14 537 P.2d
(1975) Cal.3d 827 Cal.Rptr. [122 intent, remained. has though, that the defendant act with culpable
quirement
Thus, of contract it is essential for breach inducing an action breach to induce a defendant “intended that the plead
plaintiff prove 604, 608 (1974) (Abrams Briney Cal.App.3d Fox 39
thereof . . . .” & v. El Centro added; City M v. 328], H & Associates italics Cal.Rptr. [114 392]; La 399, Richardson v. 405
(1980) Cal.Rptr. 109 Cal.App.3d [167 285]; 73, Mayes v. (1979) Cal.Rptr.
Rancherita 98 Cal.App.3d [159 Sales, 69, 78 (1979) Cal.Rptr. Cal.App.3d Northern Inc.
Sturdy [154 Rossier, at p. 18 Cal.2d
43]; supra, Ice Co. v. Imperial see interference for intentional on cause of action
Similarly, prevail “intentional must plead prove economic advantage, plaintiff
prospective the relationship.” designed disrupt
acts on the of the defendant part added; Johnson, 827, Institute italics 14 Cal.3d at
(Buckaloo v. supra, Laboratories, (1981) Inc. Health Inc. v. Veterinary Pathology, California & Mother’s Cake 74]; Lowell v. Cal.Rptr. Cal.App.3d [172 664].) Cal.Rptr. 18-19
Cookie Co. 79 Cal.App.3d [144 does to interfere” an “intent if establishes and when
Only plaintiff Cake & (Lowell Mother’s into v. come “justification” play. issue Co., “[Wjhile defendant’s 18-19.) at pp.
Cookie Cal.App.3d and proved to be of action pleaded intent is an element of cause
culpable the torts defense” is an affirmative justification defendant’s
by plaintiff, (A. F. relationship. economic with an existing prospective interference Ins., Inc. &
Arnold Co. Professional Pacific intentionally motive 96].) It is here that defendant’s con with the to interfere intention becomes relevant. “Given the
interfering *14 which or object
tract, ultimate purpose will turn usually upon 129, 1971) (4th ed. (Prosser, Torts § is to advance.”
the defendant seeking therefore, it that Standard’s mistaken, when asserts is
Seaman’s necessary prerequisite not a the contract is
“intent” to interfere with 767 It mistaken is. when it that liability.5 Similarly, implies Standard is
an cause of action rather “motive” is an element of improper plaintiff’s
than a in factor defendant’s affirmative It not. defense. is case,
In this is deemed was instructed that defendant jury “[a]
to have acted or interference with an if it knew that intentionally disruption certain result from its con
advantageous substantially was relationship
duct.”
Intent, course, well by be established inference as as may Thus,
direct the trial have instructed the proof. jury court could properly might
that it infer intent certain” to culpable from conduct “substantially Here,
interfere the contract. was instructed jury though,
that intent was if its culpable “deemed” to exist Standard knew that conduct above,
would interfere with the this contract. Under outlined principles Co. v. American (See
instruction was in Gantry Pipe Constr. clearly error.
& Constr. Co. 186, 834].) Cal.Rptr. [122 it that error an instruction was appears improper
“[I]f giving
likely verdict, to mislead the and thus to it is jury become a factor its (Henderson Harnischfeger
prejudicial for Corp. ground reversal.” v. 663, Here, 12 Cal.3d 353].) Cal.Rptr. P.2d [117
there is simply no evidence record that Standard acted with the pur Rather,
pose design of Seaman’s to breach its contract with causing City. obvious, otherwise, seems and Seaman’s does not contend that breach incidental,
was merely foreseeable, if of Standard’s action. consequence
Under these circumstances, it is clear its burden plaintiff carry failed Thus, proving “intent.” clearly the erroneous were jury instructions
prejudicial, the judgment for Seaman’s this count must reversed.
IV. whether, issue raised what principal is under cir- appeal cumstances, a breach of faith and fair covenant implied
in a commercial contract give rise to an action tort. Standard con- may been,
tends tort action for always breach covenant has implied be,
and should continue to limited to cases where underlying 5Citing Corp. Gregory (1979) J’Aire Cal.3d P.2d 60], longer necessary no cause of contends intent is element action J’Aire, however, negligent intentional interference with contractual relations. concerned that, with prospective regardless interference It advantage. economic is sufficient note possible facts, negligent merits of an action for interference on these Seaman’s neither
pled proved nor nor jury any theory liability. submitted to the such
768 Seaman’s, this by
one of recent cases decided insurance. several pointing and A brief review
court the Courts this contention. challenges Appeal,
of the of the tort is in order. development that, California, every
It law is well settled implies Witkin, Cal. Law (1 Summary
a covenant of faith and fair dealing. good Contracts, 493; (8th 1973) 576, see, Mutual Oma Egan ed. v. p. e.g., § 141]; 809, 691, P.2d (1979)
ha Ins. 24 818 620 Cal.Rptr. Co. Cal.3d [169 480, 566, 573
Gruenberg (1973) Cal.Rptr. Aetna Ins. 9 Cal.3d v. Co. [108 (1958) & Co. 50 Cal.2d 1032];
510 P.2d Traders General Ins. Comunale v. 198, Ins.
654, 883]; Security Crisci v. Co. 658 P.2d 68 A.L.R.2d [328 , 13, every 426 P.2d
(1967) 66 425 Cal.Rptr. Cal.2d 429 173] [“in [58
contract, insurance, is an covenant there including policies implied stated, (Italics added.)]) faith Broadly and fair . . . .” dealing the other do which will deprive
covenant that neither anything requires 493.) Witkin, (1 supra,
of the of the cit. agreement. op. benefits covenant, en this and have
California courts existence recognized it, have pro
forced of contracts. Courts in cases a wide involving variety in such contracts
vided diverse contract remedies for breach covenant (1949) 34 (Brown Court Superior
as to make wills v. agreements mutual to sell 559, agreements
Cal.2d 564 [specific P.2d performance]), [212 878] (Osborne (1978) Cal.App.3d 80 Corp.
real Cal-Am Financial property v.
259, contracts [rescission]), 266 incentive Cal.Rptr. employee [145 584] 499, Cal.Rptr.
(Foley v. Paving Cal.App.2d U. S. Co. [68 Associates (Cordonier v. Shopping leases Central [damages]), Plaza
780] [same]), and 1000, 991, Cal.App.3d 558] [147 & Elec Gas (Masonite utility Corp.
contracts to services provide Pacific [same]). Co. (1976)
tric Cal.Rptr. 170] Co., supra, seminal & General Ins.
In the cases of v. Traders Comunale Co., Cal.2d
50 Cal.2d and Security Crisci v. Ins. dealing by fair breach faith and
court held that a of the covenant of good well as in in tort as of action may
an insurance carrier rise to cause give (Crisci, supra,
contract. at p. faith covenant of
While the that the law implies proposition advanced proposition
fair in all contracts is well established ^he action in to an covenant! rise always' gives Seaman’s—that breach of the for breach of In is available clear. that a tort' action holding
tort—is not so contract, the /‘special emphasized an insurance we have
the covenanrin elepients of insured, characterized between insurer
relationship” adhesion, v. Mutual interest, fiduciary (Egan responsibility.
public *16 Co.,
Omaha Ins. there are other Cal.3d at No doubt with of similar and similar treat-
relationships legal characteristics deserving
ment.6
When we move the from such to consideration of special relationships contract,
tort in the context the we move remedy of commercial ordinary waters.)
into/largely Here, uncharted and of parties potentially dangerous
roughly free contours of their equaTbargaining are to the" power shape and to
agreement include for fees and dam attorney provisions liquidated in the
ages event of They may breach. noFbe permitfed-tb"di^lmm_the least, free,
covenant of faith but are within reasonable limits at good they
to of covenant is be agree upon standards which application contracts,
measured.7 In such it be difficult to may distinguish_between contract,
breach of the covenanf and'breach of and is risk tHat there tort inteijecting remedies will intrude upon parties. expectations ^ is not
/ say This tort remedies have no in such a commercial place /context,
/ but that it is wise to with in their scope caution proceed determining and application.
/
For the of this it purposes case is to decide the broad unnecessary question Indeed,
which Seaman’s poses. it is not even liability necessary predicate
on a breach of the covenant. implied recognize It sufficient to a party when, contract may incur tort remedies in addition to breaching liability by denying, contract, to shield itself from seeks in bad faith ~ -- and without cause, probable that the contract exists^
It has been held that a to a may subject liability, be to tort party
including punitive if he coerces other damages, more than party pay “ is due under lawsuit, the contract terms made through threat ‘with-
out cause probable and with no belief the existence the cause of ac- (Adams
tion.’”
v. Crater
(1976)
WellDrilling, Inc.
679, 681].) difference, There is little between a principle, contracting manner, obtaining excess payment such and a contracting party
seeking to avoid all aon claim meritorious contract by adopting Tameny 6In Co. 27 Cal.3d footnote 12 [164 Atlantic Richfield 1330], 610 P.2d this court intimated that breach of the covenant of faith and fair in the employment give relationship might rise to tort That remedies. relationship has some of the relationship same characteristics as between insurer (See Jurika, insured. & Limiting Louderback Standards Bad Faith Tort Breach 187, 220-226.) Contract 16 U.S.F. L.Rev. 7California’s prohibits Commercial Code section 1102 obli disclaimer faith
gation, as obligations reasonableness, care, well as the diligence, provides but parties may by agreement “the performance determine the standards which the of such obligations is to if manifestly measured such are not standards unreasonable.” (“see court”)
“stonewall” without cause position you probable *17 mere
no in the the beyond belief existence of a defense. Such conduct goes (See Jones of It of ethics.
breach contract. offends notions business accepted rem- (1976) 635].)
v. Abriani
of tort
edies situation to intrude or contracting reasonable of the
tiotiship upset parties. expections that case, was to the facts of this the instructed
Turning jury law a cov
“where a contract been the binding upon, implies agreed [has] contract, doing of
enant that neither will the existence since deny party
so the realization violates to legal prohibition against doing anything prevent of the of the contract.” the promises performance Standard, to jury allowed the
According erroneously this instruction valid if it denied the existence of a
hold Standard liable found that Standard
contract, bad was in faith. good of whether that denial regardless course, his
Of “it is obligor dispute not a tort a contractual 83 (1978) under America (Sawyer v. Bank contract” [a] un 135, 623]) if the is honest and
Cal.App.3d Cal.Rptr. dispute [145 Ins. Co. (See in Western National
dertaken faith. Fletcher v. Life (1970) 78, 286].) Similarly, A.L.R.3d [89 faith, binding
it in existence of a is not a tort for one the deny, party
contract. of a binding
Since Standard’s denial the existence faith, trial erred have the court
would not been tortious if made in good this decide whether necessary to so the It is instruct then
failing jury.
error that the be reversed. judgment requires VI, that error provides
Article section 13 of the California Constitution reviewing when the only the shall be for reversal instructing jury grounds evidence,” cause, the
court, including “after an of the entire examination In inter of justice.” in “miscarriage
concludes the error has resulted 13, court as used in section justice”
preting phrase “miscarriage of jus ‘miscarriage
has formulated the test. general following “[A] of the court, ‘after an examination
tice’ should declared when the only evidence,’ reasonably cause, is is of the including ‘opinion’
entire have would more favorable to the appealing a result
probable (1956) Watson (People reached in the absence of error.”
been 243].) updn based “necessarily P.2d The test []
Cal.2d [299 otherwise rather than mere probabilities upon possibilities;
reasonable (Id., at would be defeated.”
entire of the constitutional provision purpose
p. likelihood also stated terms
The test reversible error has been v. Harnisch (See Henderson
that the instruction misled improper jury. 670; Cab Co. v. Yellow Butigan 12 Cal.3d at
feger Corp., supra, 1].) While
49 Cal.2d 660-661 P.2d 65 A.L.R.2d erro effect
there is no formula for precise measuring prejudicial “(1) instruction, degree be considered:
neous factors following may [citations]; respon whether
of conflict the evidence on critical issues mis instruction’s
dent’s to the have contributed argument jury may [citation]; (3) rereading effect requested whether
leading jury *18 [citation]; the of evidence
erroneous instruction related [citation] [citation]; the of other instruc
closeness of the effect jury’s verdict University in (LeMons Regents
tions the error remedying [citations].” 355, 582 P.2d (1978) 21 Cal.3d of California 946].) in case,
In the evi there a considerable of conflict degree of a
dence on the the contract issue of whether Standard denied existence the hand,
in bad faith. evidence from which On the one the record contains inferred could in bad faith and without
jury have that Standard acted of a binding
reasonable in it belief its when denied existence position The in which they
contract. of the denials and circumstances timing at cynically
were made would Standard was the conclusion that support to avoid both for
tempting nonperformance performance binding.
contractual which it to be obligations recognized privately hand,
On the other from which Standard offered evidence conflicting could stren-
jury argued have concluded that it acted in faith. Standard binding that never viewed as a
uously the October document ele-
contract since it believed essential that the document did contain and, Hence, therefore,
ments appli- failed to the statute of frauds. satisfy
cation a finding first five factors identified LeMons supports
of prejudice. to
The second LeMons arguments factor concerns the effect Seaman’s In two Seaman’s made least jury. argument, his counsel for closing in-
statements effect of the may misleading which have contributed to the First, to
struction. he told the that it award punitive damages should jury
teach Standard with that can’t threaten endless expensive people “[y]ou that if That’s an was not told Standard
litigation. unjust hardship.” jury existed, refuse right
believed faith that contract Standard had to no litigate
to to to force Seaman’s to the existence of contract and stipulate Second, rebuttal,
its claim. in his attorney acknowledged However, he had
Standard order. right February supply appeal
added that if Standard appealed “erroneously, vexatiously harass—and
doesn’t think anybody that that was the motive Seaman’s— regard
then they pay It is not had piper. say they right.” sufficient
(Italics added.)8
These reinforced the arguments effect of the instruction. Both misleading
statements suggested Standard could be liable held ex- denying
istence of the if the denials were shown to erro- subsequently
neous, without any for a bad requirement faith. finding
Seaman’s arguments also included other statements aimed at persuading
the jury that the denials were in fact Both in made bad faith. his opening
statement and his closing counsel for Seaman’s stressed certain argument,
evidence which he claimed established that Standard had believed prior
its denials that a binding contract existed.
The evidence in Bodnar, was the question Ernest deposition testimony
an independent financial consultant. Bodnar’s firm was hired City
Eureka to evaluate Seaman’s financial and to the solvency ability rent pay evaluation,
under the proposed facility lease. In the course of the Bod- port
nar became convinced that Seaman’s as a tenant turned on acceptability 11, 1972,
whether the October letter constituted a firm commitment by
Standard to supply Seaman’s with fuel on set in the terms forth the letter.
Bodnar MacDonald, official, testified that he Mr. a Standard telephoned
to verify MacDonald, this fact. After with it his speaking was understanding
that Standard to intended with the of terms the letter. Bodnar also comply
testified that he had relied in on the conversation favorable a preparing to the
report city the of a Seaman’s prospect tenancy.
In his closing Seaman’s returned to this to argument, attorney testimony that
argue Standard knew before its it had binding denials that a
with Seaman’s.9 8The latter of argument regarding statements were made in the of the cause action course However, for intentional with suggestion interference contractual relations. the Standard that could be held liable if appeal—the binding the basis of its lack of a contract- administrative
turned out merely equal to be to applied erroneous with force the cause of action for breach implied of the dealing. covenant of faith fair point 9At one in argument, attorney suggested produce his failed to Seaman’s that Standard
MacDonald trial recognized subsequent because it his that affirmance denial extremely existence of the contract unexplainable damaging with Seaman’s was Stan jury dard. The says, was told that Bodnar ‘I “Mr. ... called MacDonald and verified him that Standard who Any had a deal.’ denial of that? This the same MacDonald three is [Seaman’s], year saying four months or a later ‘We never had a deal .... We’ll ’ fight you highest Why you to the court the land. It’s the same didn’t see MacDonald. de- Standard’s the jury
The Bodnar have testimony persuaded might However, regard- Seaman’s arguments
nials were fact made bad faith. before jury effect did not inform the the of that
ing testimony Thus, not did they
could be a of bad faith was imposed, required. finding made of other statements tendency
serve counteract erroneous instruction. effect of the
attorney reinforce misleading the jury is whether
The third factor in measuring prejudice considered related evidence. or of the erroneous instruction
requested rereading
Here, all of causes written instructions on jury that the requested on the The instructions
action be left with them their deliberations. during faith and fair of action covenant of good
cause for breach of the implied record Furthermore, from the were not it is clear out. singled the specific duty
whether the instruction on included the erroneous request result, the jury’s
not to As a deny binding existence of a contract. determination of little instructions is assistance
request
prejudice.
However the also later withdrew—for jury made request—which noted, was testimony the Bodnar As
rereading testimony. previously
closely related to the instruction. subject matter the erroneous effect,
For re- purposes prejudicial instruction’s determining
traction of the is even more than the itself. request significant request
record fore- reflects the court and following colloquy jury between re-
man: of Mr. Bodnar asked have the testimony “The Court: [Y]ou read, or alleged certain about his state mind and portions phone about
call made Mr. MacDonald. The been daily typed have transcripts up, Jury
the court will that of reporter you testimony, read to the portion [f] Honor, we need that Flohaug: Your don’t think this point I Foreman I that we We but don’t think had talked about it portion requested, prior, [t]
it is any longer necessary to our train of it.” thought jury
The for a that the request testimony suggests Bodnar rereading tried when it subse- to decide whether Standard acted bad faith
initially However, fore- denied the of a contract.10 the existence
quently binding
that Mr. MacDonald? I would to have seen him in this courtroom.” like rebuttal, jury testimony, telling again In his counsel for the Bodnar stressed got a says, that “Bodnar a deal. We’ve called MacDonald and MacDonald ‘Yes. We have deal . . . .’” firm request might solely question 10The have directed of whether also been threshold
binding jury had in order to reach question had been The to resolve that formed. verdict, only good implied on the cause of for of faith and action breach of the covenant However, dealing, fair but on the for at the same also cause of action breach of contract. requested testimony, jury request time that it the Bodnar which establishes made another
man’s of retraction with his that Bodnar’s request, together explanation
testimony about the discussion with was no longer “necessary MacDonald train of jury’s] [the indicate concluded that no thought,” jury
finding Thus, bad faith was the retraction of the required. sup- request Standard’s
ports contention that the effect of the erroneous instruction was
prejudicial. nine of the
Only twelve for jurors concurred in verdict Seaman’s on
the cause of action for breach of the covenant of faith and fair implied Here,
dealing. as in Robinson Cable v. Cal.2d 428 [11 929], 359 P.2d fact that the bare number of only “[t]he
jurors to reach a required verdict the verdict for lends agreed upon [plaintiff]
further to the support the erroneous instruction was the probability
factor which the scales in tipped (Accord favor.” v. [plaintiff’s] LeMons
Regents 877.) University California, supra, 21 Cal.3d at p.
Finally, Thus, none the other instructions remedied the error. each of five factors which have been considered in the effect of an measuring
erroneous instruction to the same conclusion. points
“Where it seems been probable verdict have jury’s may based on the erroneous instruction and this court prejudice ‘should appears ” Cable,
not speculate (Robinson the basis of upon the verdict.’ v. 428;
55 Cal.2d at Henderson Harnischfeger Corp., supra, Cal.3d Here,
p.at it seems that the have jury may probable imposed on Standard as a result of the trial court’s failure to instruct as to bad faith requirement. Accordingly, in favor of Seaman’s judgment
for breach duty good faith and fair dealing must reversed.
V. The judgment favor of Seaman’s for breach of contract is affirmed. for judgment intentional interference with contractual relations and
breach of the duty faith and fair reversed11 directions
to conduct further consistent with this proceedings opinion.
BIRD, I, C. J. concur II and III of the court’s sections opinion. I
However, I dissent in from section IV. A should not part contracting already
that it binding had reached firm of That a decision the existence a contract. request read: “‘We took or not was a a vote determine whether the 10-11-72 letter ” contract. Do anywhere?’ we have record this judgment 11Reversal for of on the for actions intentional interference implied good dealing
breach of the of covenant faith and fair makes consideration of Sea cross-appeal damages unnecessary. man’s from the remittitur of punitive itself to shield in order the existence of valid deny
be able to holds that court Today, for breach of that contract.
from liability to acknowl- However, it refuses such conduct. will lie in tort against
action analyzing decisions past this court’s its holding compelled
edge court This dealing. fair faith and of covenant of scope implied area. in this authority decisional from its own
should not continue to retreat forthrightly court should that this
I because I believe also write separately circumstances, of con- a breach that, under certain
recognize principle covenant. of implied for breach cause of action
tract tort may support I. covenant of the implied that a breach Over 25 this court held years ago, (Ma- of action. a tort cause rise to may give faith and fair (1958) Ins. Co. ante, 768; Traders General Comunale v.
jority opn., Ins. 883]; Security 198, Crisci Cal.2d 654 P.2d A.L.R.2d [328 173].) Since 426 P.2d (1967) Cal.Rptr.
Co. 66 Cal.2d [58 duty of that
time, defining scope of law has body developed substantial and punitive measurement compensatory
with criteria for the award and (1979) 24 Co. Omaha Ins. (See, v. Mutual e.g., Egan
tort damages.
Ins. Ex-
141];
Farmers
Neal v.
P.2d
Cal.3d 809
Cal.Rptr.
[169
389]; Silberg v.
Cal.Rptr.
Cal.3d 910
change
[148
California
1103];
711, 521 P.2d
(1974)
Life 480, 510 Cal.Rptr. Cal.3d 566 v. Aetna Ins. Co. Gruenberg (1975) 48 Cal.App.3d Title Ins. Co. 1032]; Jarchow v. Transamerica
P.2d 470].)
917 [122 breach of the implied that a
California has not been alone recognizing many in tort. The courts
covenant rise to a cause of action may give covenant. breach of this
other states have tort for the recovery allowed a Covenant Good (See Kornblum, Implied Recent Cases Interpreting 411, 431-432, 50 [collecting fn.
Faith Fair Def.L.J. Dealing (1981)
cases].) of insurance the context taken
This has development place primarily limited Howgvciv-this-eourt or-implie.dly
contracts. has never -expressiy.
tort action to insurance cases.
Moreover, availability courts have expressly recognized California (See generally, contexts. breach of the covenant in other
a tort for recovery Breach Bad Faith Jurika, the Tort & Standards Limiting
Louderback *22 in v. Tameny (1982) 187.) For example, Contract 16 U.S.F. L.Rev. of
776
Atlantic
(1980)
839,
Co.
court acknowledged that a action of tort for breach possibility covenant
implied was area of applicable employment contracts. court Tameny noted that California cases have held that a “past
breach of this implied-at-law covenant in tort well sounds as as con- ” (Id., 179, 12, tract. cue, at fn. p. added.) italics Following Tameny
two recent cases the Court of that a Appeal have tort cause recognized
of action for of the breach of faith and fair will duty good lie Airlines,
outside the (See, insurance context. Cleary v. e.g., American Inc.
(1980) 443, 839, 1330]; Cal.App.3d 610 P.2d Wag- Cal.Rptr. [164
ner v. 27, Benson 516]; cf. Glen- Cal.App.3d Cal.Rptr. [161
dale Fed. &Sav. Loan Assn. v. Marina Dev. Heights View Co. 101, 135,
Cal.App.3d 802].) fn. This case raises this issue should be resolved.
When determining what cdSduct breach constitutes tortious of duty faith and fair good first dealing|ycourts consider the “reasonable parties’
expectations” the nature of their their concerning agreement and rights Co., (Jarchow
responsibilities thereunder. v. supra, Transamerica Title Ins. 941.) p. ‘“Good faith or enforcement of a performance faithfulness to an emphasizes common and consis agreed purpose
tency with the justified expectations (Neal the other . . . .’” v.
Farmers Ins. Exchange, supra, 21 Cal.3d at fn. those p. Once
“justified established, are expectations” faith” “good requires parties to act "reasonably" in light of those expectations.
Past cases which have a tort of action for recognized cause breach
covenant In emphasize “reasonableness.” v. Mutual Omaha Ins. Egan Co., supra, 24 Cal.3d at examined the court first both example,
the motivation and of in- expectations obtaining insured policy
surance. In of those held cov- light expectations, the court implied
enant imposed duty the insurer the foundation thoroughly investigate
of an insured’s claim before it and in “reasonably could deny faith
payments (Ibid., its insured . . added.) . .” italics Breach of that duty (Ibid.)
awas tort. Co., in Crisci
Similarly, Security Ins. 66 Cal.2d at page
the court noted that “one the usual which an insured receives methods under a with-
protection insurance settlement claims policy Therefore,
out . . litigation duty . .” an insurer breaches the faith concluded,
and fair dealing, “unwarrantedly court when it refuses an *23 of the most reasonable manner of disposing where
offered settlement the (Id., added.) And, at italics
claim is the settlement.” by p. accepting Co., the duty Aetna at supra, Ins. Cal.3d Gruenberg page
in v. “a not to withhold duty in faith was held to include fairly good
act Neal added; see also (Italics under a policy.”
unreasonably payments due 920; Silberg v. Farmers Exchange, supra, Ins. Cal.3d at p.
v. California Co., “the where Ins. supra, Cal.3d at 460-461 pp. [tort
Life the claim of the unreasonably
insurer and in bad faith withholds payment
insured,” added].) emerges faith conduct italics The standard of good act reasonably
from these both must decisions contracting parties the discussion (See generally of the of the other.
light justified expectations 1, 27-32 Austero v. National Cas. Co. 84 Cal.App.3d 623].) by implied promise of the nature extent precise duty imposed therefore, contract, any particular depends faith and fair good (Egan of the contract. and the
upon purposes expectations parties Omaha, v. National Cas. 818; Mutual Austero supra, 24 Cal.3d
v. at p. Co., supra, 27.) duty extent of the varies While the p. every contract,
from contract. contract itself inheres duty ordinary by
Insurance contracts have several characteristics not shared contracts into For consumers example,
commercial entered corporations. such contracts obtain a but
purchase advantage, not to commercial protect Omaha, Mutual Egan (See
themselves against calamity. Thus, 819.)
Cal.3d at relation- “special insurance contracts create a may (Id., 820.) between insurer and insured. These characteristics
ship” at p. contracting parties, of the
undoubtedly help shape justified expectations
and, therefore, duty determine the nature and extent of help id., (See
faith between them. at p. characteristics,
In lack the expectations commercial contracts which those of insurer and differ from those purposes parties necessarily Thus, requirements
insured. are faith a.commercial iir
different those require- than the on an insurer. While requirements imposed ihéy~dejinítély coñté^f,
ments are a cómmerciaí strmgehtTn probably' [ess ~~ exist. notion very
Certain from so basic to derive expectations assumptions parties. Fore-
of a contract are all they by virtually contracting shared breaching compensate most that a will these is among party expectation
the other failure perform. for losses caused breaching party’s turn, supports equally funda- of contract
nrhe~avaiIaMity damagesTin
mental and, that is assumption situations, breach ac- foreseeable most
ceptable possibility.
Indeed, will, may that breach at con- assumption parties risking only
tract damages, is one of the cornerstones of contract is law. “[I]t contracts, of the law to
policy adherence to but compel each only require
party choose between in accordance with the contract and performing
compensating the other for from a failure to party injury resulting perform.
This view contains In economic cases it un- important insight. is many
economical to induce the of the contract after it has been completion (Posner,
breached.” Economic (1972) 55.) of Law In most Analysis p. contracts,
commercial economic of this leads the recognition reality parties breach, accept possibility of their right since recover particularly
contract damages provides adequate protection.
For example, one to a contract decide to breach if it concludes may
that the market will for bring a its than set forth higher price product
in the In contracts, contract. commercial risk of such a breach is widely and
recognized “[Ijntentional, willful, generally induced accepted. selfishly of contract often an and anticipated, expected encouraged
breach[es] [are] reality of (Diamond, commercial life.” The Tort Bad Faith Breach of of When, All, Contract: At It Beyond Should Be Extended Insurance Trans- If (1981) 425, 438.)1
actions? 64 Marq.L.Rev.
When the breaching faith party acts bad to shield itself from entirely for however, of faith fair damages, duty (See Diamond, violated. The Tort Bad Faith Breach Con- of of When, All, tract: At It Should Be Insurance Beyond Extended Transac- If tions?, 447; Keeton, Marq.L.Rev. Liability see also Insur-
ance and Responsibility Settlement 67 Harv.L.Rev. for fn. faith is frequently defined as “the intentional disregard [bad (other
financial interests of the in the contracting party) hope escaping . . full .”].)
. . responsibility .
This conduct violates type nonbreaching justified expecta- party’s
tion will that it be able to for losses in the event of a recover its damages it, put morning 1As one commentator learn “Every the businessmen America to their chagrin suppliers they they will want delivering their not be what want when it. time, count, goods will not arrive on will they only be short and the ones in stock are green. If enough, daily avocado that were not bad the same businessmen discover that their (Rosett, pay
customers will not take they for what the businessmen think ordered.” Promises, Contract Obligation and the Conditions Communicate Performance: UCLA L.Rev. Otherwise, acceptance That be expectation protected.
breach. must as a whole society parties breach possibility contracting
may seriously undermined. denial of bad faith recovery
There is no tort permitting danger breach of make every contract will
the existence a valid commercial in the commer- First, breaches
contract a tort. of contract majority vast *25 of faith conduct.
cial context do not involve this bad type “ ‘ of
Second, if the cause “it in this state that well established action [is] contract, is the action ex a in the
arises from breach of a set forth promise
contractu, out the contract but breach duty growing it arises of if from of ” ’ (Italics added.) it is ex delicto. v. Atlantic (Tameny [Citations.]” Richfield Co., Thus, is for 175.) “[liability 27 at tort supra, p. imposed Cal.3d . . contract, duty bad to meet the . faith breach of the but for failure (Crisci within of faith and fair dealing.”
included the covenant implied good Co., 430, added.) There are Security
v. Ins. 66 Cal.2d at italics supra, p. in tort sound both
many situations in which defendant’s actions may in some situations may
contract.2 The fact that remedies exist overlapping
does not make breach of contract a tort. every an for contract
Similarly, any liability damages may avoid attempt from or be the indistinguishable
involve a discrete of conduct it may course injured party
breach of contract itself. “Breach of the covenant the provides ’ faith, the notwithstanding complained a tort action for ‘bad that acts Co., Ins. (Crisci Security
of of v. also constitute a breach contract. may 430; Ins. Co. National
supra, 66 Cal.2d Fletcher v. Western Life (Jarchow v. [(1970)] 78.)” 10 Tran- Cal.Rptr. Cal.App.3d Co., 940.)3
samerica Title at supra, Ins. Cal.App.3d p. expec-
It is a of that the reasonable well-established law principle parties’ a tor- the conduct constitutes
tations should determination of what govern (See fair dealing.
tious of faith and breach the covenant of implied good Co., 818; at Austero v. Egan p. v. Mutual Omaha Ins. Cal.3d supra, of Co., of 27-32.) that Application
National Cas. supra, Cal.App.3d pp. fair dealing of faith and fully good is warranted here.
principle duty Co., case, (Crisci remedy. Security Ins. 2In which is elect the plaintiff free to
was violated because a avoid all for a attempted faith,
breach in bad denying, very existence the contract. Such
conduct violates the nearly universal expectation that will injured party for compensated losses caused failure breaching party’s per-
form. tort This remedy was recognized by this court its earlier decisions
involving covenant faith implied dealing. and fair Those deci-
sions should be the basis the holding here.
n. A breach contract may also constitute a tortious breach covenant faith and fair in a situation where the possibility
contract will be breached is not reasonably expected by accepted
parties.
This could if the of happen, at time the example, contracting, parties that a he indicate breach would
expressly understanding impermissible. th^ir Or, it could if it were clear from the of the contract happen inception that
contract would be or damages unavailable would be compensa- inadequate circumstances,
tion for a breach. Under these a breach the contract could
well constitute a tortious breach faith and fair duty good dealing. and
Insurance are employment contracts of the good examples latter sit- that,
uation. Both the insurer and the insured an know once has injury
occurred, the insured or the insured’s beneficiary will suffer great hardship
if benefits are Thus, not paid a promptly. breach contract the insurer by
will almost a certainly cause of harm for which contract would type damages Insureds, therefore,
be inadequate. are in justified their in- expecting that
surance contract will not be Similarly, breached. breach of an employment can, situations,
contract by employer some cause severe harm to an
employee’s and reputation ability find new The harm caused employment. Thus,
cannot be an undone award of back be entitled pay. may employees expect their contracts will not or be breached for frivolous improper
reasons. that,
These are just a few If show under plaintiff a can examples. contract,
circumstances characteristics he justified of his was expecting breach,
that the other would not then a breach party voluntary
could well constitute a violation of the to deal faith. duty fairly record,
On this there is evidence to the conclusion ample support did
parties’ reasonable not include the breach. expectations possibility
Standard was informed that needed a com- repeatedly “binding ” on the need was emphasis
mitment. there Throughout negotiations, Seaman’s and between relationship
for such a and for a stable commitment and, extent, lease, to some
its Standard knew that Seaman’s supplier. these circum- factors. Under
entire marina on these development depended
stances, justified the parties’ expec- would be to conclude that reasonable
tations did not include the breach. possibility faith action, of bad should
Under cause of no independent showing not reasonably Where the of breach was expected required. possibility contract, breach of an acknowledged
at the of the inception voluntary faith.
contract is in a to deal fairly itself violation duty refusal under the
Standard’s breach did take the form of a to perform yy Instead, of an Standard denied existence
terms contract. acknowledged if refused stipulate
of the contract to the agency subsequently federal
to its This to a denial. Those denials-com/^ existence. action was tantamount (1975) 15 Johnston (Taylor
stituted of the contract. breaches anticipatory
Cal.3d-130,
[
In this will not support fact that breach occurred setting, simple as a existence without a of bad faith. Just denial
recovery showing
of a only upon finding contract the basis for tort binding provides ante, 769-770), faith breach
of bad (majority opn., pp. predi theory of unex recovery
cated such a denial tort upon will support *27 and is to have been only breach if the denial found
pected unacceptable America, (See
made in bad Bank 83 supra, Cal.App.3d faith. v. Sawyer Co., 139; 10 Fletcher v. National Ins. at p. supra, Western Life 376.) m. The trial failed to bad in court include a faith its instruction requirement
on the of a This duty to refrain from existence contract. denying binding will if was made in Recovery
failure constituted error. lie tort the denial
bad faith. did not deny evidence at trial showed that Standard undisputed to
a contract existed until it was ordered the federal government after time, fuel assured Sea- supply continually to Seaman’s. Until that Standard that, be
man’s but for the federal the contract would honored. regulations, to and complete
Standard fostered this obtain idea helping regulations.
forms to secure from the federal necessary relief evidence that it
These actions on the of Standard part strong constitute also knew
recognized open that a contract existed. Standard binding of its
repudiation obligation to would perform constitute a breach of contract
for which it would be liable It would that Standard damages. appear
believed that a to decision not rely contract and on repudiate
regulations to justify would all nonperformance effectively shield from
liability.4 Clearly, shield, the federal using as a Standard regulations hoped
to avoid both contract, performance and nonperformance
whose existence it could not deny.
An examination of the between the defense relationship supervening
legal and the impossibility duty faith and fair is good instructive.
A excused, contractual is duty discharged, is when performance per- statute, ordinance,
formance is rendered ad- impossible by change or
ministrative (See Code, after the regulation formed. Civ. § 1; Witkin, (8th Contracts,
subd. 1973) of Cal. Summary Law ed. § 517.) However,
p. the covenant of faith and fair cer- dealing imposes
tain duties on a if that contracting party seeks its party justify nonper-
formance this basis.
First, the party’s will be excused if it has obligation perform only
diligently attempted (McNally contest of the new law. application
Moser
555, 561,
to seek zoning status]; or permit, use special nonconforming Plazas,
Pennsylvania State Shopping Inc. v. Olive Va. 372, 375-376,
S.E.2d variance].) A.L.R.2d to seek [duty zoning 1016]
“One or may rely on where the illegality invalidity doing [which said to forbidden be made may reasonably legal through
is] possible Moser,
administrative or action.” judicial (McNally v. A.2d at who his seeks justify “[A] non-performance impractic [as
able due to the of governmental have operation regulation must order]
observed the faith fair duty dealing ... where attempting, b; Contracts, to avoid its
appropriate, (Rest.2d application.” com. § id.,
see a, 4.) also com. illus. §
Further, the faith and fair duty imposes obligation to refrain from or contracting party initiating the enforcement facilitating
of an or (See order that would render Web- regulation illegal. performance
ster (1977) v. Southern Cal. First Bank Nat. 68 416 Cal.App.3d [137 (c) 4Subdivision provides section 755 of United States Code be that shall “[t]here any brought
available as defense to action State any for breach of contract Federal or sell, oil, court arising delay provide, exchange out of or failure to or offer for sale or crude oil, any residual petroleum product, delay fuel or refined that failure was caused such solely by compliance provisions chapter any other regulation or with the order chapter.” under this Co. 293]; v. Hutchinson Corp. National Pave.
Cal.Rptr. Moser, at 122 A.2d 534]; supra, McNally P.2d cf.
Cal.App. [22 567, 560-561; Cal.App.2d Colwell Co. v. Hubert
pp. to affirmative duty to the 753].) This is a negative duty corollary circum- law where the
seek an from the of such a exemption application
stances it. permit case, after the
In this were promulgated federal fuel allocation regulations to had formed. The regulations appeared between the been parties to to fuel duty Standard from its contractual
prohibit supply performing it would Seaman’s that by assuring
Seaman’s. Standard responded initially be could if the government
be ahead with the contract federal willing go with the Standard Seaman’s order.
persuaded change supply provided Seaman’s helped
forms relief from the necessary regulations to secure
fill them out. with its to take in this Standard
By assisting duty way, complied of its
whatever were to make the necessary performance reasonable steps
contractual effort of was successful obligations legal. joint parties
and resulted in of a order supply the issuance the federal agency
authorized Standard to fuel to Seaman’s. supply
In It did reaffirm Standard reversed its response, abruptly position.
its forward with the contract if willingness previously expressed go Instead,
barrier Standard ap- could removed. posed by regulations By order it had Seaman’s to obtain.
pealed supply helped appealing
order, actively ap- Standard breached its to refrain from duty seeking of its would excuse contractual
plication regulations performance Bank, (Webster Nat. v. Southern Cal. First
obligations. successful, authorizing
Standard’s was and the order it to supply appeal
Seaman’s was Standard was delighted, apparently believing rescinded. from As the
the decision shielded it contractual Seaman’s. any demonstrates, how- legal discussion
preceeding applicable principles
ever, if the duties would not have been discharged Standard’s contractual had there.
chain of and reversals order ended appeals regarding supply Stan-
The decision order was the direct result of rescinding supply
dard’s its refrain duty Standard breached appeal. By taking appeal, *29 Accord-
from actions that would make its legally impossible. performance Standard from renewed of the
ingly, regulations prohibit application con- with fuel not have Standard’s
supplying discharged would
tractual duty. Seaman’s would have been entitled to recover contract dam-
ages from resulting Standard’s breach of that even Standard’s duty, though
only alternative to breach at would point have it to violate the required
federal regulations.
The chain of appeals reversals did not with the decision rescind- stop order,
ing supply however. Seaman’s this time appealed again, relying
on the existence of its supply with Standard as the basis for an to the
exception regulations. Standard of an opposed granting exception.
For the first time in its with the dealings federal agency regarding supply
order, Standard now contended that no contract existed between the parties.
Despite objections Standard, raised by Seaman’s obtained a favorable
decision. Under the decision, terms of the Standard would be ordered to
fulfill its Seaman’s, supply obligations that the federal provided agency
received a of a copy court decree the existence of a valid con- establishing
tract between the parties. Seaman’s asked Standard to as to the stipulate
existence of a contract. Standard refused.
Standard’s denial of the existence of the contract to the federal agency
and the refusal to subsequent were stipulate breaches anticipatory Johnston,
contract. (Taylor v. supra, 137.) Cal.3d at Neither the p.
breach nor the underlying resistance an assertion of contract liability
a tort if (See America, undertaken in faith. Sawyer v. Bank supra, 139; Co., at Cal.App.3d p. Fletcher v. Western National Ins. Life case, however, In did Standard deny
a contract existed until it had been ordered the federal government fuel to Moreover,
supply Seaman’s. Standard did not make its forth- denials as a
rightly defense to an action for breach contract. It used them as a card in its
trump final to avoid all The attempt nonperformance. and the
timing intended effect of both denials tend to establish that strongly
they were made bad faith.
I would affirm the for Seaman’s for judgment breach contract and
breach of the faith and duty fair dealing. petition plaintiff for a was denied appellant rehearing Bird, J.,
November 1984. C. was of the that the should petition opinion
be granted.