Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-cand-3_04-cv-01523/USCOURTS-cand-3_04-cv-01523-3/pdf.json

Nature of Suit Code: 190
Nature of Suit: Other Contract Actions
Cause of Action: 28:1441 Petition For Removal--Other Contract

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United States District Court

For the Northern District of California

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United States District Court

For the Northern District of California

IN THE UNITED STATES DISTRICT COURT

FOR THE NORTHERN DISTRICT OF CALIFORNIA

CITY AND COUNTY OF SAN FRANCISCO,

et al,

Plaintiffs,

v

CAMBRIDGE INTEGRATED SERVICES

GROUP, INC, et al,

Defendants.

CAMBRIDGE INTEGRATED SERVICES

GROUP, INC,

Third-Party Plaintiff,

v

INTERCARE INSURANCE SERVICES,

INC,

Third-Party Defendant. /

No C 04-1523 VRW

ORDER

On April 2, 2007, the court granted Cambridge Integrated

Services Group, Inc’s (Cambridge) motion for leave to file a motion

for reconsideration of the court’s November 29, 2006 order

dismissing Cambridge’s third-party complaint against Intercare

Insurance Services, Inc (Intercare). Doc #81. The court found

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that Cambridge had fully briefed its motion for reconsideration.

The court gave Intercare an opportunity to submit supplemental

briefing in opposition. Id at 7. The matter is now fully briefed. 

For reasons discussed below, the court GRANTS Cambridge’s motion

for reconsideration and DENIES Intercare’s March 20, 2006 motion to

dismiss.

I

The parties are familiar with the facts and legal issues

underlying Cambridge’s motion, and the court need not fully recite

them here. Suffice it to say that Cambridge impleaded Intercare

through a third party complaint that asserts a single claim for

equitable indemnity. Doc #43. Intercare moved to dismiss the

third-party complaint arguing that Cambridge’s claim was solely

based on Intercare’s alleged breach of contractual obligations and,

accordingly, that Cambridge could not assert a tort duty owed by

Intercare as required for equitable indemnity. Doc #47. In its

order granting Cambridge’s motion for leave to file a motion for

reconsideration, the court preliminarily found that Cambridge might

be able to base a tort claim against Intercare on a theory of

negligent performance of a professional services contract under

Eads v Marks, 39 Cal 2d 807 (1952) and North American Chemical Co v

Superior Court, 59 Cal App 4th 764 (1997). Doc #81 at 7. The

court noted, however, that Intercare did not have sufficient

opportunity to respond to Cambridge’s “professional negligence”

argument. Id. Intercare filed its supplemental brief in

opposition to Cambridge’s motion for reconsideration on April 18,

2007. Doc #84.

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II

In Eads v Marks, 39 Cal 2d 807 (1952), the California

Supreme Court reversed an order sustaining a demurrer to a

complaint alleging negligent performance of an agreement between

defendant dairy company and plaintiffs. Plaintiffs sued defendant

for damages for personal injuries suffered by their one-year-old

child because of defendant’s negligence in leaving empty bottles

outside plaintiffs’ house in violation of plaintiffs’ instructions

to leave the bottles inside the house and beyond reach of the

child. The plaintiffs alleged that their letter of instructions

constituted an agreement made with defendant for the benefit of

their child. Defendant argued that, assuming there was a valid

agreement, plaintiffs had no tort cause of action for failure to

perform. The court disagreed:

The same act may be both a tort and a breach of contract. 

Even where there is a contractual relationship between

the parties, a cause of action in tort may sometimes

arise out of the negligent manner in which the

contractual duty is performed, or out of a failure to

perform such duty. Here, the duty of care arose by reason

of the contract, and plaintiff has sued in tort for the

breach of that duty. The contract is of significance only

in creating the legal duty, and the negligence of the

defendant should not be considered as a breach of

contract, but as a tort governed by tort rules. * * *

Where the cause of action arises from the breach of a

contractual duty, the action is delictual notwithstanding

that it also involves a breach of contract. * * * In

situations such as this, there is contractual negligence

or the breach of a primary duty owed to the injured

party, * * *. A tort may grow out of or be coincident

with a contract, and the existence of a contractual

relationship does not immunize a tort feasor from tort

liability for his wrongful acts in breach of the

contract. Contractual negligence ordinarily gives rise

to an action either on contract or in tort, and the

injured party may at his election waive the contract and

sue in tort; or waive the tort and base his action on the

contract alone. In general, however, it has been held

that actions based on negligent failure to perform

contractual duties * * * are regarded as delictual

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actions, since negligence is considered the gravamen of

the action.

Eads at 810-12 (citations omitted).

In North American Chemical Co v Superior Court, 59 Cal

App 4th 764 (1997), a chemical company brought an action seeking

recovery of sums that it paid as damages in settlement of a

customer’s claim that arose from a contaminated chemical product

packaged and shipped for plaintiff by defendant. The court held

that plaintiff was entitled to bring a tort action where the

packaging and shipping contract “imposed upon the [defendant] a

duty of reasonable care in carrying out and performing that

contract.” Id at 776. The court stated:

This court recently endorsed the general rule that where

the “negligent” performance of a contract amounts to

nothing more than a failure to perform the express terms

of the contract, the claim is one for contract breach,

not negligence. However, for over 50 years California

has also recognized the fundamental principle that “

'[a]ccompanying every contract is a common-law duty to

perform with care, skill, reasonable expedience, and

faithfulness the thing agreed to be done, and a negligent

failure to observe any of these conditions is a tort, as

well as a breach of the contract.' The rule which imposes

this duty is of universal application as to all persons

who by contract undertake professional or other business

engagements requiring the exercise of care, skill and

knowledge; the obligation is implied by law and need not

be stated in the agreement [citation].” * * * A contract

to perform services gives rise to a duty of care which

requires that such services be performed in a competent

and reasonable manner. A negligent failure to do so may

be both a breach of contract and a tort. In such a hybrid

circumstance, the plaintiff is entitled to pursue both

legal theories until an occasion for an election of

remedies arises.

Id at 774-75 (citations omitted).

It is noteworthy that the court found that a contract

measure of damages would not result in full compensation for

defendant’s alleged wrongful conduct. Id at 785. The standard for

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measuring contract damages would limit the plaintiff to the

contract price or the market value of the damaged chemical product. 

In contrast, the court found that plaintiff was entitled to tort

damages, which are designed to compensate for all damages

proximately caused by the wrongful conduct. Id at 786.

It is also noteworthy that the court in North American

specifically analyzed the case before it as one involving a

services contract that gave rise to economic loss. Id at 781-85. 

In reaching its conclusion, the court carefully analyzed those

cases applying the economic loss rule, which limits the tort

recovery of economic damages to those situations in which the

economic damages are accompanied by physical harm (personal injury

or property damage). The court distinguished cases involving

defective products, for which the economic loss rule applies, and

those involving defective services, for which the economic loss

rule does not apply. Id at 780-81.

Intercare argues that, following the California Supreme

Court’s decisions in Aas v Superior Court, 24 Cal 4th 627 (2000)

and Erlich v Menezes, 21 Cal 4th 543 (1999), Eads and North

American Chemical are no longer good law for the proposition that a

tort duty may arise out of a contract. Doc #84 at 12. 

Both Erlich and Aas were construction defect cases

brought by homeowners. Erlich involved the issue whether

homeowners who contracted with the defendant for construction of

their home could recover emotional distress damages for defects in

the home’s construction. Id at 558. The court held that a

contractual relationship, without more, is insufficient to support

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an award of damages for mental suffering if the tortious conduct

resulted only in economic injury to the plaintiff. Id at 554-57. 

In Aas, the issue was whether negligence damages were

recoverable for construction defects that violated the Uniform

Building Code. The court found that homeowners could not recover

in negligence from housing developers and contractors for

deviations from applicable building codes and industry standards

that had not yet caused property damage or personal injury or

ripened into involuntary out-of-pocket repair costs. Id at 643. 

The court rejected an argument that recovery of tort damages for

economic loss should be allowed based on North American, holding

instead that, after Erlich, the negligent performance of a

construction contract, without more, does not justify an award of

tort damages. Aas at 643.

The court takes Intercare’s point that these holdings

seem to state a general rule that if damages for economic loss

would be recoverable under a contract cause of action, a similar

recovery in tort for the negligent performance of a services

contract is probably prohibited. See also Neil M Levy, 4

California Torts § 50.05 (Matthew Bender 2006).

The court notes, however, that Eads and North American

Chemical, while distinguished in later cases involving home

construction defects, have not been formally overruled. Indeed,

Erlich acknowledged, citing North American at 774, that the same

wrongful act may at times constitute both a breach of contract and

a tort. Erlich at 551. 

\\

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More importantly, none of these cases – Eads, North

American, Erlich, or Aas – addresses the issue of professional

services contracts as opposed to mere services contracts. While

Erlich states that a claimant is required to plead a tort duty

independent of the contract, Erlich does not address whether

improper performance of a professional services contract gives rise

to an independent tort duty. Aas is similarly silent on this

issue.

The issue was addressed in the case of Loube v Loube, 64

Cal App 4th 421 (1998). The California Court of Appeal held that a

legal malpractice action was not an action “on a contract” and did

not give rise to a right to attorneys’ fees under Cal Civ Code §

1717:

Curiously, there seems to be no case that has addressed

the question of whether an action for professional

negligence is an action “on the contract” for purposes of

awarding attorney fees; at least no party has cited us to

such a case. It is true that, unlike ordinary

negligence, professional negligence breaches a duty that

exists only because the parties have a contractual

agreement, and it has been recognized that an action for

professional negligence constitutes both a tort and a

breach of contract. (Neel v Magana, Olney, Levy, Cathcart

& Gelfand (1971) 6 Cal 3d 176, 181 [98 Cal Rptr 837, 491

P.2d 421].) Nonetheless, we conclude that appellants did

not bring suit “on the contract.” They brought suit for

negligence. “Actionable legal malpractice is compounded

of the same basic elements as other kinds of actionable

negligence: duty, breach of duty, causation, and damage.

The elements of a cause of action for professional

negligence are: (1) the duty of the professional to use

such skill, prudence and diligence as other members of

the profession commonly possess and exercise; (2) breach

of that duty; (3) a causal connection between the

negligent conduct and the resulting injury; and (4)

actual loss or damage resulting from the professional

negligence.” * * * Here, although the parties had a

contractual relationship, and appellant's claim for legal

negligence arose from the relationship between them,

which relationship was founded on a contract, the cause

of action sounded in tort and was no more “on the

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contract” than a claim for breach of fiduciary duty or

for fraud involving a contract. It follows that Civil

Code section 1717 provides no basis for an award of

attorney fees.

Loube v Loube, 64 Cal App 4th 421, 430 (1998). See also Jackson v

Rogers & Wells, 210 Cal App 3d 336 (1989) (holding that plaintiff’s

breach of contract action against his attorney was in essence a

claim for attorney negligence or malpractice which could not be

assigned):

[L]egal malpractice constitutes both a tort and a breach

of contract. Jackson contends his breach of contract

cause of action is different from the norm in that it

alleges intentional conduct caused the breach, rather

than negligent performance. In either case, the modern

trend in analyzing legal malpractice causes of action is

to blur the contract-tort distinction, which has been

found not to be useful in this context. 

Jackson at 349. 

Cases decided subsequent to Aas and Erlich continue to

apply a rule that negligent failure to exercise reasonable care and

skill in undertaking to perform a professional services contract is

a tort as well as a breach of contract. In Moreno v Sanchez, 106

Cal App 4th 1415 (2003), the California Court of Appeal applied

this principle to an action alleging breach of contract, negligence

and negligent misrepresentation against a home inspector. The

parties’ contract provided that any suit on the contract had to be

brought within one year of the inspection. The trial court

sustained a demurrer on statute of limitations grounds. The Court

of Appeal reversed, finding that the delayed discovery rule applied

notwithstanding the parties’ agreement. In reaching this

conclusion, the court rejected defendant’s claim that the

plaintiffs were not entitled to tort damages because a breach of

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the duty of care under a contract was no longer actionable in tort

after Freeman & Mills, Inc v Belcher Oil Co, 11 Cal 4th 85 (1995). 

The court found that Freeman, in fact, supported a contrary view:

In Freeman, the Supreme Court directed “courts should

limit tort recovery in contract breach situations to the

insurance area, at least in the absence of violation of

an independent duty arising from principles of tort law

other than denial of the existence of, or liability

under, the breached contract.” Under the common law the

established rule is the negligent failure to exercise

reasonable care and skill in undertaking to perform a

service contract of this type is a tort, as well as a

breach of contract. 

Moreno at 1435 (emphasis in original). See also Hydro-Mill Co, Inc

v Hayward, Tilton & Rolapp Ins Associates, Inc, 115 Cal App 4th

1145, 1153 (2004) (“Insurance agents and brokers have been held

liable to insureds or applicants for insurance on a number of

theories including breach of contract and professional

negligence.”) Perhaps the most obvious example of professional

negligence in a contractual relationship is legal malpractice,

which needless to say, California courts still recognize. See

Loube, supra; Jackson, supra.

Intercare attempts to distinguish these cases by arguing

that it does not perform the types of services that qualify for a

professional negligence claim. Doc #84 at 1. As stated in the

court’s previous order, however, it would be premature to make such

a determination at the motion to dismiss stage, where review is

generally limited to the contents of the complaint. Doc #81 at 6. 

Cambridge alleges that Intercare was a party to a professional

services contract. The California Supreme Court has not seen fit

to overrule North American or Eads, which hold that negligent

performance of a service contract may be a tort as well as a breach

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of contract. More recent decisions recognize this rule in the

context of professional negligence. Accordingly, Cambridge has

sufficiently pled an underlying tort claim on which to base its

claim for equitable indemnity.

III

For the reasons discussed above, Cambridge’s motion for

reconsideration is GRANTED. On reconsideration, the court DENIES

Intercare’s March 2006 motion to dismiss. The parties shall appear

for a case management conference on July 24, 2007 at 9:00am.

SO ORDERED.

 

VAUGHN R WALKER

United States District Chief Judge

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