Source: https://caselaw.findlaw.com/ca-supreme-court/1773931.html
Timestamp: 2019-04-19 23:27:33+00:00

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Supreme Court of California,In Bank.
APPLIED EQUIPMENT CORPORATION, Plaintiff and Respondent, v. LITTON SAUDI ARABIA LIMITED et al., Defendants and Appellants.
Arthur W. Homan, Bronson, Bronson & McKinnon, Robert J. Stumpf, Jr. and David Eiseman, San Francisco, for defendants and appellants. Jennie M. Crowley, Beverly Hills, Victoria Thomas McGhee, San Francisco, John W. Patton, Jr., Los Angeles, Dilworth, Paxson, Kalish & Kauffman, Cutler & Cutler, Felice R. Cutler and Robert A. Philipson, Los Angeles, as amici curiae, on behalf of defendants and appellants. Hillel Chodos Los Angeles, and Michael A. Chodos, Santa Monica, for plaintiff and respondent.
Can a contracting party be held liable in tort for conspiracy to interfere with its own contract? Following a line of appellate cases, the Court of Appeal answered this question in the affirmative. Our study of applicable precedent and policy yields a contrary answer. We will therefore reverse the judgment of the Court of Appeal.
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 was 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 Varian Associates Inc. (Varian). With Litton's approval, Applied ordered from Varian 11 VA–145E tubes at a price of $67,500 per unit. Applied issued a purchase order to Varian; Varian accepted and acknowledged the order.
Litton subsequently contacted Varian directly and renegotiated the Applied/Varian purchase order, eventually obtaining Varian'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 Varian as a fait accompli.
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 Varian 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.
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.
Conspiracy is not a cause of action, but a legal doctrine that imposes liability on persons who, although not actually committing a tort themselves, share with the immediate tortfeasors a common plan or design in its perpetration. (Wyatt v. Union Mortgage Co. (1979) 24 Cal.3d 773, 784, 157 Cal.Rptr. 392, 598 P.2d 45.) By participation in a civil conspiracy, a coconspirator effectively adopts as his or her own the torts of other coconspirators within the ambit of the conspiracy. (Ibid.) In this way, a coconspirator incurs tort liability co-equal with the immediate tortfeasors.
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 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) 48 Cal.2d 577, 311 P.2d 494, plaintiff was discharged from his position as a professor at Long Beach State College. After obtaining reinstatement following proceedings before the State Personnel Board, plaintiff sued two groups of defendants for malicious prosecution: (1) the “school defendants,” who were agents of the college or the State Department of Education; and (2) the “non-school defendants,” who were not affiliated with those government entities.
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 on 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. (Doctor's Co., supra, 49 Cal.3d 39, 260 Cal.Rptr. 183, 775 P.2d 508; Gruenberg v. Aetna Ins. Co., supra, 9 Cal.3d 566, 108 Cal.Rptr. 480, 510 P.2d 1032; Hardy v. Vial, supra, 48 Cal.2d 577, 311 P.2d 494.) Because a party to a contract owes no tort duty to refrain from interference with its performance, he or she cannot be bootstrapped into tort liability by the pejorative plea of conspiracy.
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) 71 Cal. 163, 11 P. 882; Brandon & Tibbs v. George Kevorkian Accountancy Corp. (1990) 226 Cal.App.3d 442, 455–456, 277 Cal.Rptr. 40; Mendoyoma, Inc. v. County of Mendocino (1970) 8 Cal.App.3d 873, 879, 87 Cal.Rptr. 740 [applying the rule of Hadley v. Baxendale (1884 Ex.) 156 Eng.Rep. 145 to contract damages recoverable under Civ.Code, § 3300]; see also Note, supra, 8 Loyola L.A.L.Rev. at p. 323–328.) This limitation on available damages serves to encourage contractual relations and commercial activity by enabling parties to estimate in advance the financial risks of their enterprise.
The fundamental differences between contract and tort are obscured by the imposition of tort liability on a contracting party for conspiracy to interfere with contract. Whether or not a stranger to the contract induces its breach, the essential character of a contracting party's conduct remains thesame—an unjustified failure or refusal to perform. In economic terms, the impact is identical—plaintiff has lost the benefit of a bargain and is entitled to recover compensation in the form of contract damages. In ethical terms, the mere entry of a stranger onto the scene does not render the contracting party's breach more socially or morally reprehensible. A party may breach a contract without any third party inducement because of personal, racial, or ethnic animus, or for other nefarious or unethical reasons. In contrast, a breach may be the product of naive or innocent misunderstanding or misperception created by the aggressive solicitation of an outsider. In any case, motivation is irrelevant. Regardless of the presence or absence of third party involvement, the contracting party has done nothing more socially opprobrious than to fall short in meeting a contractual commitment. Only contract damages are due.
We agree with Applied's summary of contract law. In its contract with Applied, Varian assumed only the obligation to perform the contract or pay damages for breach. It did not assume the independent tort obligation not to interfere with the performance of its own contract. Accordingly, Varian is legally responsible only in contract, not in tort.
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, 35 Cal.Rptr. 652.) The cases cited by the parties, as well as those disclosed by our own research, 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.
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 are jointly and severally responsible for the ensuing wrong.” (Wise, supra, 223 Cal.App.2d at pp. 71–72, 35 Cal.Rptr. 652.) 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, 254 Cal.Rptr. 211, 765 P.2d 373.) 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.
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.
Justice Sullivan, later on this court, wrote for the Court of Appeal in Wise v. Southern Pacific Co. (1963) 223 Cal.App.2d 50, 74, 35 Cal.Rptr. 652, that a cause of action for civil conspiracy requires three allegations: (1) the formation and operation of the conspiracy, (2) the wrongful act or acts done pursuant thereto and (3) the resulting damage. Nowhere in those three requirements is there a limitation on or any grant of immunity from liability for anyone participating in a conspiracy.
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 of the conspirators had obligations to perform as a contracting party would seem to enhance rather than diminish his culpability.
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.
Shapoff v. Scull (1990) 222 Cal.App.3d 1457, 1465, 272 Cal.Rptr. 480, “․ a party to a contract may under some circumstances be held liable in tort for inducing a breach ․ when a party to a contract has conspired with a third party to breach a contract, the contracting party may be held liable in tort as a coconspirator.” Petition for review denied November 15, 1990.
Manor Investment Co. v. F.W. Woolworth Co. (1984) 159 Cal.App.3d 586, 594, 206 Cal.Rptr. 37, “․ a contracting party may be held liable for conspiring with third parties to interfere with his own contractual relation.” (Italics in original.) Petition for review denied October 31, 1984.
Rosenfeld, Meyer & Susman v. Cohen (1983) 146 Cal.App.3d 200, 225, 194 Cal.Rptr. 180, “․ while a party to a contract may not be held liable in tort for interfering with his own contract by breaking it, he may be held liable in tort for interference with his own contract if he conspires with a third party to breach it.” (Italics in original.) Petition for hearing denied November 9, 1983.
Owens v. Palos Verdes Monaco (1983) 142 Cal.App.3d 855, 872, 191 Cal.Rptr. 381 [citing with approval Olivet v. Frischling (1980) 104 Cal.App.3d 831, 838, 164 Cal.Rptr. 87], “․ it is accepted, at least in California, that an action for conspiracy to induce a breach of contract will in fact lie against a party to the agreement․” Petition for hearing denied October 10, 1983.
Owens v. Foundation for Ocean Research (1980) 107 Cal.App.3d 179, 185, 165 Cal.Rptr. 571, “An action for civil conspiracy to induce breach of contract will lie against a party to the contract․” Petition for hearing denied August 27, 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.
1. We intimate no view as to the legal sufficiency of Applied's claim for lost profits.
2. Contrary to Applied's suggestion of procedural irregularity, Varian 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) 11 Cal.3d 908, 918, fn. 7, 114 Cal.Rptr. 622, 523 P.2d 662.) Moreover, as Applied itself concedes, Varian's objection to submission of a conspiracy theory was preserved in accordance with section 647 of the Code of Civil Procedure, which provides for automatic exceptions to jury verdicts and instructions.
3. 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.
4. 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, 223 Cal.App.2d at p. 72, 35 Cal.Rptr. 652.) The rule “derives from the principle that ordinarily corporate agents and employees acting for or on behalf of the corporation cannot be held liable for inducing a breach of the corporation's contract since being in a confidential relationship to the corporation their action in this respect is privileged.” (Id. at pp. 72–73, 35 Cal.Rptr. 652.) We have endorsed and applied the agent's immunity rule as expressed in Wise (e.g., Shoemaker v. Myers (1990) 52 Cal.3d 1, 24–25, 276 Cal.Rptr. 303, 801 P.2d 1054; Gruenberg, supra, 9 Cal.3d at p. 576, 108 Cal.Rptr. 480, 510 P.2d 1032; Doctor's Co., supra, 49 Cal.3d at p. 45, 260 Cal.Rptr. 183, 775 P.2d 508). Nothing in this decision is intended to abrogate or impair the agent's immunity rule.
6. See, for example, White v. Land Clearance for Redevelopment Authority (Mo.Ct.App.1992) 841 S.W.2d 691, 695 (“A party to the contract cannot be held responsible for inducing himself to commit a breach or for conspiring to breach it. To hold otherwise would be tantamount to permitting recovery of punitive damages in a contract action․”); Schell v. Kaiser–Frazer Sales Corp. (1971) 28 Ohio App.2d 16, 57 O.O.2d 9, 274 N.E.2d 315, 319; Koehler v. Cummings (M.D.Tenn.1971) 380 F.Supp. 1294, 1313–1314 (“If a party cannot be liable for inducing the breach of his own contract, it is similarly difficult to understand how he might be liable for participating in a conspiracy to induce the breach of his own contract”; applying Tennessee law); Mason v. Funderburk (1969) 247 Ark. 521, 446 S.W.2d 543, 550; Harris v. Equitable Life Assurance Society (S.D.Iowa 1957) 147 F.Supp. 478 (“ ‘․ Charges that a party colluded or conspired with others in connection with its breach will not serve to convert what is essentially a separable cause of action for a breach of contract into a joint cause of action for tort.”); Barber v. Stephenson (1953) 260 Ala. 151, 69 So.2d 251, 255 (“[I]t is generally held that an action for conspiring with another to induce the latter to break his contract cannot be maintained, the remedy being to sue on it.”).
7. See, for example, Fox v. Deese (1987) 234 Va. 412, 362 S.E.2d 699, 708; Boyles v. Thompson (Tex.Civ.App.1979) 585 S.W.2d 821, 836; National Linen v. Clower (1934) 179 Ga. 136, 175 S.E. 460, 466; Beverly v. McCullick (1973) 211 Kan. 87, 505 P.2d 624; Sorenson v. Chevrolet Motor Co. (1952) 171 Minn. 260, 214 N.W. 754, 764–765.
8. The tort of interference with contract—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.
9. 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.
10. 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: F.W. Shapoff v. Scull, supra, 222 Cal.App.3d 1457, 272 Cal.Rptr. 480; Manor Investment Co. v. Woolworth Co., supra, 159 Cal.App.3d 586, 206 Cal.Rptr. 37; Rosenfeld, Meyer & Susman v. Cohen, supra, 146 Cal.App.3d 200, 194 Cal.Rptr. 180; Owens v. Palos Verdes Monaco, supra, 142 Cal.App.3d 855, 191 Cal.Rptr. 381; Owens v. Foundation for Ocean Research, supra, 107 Cal.App.3d 179, 165 Cal.Rptr. 571; Olivet v. Frischling, supra, 104 Cal.App.3d 831, 164 Cal.Rptr. 87; Mayes v. Sturdy Northern Sales, Inc., supra, 91 Cal.App.3d 69, 154 Cal.Rptr. 43; Wetherton v. Growers Farm Labor Assn., supra, 275 Cal.App.2d 168, 79 Cal.Rptr. 543; Wise v. Southern Pacific Co., supra, 223 Cal.App.2d 50, 35 Cal.Rptr. 652.
1. 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) 98 Cal.App.2d 145, 156, 219 P.2d 511: “․ it is apparent that the plaintiff is not confined to an action ex contractu against the party with whom he contracted.” Also James v. Herbert (1957) 149 Cal.App.2d 741, 309 P.2d 91.
KENNARD, ARABIAN, BAXTER and GEORGE, JJ., and RAMIREZ, J. Pro Tem.*, concur.

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