Case Name: FREEMAN & MILLS, INCORPORATED, Plaintiff and Appellant, v. BELCHER OIL COMPANY, Defendant and Appellant
Court: Supreme Court of California
Jurisdiction: California
Decision Date: 1995-08-31
Citations: 11 Cal. 4th 85
Docket Number: No. S042831
Parties: FREEMAN & MILLS, INCORPORATED, Plaintiff and Appellant, v. BELCHER OIL COMPANY, Defendant and Appellant.
Judges: 
Reporter: California Reports
Volume: 11
Pages: 85–117

Head Matter:
[No. S042831.
Aug. 31, 1995.]
FREEMAN & MILLS, INCORPORATED, Plaintiff and Appellant, v. BELCHER OIL COMPANY, Defendant and Appellant.
Counsel
McClintock, Weston, Benshoof, Rochefort, Rubalcava & MacCuish, John M. Rochefort, Martha S. Doty, Saman Zia-Zarifi and Andrew M. Gilford for Plaintiff and Appellant.
Ian Herzog, Douglas DeVries, Leonard Sacks, Bruce Broillet, Thomas Stolpman, Robert B. Steinberg, Roland Wrinkle, Gary Paul, Steven Kleifeld, Harvey Levine, Wayne McClean, William Turley, Rose, Klein & Marias, David A. Rosen, Miller, Starr & Regalia, Edmund L. Regalia, Bernard & Wood, David P. Bonaccorsi, Crowe & Day, J. Michael Crowe and Douglas L. Day as Amici Curiae on behalf of Plaintiff and Appellant.
Stanley E. Crawford, Jr., David A. Engels, Sands, Narwitz, Forgie, Leonard & Lemer and Arthur A. Leonard for Defendant and Appellant.
Horvitz & Levy, Ellis J. Horvitz, Lisa Perrochet, John A. Taylor, Jr., Tanke & Willemsen, Tony J. Tanke, Michael A. Willemsen, McCutchen, Doyle, Brown & Enersen, John R. Reese, Robert A. Lewis and William Carpenter as Amici Curiae on behalf of Defendant and Appellant.

Opinion:
Opinion
LUCAS, C. J.
We granted review in this case to resolve some of the widespread confusion that has arisen regarding the application of our opinion in Seaman's Direct Buying Service, Inc. v. Standard Oil Co. (1984) 36 Cal.3d 752 [206 Cal.Rptr. 354, 686 P.2d 1158] (Seaman's). We held in that case that a tort cause of action might lie "when, in addition to breaching the contract, [defendant] seeks to shield itself from liability by denying, in bad faith and without probable cause, that the contract exists." (Id. at p. 769.)
In the present case, the Court of Appeal reversed judgment for plaintiff and remanded the case for a limited retrial, but also suggested that "it is time for the Supreme Court to reexamine the tort of 'bad faith denial of contract.' " We agree, and proceed to do so here. As our order granting review stated, "the issue to be argued before this court is limited to whether, and under what circumstances, a party to a contract may recover in tort for another party's bad faith denial of the contract's existence."
In light of certain developments occurring subsequent to Seaman's that call into question its continued validity, we find it appropriate to reexamine that decision. (See generally, Moradi-Shalal v. Fireman's Fund Ins. Companies (1988) 46 Cal.3d 287 [250 Cal.Rptr. 116, 758 P.2d 58] (Moradi-Shalal).) As will appear, we have concluded that the Seaman's court incorrectly recognized a tort cause of action based on the defendant's bad faith denial of the existence of a contract between the parties. That holding has been widely criticized by legal scholars, has caused considerable confusion among lower courts, and has been rejected by the courts of several other jurisdictions. These critics convincingly argue that the Seaman's decision is confusing and ambiguous, analytically flawed, and promotes questionable policy. After careful review of all the foregoing considerations, we conclude that our Seaman's holding should be overruled.
I. Facts
We first review the underlying facts, taken largely from the Court of Appeal opinion herein. In June 1987, defendant Belcher Oil Company (Belcher Oil) retained the law firm of Morgan, Lewis & Bockius (Morgan) to defend it in a Florida lawsuit. Pursuant to a letter of understanding signed by Belcher Oil's general counsel (William Dunker) and a Morgan partner (Donald Smaltz), Belcher Oil was to pay for costs incurred on its behalf, including fees for accountants. In February 1988, after first obtaining Dunk-er's express authorization, Smaltz hired plaintiff, the accounting firm of Freeman & Mills, Incorporated (Freeman and Mills), to provide a financial analysis and litigation support for Belcher Oil in the Florida lawsuit.
In March, an engagement letter was signed by both Morgan and Freeman & Mills. At about this time, William Dunker left Belcher Oil and was replaced by Neil Bowman. In April 1988, Bowman became dissatisfied with Morgan's efforts and the lawyers were discharged. Bowman asked Morgan for a summary of the work performed by Freeman & Mills and, at the same time, directed Smaltz to have Freeman & Mills stop their work for Belcher Oil. Smaltz did as he was asked. Freeman & Mills's final statement was for $70,042.50 in fees, plus $7,495.63 for costs, a total of $77,538.13.
Freeman & Mills billed Morgan, but no payment was forthcoming. Freeman & Mills then billed Belcher Oil directly and, for about a year, sent monthly statements and regularly called Bowman about the bill, but no payment was forthcoming. In August 1989, Smaltz finally told Freeman & Mills that Belcher Oil refused to pay their bill. Freeman & Mills then wrote to Bowman asking that the matter be resolved. In September 1989, Bowman responded, complaining that Belcher Oil had not been consulted about the extent of Freeman & Mills's services and suggesting Freeman & Mills should look to Morgan for payment of whatever amounts were claimed due.
Ultimately, Freeman & Mills filed this action against Belcher Oil, alleging (in its second amended complaint) causes of action for breach of contract, "bad faith denial of contract," and quantum meruit. Belcher Oil answered and the case was presented to a jury in a bifurcated trial, with punitive damages reserved for the second phase. According to the evidence presented during the first phase, the amount owed to Freeman & Mills (as indicated on their statements) was $77,538.13.
The jury returned its first phase verdict. On Freeman & Mills's breach of contract claim, the jury found that Belcher Oil had authorized Morgan to retain Freeman & Mills on Belcher Oil's behalf, that Freeman & Mills had performed its obligations under the contract, that Belcher Oil had breached the contract, and that the amount of damages suffered by Freeman & Mills was $25,000. The jury also answered affirmatively the questions about whether Belcher Oil had denied the existence of the contract and had acted with oppression, fraud, or malice. Thereafter, the jury returned its verdict awarding $477,538.13 in punitive damages and judgment was entered consistent with the jury's verdicts.
In three post-trial motions, Freeman & Mills asked for orders (1) "correcting" the jury's verdicts and the court's judgment to reflect compensatory damages of $77,538.13 and punitive damages of $425,000 (on the ground that the jury's questions showed this was its true intent); (2) awarding attorney fees as sanctions for the litigation tactics of Belcher Oil's attorneys; and (3) awarding prejudgment interest on the compensatory damage award. Over Belcher Oil's opposition, all three motions were granted—but with some changes in the course of correcting the judgment—by giving Freeman & Mills $131,614.93 in compensatory damages (the $25,000 actually awarded by the jury, plus the $77,538.13 included in the punitive damage award, plus $29,076.80 for prejudgment interest), and $400,000 (not $425,000 as requested) in punitive damages.
Belcher Oil appealed from the "corrected" judgment. Freeman & Mills cross-appealed from a mid-trial order denying its request to amend its complaint to add a cause of action for fraud, an issue not presently before us. The Court of Appeal majority, finding no "special relationship" between the parties to justify a tort theory of recovery under Seaman's, reversed the judgment and remanded the case to the trial court for a retrial limited to the issue of damages under plaintiff's breach of contract cause of action. (The Court of Appeal dissenting justice would have sustained the tort cause of action and remanded for retrial of the damage issue as to both causes of action.) As will appear, we affirm the judgment of the Court of Appeal, concluding that a tort recovery is unavailable in this case.
II. The Seaman's Decision
The tort of bad faith "denial of contract" was established in a per curiam opinion in Seaman's, supra, 36 Cal.3d 752. These were the facts before the court in that case: In 1971, Seaman's Direct Buying Service, a small marine fueling station in Eureka, wanted to expand its operation by developing a marine fuel dealership in conjunction with a new marina under development by the City of Eureka. When Seaman's approached the city about a long-term lease of a large parcel of land in the marina, the city required Seaman's to obtain a binding commitment from an oil supplier. To that end, Seaman's negotiated with several companies and, by 1972, reached a tentative agreement with Standard Oil Company of California.
Both Seaman's and Standard Oil signed a letter of intent setting forth the basic terms of their arrangement, but that letter was subject to government approval of the contract, continued approval of Seaman's credit status, and future agreement on specific arrangements. Seaman's showed the letter to the city and, shortly thereafter, signed a 40-year lease with the city. (Seaman's, supra, 36 Cal.3d at pp. 759-760.)
Shortly thereafter, an oil shortage dramatically reduced the available supplies of oil and, in November 1973, Standard Oil told Seaman's that new federal regulations requiring allocation of petroleum products to those that had been customers since 1972 precluded its execution of a new dealership agreement. In response, Seaman's obtained an exemption from the appropriate federal agency. Standard Oil appealed and persuaded the agency to reverse the order, but Seaman's eventually had the exemption reinstated contingent on a court determination that a valid contract existed between the parties. (36 Cal.3d at pp. 760-761.)
Seaman's then asked Standard Oil to stipulate to the existence of a contract, stating that a refusal would force it to discontinue operations. Standard Oil's representative refused the request, telling Seaman's, "See you in court." Seaman's business collapsed and it sued Standard Oil for damages on four theories—breach of contract, fraud, breach of the implied covenant of good faith and fair dealing, and interference with Seaman's contractual relationship with the city. (36 Cal.3d at pp. 761-762.)
The case was tried to a jury, which returned its verdicts in favor of Seaman's on all theories except fraud, awarding compensatory and punitive damages. Standard Oil appealed. (36 Cal.3d at p. 762.) We considered "whether, and under what circumstances, a breach of the implied covenant of good faith and fair dealing in a commercial contract may give rise to an action in tort." (Id. at p. 767.) For purposes of completeness, we quote from Seaman's at some length:
"It is well settled that, in California, the law implies in every contract a covenant of good faith and fair dealing. [Citations.] Broadly stated, that covenant requires that neither party do anything which will deprive the other of the benefits of the agreement. [Citation.] [f] California courts have recognized the existence of this covenant, and enforced it, in cases involving a wide variety of contracts. .[<][] In the seminal cases of Comunale v. Traders & General Ins. Co. [(1958)] 50 Cal.2d 654 [328 P.2d 198, 68 A.L.R.2d 883], and Crisci v. Security Ins. Co. [(1967)] 66 Cal.2d 425 [58 Cal.Rptr. 13, 426 P.2d 173], this court held that a breach of the covenant of good faith and fair dealing by an insurance carrier may give rise to a cause of action in tort as well as in contract. [Citation.]
"While the proposition that the law implies a covenant of good faith and fair dealing in all contracts is well established, the proposition advanced by Seaman's—that breach of the covenant always gives rise to an action in tort—is not so clear. In holding that a tort action is available for breach of the covenant in an insurance contract, we have emphasized the 'special relationship' between insurer and insured, characterized by elements of public interest, adhesion, and fiduciary responsibility. [Citation.] No doubt there are other relationships with similar characteristics and deserving of similar legal treatment.
"When we move from such special relationships to consideration of the tort remedy in the context of the ordinary commercial contract, we move into largely uncharted and potentially dangerous waters. Here, parties of roughly equal bargaining power are free to shape the contours of their agreement and to include provisions for attorney fees and liquidated damages in the event of breach. They may not be permitted to disclaim the covenant of good faith but they are free, within reasonable limits at least, to agree upon the standards by which application of the covenant is to be measured. In such contracts, it may be difficult to distinguish between breach of the covenant and breach of contract, and there is the risk that interjecting tort remedies will intrude upon the expectations of the parties. This is not to say that tort remedies have no place in such a commercial context, but that it is wise to proceed with caution in determining their scope and application.
"For the purposes of this case it is unnecessary to decide the broad question which Seaman's poses. Indeed, it is not even necessary to predicate liability on a breach of the implied covenant. It is sufficient to recognize that a party to a contract may incur tort remedies when, in addition to breaching the contract, it seeks to shield itself from liability by denying, in bad faith and without probable cause, that the contract exists. [Italics added.]
"It has been held that a party to a contract may be subject to tort liability, including punitive damages, if he coerces the other party to pay more than is due under the contract terms through the threat of a lawsuit, made ' "without probable cause and with no belief in the existence of the cause of action." ' [Citation.] There is little difference, in principle, between a contracting party obtaining excess payment in such manner, and a contracting party seeking to avoid all liability on a meritorious contract claim by adopting a 'stonewall' position ('see you in court') without probable cause and with no belief in the existence of a defense. Such conduct goes beyond the mere breach of contract. It offends accepted notions of business ethics. [Citation.] Acceptance of tort remedies in such a situation is not likely to intrude upon the bargaining relationship or upset reasonable expectations of the contracting parties." (Seaman's, supra, 36 Cal.3d at pp. 768-770, fns. omitted.)
Seaman's concluded that, because a good faith denial of the existence of a binding contract is not a tort (Seaman's, supra, 36 Cal.3d at p. 770), the trial court's failure to instruct the jury on the requirement of bad faith was error (ibid.) and that error was prejudicial (id. at p. 774).
III. Stare Decisis
Before examining various recent developments pertinent to our reconsideration of Seaman's, we briefly review certain well-established principles governing the respect we confer upon prior opinions of this court. These principles were summarized in Moradi-Shalal, supra, 46 Cal.3d 287, as follows:
". . . It is, of course, a fundamental jurisprudential policy that prior applicable precedent usually must be followed even though the case, if considered anew, might be decided differently by the current justices. This policy, known as the doctrine of stare decisis, 'is based on the assumption that certainty, predictability and stability in the law are the major objectives of the legal system; i.e., that parties should be able to regulate their conduct and enter into relationships with reasonable assurance of the governing rules of law.' (9 Witkin, Cal. Procedure (3d ed. 1985) Appeal, § 758, at p. 726, and see cases cited.)
"It is likewise well established, however, that the foregoing policy is sufficiently flexible to permit this court to reconsider, and ultimately to depart from, its own prior precedent in an appropriate case. (Id., § 759, and cases cited.) As we stated in Cianci v. Superior Court (1985) 40 Cal.3d 903, 924, . . . ' [ajlthough the doctrine [stare decisis] does indeed serve important values, it nevertheless should not shield court-created error from correction.' (Accord, People v. Guerrero (1988) 44 Cal.3d 343, 356, . . . ; People v. Anderson (1987) 43 Cal.3d 1104, 1147, . . . ; County of Los Angeles v. Faus (1957) 48 Cal.2d 672, 679, . . . .) In Anderson, Justice Mosk noted the need for flexibility in applying stare decisis, stating, 'This is especially so when, as here, the error [in the prior opinion] is related to a "matter of continuing concern" to the community at large. [Citations.]' (Anderson, supra, 43 Cal.3d at p. 1147, . . . ; see also Monell v. New York City Dept, of Social Services (1978) 436 U.S. 658, 695, . . . [stare decisis not mechanically applied to prohibit overruling prior decisions interpreting statutes].)
"Anderson also recognized that reexamination of precedent may become necessary when subsequent developments indicate an earlier decision was unsound, or has become ripe for reconsideration. [Citation.]" (Moradi-Shalal, supra, 46 Cal.3d at pp. 296-297; see also People v. Latimer (1993) 5 Cal.4th 1203,1212-1216 [23 Cal.Rptr.2d 144, 858 P.2d 611], and cases cited.)
As we explain below, developments occurring subsequent to the Seaman's decision convince us that it was incorrectly decided, that it has generated unnecessary confusion, costly litigation, and inequitable results, and that it will continue to produce such effects unless and until we overrule it.
IV. Subsequent Developments
A. California Supreme Court Decisions—Subsequent opinions of this court indicate a continuing reluctance, originally reflected in Seaman's itself, to authorize tort recovery for noninsurance contract breaches.
In Foley v. Interactive Data Corp. (1988) 47 Cal.3d 654 [254 Cal.Rptr. 211, 765 P.2d 373] (Foley), we considered the availability of tort damages for the wrongful termination of a discharged employee. Declining to rely on dictum in Seaman's (see id. at p. 769 & fn. 6) regarding the possible availability of tort remedies for breach of the implied covenant of good faith and fair dealing (hereafter the implied covenant) in the employment context, we refused to afford such remedies for the essentially contractual claim of breach of the implied covenant arising in that context. (See Foley, supra, 47 Cal.3d at pp. 683-693.)
In reaching our conclusion in Foley, we relied in part on certain basic principles relevant to contract law, including the need for "predictability about the cost of contractual relationships," and the purpose of contract damages to compensate the injured party rather than punish the breaching party. (47 Cal.3d at p. 683.) Focusing on the implied covenant, we observed that, with the exception of insurance contracts, "[bjecause the covenant is a contract term, . . . compensation for its breach has almost always been limited to contract rather than tort remedies." (Id. at p. 684.)
We acknowledged in Foley that "[t]he insurance cases . . . were a major departure from traditional principles of contract law," and we stressed that the courts should take "great care" before extending "the exceptional approach taken in those cases" to "another contract setting." (47 Cal.3d at p. 690.) We concluded that "the employment relationship is not sufficiently similar to that of insurer and insured to warrant judicial extension of the proposed additional tort remedies . . . ." (Id. at p. 693.)
Thereafter, in Hunter v. Up-Right, Inc. (1993) 6 Cal.4th 1174, 1180-1182 [26 Cal.Rptr.2d 8, 864 P.2d 88] (Hunter), we held that Foley's analysis would preclude recovery of tort damages for employer misrepresentations made to induce termination of employment. In the course of our analysis, and without mentioning Seaman's, we nonetheless confirmed that, with the exception of insurance contracts, remedies for breach of the implied covenant "have almost always been limited to contract damages." (6 Cal.4th at p.1180.)
We reasoned in Hunter that the defendant's misrepresentations were "merely the means to the end desired by the employer, i.e., termination of employment. They cannot serve as a predicate for tort damages . . . ." (Hunter, supra, 6 Cal.4th at p. 1185.) Similar analysis would apply to a defendant's denial of the existence of the underlying contract. Although such "stonewalling" conduct may have been intended to terminate the contractual relationship, there is no logical reason why it should serve as a predicate for tort damages.
Most recently, in Applied Equipment Corp. v. Litton Saudi Arabia Ltd. (1994) 7 Cal.4th 503 [28 Cal.Rptr.2d 475, 869 P.2d 454] (Applied Equipment), we held that a contracting party may not be held liable in tort for conspiring with another to interfere with his own contract. We reiterated the important differences between contract and tort theories of recovery, stating that "[c]onduct amounting to a breach of contract becomes tortious only when it also violates an independent duty arising from principles of tort law" (id. at p. 515), and that "the law generally does not distinguish between good and bad motives for breaching a contract" (id. at p. 516). We noted that limiting contract breach damages to those within the reasonably foreseeable contemplation of the parties when the contract was formed "serves to encourage contractual relations and commercial activity by enabling parties to estimate in advance the financial risks of their enterprise." (Id. at p. 515.)
Our decisions in Foley, Hunter, and Applied Equipment each contains language that strongly suggests 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. (See also White v. Western Title Ins. Co. (1985) 40 Cal.3d 870, 901 [221 Cal.Rptr. 509, 710 P.2d 309] (cone, and dis. opn. of Kaus, J.) [observing that "our experience in Seaman's surely tells us that there are real problems in applying the substitute remedy of a tort recovery—with or without punitive damages—outside the insurance area," and urging a legislative solution].)
B. Court of Appeal Decisions—Subsequent decisions of the Courts of Appeal have encountered considerable difficulty in applying our Seaman's decision. As one recent commentary stated, "The Seaman's tort has generated confusion among California courts. Consequently, in recent decisions, almost every court offers a different interpretation of the tort." (Comment, California's Detortification of Contract Law: Is the Seaman's Tort Dead? (1992) 26 Loyola L.A. L.Rev. 213, 223 (hereafter Detortification Comment).)
Without analyzing the particular facts of each case, it is sufficient to observe that our Seaman's holding has presented the lower courts with a number of unanswered questions, and that these courts have reached varying, and often inconsistent, conclusions in response. (See, e.g., Harris v. Atlantic Richfield Co. (1993) 14 Cal.App.4th 70, 77-80 [17 Cal.Rptr.2d 649] (hereafter Harris) [reviewing cases and noting criticism of Seaman's for "singling out" one type of bad faith contract breach for tort damages]; DuBarry Internat., Inc. v. Southwest Forest Industries, Inc. (1991) 231 Cal.App.3d 552, 566-572 [282 Cal.Rptr. 181] (hereafter DuBarry) [reviewing conflicting cases and holding Seaman's requires actual denial of contract's existence rather than mere denial of contract liability]-, Copesky v. Superior Court (1991) 229 Cal.App.3d 678, 686-694 [280 Cal.Rptr. 338] [general review of cases]; Careau & Co. v. Security Pacific Business Credit, Inc. (1990) 222 Cal.App.3d 1371, 1397, fn. 22 [272 Cal.Rptr. 387] (hereafter Careau) [acknowledging "confusion and uncertainty" generated by Seaman's]', Lynch & Freytag v. Cooper (1990) 218 Cal.App.3d 603, 610-611 [267 Cal.Rptr. 189] (hereafter Lynch & Freytag) [ruling Seaman's inapplicable to denials of contract existence set forth in pleadings]; Okun v. Morton (1988) 203 Cal.App.3d 805, 824-826 [250 Cal.Rptr. 220] (hereafter Okun) [concluding that Seaman's tort is based on breach of implied covenant]; Multiplex Ins. Agency, Inc. v. California Life Ins. Co. (1987) 189 Cal.App.3d 925, 937-940 [235 Cal.Rptr. 12] (hereafter Multiplex) [extending Seaman's to bad faith denial of liability]; Koehrer v. Superior Court (1986) 181 Cal.App.3d 1155, 1170-1171 [226 Cal.Rptr. 820] [extending Seaman's to bad faith attempt to deprive employee of contractual benefits]; Quigley v. Pet, Inc. (1984) 162 Cal.App.3d 877, 890-892 [208 Cal.Rptr. 394] [noting uncertainties presented by Seaman's, including its application to bad faith disputes over contractual "terms and performance"]; Wallis v. Superior Court (1984) 160 Cal.App.3d 1109, 1118-1119 [207 Cal.Rptr. 123] [interpreting Seaman's as allowing tort action for breach of implied covenant in noninsurance cases].)
Several of the foregoing cases criticize our Seaman's holding, raise doubts as to its continued viability, or urge our reconsideration of that decision. (See Harris, supra, 14 Cal.App.4th at p. 79-82 [noting criticism and declining to extend Seaman's tort to contract breaches in violation of public policy]; Careau, supra, 222 Cal.App.3d at p. 1401, fn. 27 ["unfortunate" that Seaman's failed to explain or justify why tort liability could be imposed for bad faith denial of contract existence but not for bad faith assertion of other defenses]; Lynch & Freytag, supra, 218 Cal.App.3d at pp. 611 (maj. opn.) [observing that "[t]he contours of this new tort have perplexed the appellate courts almost from the day Seaman's was filed."], 616 (conc. opn. of Woods (Fred), J.) [stating that "[t]he general viability of Seaman's in view of Foley appears to be tenuous at best"]; Okun, supra, 203 Cal.App.3d at p. 826 ["we are of the view—as are many others—that the whole concept of tort liability in bad faith commercial litigation needs to be reexamined"].)
As these cases indicate, much confusion and conflict has arisen regarding the scope and application of our Seaman's holding. For example, does the Seaman's tort derive from breach of the implied covenant or from some other independent tort duty? (Compare Okun, supra, 203 Cal.App.3d at pp. 823-826, with Quigley v. Pet, Inc., supra, 162 Cal.App.3d at p. 890.) Does the Seaman's tort extend to a bad faith denial of liability under a contract, as well as denial of its existence? (Compare DuBarry, supra, 231 Cal.App.3d at pp. 566-572, with Multiplex, supra, 189 Cal.App.3d at pp. 937-940.) Is a "special relationship" between the contracting parties a prerequisite to a Seaman's action? (Compare Multiplex, supra, 189 Cal.App.3d at p. 939, and Quigley v. Pet, Inc., supra, 162 Cal.App.3d at p. 890, with Okun, supra, 203 Cal.App.3d at pp. 823-826; see also Air-Sea Forwarders, Inc. v. Air Asia Co., Ltd. (9th Cir. 1989) 880 F.2d 176 [reviewing the conflicting cases].)
The foregoing "special relationship" conflict extends to the present case, for as previously noted, the Court of Appeal herein concluded that the Seaman's tort requires a showing of a special relationship between the parties. As the Court of Appeal stated, "Whatever need there may be to provide special remedies to cover special relationships, there is no similar need in routine business cases. For this reason, we believe our colleagues in Division Two were correct when they interpreted Seaman's narrowly, limiting the tort of bad faith denial of contract to the situations where, in addition to whatever other elements may be required (which depends on which case is cited), there is (1) a special relationship and (2) conduct extraneous to the contract (as there was in Seaman's). (Okun v. Morton, supra, 203 Cal.App.3d at pp. 823-826 . . . .) We also think it is time for the Supreme Court to grant review and resolve the conflict created by Okun on the one hand and the Quigley line of cases on the other."
Confusion and conflict alone might not justify a decision to abrogate Seaman's, for we could attempt to resolve all the uncertainties engendered by that decision. But there are additional considerations that convince us to forgo that predictably Herculean effort. Many of the pertinent Court of Appeal decisions recognize compelling policy reasons supporting the preclusion of tort remedies for contractual breaches outside the insurance context.
For example, in DuBarry, supra, 231 Cal.App.3d at page 569, the court refused to extend the Seaman's tort to bad faith defenses to contract claims. The court explained: "If the rule were otherwise, then any party attempting to defend a disputed contract claim would risk, at the very least, exposure to the imposition of tort damages and an expensive and time-consuming expansion of the litigation into an inquiry as to the motives and state of mind of the breaching party. The distinction between tort and contract actions, and their purposefully different measures of damages, would be blurred if not erased. The insult to commercial predictability and certainty would only be exceeded by the increased burden on the already overworked judicial system." (Ibid.) Many of these considerations are equally applicable to the Seaman's tort itself.
Similarly, in Harris, supra, 14 Cal.App.4th 70, the Court of Appeal denied a tort recovery for bad faith contract breach in violation of public policy.
The court elaborated on the applicable policy considerations as follows: "The traditional goal of contract remedies is compensation of the promisee for the loss resulting from the breach, not compulsion of the promisor to perform his promises. Therefore, 'willful' breaches have not been distinguished from other breaches. [Citation.] The restrictions on contract remedies serve purposes not found in tort law. They protect the parties' freedom to bargain over special risks and they promote contract formation by limiting liability to the value of the promise. This encourages efficient breaches, resulting in increased production of goods and services at lower cost to society. [Citation.] Because of these overriding policy considerations, the California Supreme Court has proceeded with caution in carving out exceptions to the traditional contract remedy restrictions. [Citations.]" (14 Cal.App.4th at p. 77.)
The Harris court set forth as reasons for denying tort recovery in contract breach cases (1) the different objectives underlying the remedies for tort and contract breach, (2) the importance of predictability in assuring commercial stability in contractual dealings, (3) the potential for converting every contract breach into a tort, with accompanying punitive damage recovery, and (4) the preference for legislative action in affording appropriate remedies. (Harris, supra, 14 Cal.App.4th at pp. 81-82; see also Foley, supra, 47 Cal.3d at pp. 683, 694, fn. 31, 696.)
As we shall see (pt. V., post, pp. 102-103), the foregoing policy considerations fully support our decision to overrule Seaman's rather than attempt to clarify its uncertain boundaries. (We observe that plaintiff has asked us to take judicial notice of certain records purportedly showing there were only a few jury verdicts involving Seaman's claims during the period from 1981 to 1994. Because jury verdicts are an inconclusive indicia of excessive litigation, and because defendant has raised some doubts regarding the accuracy and completeness of the submitted materials, the application for judicial notice is denied.)
C. Criticism by Courts of Other Jurisdictions
We decided Seaman's in 1984. Since then, courts of other jurisdictions have either criticized or declined to follow our Seaman's analysis. Of all the states, only Montana has recognized the tort of bad faith in typical arm's length commercial contracts, and recently even that state has qualified the tort by requiring a showing of a special relationship between the contracting parties. (See Story v. Bozeman (1990) 242 Mont. 436 [791 P.2d 767, 776]; see also Farnsworth, Contracts Is Not Dead (1992) 77 Cornell L.Rev. 1034, 1037; Macintosh, Gilmore Spoke Too Soon: Contract Rises From the Ashes of the Bad Faith Tort (1994) 27 Loyola L.A. L.Rev. 483 , 496-497, 500; Detortification Comment, supra, 26 Loyola L.A. L.Rev. at pp. 235-236.)
Ninth Circuit Judge Kozinski expressed his candid criticism of Seaman's in a concurring opinion in Oki America, Inc. v. Microtech Intern., Inc. (9th Cir.1989) 872 F.2d 312, 314-317 (Oki America). Among other criticism, Judge Kozinski found the Seaman's holding unduly imprecise and confusing. As he stated, "It is impossible to draw a principled distinction between a tortious denial of a contract's existence and a permissible denial of liability under the terms of the contract. The test . . . seems to be whether the conduct 'offends accepted notions of business ethics.' [Citation.] This gives judges license to rely on their gut feelings in distinguishing between a squabble and a tort. As a result, both the commercial world and the courts are needlessly burdened . . . ." (Oki America, supra, 872 F.2d at p. 315.)
Judge Kozinski also mentioned the substantial costs associated with Seaman's litigation, and the resulting interference with contractual relationships. "Perhaps most troubling, the willingness of courts to subordinate voluntary contractual arrangements to their own sense of public policy and proper business decorum deprives individuals of an important measure of freedom. The right to enter into contracts—to adjust one's legal relationships by mutual agreement [] is too easily smothered by government officers eager to tell us what's best for us." (872 F.2d at p. 316.) Judge Kozinski concluded by observing that "Seaman's is a prime candidate for reconsideration." (Id. at p. 317.)
Similarly, in Air-Sea Forwarders, Inc. v. Air Asia Co., Ltd., supra, 880 F.2d at pages 184-185, Judge Hall observed that Seaman's "ambiguous" holding had caused widespread confusion among the lower courts. As Judge Hall stated, "Indeed, the Seaman's court's failure to explain why it was not necessary to predicate its holding on the implied covenant of good faith and fair dealing, or to justify the dramatically greater liability for the bad faith denial of the existence of a contract as compared to the bad faith dispute of a contract's terms, undoubtedly spawned the confusion in the appellate division cases discussed infra." (Id. at p. 184, fn. 11.)
Other federal courts have found similar difficulty interpreting and applying Seaman's. Thus, in Elxsi v. Kukje America Corp. (N.D.Cal. 1987) 672 F.Supp. 1294, 1296, Judge Aguilar observed: "The major difficulty confronting jurists and commentators trying to understand and apply Seaman's is the faithful interpretation of the . . . passage [condemning "stonewalling" "without probable cause and with no belief in the existence of a defense"]. The initial sentence . . . states that the new tort is denial of the existence of a contract, while the subsequent passage describes denial of the existence of liability. Ultimately, the dilemma involves determining whether the subsequent passage is definitional or descriptive."
As we stated in Moradi-Shalal, supra, 46 Cal.3d 287, 298, in which we were faced with a similar tide of critical or contrary authority from other jurisdictions regarding one of our prior decisions, "[Ajlthough holdings from other states are not controlling, and we remain free to steer a contrary course, nonetheless the near unanimity of agreement . . . indicates we should question the advisability of continued allegiance to our minority approach."
D. Scholarly Criticism
Scholarly commentary on Seaman's also has been generally critical of our Seaman's holding and underlying analysis. (See, e.g., Ashley, Bad Faith Actions; Liability and Damages (1994) § 11.08, at p. 28 [stating that the Seaman's court, in creating a new tort of "stonewalling" based on "inapposite" authority, "can only be described as out of balance," having "lost touch with the traditions of contract law"]; Putz & Klippen, Commercial Bad Faith: Attorney Fees—Not Tort Liability—Is the Remedy for "Stonewalling" (1987) 21 U.S.F. L.Rev. 419, 459 (hereafter Putz & Klippen) [finding "no rational way" to distinguish denial of contract existence from other denials of liability]; Sebert, Punitive and Nonpecuniary Damages in Actions Based Upon Contract: Toward Achieving the Objective of Full Compensation (1986) 33 U.C.L.A. L.Rev. 1565, 1640-1641 (hereafter Sebert) stating that Seaman's is an "unhappy compromise" that is "both troubling and likely to be mischievous" by creating a "meaningless distinction" between denial of contract existence and other breaches]; Snyderman, What's So Good About Good Faith? The Good Faith Performance Obligation in Commercial Lending (1988) 55 U.Chi. L.Rev. 1335, 1363 (hereafter Snyderman) [stating that Seaman's "represents a potentially disastrous expansion of the bad faith tort into the commercial realm"]; Wallenstein, Breach of the Implied Covenant of Good Faith and Fair Dealing in Commercial Contracts: A Wrong in Search of a Remedy (1988-1989) 20 U. West L.A. L.Rev. 113, 124 ["[w]ith the advent of Seaman's, the root causes of the confusion surrounding the implied covenant in commercial contracts began to emerge"]; Comment, The Role of Good Faith in Lender Liability Suits: Rising Star or Fading Gadfly (1989) 31 Ariz. L.Rev. 939, 953 (hereafter Arizona Comment) [stating that Seaman's created an "undefined new source of liability" that will have the effect of "deter(ring) zealous advocacy"]; Comment, Extending the Bad Faith Tort Doctrine to General Commercial Contracts (1985) 65 B.U. L.Rev. 355, 376 [observing that Seaman's failed to articulate a "generally applicable tort standard which would differentiate between mere breaches of contract and breaches of the tort duty of good faith and fair dealing"]; Comment, Tort Remedies for Breach of Contract: The Expansion of Tortious Breach of the Implied Covenant of Good Faith and Fair Dealing Into the Commercial Realm (1986) 86 Colum. L.Rev. 377, 401 (hereafter Columbia Comment) [finding "no principled distinction" between denial of a contract's existence, and denial that certain parts or terms exist, and concluding that Seaman's ultimate result "will be to expose commercial parties to tort-level damages whenever a party refuses to perform under the contract"]; Comment, Bad Faith Lenders (1989) 60 Colo. L.Rev. 417, 427 [Seaman's disclaimer of reliance on implied covenant is inconsistent with imposition of liability for bad faith denial of contract's existence]; Comment, Lender Liability for Breach of the Obligation of Good Faith Performance (1987) 36 Emory L.J. 917, 960 [Seaman's award of tort damages for contract breach is "troublesome" and "easy to misinterpret"]; Comment, Seaman's Direct Buying Service, Inc. v. Standard Oil Co.: Tortious Breach of the Covenant of Good Faith and Fair Dealing in a Noninsurance Commercial Contract Case (1986) 71 Iowa L.Rev. 893, 898 ["Seaman's leaves attorneys to guess whether their commercial client's conduct is merely healthy capitalistic competition or manifest bad faith."]; Detortification Comment, supra, 26 Loyola L.A. L.Rev. at p. 239 ["[a] growing distaste for the Seaman's tort among the California appellate districts, in the Ninth Circuit and in other states mandates that the California Supreme Court . . . overrule Seaman's"]; Comment, Sailing the Uncharted Seas of Bad Faith: Seaman's Direct Buying Service, Inc. v. Standard Oil Co. (1985) 69 Minn. L.Rev. 1161, 1175 (hereafter Minnesota Comment) [observing that Seaman's failure to distinguish its new tort from breaches of implied covenant of good faith "exacerbated the confusion" in the area].)
Many of the foregoing articles and commentaries observe that the Seaman decision, being unclear and subject to multiple interpretations, has resulted in widespread confusion among the lower courts. (E.g., Snyderman, supra, 55 U.Chi. L.Rev. at p. 1363 [Seaman's tort could be applied in all contract breach cases, resulting in "complete subversion of the expectation damages standard"]; Sebert, supra, 33 U.C.L.A. L.Rev. at pp.11640-1641 [decision is "troubling" because it "singles out one particular type of breach for sanction—the bad faith denial of the existence of a contract"]; Detortification Comment, supra, 26 Loyola L.A. L.Rev. at p. 223, fn. omitted ["The Seaman's tort has generated confusion among California courts. Consequently, in recent decisions, almost every court offers a different interpretation of the tort. The one similarity . is that every court appears to limit the tort's application."].)
Additionally, several of these commentaries emphasize the extreme difficulty courts experience in distinguishing between tortious denial of a contract's existence and permissible denial of liability under the terms of the contract. (Columbia Comment, supra, 86 Colum. L.Rev. at pp. 401-402; Detortification Comment, supra, 26 Loyola L.A. L.Rev. at pp. 223-228.) Further confusion concerns the quantum of proof required to establish a denial of the existence of the contract (Detortification Comment, supra, 26 Loyola L.A. L.Rev.at pp. 227-228; see DuBarry, supra, 231 Cal.App.3d at pp. 572-575) and, as previously discussed, whether or not proof is required of a "special relationship" between the contracting parties (Detortification Comment, supra, 26 Loyola L.A. L.Rev. at pp. 229-231, and cases cited).
The foregoing commentaries raise a wide variety of additional criticisms that support reconsideration of the Seaman's decision, including widespread confusion among judges and juries in applying its holding, inappropriately excessive damage awards, overcrowded court dockets and speculative litigation, delay and complication of ordinary contract breach claims, deterrence of contract formation, and restraint on zealous advocacy. (See, e.g., Arizona Comment, supra, 31 Ariz. L.Rev. at p. 953; Columbia Comment, supra, 86 Colum. L.Rev.at p. 402; Detortification Comment, supra, 26 Loyola L.A. L.Rev. pp. 236-238.) As one article observes, Seaman's created "intolerable uncertainty" and constitutes a "dangerous misstep", that this court should "promptly correct." (Putz & Klippen, supra, 21 U.S.F. L.Rev. at p. 499.)
As we stated in Moradi-Shalal, supra, 46 Cal.3d at page 299, "the breadth of the criticism . is disturbing and, like the flood of contrary decisions of other state courts, is pertinent to our determination whether or not to reconsider that decision. [Citation.]"
V. Seaman's Should Be Overruled
As previously indicated, the Seaman's decision has generated uniform confusion and uncertainty regarding its scope and application, and widespread doubt about the necessity or desirability of its holding. These doubts and criticisms, express or implied, in decisions from this state and from other state and federal courts, echoed by the generally adverse scholarly comment cited above, convince us that Seaman's should be overruled in favor of a general rule precluding tort recovery for noninsurance contract breach, at least in the absence of violation of "an independent duty arising from principles of tort law" (Applied Equipment, supra, 7 Cal.4th at p. 515) other than the bad faith denial of the existence of, or liability under, the breached contract.
As set forth above, the critics stress, among other factors favoring Seaman's abrogation, the confusion and uncertainty accompanying the decision, the need for stability and predictability in commercial affairs, the potential for excessive tort damages, and the preference for legislative rather than' judicial action in this area.
Even if we were unimpressed by the nearly unanimous criticism leveled at Seaman's, on reconsideration the analytical defects in the opinion have become apparent. It seems anomalous to characterize as "tortious" the bad faith denial of the existence of a contract, while treating as "contractual" the bad faith denial of liability or responsibility under an acknowledged contract. In both cases, the breaching party has acted in bad faith and, accordingly, has presumably committed acts offensive to "accepted notions of business ethics." (Seaman's, supra, 36 Cal.3d at p. 770.) Yet to include bad faith denials of liability within Seaman's scope could potentially convert every contract breach into a tort. Nor would limiting Seaman's tort to incidents involving "stonewalling" adequately narrow its potential scope. Such conduct by the breaching party, essentially telling the promisee, "See you in court," could incidentally accompany every breach of contract.
For all the foregoing reasons, we conclude that Seaman's should be overruled. We emphasize that nothing in this opinion should be read as affecting the existing precedent governing enforcement of the implied covenant in insurance cases. Further, nothing we say here would prevent the Legislature from creating additional civil remedies for noninsurance contract breach, including such measures as providing litigation costs and attorney fees in certain aggravated cases, or assessing increased compensatory damages covering lost profits and other losses attributable to the breach, as well as restoration of the Seaman's holding if the Legislature deems that course appropriate. (See, e.g., Ashley, Bad Faith Actions; Liability and Damages, supra, § 11.05, at p. 14 ["[t]he uniform liberalization of contract damages rules is what is needed"]; Putz & Klippen, supra, 21 U.S.F. L.Rev. at pp. 481-499; Detortification Comment, supra, 26 Loyola L.Rev. at p. 238; Minnesota Comment, supra, 69 Minn. L.Rev. at p. 1198.) Thus far, however, the Legislature has not manifested an intent either to expand contract breach recovery or to provide tort damages for ordinary contract breach.
VII. Conclusion
The judgment of the Court of Appeal, reversing the trial court's judgment in plaintiff's favor and remanding the case for a retrial limited to the issue of damages under plaintiff's breach of contract cause of action, and for judgment in favor of defendant on plaintiff's bad faith denial of contract cause of action, is affirmed.
Baxter, J., Werdegar, J., and Klein, J., concurred.
Presiding Justice, Court of Appeal Second Appellate District, Division Three, assigned by the Acting Chairperson of the Judicial Council.