Court Opinion

ID: 9790974
Source: CourtListenerOpinion
Date Created: 2023-08-31 02:02:25.878053+00
Date Added: 2024-06-11T07:37:32.979983
License: Public Domain

BIRD, C. J.
I concur in sections I, II and III of the court’s opinion. However, I dissent in part from section IV. A contracting party should not *775be able to deny the existence of a valid contract in order to shield itself from liability for breach of that contract. Today, the court holds that an action will lie in tort against such conduct. However, it refuses to acknowledge that its holding is compelled by this court’s past decisions analyzing the scope of the implied covenant of good faith and fair dealing. This court should not continue to retreat from its own decisional authority in this area.
I also write separately because I believe that this court should forthrightly recognize the principle that, under certain circumstances, a breach of contract may support a tort cause of action for breach of implied covenant.
Over 25 years ago, this court held that a breach of the implied covenant of good faith and fair dealing may give rise to a tort cause of action. (Majority opn., ante, at p. 768; Comunale v. Traders General Ins. Co. (1958) 50 Cal.2d 654 [328 P.2d 198, 68 A.L.R.2d 883]; Crisci v. Security Ins. Co. (1967) 66 Cal.2d 425, 432 [58 Cal.Rptr. 13, 426 P.2d 173].) Since that time, a substantial body of law has developed defining the scope of that duty with criteria for the award and measurement of compensatory and punitive tort damages. (See, e.g., Egan v. Mutual of Omaha Ins. Co. (1979) 24 Cal.3d 809 [169 Cal.Rptr. 691, 620 P.2d 141]; Neal v. Farmers Ins. Exchange (1978) 21 Cal.3d 910 [148 Cal.Rptr. 389]; Silberg v. California Life Ins. Co. (1974) 11 Cal.3d 452 [113 Cal.Rptr. 711, 521 P.2d 1103]; Gruenberg v. Aetna Ins. Co. (1973) 9 Cal.3d 566 [108 Cal.Rptr. 480, 510 P.2d 1032]; Jarchow v. Transamerica Title Ins. Co. (1975) 48 Cal.App.3d 917 [122 Cal.Rptr. 470].)
California has not been alone in recognizing that a breach of the implied covenant may give rise to a cause of action in tort. The courts of many other states have allowed a tort recovery for the breach of this covenant. (See Kornblum, Recent Cases Interpreting the Implied Covenant of Good Faith and Fair Dealing (1981) Def.L.J. 411, 431-432, fn. 50 [collecting cases].)
This development has taken place primarily in the context of insurance contracts. Howgvciv-this-eourt has never -expressiy. or-implie.dly limited the tort action to insurance cases.
Moreover, California courts have expressly recognized the availability of a tort recovery for breach of the covenant in other contexts. (See generally, Louderback & Jurika, Standards for Limiting the Tort of Bad Faith Breach of Contract (1982) 16 U.S.F. L.Rev. 187.) For example, in Tameny v. *776Atlantic Richfield Co. (1980) 27 Cal.3d 167 [164 Cal.Rptr. 839, 610 P.2d 1330], the late Justice Mathew O. Tobriner writing for a near unanimous court acknowledged the possibility that a tort action for the breach of the implied covenant was applicable in the area of employment contracts.
*775I.
*776The Tameny court noted that “past California cases have held that a breach of this implied-at-law covenant sounds in tort as well as in contract. ” (Id., at p. 179, fn. 12, italics added.) Following the Tameny cue, two recent cases in the Court of Appeal have recognized that a tort cause of action for the breach of the duty of good faith and fair dealing will lie outside the insurance context. (See, e.g., Cleary v. American Airlines, Inc. (1980) 111 Cal.App.3d 443, 455 [164 Cal.Rptr. 839, 610 P.2d 1330]; Wagner v. Benson (1980) 101 Cal.App.3d 27, 33 [161 Cal.Rptr. 516]; cf. Glendale Fed. Sav. & Loan Assn. v. Marina View Heights Dev. Co. (1977) 66 Cal.App.3d 101, 135, fn. 8 [135 Cal.Rptr. 802].) This case raises this issue and it should be resolved.
When determining what cdSduct constitutes a tortious breach of the duty of good faith and fair dealing|ycourts first consider the parties’ “reasonable expectations” concerning the nature of their agreement and their rights and responsibilities thereunder. (Jarchow v. Transamerica Title Ins. Co., supra, 48 Cal.App.3d at p. 941.) ‘“Good faith performance or enforcement of a contract emphasizes faithfulness to an agreed common purpose and consistency with the justified expectations of the other party . . . .’” (Neal v. Farmers Ins. Exchange, supra, 21 Cal.3d at p. 922, fn. 5.) Once those “justified expectations” are established, “good faith” requires the parties to act "reasonably" in light of those expectations.
Past cases which have recognized a tort cause of action for breach of the covenant emphasize “reasonableness.” In Egan v. Mutual of Omaha Ins. Co., supra, 24 Cal.3d at p. 819, for example, the court first examined both the motivation and expectations of the insured in obtaining a policy of insurance. In light of those expectations, the court held that the implied covenant imposed a duty on the insurer to thoroughly investigate the foundation of an insured’s claim before it could “reasonably and in good faith deny payments to its insured . . . .” (Ibid., italics added.) Breach of that duty was a tort. (Ibid.)
Similarly, in Crisci v. Security Ins. Co., supra, 66 Cal.2d at page 429, the court noted that “one of the usual methods by which an insured receives protection under a liability insurance policy is by settlement of claims without litigation . . . .” Therefore, an insurer breaches the duty of good faith and fair dealing, the court concluded, when it “unwarrantedly refuses an *777offered settlement where the most reasonable manner of disposing of the claim is by accepting the settlement.” (Id., at p. 430, italics added.) And, in Gruenberg v. Aetna Ins. Co., supra, 9 Cal.3d at page 573, the duty to act fairly and in good faith was held to include “a duty not to withhold unreasonably payments due under a policy.” (Italics added; see also Neal v. Farmers Ins. Exchange, supra, 21 Cal.3d at p. 920; Silberg v. California Life Ins. Co., supra, 11 Cal.3d at pp. 460-461 [tort liability where “the insurer unreasonably and in bad faith withholds payment of the claim of the insured,” italics added].) The standard of good faith conduct that emerges from these decisions is that both contracting parties must act reasonably in light of the justified expectations of the other. (See generally the discussion in Austero v. National Cas. Co. (1978) 84 Cal.App.3d 1, 27-32 [148 Cal.Rptr. 623].)
The precise nature and extent of the duty imposed by the implied promise of good faith and fair dealing in any particular contract, therefore, depends upon the expectations of the parties and the purposes of the contract. (Egan v. Mutual of Omaha, supra, 24 Cal.3d at p. 818; Austero v. National Cas. Co., supra, 84 Cal.App.3d at p. 27.) While the extent of the duty varies from contract to contract, the duty itself inheres in every contract.
Insurance contracts have several characteristics not shared by ordinary commercial contracts entered into by corporations. For example, consumers purchase such contracts not to obtain a commercial advantage, but to protect themselves against calamity. (See Egan v. Mutual of Omaha, supra, 24 Cal.3d at p. 819.) Thus, insurance contracts may create a “special relationship” between insurer and insured. (Id., at p. 820.) These characteristics undoubtedly help shape the justified expectations of the contracting parties, and, therefore, help determine the nature and extent of the duty of good faith between them. (See id., at p. 819.)
In commercial contracts which lack those characteristics, the expectations and purposes of the parties necessarily differ from those of insurer and insured. Thus, the requirements of good faith iir a.commercial contract are different than the requirements imposed on an insurer. While those requirements are probably' [ess strmgehtTn a cómmerciaí coñté^f, ihéy~dejinítély exist. ~~
Certain expectations derive from assumptions so basic to the very notion of a contract that they are shared by virtually all contracting parties. Foremost among these is the expectation that a breaching party will compensate the other party for losses caused by the breaching party’s failure to perform. nrhe~avaiIaMity of contract damagesTin turn, supports the equally funda*778mental assumption that breach is a foreseeable and, in most situations, acceptable possibility.
Indeed, the assumption that parties may breach at will, risking only contract damages, is one of the cornerstones of contract law. “[I]t is not the policy of the law to compel adherence to contracts, but only to require each party to choose between performing in accordance with the contract and compensating the other party for injury resulting from a failure to perform. This view contains an important economic insight. In many cases it is uneconomical to induce the completion of the contract after it has been breached.” (Posner, Economic Analysis of Law (1972) p. 55.) In most commercial contracts, recognition of this economic reality leads the parties to accept the possibility of breach, particularly since their right to recover contract damages provides adequate protection.
For example, one party to a contract may decide to breach if it concludes that the market will bring a higher price for its product than that set forth in the contract. In commercial contracts, the risk of such a breach is widely recognized and generally accepted. “[Ijntentional, willful, selfishly induced breach[es] of contract [are] often an anticipated, expected and encouraged reality of commercial life.” (Diamond, The Tort of Bad Faith Breach of Contract: When, If At All, Should It Be Extended Beyond Insurance Transactions? (1981) 64 Marq.L.Rev. 425, 438.)1
When the breaching party acts in bad faith to shield itself entirely from liability for contract damages, however, the duty of good faith and fair dealing is violated. (See Diamond, The Tort of Bad Faith Breach of Contract: When, If At All, Should It Be Extended Beyond Insurance Transactions?, supra, 64 Marq.L.Rev. at p. 447; see also Keeton, Liability Insurance and Responsibility for Settlement (1954) 67 Harv.L.Rev. 1136, 1139, fn. 6 [bad faith is frequently defined as “the intentional disregard of the financial interests of the (other contracting party) in the hope of escaping . . . full responsibility . . .”].)
This type of conduct violates the nonbreaching party’s justified expectation that it will be able to recover damages for its losses in the event of a *779breach. That expectation must be protected. Otherwise, the acceptance of the possibility of breach by the contracting parties and by society as a whole may be seriously undermined.
There is no danger that permitting tort recovery for bad faith denial of the existence of a valid commercial contract will make every breach of contract a tort. First, the vast majority of contract breaches in the commercial context do not involve this type of bad faith conduct.
Second, “ ‘ “it [is] well established in this state that if the cause of action arises from a breach of a promise set forth in the contract, the action is ex contractu, but if it arises from a breach of duty growing out of the contract it is ex delicto. ” ’ (Italics added.) [Citations.]” (Tameny v. Atlantic Richfield Co., supra, 27 Cal.3d at p. 175.) Thus, tort “[liability is imposed not for a bad faith breach of the contract, but for failure to meet the duty . . . included within the implied covenant of good faith and fair dealing.” (Crisci v. Security Ins. Co., supra, 66 Cal.2d at p. 430, italics added.) There are many situations in which a defendant’s actions may sound both in tort and contract.2 The fact that overlapping remedies may exist in some situations does not make every breach of contract a tort.
Similarly, an attempt to avoid any liability for contract damages may involve a discrete course of conduct or it may be indistinguishable from the breach of contract itself. “Breach of the covenant provides the injured party with a tort action for ‘bad faith, ’ notwithstanding that the acts complained of may also constitute a breach of contract. (Crisci v. Security Ins. Co., supra, 66 Cal.2d 425, 430; Fletcher v. Western National Life Ins. Co. [(1970)] 10 Cal.App.3d 376, 401 [89 Cal.Rptr. 78.)” (Jarchow v. Transamerica Title Ins. Co., supra, 48 Cal.App.3d at p. 940.)3
It is a well-established principle of law that the parties’ reasonable expectations should govern the determination of what conduct constitutes a tortious breach of the implied covenant of good faith and fair dealing. (See Egan v. Mutual of Omaha Ins. Co., supra, 24 Cal.3d at p. 818; Austero v. National Cas. Co., supra, 84 Cal.App.3d at pp. 27-32.) Application of that principle is fully warranted here. The duty of good faith and fair dealing *780was violated because a party attempted to avoid all liability for a contract breach by denying, in bad faith, the very existence of the contract. Such conduct violates the nearly universal expectation that the injured party will be compensated for losses caused by the breaching party’s failure to perform. This tort remedy was recognized by this court in its earlier decisions involving the implied covenant of good faith and fair dealing. Those decisions should be the basis for the holding here.
n.
A breach of contract may also constitute a tortious breach of the covenant of good faith and fair dealing in a situation where the possibility that the contract will be breached is not accepted or reasonably expected by the parties.
This could happen, for example, if at the time of contracting, the parties expressly indicate th^ir understanding that a breach would he impermissible. Or, it could happen if it were clear from the inception of the contract that contract damages would be unavailable or would be inadequate compensation for a breach. Under these circumstances, a breach of the contract could well constitute a tortious breach of the duty of good faith and fair dealing.
Insurance and employment contracts are good examples of the latter situation. Both the insurer and the insured know that, once an injury has occurred, the insured or the insured’s beneficiary will suffer great hardship if benefits are not paid promptly. Thus, a breach of contract by the insurer will almost certainly cause a type of harm for which contract damages would be inadequate. Insureds, therefore, are justified in expecting that their insurance contract will not be breached. Similarly, breach of an employment contract by the employer can, in some situations, cause severe harm to an employee’s reputation and ability to find new employment. The harm caused cannot be undone by an award of back pay. Thus, employees may be entitled to expect that their contracts will not be breached for frivolous or improper reasons.
These are just a few examples. If a plaintiff can show that, under the circumstances or characteristics of his contract, he was justified in expecting that the other party would not breach, then a voluntary breach by that party could well constitute a violation of the duty to deal fairly and in good faith.
On this record, there is ample evidence to support the conclusion that the parties’ reasonable expectations did not include the possibility of breach. Standard was repeatedly informed that Seaman’s needed a “binding com*781mitment. ” Throughout the negotiations, there was an emphasis on the need for such a commitment and for a stable relationship between Seaman’s and its supplier. Standard knew that Seaman’s lease, and, to some extent, the entire marina development depended on these factors. Under these circumstances, it would be reasonable to conclude that the parties’ justified expectations did not include the possibility of breach.
Under this cause of action, no independent showing of bad faith should be required. Where the possibility of breach was not reasonably expected at the inception of the contract, the voluntary breach of an acknowledged contract is in itself a violation of the duty to deal fairly and in good faith.
Standard’s breach did not take the form of a refusal to perform under the 1 terms of an acknowledged contract. Instead, Standard denied the existence yy of the contract to the federal agency and subsequently refused to stipulate if to its existence. This action was tantamount to a denial. Those denials-com/^ stituted anticipatory breaches of the contract. (Taylor v. Johnston (1975) 15 Cal.3d-130, 137 [123 Cal.Rptr. 641, 539 P.2d 425].)
In this setting, the simple fact that a breach occurred will not support tort recovery without a showing of bad faith. Just as a denial of the existence of a binding contract provides the basis for tort liability only upon a finding of bad faith (majority opn., ante, at pp. 769-770), a contract breach predicated upon such a denial will support tort recovery on the theory of unexpected and unacceptable breach only if the denial is found to have been made in bad faith. (See Sawyer v. Bank of America, supra, 83 Cal.App.3d at p. 139; Fletcher v. Western National Life Ins. Co., supra, 10 Cal.App.3d 376.)
m.
The trial court failed to include a bad faith requirement in its instruction on the duty to refrain from denying the existence of a binding contract. This failure constituted error. Recovery will lie in tort if the denial was made in bad faith.
The undisputed evidence at trial showed that Standard did not deny that a contract existed until after it was ordered by the federal government to supply fuel to Seaman’s. Until that time, Standard continually assured Seaman’s that, but for the federal regulations, the contract would be honored. Standard fostered this idea by helping Seaman’s to obtain and complete the forms necessary to secure relief from the federal regulations.
These actions on the part of Standard constitute strong evidence that it recognized that a binding contract existed. Standard also knew that an open *782repudiation of its obligation to perform would constitute a breach of contract for which it would be liable in damages. It would appear that Standard believed that a decision not to repudiate the contract and to rely on the regulations to justify nonperformance would effectively shield it from all liability.4 Clearly, using the federal regulations as a shield, Standard hoped to avoid both performance and liability for nonperformance of the contract, whose existence it could not deny.
An examination of the relationship between the defense of supervening legal impossibility and the duty of good faith and fair dealing is instructive. A contractual duty is discharged, and performance is excused, when performance is rendered impossible by a change in statute, ordinance, or administrative regulation after the contract is formed. (See Civ. Code, § 1511, subd. 1; 1 Witkin, Summary of Cal. Law (8th ed. 1973) Contracts, § 607, p. 517.) However, the covenant of good faith and fair dealing imposes certain duties on a contracting party if that party seeks to justify its nonperformance on this basis.
First, the party’s obligation to perform will be excused only if it has diligently attempted to contest the application of the new law. (McNally v. Moser (1956) 210 Md. 127 [122 A.2d 555, 561, 60 A.L.R.2d 388] [duty to seek zoning variance, special permit, or nonconforming use status]; Pennsylvania State Shopping Plazas, Inc. v. Olive (1961) 202 Va. 862 [120 S.E.2d 372, 375-376, 88 A.L.R.2d 1016] [duty to seek zoning variance].) “One may not rely on illegality or invalidity where the doing of that [which is] said to be forbidden may reasonably be made legal and possible through administrative or judicial action.” (McNally v. Moser, supra, 122 A.2d at p. 561.) “[A] party who seeks to justify his non-performance [as impracticable due to the operation of a governmental regulation or order] must have observed the duty of good faith and fair dealing ... in attempting, where appropriate, to avoid its application.” (Rest.2d Contracts, § 264, com. b; see also id., § 264, com. a, illus. 4.)
Further, the duty of good faith and fair dealing imposes an obligation on a contracting party to refrain from initiating or facilitating the enforcement of an order or regulation that would render performance illegal. (See Webster v. Southern Cal. First Nat. Bank (1977) 68 Cal.App.3d 407, 416 [137 *783Cal.Rptr. 293]; National Pave. Corp. v. Hutchinson Co. (1933) 132 Cal.App. 235 [22 P.2d 534]; cf. McNally v. Moser, supra, 122 A.2d at pp. 560-561; Colwell Co. v. Hubert (1967) 248 Cal.App.2d 567, 575 [56 Cal.Rptr. 753].) This negative duty is a corollary to the affirmative duty to seek an exemption from the application of such a law where the circumstances permit it.
In this case, federal fuel allocation regulations were promulgated after the contract between the parties had been formed. The regulations appeared to prohibit Standard from performing its contractual duty to supply fuel to Seaman’s. Standard responded initially by assuring Seaman’s that it would be willing to go ahead with the contract if the federal government could be persuaded to change the supply order. Standard provided Seaman’s with the forms necessary to secure relief from the regulations and helped Seaman’s fill them out.
By assisting Seaman’s in this way, Standard complied with its duty to take whatever reasonable steps were necessary to make the performance of its contractual obligations legal. The joint effort of the parties was successful and resulted in the issuance by the federal agency of a supply order that authorized Standard to supply fuel to Seaman’s.
In response, Standard abruptly reversed its position. It did not reaffirm its previously expressed willingness to go forward with the contract if the barrier posed by the regulations could be removed. Instead, Standard appealed the supply order it had helped Seaman’s to obtain. By appealing the order, Standard breached its duty to refrain from actively seeking the application of regulations that would excuse performance of its contractual obligations. (Webster v. Southern Cal. First Nat. Bank, supra, 68 Cal.App.3d at p. 416.)
Standard’s appeal was successful, and the order authorizing it to supply Seaman’s was rescinded. Standard was delighted, apparently believing that the decision shielded it from any contractual liability to Seaman’s. As the preceeding discussion of the applicable legal principles demonstrates, however, Standard’s contractual duties would not have been discharged if the chain of appeals and reversals regarding the supply order had ended there.
The decision rescinding the supply order was the direct result of Standard’s appeal. By taking the appeal, Standard breached its duty to refrain from actions that would make its performance legally impossible. Accordingly, the renewed application of the regulations to prohibit Standard from supplying Seaman’s with fuel would not have discharged Standard’s con*784tractual duty. Seaman’s would have been entitled to recover contract damages resulting from Standard’s breach of that duty, even though Standard’s only alternative to breach at that point would have required it to violate the federal regulations.
The chain of appeals and reversals did not stop with the decision rescinding the supply order, however. Seaman’s appealed again, this time relying on the existence of its supply contract with Standard as the basis for an exception to the regulations. Standard opposed the granting of an exception. For the first time in its dealings with the federal agency regarding the supply order, Standard now contended that no contract existed between the parties.
Despite the objections raised by Standard, Seaman’s obtained a favorable decision. Under the terms of the decision, Standard would be ordered to fulfill its supply obligations to Seaman’s, provided that the federal agency received a copy of a court decree establishing the existence of a valid contract between the parties. Seaman’s asked Standard to stipulate as to the existence of a contract. Standard refused.
Standard’s denial of the existence of the contract to the federal agency and the subsequent refusal to stipulate were anticipatory breaches of the contract. (Taylor v. Johnston, supra, 15 Cal.3d at p. 137.) Neither the breach nor the underlying resistance to an assertion of contract liability is a tort if undertaken in good faith. (See Sawyer v. Bank of America, supra, 83 Cal.App.3d at p. 139; Fletcher v. Western National Life Ins. Co., supra, 10 Cal.App.3d at p. 395.) In this case, however, Standard did not deny that a contract existed until it had been ordered by the federal government to supply fuel to Seaman’s. Moreover, Standard did not make its denials forthrightly as a defense to an action for breach of contract. It used them as a trump card in its final attempt to avoid all liability for nonperformance. The timing and the intended effect of both denials tend strongly to establish that they were made in bad faith.
I would affirm the judgment for Seaman’s for breach of contract and breach of the duty of good faith and fair dealing.
The petition of plaintiff and appellant for a rehearing was denied November 15, 1984. Bird, C. J., was of the opinion that the petition should be granted.

As one commentator put it, “Every morning the businessmen of America learn to their chagrin that their suppliers will not be delivering what they want when they want it. The goods will not arrive on time, they will be short count, and the only ones in stock are avocado green. If that were not bad enough, the same businessmen discover daily that their customers will not take and pay for what the businessmen think they ordered.” (Rosett, Contract Performance: Promises, Conditions and the Obligation to Communicate (1975) 22 UCLA L.Rev. 1083.)

In which case, the plaintiff is free to elect the remedy. (Crisci v. Security Ins. Co., supra, 66 Cal.2d at p. 432.)

 Sawyer v. Bank of America (1978) 83 Cal.App.3d 135, 139 [145 Cal.Rptr. 623], contains the following language suggesting that bad faith conduct in addition to the breach of contract is required for tort recovery: “[T]he tort of breaching an implied covenant of good faith and fair dealing consists in bad faith action, extraneous to the contract, with the motive intentionally to frustrate the obligee’s enjoyment of contract rights.” (Italics added.) To the extent that Sawyer states such a requirement, it should be disapproved.

Subdivision (c) of section 755 of 15 United States Code provides that “[t]here shall be available as a defense to any action brought for breach of contract in any Federal or State court arising out of delay or failure to provide, sell, or offer for sale or exchange crude oil, residual fuel oil, or any refined petroleum product, that such delay or failure was caused solely by compliance with the provisions of this chapter or with the regulation of any other order under this chapter.”