Court Opinion

ID: 9790973
Source: CourtListenerOpinion
Date Created: 2023-08-31 02:02:25.870549+00
Date Added: 2024-06-11T07:37:32.956332
License: Public Domain

Opinion
THE COURT.*
This case, which arises out of a complex factual setting, presents three issues for decision. (1) Was the letter agreement signed by Seaman’s Direct Buying Service, Inc. and Standard Oil of California, Inc. sufficient to satisfy the statute of frauds? (2) Is “intent” an element of a cause of action for intentional interference with contractual relations? (3) May a plaintiff recover in"' tort for breach of an implied covenant of good faith and fair dealing in [a noninsurance, commercial contract?
*759I.
Plaintiff, Seaman’s Direct Buying Service, Inc. (Seaman’s), is a close corporation composed of three shareholders. During the late 1960’s and early 1970’s, Seaman’s operated as a ship chandler, i.e., a dealer in ship supplies and equipment, in the City of Eureka (City). By 1970, Seaman’s business encompassed a number of activities including acting as a “general contractor” for incoming vessels, i.e., refurbishing their supplies, selling tax-free goods for offshore use, and managing a small marine fueling station as the consignee of Mobil Oil Company (Mobil).
Around this time, the City decided to condemn the decrepit waterfront area where Seaman’s was located for development into a modern marina. To this end, it sought funds from the federal Economic Development Agency (EDA). Seaman’s saw the redevelopment as a way to expand and modernize its operations. Accordingly, the company approached the City with a plan to lease a large portion of the new marina. Seaman’s planned to use some of the area for its own operations and to profitably sublet the remainder.
In early 1971, Seaman’s and the City signed an initial lease for a relatively small area, with the understanding that the lease could be renegotiated to include the larger area that Seaman’s wanted. The renegotiation was conditioned on Seaman’s providing evidence of financial responsibility to both the EDA and the City’s bonding consultants.
A major element of Seaman’s planned expansion, and the key to approval of the larger lease, was Seaman’s operation of a marine fuel dealership with modernized fueling equipment. To secure such a dealership, Seaman’s opened negotiations with several oil companies, but soon narrowed the field to Mobil and the defendant here, Standard Oil of California (Standard).
While negotiations with both companies were progressing, the City began pressuring Seaman’s for a final decision on the marina lease. The City’s bonding consultants demanded written evidence of a binding agreement with an oil supplier before they would approve leasing the larger area to Seaman’s.
Upon reaching a tentative agreement with Standard, Seaman’s requested evidence of that agreement—“something that would be binding on both parties”—to show to the City. In response, Standard sent a “letter of intent” setting forth the terms of negotiation. However, the letter explicitly provid*760ed that the terms were not binding. Since Seaman’s needed a binding commitment, it continued to negotiate with Mobil.
Finally, Seaman’s and Standard reached an agreement on all major points. Upon Seaman’s repeated requests for an instrument evidencing a binding commitment, Standard, on October 11, 1972, wrote a letter setting forth the terms of the agreement. In the letter, Standard proposed (1) to sign a Chevron Marine Dealer agreement with Seaman’s for an initial term of 10 years; (2) to advance Seaman’s the cost of the new fueling facilities, or up to $75,000, which sum was to be amortized over the life of the agreement at the rate of one cent per gallon of oil; (3) to provide a 4.5 cent discount per gallon off the posted price of fuel; and (4) to sign an agreement providing for Standard’s right to cure in case of default by Seaman’s.
The letter concluded “this offer is subject to our mutual agreement on the specific wording of contracts to be drawn, endorsement and/or approval by governmental offices involved, and continued approval of Seaman’s credit status at the time the agreements are to go into effect.[1] If this approach and proposal meets with your approval, we would appreciate your acknowledgement and acceptance of these terms by signing and returning two copies of this letter. We can then proceed further with the drafting of the final agreements . . . .” (Italics added.) The letter was signed by an agent of Standard and—under the legend, “we accept and agree to the terms and conditions stated herein”— by an agent of Seaman’s. (Italics added.)
According to Seaman’s, the signing of this letter was a momentous occasion. One of those present suggested, “Well, shouldn’t we have souvenir pens here and I will exchange pens,” as “when the President signs a bill into law.” Standard’s representative exclaimed that it was “going to be great doing business with [Seaman’s]” and that the agreement was a “feather in his cap.” One of the parties declared, “We finally have a contract” and “we’re on our way.”
Seaman’s immediately presented the letter to the City and shortly thereafter signed a 40-year lease for the entire area it sought in the marina. Seaman’s also ended negotiations with Mobil after informing them that a contract had been signed with Standard.
Conditions in the oil industry soon changed, however. By the end of 1972, what had been a “buyer’s market” had become a “seller’s market.” As a *761result, in January of 1973, Standard adopted a “no new business” policy. During 1973, Standard and Seaman’s signed a temporary marine dealership agreement designed to supply Seaman’s with the fuel it needed while the new marina was under construction. The marine dealership agreement contemplated in the October 11, 1972, letter, however, was never signed.
In November of 1973, a federal program mandating the allocation of petroleum products among existing customers went into effect. By letter dated November 20, 1973, Standard told Seaman’s that the new federal “regulations require suppliers to supply those purchasers to whom they sold during [the base period of 1972]. Our records disclose that we did not supply diesel fuel to you at any time during 1972 . . . . [f] Under the circumstances, we will not be able to go forward with the financing we [have] been discussing. In the event the mandatory program is withdrawn and our supply situation improves, we would, of course, be pleased to again discuss supplying your needs.”
In telephone calls and personal meetings with Seaman’s, Standard indicated that the new federal regulations were the only barrier to the contract. “[I]f it wasn’t for the [federal agency], . . . [Standard] would be willing to go ahead with the contract . . . .” “If [Seaman’s could] get the federal government to change that order so that Standard could supply [Seaman’s] with fuel [Standard] would be very happy . . . .” Standard even supplied Seaman’s with the forms necessary to seek a supply authorization from the federal agency and helped fill them out.
As a result of these efforts, a supply order was issued on February 4, 1974. Standard responded by changing its position. The company contended now that no binding agreement with Seaman’s had ever been reached. Therefore, Standard decided to appeal the order “[b]ecause [it] did not want to take on any new business.” When Seaman’s learned of the appeal, it twice wrote to Standard requesting an explanation. None was forthcoming. Standard’s federal appeal was successful. Internal memoranda reveal Standard’s reaction to this result: “[g]reat!!” “We are recommending to other divisions] that they follow your example.”
Seaman’s then appealed and this decision was, in turn, reversed. The new decision provided that an order “directing] [Standard] to fulfill supply obligations to Seaman’s” would be issued upon the filing of a copy of a court decree that a valid contract existed between the parties under state law.
Seaman’s asked Standard to stipulate to the existence of a contract, explaining that it could not continue in operation throughout the time that a *762trial would take. In reply, Standard’s representative laughed and said, “See you in court.” Seaman’s testified that if Standard had cooperated, Seaman’s would have borrowed funds to remain in business until 1976 when the new marina opened.
Seaman’s discontinued operations in early 1975. Soon thereafter, the company filed suit against Standard, charging Standard with 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. The case was tried before a jury which returned a verdict for Seaman’s on all but the fraud cause of action. For breach of contract, the jury awarded compensatory damages of $397,050. For tortious breach of the implied covenant of good faith and fair dealing, they awarded $397,050 in compensatory damages and $11,058,810 in punitive damages. Finally, for intentional interference with an advantageous business relationship, the jury set compensatory damages at $1,588,200 and punitive damages at $11,058,810.
Standard moved for a new trial, charging, inter alia, that the damages were excessive as a matter of law. The trial court conditionally granted the motion unless Seaman’s consented to a reduction of punitive damages on the interference count to $6 million and on the good faith count to $1 million. Seaman’s consented to the reduction, and judgment was entered accordingly. Standard appeals from the judgment. Seaman’s has filed a cross-appeal.
H.
The first issue this court must decide is whether the October 11th letter signed by Seaman’s and Standard is sufficient to satisfy the statute of frauds.
California’s general statute of frauds is found at section 1624 of the Civil Code. That section provides that “[a]n agreement that by its terms is not to be performed within a year from the making thereof” is “invalid, unless the same, or some note or memorandum thereof, is in writing and subscribed by the party to be charged or by his agent . . . .”
It is well settled that to be enforceable under this statute, such writing must “contain the essential elements of a specific, consummated agreement.” (Franklin v. Hansen (1963) 59 Cal.2d 570, 574 [30 Cal.Rptr. 530, 381 P.2d 386].) Only the essential terms must be stated, “ ‘details or particulars’ need not [be]. What is essential depends on the agreement and its *763context and also on the subsequent conduct of the parties . . . .” (Rest.2d Contracts, § 131, com. g, p. 338.)
Standard contends that the October 11th letter is not sufficiently precise, with respect to the essential terms of price, parties, and quantity, to pass muster. Put simply, this contention is not well taken.
The October 11th letter evidences an agreement between the parties that Seaman’s would become a “Chevron,” i.e., Standard, dealer. The price Seaman’s agreed to pay for fuel was clearly set forth in the letter as 4.5 cents less than Standard’s wholesale posted price at the time of delivery. Thus, both “parties” and “price” were established with sufficient specificity.
Moreover, although no express quantity term was set forth, none was necessary here.  An “ ‘agreement will not be held deficient [under the statute of frauds] for the failure to express that which is clearly implied when the writing is interpreted in accordance with the intentions of the parties.’ [Citations.]” (Seek v. Foulks (1972) 25 Cal.App.3d 556, 568 [102 Cal.Rptr. 170].)  The October 11th letter is evidence of a dealership arrangement. The obvious implication of such an arrangement is that the wholesaler will supply as much fuel as the dealer requires. That is, the parties entered into a “requirements” contract.
Such contracts “ ‘ “have been enforced by the courts with little difficulty, where the surrounding circumstances indicate the approximate scope of the promise.”’” (Fisher v. Parsons (1963) 213 Cal.App.2d 829, 834 [29 Cal.Rptr. 210], quoting 1 Williston on Contracts (3d ed. 1957) § 104A, p. 402.)  Since “requirements” contracts are sufficiently precise to be enforceable, they are sufficiently precise to satisfy the statute of frauds. (See, infra, 2 Anderson, Uniform Commercial Code (3d ed. 1982) § 2-201:113, p. 70 [considering same issue under Uniform Commercial Code (UCC)].)
 Thus, the letter contained all the “essential terms” of the contract, and is enforceable under Civil Code section 1624.2
*764Since this contract contemplated a sale of goods, the requirements of the statute of frauds of the UCC must also be met. (Cal. U. Com. Code, § 2201.) To be sufficient under this statute, the writing must be signed, it must indicate that a contract has been made, and it must specify a quantity term. (U.C.C. com. 1, 23A West’s Cal. Ann. Com. Code (1964 ed.) p. 132.)
Standard argues again that the letter fails to satisfy the UCC’s statute of frauds because a quantity term is not specified. However, as noted, the letter evidences a “requirements” contract. This is sufficient to satisfy the UCC’s statute of frauds.  “[S]ince a written contract for output and requirements is binding under the [UCC], it should follow that a writing is sufficient which indicates that there has been a ‘real transaction’ for the sale of output or for the purchase of requirements.” (2 Anderson, Uniform Commercial Code (3d ed. 1982) § 2-201:113, p. 70, fn. omitted.)
The overwhelming weight of authority supports this view. (R. F. Weaver & Assoc., Inc. v. Asphalt Const. Inc. (D.C. Cir. 1978) 587 F.2d 1315; Riegel Fiber Corp. v. Anderson Gin. Co. (5th Cir. 1975) 512 F.2d 784, 788 and fn. 7; Rockland Industries, Inc. v. Frank Kasmir Assoc. (N.D.Tex. 1979) 470 F.Supp. 1176; R. L. Kimsey Cotton Co., Inc. v. Ferguson (1975) 233 Ga. 962 [214 S.E.2d 360, 363]; Harris v. Hine (1974) 232 Ga. 183 [205 S.E.2d 847, 850]; Fortune Furn. Mfg. Co., Inc. v. Mid-South Plastic Fab. Co. (Miss. 1975) 310 So.2d 725, 728; Kubik v. J & R Foods of Oregon, Inc. (1978) 282 Ore. 179 [577 P.2d 518]; Port City Construction Co., Inc. v. Henderson (1972) 48 Ala.App. 639 [266 So.2d 896].)3
It is important to remember that “[t]he primary purpose of the Statute [of frauds] is evidentiary, to require reliable evidence of the existence and terms of the contract and to prevent enforcement through fraud or perjury of contracts never in fact made .... Where only an evidentiary purpose is served, the requirement of a memorandum is read in the light of the dispute which arises and the admissions of the party to be charged; there is *765no need for evidence on points not in dispute.”4 (Rest.2d Contracts, § 131, com. c, p. 335, italics added.)  Standard signed a letter which contained, by its own terms, an “offer” of contract. Seaman’s “accepted” this offer—again the terms are Standard’s—by signing the letter and returning one copy. The evidence leaves no doubt a contract was made. The requirements of the statute of frauds were more than adequately met here.
III.
This court must next consider the role of “intent” or “motive” in the tort of “intentional interference with contractual relations.” According to Standard, its “motive” or “purpose” in interfering with Seaman’s contract with the City is critical to a finding of liability. Seaman’s contends, in turn, that Standard’s motive is irrelevant—it is enough that Standard knew that interference with the contract was “substantially certain” to result from its conduct. Both parties’ arguments, however, betray some confusion about the function and meaning of “intent” in this tort.
Intentional interference with contractual relations has its roots in the tort of “inducing breach of contract.” Both are intentional torts. As this court explained in an early case,  “The act of inducing the breach must be an intentional one. If the actor had no knowledge of the existence of the contract or his actions were not intended to induce a breach, he cannot be held liable though an actual breach results from his lawful and proper acts. (Rest., Torts, sec. 766, comment e; [citations].)” (Imperial Ice Co. v. Rossier (1941) 18 Cal.2d 33, 37 [112 P.2d 631], italics added; Charles C. Chapman Building Co. v. California Mart (1969) 2 Cal.App.3d 846, 853 [82 Cal.Rptr. 830]; Springer v. Singleton (1967) 256 Cal.App.2d 184, 188 [63 Cal.Rptr. 770, 27 A.L.R.3d 1220].)
The Restatement section cited by the court explains, “The essential thing is the purpose to cause the result. If the actor does not have this purpose, his conduct does not subject him to liability under this rule even if it has the unintended effect of deterring the third person from dealing with the other." (Rest., Torts, § 766, com. d, italics added.) It is not enough that the actor intended to perform the acts which caused the result—he or she must have intended to cause the result itself.
*766In recent years, the tort of “inducing breach of contract” has expanded to permit liability where the defendant does not literally induce a breach of contract, but makes plaintiff’s performance of the contract “more expensive or burdensome” (Lipman v. Brisbane Elementary Sch. Dist. (1961) 55 Cal.2d 224, 232 [11 Cal.Rptr. 97, 359 P.2d 465]), or interferes with the formation of a prospective economic relationship (Buckaloo v. Johnson (1975) 14 Cal.3d 815, 827 [122 Cal.Rptr. 745, 537 P.2d 865]). The requirement that the defendant act with culpable intent, though, has remained.
Thus, in an action for inducing breach of contract it is essential that plaintiff plead and prove that the defendant “intended to induce a breach thereof . . . .” (Abrams & Fox v. Briney (1974) 39 Cal.App.3d 604, 608 [114 Cal.Rptr. 328], italics added; H & M Associates v. City of El Centro (1980) 109 Cal.App.3d 399, 405 [167 Cal.Rptr. 392]; Richardson v. La Rancherita (1979) 98 Cal.App.3d 73, 80 [159 Cal.Rptr. 285]; Mayes v. Sturdy Northern Sales, Inc. (1979) 91 Cal.App.3d 69, 78 [154 Cal.Rptr. 43]; see Imperial Ice Co. v. Rossier, supra, 18 Cal.2d at p. 39.)  Similarly, to prevail on a cause of action for intentional interference with prospective economic advantage, plaintiff must plead and prove “intentional acts on the part of the defendant designed to disrupt the relationship.” (Buckaloo v. Johnson, supra, 14 Cal.3d at p. 827, italics added; Institute of Veterinary Pathology, Inc. v. California Health Laboratories, Inc. (1981) 116 Cal.App.3d 111, 126 [172 Cal.Rptr. 74]; Lowell v. Mother’s Cake & Cookie Co. (1978) 79 Cal.App.3d 13, 18-19 [144 Cal.Rptr. 664].)
Only if and when plaintiff establishes an “intent to interfere” does the issue of “justification” come into play. (Lowell v. Mother’s Cake & Cookie Co., supra, 79 Cal.App.3d at pp. 18-19.) “[Wjhile defendant’s culpable intent is an element of the cause of action to be pleaded and proved by plaintiff, defendant’s justification is an affirmative defense” in the torts of interference with an existing or prospective economic relationship. (A. F. Arnold & Co. v. Pacific Professional Ins., Inc. (1972) 27 Cal.App.3d 710, 714 [104 Cal.Rptr. 96].) It is here that defendant’s motive for intentionally interfering becomes relevant. “Given the intention to interfere with the contract, liability usually will turn upon the ultimate purpose or object which the defendant is seeking to advance.” (Prosser, Torts (4th ed. 1971) § 129, p. 942.)
Seaman’s is mistaken, therefore, when it asserts that Standard’s “intent” to interfere with the contract is not a necessary prerequisite to *767liability.5 It is.  Similarly, Standard is mistaken when it implies that an improper “motive” is an element of plaintiff’s cause of action rather than a factor in defendant’s affirmative defense. It is not.
In this case, the jury was instructed that “[a] defendant is deemed to have acted intentionally if it knew that disruption or interference with an advantageous relationship was substantially certain to result from its conduct.”
Intent, of course, may be established by inference as well as by direct proof. Thus, the trial court could properly have instructed the jury that it might infer culpable intent from conduct “substantially certain” to interfere with the contract.  Here, though, the jury was instructed that culpable intent was “deemed” to exist if Standard knew that its conduct would interfere with the contract. Under the principles outlined above, this instruction was clearly in error. (See Gantry Constr. Co. v. American Pipe & Constr. Co. (1975) 49 Cal.App.3d 186, 199 [122 Cal.Rptr. 834].)
“[I]f it appears that error in giving an improper instruction was likely to mislead the jury and thus to become a factor in its verdict, it is prejudicial and ground for reversal.” (Henderson v. Harnischfeger Corp. (1974) 12 Cal.3d 663, 670 [117 Cal.Rptr. 1, 527 P.2d 353].)  Here, there is simply no evidence in the record that Standard acted with the purpose or design of causing Seaman’s to breach its contract with City. Rather, it seems obvious, and Seaman’s does not contend otherwise, that the breach was merely an incidental, if foreseeable, consequence of Standard’s action. Under these circumstances, it is clear that plaintiff failed to carry its burden of proving “intent.” Thus, the erroneous jury instructions were clearly prejudicial, and the judgment for Seaman’s on this count must be reversed.
IV.
The principal issue raised by this appeal is 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. Standard contends that a tort action for breach of the implied covenant has always been, and should continue to be, limited to cases where the underlying contract is *768one of insurance. Seaman’s, pointing to several recent cases decided by this court and the Courts of Appeal, challenges this contention. A brief review of the development of the tort is in order.
It is well settled that, in California, the law implies in every contract a covenant of good faith and fair dealing. (1 Witkin, Summary of Cal. Law (8th ed. 1973) Contracts, § 576, p. 493; see, e.g., Egan v. Mutual of Omaha Ins. Co. (1979) 24 Cal.3d 809, 818 [169 Cal.Rptr. 691, 620 P.2d 141]; Gruenberg v. Aetna Ins. Co. (1973) 9 Cal.3d 566, 573 [108 Cal.Rptr. 480, 510 P.2d 1032]; Comunale v. Traders & General Ins. Co. (1958) 50 Cal.2d 654, 658 [328 P.2d 198, 68 A.L.R.2d 883]; Crisci v. Security Ins. Co. (1967) 66 Cal.2d 425 , 429 [58 Cal.Rptr. 13, 426 P.2d 173] [“in every contract, including policies of insurance, there is an implied covenant of good faith and fair dealing . . . .” (Italics added.)]) Broadly stated, that covenant requires that neither party do anything which will deprive the other of the benefits of the agreement. (1 Witkin, op. cit. supra, at p. 493.)
California courts have recognized the existence of this covenant, and enforced it, in cases involving a wide variety of contracts. Courts have provided contract remedies for breach of the covenant in such diverse contracts as agreements to make mutual wills (Brown v. Superior Court (1949) 34 Cal.2d 559, 564 [212 P.2d 878] [specific performance]), agreements to sell real property (Osborne v. Cal-Am Financial Corp. (1978) 80 Cal.App.3d 259, 266 [145 Cal.Rptr. 584] [rescission]), employee incentive contracts (Foley v. U. S. Paving Co. (1968) 262 Cal.App.2d 499, 505 [68 Cal.Rptr. 780] [damages]), leases (Cordonier v. Central Shopping Plaza Associates (1978) 82 Cal.App.3d 991, 1000, 1002 [147 Cal.Rptr. 558] [same]), and contracts to provide utility services (Masonite Corp. v. Pacific Gas & Electric Co. (1976) 65 Cal.App.3d 1, 9 [135 Cal.Rptr. 170] [same]).
In the seminal cases of Comunale v. Traders & General Ins. Co., supra, 50 Cal.2d 654, and Crisci v. Security Ins. Co., supra, 66 Cal.2d 425, 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. (Crisci, supra, at p. 432.)
While the proposition that the law implies a covenant of good faith and fair dealing in all contracts is well established ^he 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 covenanrin an insurance contract, we have emphasized the /‘special relationship” between insurer and insured, characterized by elepients of public interest, adhesion, and fiduciary responsibility. (Egan v. Mutual of *769Omaha Ins. Co., supra, 24 Cal.3d at p. 820.) No doubt there are other relationships with similar characteristics and deserving of similar legal treatment.6
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 equaTbargaining 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 noFbe permitfed-tb"di^lmm_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.7 In such contracts, it may be difficult to distinguish_between breach of the covenanf and'breach of contract, and there is the risk tHat inteijecting 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^ ~ --
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.’” (Adams v. Crater Well Drilling, Inc. (1976) 276 Ore. 789 [556 P.2d 679, 681].) 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 *770“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. (See Jones v. Abriani (1976) 169 Ind. 556 [350 N.E.2d 635].) Acceptance of tort remedies in such a situation is not likely to intrude upon the bargaining relátiotiship or upset reasonable expections of the contracting parties.
Turning to the facts of this case, the jury was instructed that “where a binding contract [has] been agreed upon, the law implies a covenant that neither party will deny the existence of a contract, since doing so violates the legal prohibition against doing anything to prevent realization of the promises of the performance of the contract.”
According to Standard, this instruction erroneously allowed the jury to hold Standard liable if it found that Standard denied the existence of a valid contract, regardless of whether that denial was in good or bad faith.
Of course, “it is not a tort for a contractual obligor to dispute his liability under [a] contract” (Sawyer v. Bank of America (1978) 83 Cal.App.3d 135, 139 [145 Cal.Rptr. 623]) if the dispute is honest and undertaken in good faith. (See Fletcher v. Western National Life Ins. Co. (1970) 10 Cal.App.3d 376 [89 Cal.Rptr. 78, 47 A.L.R.3d 286].) Similarly, it is not a tort for one party to deny, in good faith, the existence of a binding contract.
Since Standard’s denial of the existence of a binding contract would not have been tortious if made in good faith, the trial court erred in failing to so instruct the jury. It is then necessary to decide whether this error requires that the judgment be reversed.
Article VI, section 13 of the California Constitution provides that error in instructing the jury shall be grounds for reversal only when the reviewing court, “after an examination of the entire cause, including the evidence,” concludes that the error has resulted in a “miscarriage of justice.” In interpreting the phrase “miscarriage of justice” as used in section 13, this court has formulated the following general test.  “[A] ‘miscarriage of justice’ should be declared only when the court, ‘after an examination of the entire cause, including the evidence,’ is of the ‘opinion’ that it is reasonably probable that a result more favorable to the appealing party would have been reached in the absence of the error.” (People v. Watson (1956) 46 Cal.2d 818, 836 [299 P.2d 243].) The test is “necessarily [] based updn reasonable probabilities rather than upon mere possibilities; otherwise the entire purpose of the constitutional provision would be defeated.” (Id., at p. 837.)
*771The test of reversible error has also been stated in terms of the likelihood that the improper instruction misled the jury. (See Henderson v. Harnischfeger Corp., supra, 12 Cal.3d at p. 670; Butigan v. Yellow Cab Co. (1958) 49 Cal.2d 652, 660-661 [320 P.2d 500, 65 A.L.R.2d 1].)  While there is no precise formula for measuring the prejudicial effect of an erroneous instruction, the following factors may be considered: “(1) the degree of conflict in the evidence on critical issues [citations]; (2) whether respondent’s argument to the jury may have contributed to the instruction’s misleading effect [citation]; (3) whether the jury requested a rereading of the erroneous instruction [citation] or of related evidence [citation]; (4) the closeness of the jury’s verdict [citation]; and (5) the effect of other instructions in remedying the error [citations].” (LeMons v. Regents of University of California (1978) 21 Cal.3d 869, 876 [148 Cal.Rptr. 355, 582 P.2d 946].)
In this case, there is a considerable degree of conflict in the evidence on the issue of whether Standard denied the existence of a contract in bad faith. On the one hand, the record contains evidence from which the jury could have inferred that Standard acted in bad faith and without a reasonable belief in its position when it denied the existence of a binding contract. The timing of the denials and the circumstances in which they were made would support the conclusion that Standard was cynically attempting to avoid both performance and liability for nonperformance of contractual obligations which it privately recognized to be binding.
On the other hand, Standard offered conflicting evidence from which the jury could have concluded that it acted in good faith. Standard argued strenuously that it never viewed the October 11, 1972, document as a binding contract since it believed that the document did not contain essential elements and, therefore, failed to satisfy the statute of frauds. Hence, application of the first of the five factors identified in LeMons supports a finding of prejudice.
The second LeMons factor concerns the effect of Seaman’s arguments to the jury. In his closing argument, counsel for Seaman’s made at least two statements which may have contributed to the misleading effect of the instruction. First, he told the jury that it should award punitive damages to teach Standard that “[y]ou can’t threaten people with endless and expensive litigation. That’s an unjust hardship.” The jury was not told that if Standard believed in good faith that no contract existed, Standard had a right to refuse to stipulate to the existence of a contract and to force Seaman’s to litigate its claim. Second, in his rebuttal, Seaman’s attorney acknowledged that Standard had the right to appeal the February supply order. However, he *772added that if Standard appealed “erroneously, vexatiously to harass—and doesn’t anybody think that that was the motive with regard to Seaman’s— then they pay the piper. It is not sufficient to say that they had the right.” (Italics added.)8
These arguments reinforced the misleading effect of the instruction. Both statements suggested that Standard could be held liable for denying the existence of the contract if the denials were subsequently shown to be erroneous, without any requirement for a finding of bad faith.
Seaman’s arguments also included other statements aimed at persuading the jury that the denials were in fact made in bad faith. Both in his opening statement and in his closing argument, counsel for Seaman’s stressed certain evidence which he claimed established that Standard had believed prior to its denials that a binding contract existed.
The evidence in question was the deposition testimony of Ernest Bodnar, an independent financial consultant. Bodnar’s firm was hired by the City of Eureka to evaluate Seaman’s financial solvency and ability to pay the rent under the proposed port facility lease. In the course of the evaluation, Bodnar became convinced that Seaman’s acceptability as a tenant turned on whether the October 11, 1972, letter constituted a firm commitment by Standard to supply Seaman’s with fuel on the terms set forth in the letter.
Bodnar testified that he telephoned Mr. MacDonald, a Standard official, to verify this fact. After speaking with MacDonald, it was his understanding that Standard intended to comply with the terms of the letter. Bodnar also testified that he had relied on the conversation in preparing a favorable report to the city on the prospect of a Seaman’s tenancy.
In his closing argument, Seaman’s attorney returned to this testimony to argue that Standard knew before its denials that it had a binding contract with Seaman’s.9
*773The Bodnar testimony might have persuaded the jury that Standard’s denials were in fact made in bad faith. However, Seaman’s arguments regarding the effect of that testimony did not inform the jury that before liability could be imposed, a finding of bad faith was required. Thus, they did not serve to counteract the tendency of other statements made by Seaman’s attorney to reinforce the misleading effect of the erroneous instruction.
The third factor considered in measuring prejudice is whether the jury requested a rereading of the erroneous instruction or of related evidence. Here, the jury requested that the written instructions on all of the causes of action be left with them during their deliberations. The instructions on the cause of action for breach of the implied covenant of good faith and fair dealing were not singled out. Furthermore, it is not clear from the record whether the request included the erroneous instruction on the specific duty not to deny the existence of a binding contract. As a result, the jury’s request for the instructions is of little assistance in the determination of prejudice.
However the jury also made a request—which it later withdrew—for a rereading of the Bodnar testimony. As previously noted, that testimony was closely related to the subject matter of the erroneous instruction.
For purposes of determining the instruction’s prejudicial effect, the retraction of the request is even more significant than the request itself. The record reflects the following colloquy between the court and the jury foreman: “The Court: [Y]ou asked to have the testimony of Mr. Bodnar reread, or certain portions about his state of mind and about an alleged phone call made to Mr. MacDonald. The daily transcripts have been typed up, and the court reporter will read to you that portion of the testimony, [f] Jury Foreman Flohaug: Your Honor, at this point I don’t think we need that portion that we requested, [t] We had talked about it prior, but I don’t think it is any longer necessary to our train of thought on it.”
The request for a rereading of the Bodnar testimony suggests that the jury initially tried to decide whether Standard acted in bad faith when it subsequently denied the existence of a binding contract.10 However, the fore*774man’s retraction of the request, together with his explanation that Bodnar’s testimony about the discussion with MacDonald was no longer “necessary to [the jury’s] train of thought,” indicate that the jury concluded that no finding of bad faith was required. Thus, the retraction of the request supports Standard’s contention that the effect of the erroneous instruction was prejudicial.
Only nine of the twelve jurors concurred in the verdict for Seaman’s on the cause of action for breach of the implied covenant of good faith and fair dealing. Here, as in Robinson v. Cable (1961) 55 Cal.2d 425, 428 [11 Cal.Rptr. 377, 359 P.2d 929], “[t]he fact that only the bare number of jurors required to reach a verdict agreed upon the verdict for [plaintiff] lends further support to the probability that the erroneous instruction was the factor which tipped the scales in [plaintiff’s] favor.” (Accord LeMons v. Regents of University of California, supra, 21 Cal.3d at p. 877.)
Finally, none of the other instructions remedied the error. Thus, each of the five factors which have been considered in measuring the effect of an erroneous instruction points to the same conclusion.
“Where it seems probable that the jury’s verdict may have been based on the erroneous instruction prejudice appears and this court ‘should not speculate upon the basis of the verdict.’ ” (Robinson v. Cable, supra, 55 Cal.2d at p. 428; Henderson v. Harnischfeger Corp., supra, 12 Cal.3d at p. 670.)  Here, it seems probable that the jury may have imposed liability on Standard as a result of the trial court’s failure to instruct as to the bad faith requirement. Accordingly, the judgment in favor of Seaman’s for breach of the duty of good faith and fair dealing must be reversed.
V.
The judgment in favor of Seaman’s for breach of contract is affirmed. The judgment for intentional interference with contractual relations and for breach of the duty of good faith and fair dealing is reversed11 with directions to conduct further proceedings consistent with this opinion.

Before Bird, C. J., Mosk, J., Kaus, J., Broussard, J., Reynoso, J., and Grodin, J.

Internal memoranda indicate that Standard contemplated using nonapproval of Seaman’s credit as an excuse to justify nonperformance should the terms of the agreement later prove unfavorable.

Standard also argues that the letter was insufficient under the statute of frauds because it was ambiguous as to which party had the option to renew the contract and which party would get the benefit of the 1 cent discount upon full amortization of the loan. However, it is far from clear that the parties considered these terms “essential” to their agreement. Moreover, the fact that a term in a contract is susceptible of two interpretations does not make the contract invalid under the statute of frauds. Extrinsic evidence is always admissible to resolve ambiguities on the face of a contract. (Franklin v. Hansen, supra, 59 Cal.2d at p. 574.)

The “contrary” authority cited by Standard is simply not on point. (See Doral Hosiery Corporation v. Sav-A-Stop, Inc. (E.D.Pa. 1974) 377 F.Supp. 387 [not a “requirement” or “output” contract]; Cox Caulking, etc. v. Brockett Distributing Co. (1979) 150 Ga.App. 424 [258 S.E.2d 51, 52] [same]; Ace Concrete Prod. v. Chas. J. Rogers Const. (1976) 69 Mich.App. 610 [245 N.W.2d 353, 354] [the space for the quantity term on the memorandum was left blank; the memorandum said only “concrete for tunnels”]; Lowe’s Companies, Inc. v. Lipe (1973) 20 N.C.App. 106 [201 S.E.2d 81, 82] [no writing made any reference to quantity; plaintiff alleged only that he “agreed to furnish the Defendants with various building materials”]; Alaska Ind. Fish Mkg. Ass’n. v. New England Fish Co. (1976) 15 Wn.App. 154 [548 P.2d 348] [no written quantity term at all; no allegation of a “requirement” or “output" contract].)

In this regard, it is worthy of note that even Standard’s agent seemed to agree that the letter contained all “essential” terms. When asked at trial “the big terms are all set forth in the record, right?,” he answered, “the terms of negotiations are, yes.” Standard’s position at trial seemed to rely not on the fact that essential terms were missing from the letter/ contract, but that a binding agreement had never been reached.

Citing J’Aire Corp. v. Gregory (1979) 24 Cal.3d 799, 805 [157 Cal.Rptr. 407, 598 P.2d 60], Seaman’s contends that intent is no longer a necessary element of the cause of action for intentional interference with contractual relations. J’Aire, however, concerned negligent interference with prospective economic advantage. It is sufficient to note that, regardless of the possible merits of an action for negligent interference on these facts, Seaman’s neither pled nor proved nor submitted to the jury any such theory of liability.

In Tameny v. Atlantic Richfield Co. (1980) 27 Cal.3d 167, 179, footnote 12 [164 Cal.Rptr. 839, 610 P.2d 1330], this court intimated that breach of the covenant of good faith and fair dealing in the employment relationship might give rise to tort remedies. That relationship has some of the same characteristics as the relationship between insurer and insured. (See Louderback & Jurika, Standards for Limiting the Tort of Bad Faith Breach of Contract (1981) 16 U.S.F. L.Rev. 187, 220-226.)

California’s Commercial Code section 1102 prohibits disclaimer of the good faith obligation, as well as the obligations of diligence, reasonableness, and care, but provides that “the parties may by agreement determine the standards by which the performance of such obligations is to be measured if such standards are not manifestly unreasonable.”

The latter statements were made in the course of argument regarding the cause of action for intentional interference with contractual relations. However, the suggestion that Standard could be held liable if the basis of its administrative appeal—the lack of a binding contract-turned out to be merely erroneous applied with equal force to the cause of action for breach of the implied covenant of good faith and fair dealing.

At one point in his argument, Seaman’s attorney suggested that Standard failed to produce MacDonald at trial because it recognized that his affirmance and subsequent denial of the existence of the contract with Seaman’s was unexplainable and extremely damaging to Standard. The jury was told that “Mr. Bodnar says, ... ‘I called MacDonald and verified with him that Standard had a deal.’ Any denial of that? This is the same MacDonald who three or four months or a year later is saying to [Seaman’s], ‘We never had a deal .... We’ll fight you to the highest court in the land. ’ It’s the same MacDonald. Why didn’t you see *773that Mr. MacDonald? I would like to have seen him in this courtroom.”
In his rebuttal, counsel for Seaman’s again stressed the Bodnar testimony, telling the jury that “Bodnar called MacDonald and MacDonald says, ‘Yes. We have a deal. We’ve got a firm deal . . . .’”

The request might also have been directed solely to the threshold question of whether a binding contract had been formed. The jury had to resolve that question in order to reach a verdict, not only on the cause of action for breach of the implied covenant of good faith and fair dealing, but also on the cause of action for breach of contract. However, at the same time that it requested the Bodnar testimony, the jury made another request which establishes *774that it had already reached a firm decision on the existence of a binding contract. That request read: “‘We took a vote to determine whether or not the 10-11-72 letter was a contract. Do we have to record this anywhere?’ ”

Reversal of the judgment for Seaman’s on the actions for intentional interference and breach of the implied covenant of good faith and fair dealing makes consideration of Seaman’s cross-appeal from the remittitur of punitive damages unnecessary.