Seaman’s Direct Buying Service Inc.

v.

Standard Oil Co. Of Cal.

36 Cal 3d 752, 686 P.2d 1158 (1984)

[The plaintiff, Seaman's Direct Buying Service, Inc., a dealer in ship supplies, sued Standard Oil Company of California for breaching a marine dealership contract that Seaman's needed in order to lease marine space from the City of Eureka, California. When conditions in the oil industry changed and a federal allocation program went into effect, Standard told Seaman's that federal regulations prevented performance of the contract.]

In telephone calls and personal meetings with Seaman's, Standard indicated that the new federal regulations were the only barrier to the contract. "[If 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 agrément with Seaman's had ever been reached. Therefore, Standard decided to appeal the order "[because [it] did not want to take 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: "[great!!" "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 "direct[ing] [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 trial 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 $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 jugement was entered accordingly.Standard appeals from the judgment. Seaman's has filed a cross-appeal.

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 one 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.. . . Broadly stated, that covenant requires that neither party do anything which will deprive the other of the benefits of the agreement. 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. (Egan v. Mutual of Omaha Ins. Co., 24 Cal.3d at p. 820, 169 Cal.Rptr. 691, 620 P.2d 141.) 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.

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.' " (Crater Well Drilling, Inc. (1976) 276 Or. 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 "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. 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.

[The court reversed the judgment for Seaman's and remanded for further proceedings on

the grounds that the trial judge gave erroneous instructions to the jury.]