FREEMAN MILLS INCORPORATED v. BELCHER OIL COMPANY (1994)

In a breach of contract action masquerading as a tort claim, we reverse a judgment in favor of the plaintiff and remand for a limited new trial on the issue of breach of contract damages.   Along the way, we suggest it is time for the Supreme Court to reexamine the tort of “bad faith denial of contract.”

FACTS

In June 1987, Belcher Oil Company retained Morgan, Lewis & Bockius 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, Lewis partner (Donald Smaltz), Belcher Oil was to pay for costs incurred on its behalf, including fees for accountants.   In February 1988, after first obtaining Dunker's express authorization, Smaltz hired the accounting firm of Freeman & Mills, Incorporated, to provide a financial analysis and litigation support for Belcher Oil in the Florida lawsuit.   In March, an engagement letter was signed by Morgan, Lewis 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, Lewis's efforts and the lawyers were fired.   Bowman asked Morgan, Lewis for a summary of the work performed by Freeman & Mills and, at the same time, directed Smaltz to have Freeman & Mills stop their work on Belcher Oil's matter.   Smaltz did as he was asked.   Freeman & Mills' 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, Lewis, 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, all to no avail.   In August 1989, Smaltz finally told Freeman & Mills that Belcher Oil refused to pay the accounting firm's 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' services and suggesting Freeman & Mills should look to Morgan, Lewis 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.

When the first phase was submitted to the jury, a multi-part special verdict form asked, with regard to the breach of contract claim, “5. What amount of damages, if any, was suffered by [Freeman & Mills] as a result of [Belcher Oil's] breach of contract?” ¹  During the afternoon of its first day of deliberations, the jury submitted two questions to the trial court.   The first asked, “Could we have in ‘layman's terms' the instructions to:  Part I, Question 5.”   The second asked, “In response to Question 5 in Part One—the ‘damages' mentioned is the $77,538.13 in billing??”   In the presence of the jurors and the attorneys, the trial court read both questions aloud and then inquired of the foreman:

“THE COURT:  ․ Is your question, do the damages have to be the amount of the billing of $77,538.13?   Is that your question?  ․ [¶] THE FOREPERSON:  No.   We just wanted what—to tell us what damages were, because we seem to—we went in there thinking we were to fill out three figures․  [¶] And we're—maybe we don't have to put down the seventy-seven because it's already implied with how we answer.”

At side-bench, Freeman & Mills' attorney expressed his view of the jury's confusion:  “The instructions have to do with three causes of action, contract, the tort claim and the quantum meruit claim․   And I think they are confused because they are thinking that they have to find damages for three separate cause[s] of action[,] and in light of that question I think it would be appropriate to tell them that the damages for the breach of contract and the bad faith denial of contract are measured as one[,] and only one entry is to be made which is what I tried to do on this[,] and if they find breach of contract they are not to consider quantum meruit which is what the ․ verdict says.”   Belcher Oil's attorney agreed, with the caveat that the amount did not have to be the invoice amount.

After a few false starts and further bench conferences, the trial court told the jury:  “[Freeman & Mills'] standard hourly rates applied to the hours recorded by [Freeman & Mills] in working on the Florida ․ matter and expenses was $77,538.13, the damages, if any, for breach of contract and for bad faith denial of contract, if any, is this sum or such lesser amount that you find to be reasonable as provided in the instructions.”  [Sic.]   When asked whether that answered the questions, the jurors all nodded affirmatively.²  The jurors resumed their deliberations.

The next morning, the jury returned its first phase verdict.   On Freeman & Mills' breach of contract claim, the jury found that Belcher Oil had authorized Morgan, Lewis 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 (Question No. 5) 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.   When polled, the jurors were unanimous in their answers to all of the questions except one—Question No. 5, for which the vote was nine to three.

Phase two evidence (Belcher Oil's net worth) was then presented.   In closing arguments, both attorneys referred to the $25,000 award of compensatory damages.   Freeman & Mills' lawyer assured the jury he and his client were “proud” of the jurors' service and would “stand by it” but pointed out that “the compensatory award ․ was about one-third of what our bills were, and that does not make us—that hardly even pays our costs ․ to do the work.   But that's behind us․   And that was your decision and, as I say, we will live with that.  [¶] What I would like you to consider when you do consider this relationship [of punitive to compensatory damages] is not to be limited just in concept to that $20,000 [sic ] compensatory award.   I want you to consider the total harm.”

Belcher Oil's lawyer told the jury that punitive damages “must bear a reasonable relation to the damages actually suffered by the plaintiff, and you have already rendered your verdict that the reasonable damages actually suffered are $25,000.”   After assuring the jury that Belcher Oil had learned its lesson simply from the finding of bad faith conduct and that no monetary award was needed to make the point, counsel closed by asking that, if an award was made, it be limited just as the award of compensatory damages had been limited.   In closing, Freeman & Mills' attorney reiterated the fact that the $25,000 award did not cover his client's expenses but suggested the jury should not reconsider that amount—“unless you think there was a mistake and you can communicate to the judge, but I want you to consider the entire harm caused here.”

Within minutes after the jury began its second phase deliberations, it sent a note to the trial court:  “1) According to our verdict allready [sic ] submitted, is [Freeman & Mills] receiving $77,_ _ _— + $25,000.00 or just $25,000.00??  [¶] 2) Do both sides attorneys' fees get paid by losing side??”  The court responded thus:  “Well, the answer to the first question, according to your verdict already submitted, ․ is just $25,000.   In answer to the second question, ․ with regard to the attorneys' fees, this is not a matter that the jury should be concerned with.”   Two hours later, the jury (by a vote of 11 to 1) returned its verdict awarding $477,538.13 in punitive damages and judgment was entered on the verdict.³

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); ⁴  (2) awarding attorneys' 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 appeals from the “corrected” judgment.   Freeman & Mills appeals from a mid-trial order denying its request to amend its complaint to add a cause of action for fraud.

DISCUSSION

I.

Belcher Oil contends the judgment must be reversed because the trial court had no jurisdiction to “correct” the “mistake.”   We agree.

 Although a trial court may, upon motion of an injured party or on its own motion, correct a clerical mistake in its judgment (Code Civ.Proc., § 473), if the judgment originally entered conforms to the judgment actually rendered, there is no “clerical” error and there can be no summary amendment by the court.   An erroneous decision can only be rectified by the regular procedures for attack on a judgment—a motion for a new trial, a motion to vacate the judgment, an appeal, or (in a few situations) an independent action in equity.  (7 Witkin, Cal.Procedure (3d ed. 1985) Judgment, § 66 et seq., p. 500, and cases there cited.)

 There was no clerical error in this case.   The jury awarded $25,000 for breach of contract damages and $477,538.13 in punitive damages, and those were the amounts reflected in the original judgment.   Although Freeman & Mills' lawyer had suggested to the jury that if the $25,000 was a “mistake,” the jury should so inform the judge, no such “mistake” was mentioned—which means that, in the jury's view, there was none.   Although the jury did inquire whether its award of $25,000 was in addition to an award of $77,538.13,⁵ the jury did not add the difference ($52,538.13) to the punitive damage award—it added the full $77,538.13.   Since the judgment originally entered was in conformance with the jury's verdicts, there clearly was no “clerical error” and the corrected judgment must be reversed.⁶  As will appear (in Parts II and III, post ), the only valid cause of action in this case is for breach of contract.   On remand, we see no reason why that entire claim should be retried (no objection having been raised to the findings of formation, performance and breach) and, therefore, our remand will be for a new trial on the issue of damages only.

II.

 Belcher Oil contends the tort known as “bad faith denial of contract” exists only where there is a special relationship and that, since it is conceded no such relationship exists in this case, Freeman & Mills cannot recover tort damages on this theory.   We agree, and therefore do not reach Belcher Oil's other claims of error.

A.

The tort of bad faith denial of contract was created by a six-member Supreme Court in Seaman's Direct Buying Service, Inc. v. Standard Oil Co. (1984) 36 Cal.3d 752, 206 Cal.Rptr. 354, 686 P.2d 1158.   These were the facts before the court in Seaman's:  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.   Both parties signed a letter of intent setting forth the basic terms of the deal 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.  (Id. at pp. 759–760, 206 Cal.Rptr. 354, 686 P.2d 1158.)

Shortly thereafter, an OPEC oil crisis 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 who 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.   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 refused, 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.   (Seaman's Direct Buying Service, Inc. v. Standard Oil Co., supra, 36 Cal.3d at pp. 760–762, 206 Cal.Rptr. 354, 686 P.2d 1158.) ⁷

The case was tried to a jury, which returned its verdicts in favor of Seaman's on all theories except fraud, awarding it compensatory and punitive damages.   Standard Oil appealed.  (Seaman's Direct Buying Service, Inc. v. Standard Oil Co., supra, 36 Cal.3d at p. 762, 206 Cal.Rptr. 354, 686 P.2d 1158.)   This is what the Supreme Court did and didn't do in Seaman's.   First, the Court resolved a statute of frauds issue in favor of Seaman's.   (Id. at pp. 762–765, 206 Cal.Rptr. 354, 686 P.2d 1158.)   Second, the Court “consider[ed] the role of ‘intent’ or ‘motive’ in the tort of ‘intentional interference with contractual relations,’ ” resolved the issue against Seaman's, and reversed the judgment on that count.  (Id. at pp. 765–767, 206 Cal.Rptr. 354, 686 P.2d 1158.)   Third, the court 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, 206 Cal.Rptr. 354, 686 P.2d 1158.)   Since this is the root of our present problem, 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․   Broadly stated, that covenant requires that neither party do anything which will deprive the other of the benefits of the agreement․  [¶] 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], 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․

“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 the insurance contract, we have emphasized the ‘special relationship’ between insurer and insured, characterized by elements of public interest, adhesion, and fiduciary responsibility․   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.” ’   (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 ‘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.[App.] 556 [350 N.E.2d 635].)   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 Direct Buying Service, Inc. v. Standard Oil Co., supra, 36 Cal.3d at pp. 768–770, 206 Cal.Rptr. 354, 686 P.2d 1158, fns. omitted, most emphasis added.)

Finally, the Supreme Court concluded that, since it is not a tort for one party to deny, in good faith, the existence of a binding contract (Seaman's Direct Buying Service, Inc. v. Standard Oil Co., supra, 36 Cal.3d at p. 770, 206 Cal.Rptr. 354, 686 P.2d 1158), 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, 206 Cal.Rptr. 354, 686 P.2d 1158).

Noticeably absent from Seaman's is a definition of the newly created tort of bad faith denial of contract.

B.

In the ten years since Seaman's was decided, the Courts of Appeal have not been consistent in their interpretation and application of the tort of bad faith denial of contract and there is a direct conflict in the reported decisions.   We offer the following by way of example, accompanied by our editorial comments:

1.

In Quigley v. Pet, Inc. (1984) 162 Cal.App.3d 877, 208 Cal.Rptr. 394, the plaintiff sued on several theories, including breach of the implied covenant of good faith and fair dealing.   At trial, the jury was instructed that, “ ‘[i]f a contracting party fails to deal fairly and in good faith it is subject to liability for all damages proximately resulting from such conduct.’ ”   (Id. at p. 887, 208 Cal.Rptr. 394.)   On the defendant's appeal from a punitive damage award in favor of the plaintiff, the Fifth District reversed and remanded for a new trial at which the jury could be instructed on the required element of bad faith.  (Id. at p. 894, 208 Cal.Rptr. 394.)   In dicta (and without any analysis of its conclusion), the Fifth District suggested that, under Seaman's, when a party to a contract seeks to shield itself from liability by denying, in bad faith and without probable cause, that the contract exists, “no special contractual relationship is required.”   (Quigley v. Pet, Inc., supra, 162 Cal.App.3d at p. 890, 208 Cal.Rptr. 394.)

2.

In Multiplex Ins. Agency, Inc. v. California Life Ins. Co. (1987) 189 Cal.App.3d 925, 235 Cal.Rptr. 12, an insurance agency sued an insurer for commissions claimed under a contract, alleging theories of breach of fiduciary duty, tortious breach of the implied covenant and breach of contract.   On the defendant's appeal from a jury's award of both compensatory and punitive damages, the issue once again was the sufficiency of the jury instructions, with the court defining its task as determining “whether, under the instructions given, a jury could determine that [the defendant] was liable in tort for breach of a covenant of good faith and fair dealing because of special relationship or if the jury could find [the defendant] liable for the new tort stated in Seaman's.”  (Id. at p. 935, 235 Cal.Rptr. 12.)   After deciding there was no special relationship between these parties, Division Three of the First District concluded, without any analysis, that if the plaintiff on retrial established bad faith denial of the existence of the contract, and “[i]f a jury finds that such is the case, no special relationship is necessary.”  (Id. at p. 939, 235 Cal.Rptr. 12.)

3.

In Rogoff v. Grabowski (1988) 200 Cal.App.3d 624, 246 Cal.Rptr. 185, Division Seven of our District noted that, in Seaman's, “the language defining the ‘new intentional tort’ has striking similarities to the language in prior cases which had defined the tort of breach of an implied covenant of good faith and fair dealing as bad faith conduct, extraneous to the contract, with the motive intentionally to frustrate the enjoyment of contract rights.   (Sawyer v. Bank of America (1978) 83 Cal.App.3d 135, 139, 145 Cal.Rptr. 623․)   The majority in Seaman's cites Sawyer with approval (see 36 Cal.3d at p. 770, 206 Cal.Rptr. 354, 686 P.2d 1158), thus intimating that the cause of action it found to exist in Seaman's, based in part on principles in Sawyer, may be a subset of, or one species of, the tort of breach of the implied covenant.”  (Rogoff v. Grabowski, supra, 200 Cal.App.3d at pp. 629–630, 246 Cal.Rptr. 185.)

We find this emphasis of the “extraneous” nature of the defendant's conduct particularly significant in light of the conduct in Seaman's.   As noted above (fn. 7), Standard Oil's denial of the contract followed Seaman's appeal to the federal agency and the agency's determination that Seaman's could have its exemption if it could persuade a court that a valid contract existed between Seaman's and Standard Oil.   That was when Standard Oil said, “See you in court.”   In short, Seaman's was not a case where the defendant refused to perform under the contract and, when the plaintiff complained, denied that a contract had ever been made.   To the contrary, it was with regard to the extraneous issue of the federal agency appeal that Standard Oil said, “See you in court.”

 As the court explained in Sawyer v. Bank of America, supra, 83 Cal.App.3d at p. 139, 145 Cal.Rptr. 623, “it is not a tort for a contractual obligor to dispute his liability under the contract.   Rather, the 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.”   Since Sawyer supported the Supreme Court's creation of the related tort of bad faith denial of a contract (Seaman's Direct Buying Service, Inc. v. Standard Oil Co., supra, 36 Cal.3d at p. 770, 206 Cal.Rptr. 354, 686 P.2d 1158), it follows ineluctably that bad faith denial of contract exists only where the defendant's conduct is extraneous to the contract.   In our view, Rogoff v. Grabowski, supra, 200 Cal.App.3d at pages 629–630, 246 Cal.Rptr. 185, was correctly decided.

4.

In Okun v. Morton (1988) 203 Cal.App.3d 805, 250 Cal.Rptr. 220, a minority partner in a restaurant business sued the majority partner for specific performance, declaratory relief and damages on theories of fraud, breach of the implied covenant, and bad faith denial of the existence of contractual terms.  (Id. at pp. 815–816, 250 Cal.Rptr. 220.)   On the defendant's appeal from an award of compensatory and punitive damages in favor of the plaintiff, Division Two of our District directly confronted the issue now before us and concluded that a special relationship is required in an action for bad faith denial of a contract:

“Although some appellate courts have characterized the holding in Seaman's as creating a ‘new intentional tort’ which requires no special relationship for the imposition of liability (see Quigley v. Pet, Inc. (1984) 162 Cal.App.3d 877, 890 [208 Cal.Rptr. 394];  see also Multiplex Ins. Agency, Inc. v. California Life Ins. Co. (1987) 189 Cal.App.3d 925 [235 Cal.Rptr. 12] ), other courts and commentators have questioned the underpinnings of the decision and its analytical distinction between the ‘new’ tort and the bad faith breach of a contract․   Writing for a unanimous panel in Koehrer v. Superior Court [ (1986) ] 181 Cal.App.3d 1155, 1170 [226 Cal.Rptr. 820], Justice Kaufman stated:  ‘While the court in Seaman's stated ․ it was not necessary to base its decision on the implied covenant of good faith and fair dealing ․, it is difficult otherwise to understand its repeated reference to ‘good faith’ and ‘bad faith’ and a number of commentators suggest that the decision must be understood as resting at least on one aspect of the implied covenant of good faith and fair dealing․'⁸

“Even more recently, the court in Rogoff v. Grabowski (1988) 200 Cal.App.3d 624, 629–630 [246 Cal.Rptr. 185] observed:  ‘The court in Seaman's did not purport to define the tort cause of action for breach of the implied covenant;  however, the language defining the “new intentional tort” has striking similarities to the language in prior cases which had defined the tort of breach of an implied covenant of good faith and fair dealing as bad faith conduct, extraneous to the contract, with the motive intentionally to frustrate the enjoyment of contract rights.  (Sawyer v. Bank of America (1978) 83 Cal.App.3d 135, 139 [145 Cal.Rptr. 623];  and see Shapiro v. Wells Fargo Realty Advisors (1984) 152 Cal.App.3d 467, 479 [199 Cal.Rptr. 613].)   The majority in Seaman's cites Sawyer with approval (see 36 Cal.3d at p. 700 [206 Cal.Rptr. 354, 686 P.2d 1158] ), thus intimating that the cause of action it found to exist in Seaman's, based in part on principles in Sawyer, may be a subset of, or one species of, the tort of breach of the implied covenant․’

“We find the foregoing observations illuminating because they serve to emphasize that denial of the existence of a contract in bad faith and without probable cause falls squarely within the realm of the covenant of good faith and fair dealing.   As such, we are convinced that the court in Seaman's did not intend to jettison the special relationship and expectation factors so long associated with claims for breach of the implied covenant when describing the tort of bad faith denial of a contract.   Although the Supreme Court purported to base its decision on an independent tort rather than on a construction of the implied covenant of good faith and fair dealing, we think it clear that the court was in fact defining ‘bad faith’ when it concluded that a party ‘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.’  ․ This is further apparent in the court's adoption of the principle ․ that ‘it is not a tort for a contractual obligor to dispute his liability under a contract’ if the dispute is honest and undertaken in good faith․⁹

“As previously noted, some appellate courts have interpreted Seaman's as holding that ‘stonewalling,’ that is, unreasonable denial of liability without a substantial defense, constitutes a tortious breach of the covenant of good faith, at least in those instances where a special relationship exists between the parties.   Most notably, in Commercial Cotton Co. v. United California Bank (1985) 163 Cal.App.3d 511 [209 Cal.Rptr. 551 ․], the court found that the defendant bank had breached the implied covenant by claiming nonexistent legal defenses ‘in an unjustifiable, stonewalling effort to prevent an innocent depositor from recovering money entrusted to and lost through the bank's own negligence.’  (Id. at p. 516 [209 Cal.Rptr. 551].)   At the same time, the court held that the bank-depositor relationship was a ‘special relationship’ within the meaning of Seaman's that justified the imposition of tort liability․

“By viewing the bad faith denial of a contract as a breach of the implied covenant of good faith and fair dealing we necessarily limit its application to those situations involving a ‘special relationship’ between the contracting parties.   Even a cursory review of the cases since Seaman's makes it obvious that those courts which have considered the issue consistently analyze breaches of the implied covenant in terms of analogy to the fiduciary and unequal bargaining positions said to exist between insurer and insured․  In Wallis v. Superior Court (1984) 160 Cal.App.3d 1109 [207 Cal.Rptr. 123], a case involving an employer's refusal to pay a laid-off employee agreed-upon termination benefits, the court found that the agreement between the parties gave rise to an action in tort because of its similarities to an insurance contract.   In so concluding, the court reasoned that five ‘similar characteristics must be present in a contract’ in order for one of the parties to state a cause of action for tortious breach of the implied covenant of good faith and fair dealing:  ‘(1) the contract must be such that the parties are in inherently unequal bargaining positions;  (2) the motivation for entering the contract must be a nonprofit motivation, i.e., to secure peace of mind, security, future protection;  (3) ordinary contract damages are not adequate, because (a) they do not require the party in the superior position to account for its actions, and (b) they do not make the inferior party “whole”;  (4) one party is especially vulnerable because of the type of harm it may suffer and of necessity places trust in the other party to perform;  and (5) the other party is aware of this vulnerability.’  (Id. at p. 1118, 207 Cal.Rptr. 123.)

“We agree with the court's holding in Wallis and adopt its reasoning here.   Unless a party is able to demonstrate that its contract meets, at least in substantial part, the foregoing criteria an action in tort will not lie for bad faith denial of a contract.   This restriction appropriately limits the availability of a remedy in tort for breach of the implied covenant to those parties who, because of their unequal bargaining power, are not ‘free to shape the contours of their agreement’ or set ‘the standards by which application of the covenant is to be measured.’  ․ At the same time it also serves to reduce the potential for turning every breach of contract dispute into a punitive damage action.   Although 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, until that time comes the interpretation adopted here complies with the spirit of the court's decision in Seaman's.”  (Okun v. Morton, supra, 203 Cal.App.3d at pp. 823–826, 250 Cal.Rptr. 220, emphasis added.)

Notwithstanding the conflicting conclusions reached in Quigley v. Pet, Inc., supra, 162 Cal.App.3d 877, 208 Cal.Rptr. 394 (where the Supreme Court denied review) and Multiplex Ins. Agency, Inc. v. California Life Ins. Co., supra, 189 Cal.App.3d 925, 235 Cal.Rptr. 12 (where the Supreme Court also denied review), the Supreme Court denied review in Okun v. Morton, supra, 203 Cal.App.3d at p. 829, 250 Cal.Rptr. 220.)

5.

In Harris v. Atlantic Richfield Co. (1993) 14 Cal.App.4th 70, 17 Cal.Rptr.2d 649, the Fifth District refused to recognize a new tort of breach of a commercial contract in violation of public policy.  (Id. at p. 82, 17 Cal.Rptr.2d 649.)   On its way to that conclusion, the court reviewed existing tort remedies in the context of commercial contracts (the independent tort exception, tortious breach of the implied covenant and bad faith denial of contract) and, without reference to Okun v. Morton, supra, 203 Cal.App.3d 805, 250 Cal.Rptr. 220, concluded that, “under current California law, tort liability has been imposed for essentially contract-based claims only where (1) the breach is also a tort, (2) the parties to the contract have the requisite ‘special relationship,’ or (3) the breach is accompanied by bad faith denial of the contract.”  (Harris v. Atlantic Richfield Co., supra, 14 Cal.App.4th at p. 80, 17 Cal.Rptr.2d 649.) ¹⁰  Once again, the Supreme Court denied review.

C.

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, 250 Cal.Rptr. 220.)   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.   We are not alone in this view.

Judge Alex Kozinski expressed his thoughts in a concurring opinion in Oki America, Inc. v. Microtech Intern., Inc. (9th Cir.1989) 872 F.2d 312:  “Seaman's throws kerosene on the litigation bonfire by holding out the allure of punitive damages, a golden carrot that entices into court parties who might otherwise be inclined to resolve their differences.   Punitive damages once were reserved for truly outrageous conduct;  even then, awards were relatively small․   Today punitive damages are obtained in cases involving fairly innocuous conduct, ․ often in amounts that seem to be limited only by the ability of lawyers to string zeros together in drafting a complaint.   [¶] ․ [¶]

“The eagerness of judges to expand the horizons of tort liability is symptomatic of a more insidious disease:  the novel belief that any problem can be ameliorated if only a court gets involved.   Not so.   Courts are slow, clumsy, heavy-handed institutions, ill-suited to oversee the negotiations between corporations․  [¶] Moreover, because litigation is costly, time consuming and risky, judicial meddling in many business deals imposes onerous burdens․

“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 with other free individuals—was unknown through much of history and is unknown even today in many parts of the world.   Like other aspects of personal autonomy, it is too easily smothered by government officials eager to tell us what's best for us.   The recent tendency of judges to insinuate tort causes of action into relationships traditionally governed by contract is just such overreaching.   It must be viewed with no less suspicion because the government officials in question happen to wear robes.

“Fortunately, the tide seems to be turning.   The California Supreme Court is once again leading the way.  Foley ․ has taken a bite out of Seaman's by holding that tort remedies are not available for breach of the implied covenant of good faith and fair dealing in an employment contract․  [¶] But much remains to be done [and] Seaman's is a prime candidate for reconsideration․”  (Oki America, Inc. v. Microtech Intern., Inc., supra, 872 F.2d at pp. 315–317, conc. opn. of Kozinski, J.;   see also 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, 433, 436–437, fns. omitted.)

 In this case—a simple breach of contract dispute between two businesses with equal bargaining powers—neither law nor logic justifies tort recovery on a bad faith denial of contract theory (or, for that matter, on any theory).   Accordingly, our reversal of the judgment will be with directions disposing of this claim in favor of Belcher Oil.

III.

On its appeal, Freeman & Mills contends its mid-trial motion to amend to add a cause of action for fraud should have been granted.   We disagree.

 The fraud claim asserts a promise was made without the intent to perform and, therefore, requires (among other things) allegations of a representation (the promise) that, when made, was false (the promisor had no intent to perform) and was intended to deceive.  (Tenzer v. Superscope, Inc. (1985) 39 Cal.3d 18, 30–31, 216 Cal.Rptr. 130, 702 P.2d 212;  see also 5 Witkin, Cal.Procedure (3d ed. 1985) Pleading, § 661 et seq., p. 109 et seq.)   The most Freeman & Mills could say (in the trial court and on appeal) is that it was “reasonably inferrable” that, by April 1988, Belcher Oil was “formulating its strategy to disengage” Morgan, Lewis, not pay the fees owed to Freeman & Mills and use those unpaid fees as “pressure to gain an advantage.”   The problem is, this cause of action addresses the intent at the time the promise was made—which in this case was February 1988 (when the contract was entered) or March 1988 (when the letter agreement was executed), not April 1988.   Even if we assume Belcher Oil later decided to breach its contract, that has nothing to do with its intent at the time it entered the contract.   Accordingly, there is no basis for a fraud claim.

DISPOSITION

The judgment is reversed and the cause is remanded to the trial court with directions to retry the issue of damages on Freeman & Mills' breach of contract cause of action only and, when a final judgment is later rendered, to enter judgment in favor of Belcher Oil on Freeman & Mills' “bad faith denial of contract” cause of action.   The order denying Freeman & Mills' motion to amend to add a fraud cause of action is affirmed.   Freeman & Mills' request for sanctions payable by Belcher Oil for a frivolous appeal is denied.   Belcher Oil is awarded its costs of appeal.

While I concur in Parts I and III of the majority opinion, I dissent from Part II and from the disposition.   I would remand the matter for retrial of more than the damages portion of the breach of contract cause of action.

I

The California Supreme Court established the tort of bad faith denial of the existence of a contract in Seaman's Direct Buying Service, Inc. v. Standard Oil Co. (1984) 36 Cal.3d 752, 206 Cal.Rptr. 354, 686 P.2d 1158, after first considering the appellant's claim it necessarily could state a cause of action for tortious breach of the implied covenant of good faith and fair dealing.   The court recognized that a breach of the implied covenant is a breach of the contract itself and thus is always subject to contract remedies, but found “the proposition advanced by Seaman's—that breach of the covenant always gives rise to an action in tort”—less clear.  (At p. 768, 206 Cal.Rptr. 354, 686 P.2d 1158.)

After noting that in holding a tort action was available for breach of the covenant in an insurance contract, the court had “emphasized the ‘special relationship’ between insurer and insured, characterized by elements of public interest, adhesion, and fiduciary responsibility, [citation]” the court acknowledged the dangers of making a tortious cause of action generally available in an ordinary commercial context.  (Seaman's Direct Buying Service, Inc. v. Standard Oil Co., supra, 36 Cal.3d at pp. 768–769, 206 Cal.Rptr. 354, 686 P.2d 1158.)  “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.”  (Id. at p. 769, 206 Cal.Rptr. 354, 686 P.2d 1158, fn. omitted.)   Notwithstanding its misgivings, the court did leave open the possibility that tort remedies might have some application in a commercial context.  (Ibid.)

Having expressed its concerns, the court concluded it was “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.”  (Seaman's Direct Buying Service, Inc. v. Standard Oil Co., supra, 36 Cal.3d at p. 769, 206 Cal.Rptr. 354, 686 P.2d 1158, emphasis added.)   The court characterizes such conduct as “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.”  (Id. at pp. 769–770, 206 Cal.Rptr. 354, 686 P.2d 1158.)   In the court's view, “[s]uch 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.”   (Id. at p. 770, 206 Cal.Rptr. 354, 686 P.2d 1158.)

Had the Seaman's court believed bad faith denial of the existence of a contract to “fall[ ] squarely within the realm of the covenant of good faith and fair dealing” (Okun v. Morton (1988) 203 Cal.App.3d 805, 824, 250 Cal.Rptr. 220) or to be “a subset of, or one species of, the tort of breach of the implied covenant” (Rogoff v. Grabowski (1988) 200 Cal.App.3d 624, 630, 246 Cal.Rptr. 185), it could not have avoided the issues raised by Seaman's.   Given the purely commercial contract at issue, the court necessarily would have had to decide whether and to what extent a “ ‘special relationship’ between insurer and insured” (Seaman's Direct Buying Service, Inc. v. Standard Oil Co., supra, 36 Cal.3d at p. 768, 206 Cal.Rptr. 354, 686 P.2d 1158) was necessary to the maintenance of a bad faith denial claim.   Foley v. Interactive Data Corp. (1988) 47 Cal.3d 654, 254 Cal.Rptr. 211, 765 P.2d 373 recognizes this.

En route to deciding that tort remedies for breach of the implied covenant are not available in the employment context (without deciding whether “the special relationship model is an appropriate one to follow in determining whether to expand tort recovery”) (Foley v. Interactive Data Corp., supra, 47 Cal.3d at pp. 692, 693, 254 Cal.Rptr. 211, 765 P.2d 373), the Supreme Court criticizes the decision in Koehrer v. Superior Court (1986) 181 Cal.App.3d 1155, 226 Cal.Rptr. 820.   The Koehrer decision “acknowledged that we found it unnecessary to base our decision in Seaman's on the implied covenant of good faith and fair dealing, but nonetheless concluded that we essentially had done so.   Despite the fact that we carefully limited our holding in Seaman's [,] ․ Koehrer ․ extended the expressly circumscribed cause of action established in Seaman's based on denial of the existence of the contract, to find a tort cause of action [for breach of the implied covenant] when the dispute related to a contract term․”  (Foley, supra, 47 Cal.3d at pp. 688–689, 254 Cal.Rptr. 211, 765 P.2d 373, emphasis added.)

The majority opinion places considerable reliance on the Rogoff decision.   In characterizing bad faith denial of the existence of a contract as a species or subset of tortious breach of the implied covenant of good faith, Rogoff relies on a definition of that tortious conduct which breaches the covenant found in Sawyer v. Bank of America (1978) 83 Cal.App.3d 135, 145 Cal.Rptr. 623.  (Rogoff v. Grabowski, supra, 200 Cal.App.3d at pp. 629–630, 246 Cal.Rptr. 185.)   In Sawyer, the court defines such tortious conduct as “bad faith action, extraneous to the contract, with the motive intentionally to frustrate the obligee's enjoyment of contract rights.”  (83 Cal.App.3d at p. 139, 145 Cal.Rptr. 623.)

This definition originates in Sawyer, where the court purports to have found it implicit in the facts of two cases.   An examination of the cases upon which Sawyer relies (Brewer v. Simpson (1960) 53 Cal.2d 567, 589, 2 Cal.Rptr. 609, 349 P.2d 289;  Berkeley Lawn Bowling Club v. City of Berkeley (1974) 42 Cal.App.3d 280, 286–287, 116 Cal.Rptr. 762) discloses that the conduct at issue in those cases is not deemed tortious but a breach of contract, and is “extraneous to the contract” only in the sense that it constitutes a refusal to do something clearly intended by the parties but not set forth expressly in the contract's terms.  (See, e.g., ibid.)   While it is possible to think of an example of bad faith conduct which truly is extraneous to the contract, such as a defendant persuading an essential, single-source supplier to not do business with the plaintiff, thereby making it impossible for the plaintiff to perform, it is clear from the context that the Sawyer decision uses the definition only in the sense of meaning a denial that the defendant has an obligation to perform an act not specified in the contract's express terms.

Sawyer adopts the “extraneous to the contract” definition in the context of noting it is not a tort to dispute one's liability under a contract (Sawyer v. Bank of America, supra, 83 Cal.App.3d at p. 139, 145 Cal.Rptr. 623), but in Brewer and Berkeley Lawn Bowling Club, which Sawyer identifies as examples of conduct “extraneous to the contract,” that is precisely what happened.   Moreover, it is clear that in the insurance context a tortious breach of the implied covenant occurs when the insurer refuses in bad faith to undertake certain contractual obligations the courts have found to be implicit in the covenant.  (See Egan v. Mutual of Omaha Ins. Co. (1979) 24 Cal.3d 809, 818–819, 169 Cal.Rptr. 691, 620 P.2d 141 and cases cited therein.)   This conduct cannot be considered “extraneous to the contract” except in the loosest sense of being unrelated directly to the performance of express written terms of the contract and therefore confirms that this is the meaning the Sawyer decision intended.

The Rogoff decision considers Sawyer important because, the opinion states, Seaman's cited Sawyer with approval.  (Rogoff v. Grabowski, supra, 200 Cal.App.3d at p. 630, 246 Cal.Rptr. 185.)   While Sawyer is cited with approval in Seaman's, it is cited not for its definition of a tortious breach of the implied covenant of good faith, but for its statement that “ ‘it is not a tort for a contractual obligor to dispute his liability under [a] contract’ ” (Seaman's Direct Buying Service, Inc. v. Standard Oil Co., supra, 36 Cal.3d at p. 770, 206 Cal.Rptr. 354, 686 P.2d 1158), a statement Seaman's, relying on another insurance bad faith case ¹ , qualifies with “if the dispute is honest and undertaken in good faith.”  (Ibid.)  Thereafter, the court notes it likewise “is not a tort for one party to deny, in good faith, the existence of a binding contract.”   (Ibid.)

Contrary to the majority's characterization, Rogoff is not authority for the proposition that a tortious bad faith denial of the existence of a contract must occur in a setting which is extraneous to the contract.   Indeed, any implication to that effect in Rogoff is mere rumination, for the court goes on to hold simply that the complaint fails to allege a bad faith denial cause of action, in that “there is no allegation that respondent denied in bad faith and without probable cause that the contract exists.”  (Rogoff v. Grabowski, supra, 200 Cal.App.3d at p. 630, 246 Cal.Rptr. 185.)

When the foregoing line of authority is examined for its true worth, the majority's conclusion that Standard Oil's denial of the existence of the contract in a setting extraneous to its obligation to perform under the contract was of major importance to the court in Seaman's and, therefore, that bad faith denial of a contract exists only when the denial occurs in a setting extraneous to performance under the contract, is clearly erroneous.   Rogoff is simply another case, like Okun v. Morton, supra, 203 Cal.App.3d 805, 250 Cal.Rptr. 220 and Koehrer v. Superior Court, supra, 181 Cal.App.3d 1155, 226 Cal.Rptr. 820, which ignores the express statement in Seaman's that the court is not relying on the implied covenant of good faith in favor of a conclusion that it is doing so.  Okun and Rogoff also ignore the disapproval of that approach found in Foley v. Interactive Data Corp., supra, 47 Cal.3d at pages 688–689, 254 Cal.Rptr. 211, 765 P.2d 373.   Accordingly, I find nothing persuasive in the reasoning these cases employ.

Put quite simply, Seaman's makes clear that the theory of bad faith denial of the existence of a contract is not, as a matter of law, based on a breach of the implied covenant and, thus, no “special relationship” is necessary.  (Harris v. Atlantic Richfield Co. (1993) 14 Cal.App.4th 70, 79–80, 17 Cal.Rptr.2d 649;  Careau & Co. v. Security Pacific Business Credit, Inc. (1990) 222 Cal.App.3d 1371, 1397, fn. 21, 272 Cal.Rptr. 387;  Air–Sea Forwarders, Inc. v. Air Asia Co., Ltd. (9th Cir.1989) 880 F.2d 176, 187–188.)   Unless one ignores the clear language of Seaman's in favor of the sort of tortuous analysis condemned in Foley, no other conclusion is possible.   That aspect of the Seaman's holding has not, as yet, been overruled.

It is equally obvious that Seaman's did not deem the existence of a special relationship to be part of the tort of bad faith denial of the existence of a contract.   Had the court considered the “special relationship” aspect of tortious breach of the implied covenant of good faith to be a desirable element of tortious bad faith denial of the existence of a contract, it could not have sidestepped the issue as it clearly did.   In this respect, however “unanalyzed,” the decision in Multiplex Ins. Agency, Inc. v. California Life Ins. Co. (1987) 189 Cal.App.3d 925, 939, 235 Cal.Rptr. 12 is correct.

Moreover, it is apparent why the court did not deem a special relationship to be an important consideration in this context.   As both Seaman's and Foley note, the implied covenant of good faith is itself a contract term, the exact reach of which is determined from the express terms of the contract.  (Foley v. Interactive Data Corp., supra, 47 Cal.3d at pp. 683–684, 254 Cal.Rptr. 211, 765 P.2d 373;  Seaman's Direct Buying Service, Inc. v. Standard Oil Co., supra, 36 Cal.3d at p. 768, 206 Cal.Rptr. 354, 686 P.2d 1158.)   That is, the implied term is a means of effectuating the intentions and reasonable expectations of the contracting parties.  (Foley, supra, 47 Cal.3d at p. 684, 254 Cal.Rptr. 211, 765 P.2d 373.)   Accordingly, save in the most exceptional circumstances, contract remedies are the appropriate balm for its breach.  (Id. at pp. 684–685, 254 Cal.Rptr. 211, 765 P.2d 373;   Seaman's Direct Buying Service, Inc., supra, at pp. 768–769, 206 Cal.Rptr. 354, 686 P.2d 1158.)   But when one denies the very existence of a contract without any reasonable basis for doing so and solely for the purpose of avoiding liability thereunder, one's conduct lies so far beyond the pale, so far exceeds a mere breach of contract (however egregious), as to merit punishment that contract remedies cannot provide.  (Id. at pp. 769–770, 206 Cal.Rptr. 354, 686 P.2d 1158.)   Further, since neither contracting party expects to be able to deny the contract's existence without cause, providing a tort remedy in this situation “is not likely to intrude upon the bargaining relationship or upset [their] reasonable expectations.”  (Id. at p. 770, 206 Cal.Rptr. 354, 686 P.2d 1158.)

To the extent that Okun attempts to add the element of the existence of a special relationship to claims based on the bad faith denial of the existence of a contract, it is clearly wrong.   Consequently, I would reject the reasoning of Okun and hold, in reliance on the unmistakable language of Seaman's and Foley, that no special relationship is necessary when one alleges the bad faith denial of the existence of a contract.   The majority opinion's resolution of this question leaves unaddressed a number of issues important to the ultimate disposition of this matter.

First Denial Made in Anticipation of Litigation

Defendant asserts that a denial of the existence of the contract, made in anticipation of litigation, is not actionable.   As defendant notes, it now is established that if the initial denial of the existence of a contract is made after litigation has commenced, i.e., in a pleading or a response to discovery, the denial is not actionable.  (Lynch & Freytag v. Cooper (1990) 218 Cal.App.3d 603, 610, 267 Cal.Rptr. 189;  DuBarry Internat., Inc. v. Southwest Forest Industries, Inc. (1991) 231 Cal.App.3d 552, 575–576, 282 Cal.Rptr. 181;  Oki America, Inc. v. Microtech Intern., Inc. (9th Cir.1989) 872 F.2d 312, 314.)   Defendant additionally relies on Palmer v. Ted Stevens Honda, Inc. (1987) 193 Cal.App.3d 530, 238 Cal.Rptr. 363.  Palmer holds only that “once litigation has commenced, the actions taken in its defense are not ․ probative of whether [a] defendant in bad faith denied the contractual obligation prior to the lawsuit.”  (At p. 539, 238 Cal.Rptr. 363.)

There is no authority for the proposition that a denial of a contract's existence, made before the commencement of litigation but in anticipation that litigation might ensue, likewise is not actionable;  nor could there be authority for this proposition.   In Seaman's, Standard Oil knew that its denial it had a contract with Seaman's would prompt immediate litigation;  on refusing to stipulate to the existence of the contract, Standard Oil's representative “laughed and said, ‘See you in court.’ ”  (Seaman's Direct Buying Service, Inc. v. Standard Oil Co., supra, 36 Cal.3d at pp. 761–762, 206 Cal.Rptr. 354, 686 P.2d 1158.)   If ever a contract's existence was denied in anticipation of litigation, it was in the very case establishing a tort cause of action for such conduct.   In short, a bad faith denial of a contract's existence, made in anticipation that litigation will follow, necessarily is actionable.   It follows that defendant's insistence its September 11, 1989 letter was written in anticipation of litigation is meaningless.

Unwarranted Extension Theory

Defendant also asserts that an extension of the tort to a contract between two third parties is unwarranted.   It has long been settled that a principal is liable to a third party for an ordinary contract made with the principal's agent within the course and scope of the agency.  (2 Witkin, Summary of Cal.Law (9th ed. 1987) Agency and Employment, § 107, p. 103;  cf. Geary St. etc. R.R. Co. v. Rolph (1922) 189 Cal. 59, 64, 207 P. 539;  Del E. Webb Corp. v. Structural Materials Co. (1981) 123 Cal.App.3d 593, 606, 176 Cal.Rptr. 824.)   That is, the contract is with the principal, not solely with the agent.   A denial that a contract binding on the principal exists is every bit as offensive to accepted notions of business ethics as is a denial that one has a contract with another.   Defendant suggests no reason why the adoption of such a “ ‘stonewall’ position (‘see you in court’) without probable cause and with no belief in the existence of a defense” (Seaman's Direct Buying Service, Inc. v. Standard Oil Co., supra, 36 Cal.3d at pp. 769–770, 206 Cal.Rptr. 354, 686 P.2d 1158) should be less actionable when the contracting party is the stonewalling party's agent who is authorized to so contract than when the contracting party is the stonewalling party.   I perceive none and therefore reject the suggested dichotomy.   Whether the principal's denial amounts to stonewalling is, of course, primarily a question of fact.

II

Defendant additionally asserts there is no substantial evidence it denied the existence of the contract in bad faith and without probable cause.   In determining whether a jury's verdict is supported by substantial evidence, this court generally has no power to judge the credibility of witnesses or resolve conflicts in the evidence.  (Board of Education v. Jack M. (1977) 19 Cal.3d 691, 697, 139 Cal.Rptr. 700, 566 P.2d 602.)   Neither conflicts in the evidence nor “ ‘testimony which is subject to justifiable suspicion ․ justify the reversal of a judgment, for it is the exclusive province of the [trier of fact] to determine the credibility of a witness and the truth or falsity of the facts upon which a determination depends.’ ”  (Evje v. City Title Ins. Co. (1953) 120 Cal.App.2d 488, 492, 261 P.2d 279;  quoting from People v. Huston (1943) 21 Cal.2d 690, 693, 134 P.2d 758.)   Accordingly, the evidence must be viewed in the light most favorable to the trial court's determination, resolving all conflicts and drawing all reasonable inferences in support thereof.  (Campbell v. Southern Pacific Co. (1978) 22 Cal.3d 51, 60, 148 Cal.Rptr. 596, 583 P.2d 121;  Board of Education v. Jack M., supra, 19 Cal.3d at p. 697, 139 Cal.Rptr. 700, 566 P.2d 602.)

To prevail on a claim for the bad faith denial of the existence of a contract, a plaintiff must prove the existence of an underlying contract which the defendant breached and liability under which the defendant sought to avoid by denying its existence in bad faith and without probable cause.  (Stoll v. Shuff (1994) 22 Cal.App.4th 22, 27, 31, 27 Cal.Rptr.2d 249;  Careau & Co. v. Security Pacific Business Credit, Inc., supra, 222 Cal.App.3d at p. 1401, 272 Cal.Rptr. 387.)  “The basis for the denial of liability need not be expressly stated for the tort to be complete.   An express denial of the existence of the contract is significant, not because it is an element of the tort, but because it is a means of proving that when the party denied liability under the contract, he did so for a tortious reason, i.e., because he denied in bad faith that the contract exists.”  (Stoll, supra, 22 Cal.App.4th at p. 29, 27 Cal.Rptr.2d 249.)   A defendant denies the existence of a contract without probable cause if, on the basis of the facts known to the defendant, its denial was not objectively reasonable.  (Careau & Co., supra, 222 Cal.App.3d at p. 1402, 272 Cal.Rptr. 387.)   The existence of probable cause is a question of law unless there is conflicting evidence concerning the facts known to the defendant.  (Id. at pp. 1402–1403, 272 Cal.Rptr. 387.)

As noted ante, a principal is liable to a third party for an ordinary contract made with the principal's agent within the course and scope of the agency.  (2 Witkin, op. cit. supra, § 107, p. 103;  cf. Geary St. etc. R.R. Co. v. Rolph, supra, 189 Cal. at p. 64, 207 P. 539;  Del E. Webb Corp. v. Structural Materials Co., supra, 123 Cal.App.3d at p. 606, 176 Cal.Rptr. 824.)   Defendant signed an agreement with Morgan, Lewis & Bockius which stated the law firm would bill defendant for expenditures made for defendant and costs incurred on defendant's behalf in the Florida litigation, including fees for accountants, and could well ask defendant to pay substantial sums directly to the provider of services.   The only reasonable, commonsense interpretation to be given this agreement (Pacific Gas & E. Co. v. G.W. Thomas Drayage etc. Co. (1968) 69 Cal.2d 33, 38–39, 69 Cal.Rptr. 561, 442 P.2d 641) is that defendant authorized Morgan, Lewis & Bockius to engage the services of accountants and other experts as necessary to assist in the defense of the Florida litigation and further agreed to pay the provider of services directly if called upon to do so.   In short, Morgan, Lewis & Bockius was authorized as defendant's agent to engage plaintiff's services to assist in the litigation.

Should any doubt remain on this point, it is removed by evidence that Smaltz consulted with Dunker and obtained his express authorization before engaging plaintiff's services.   Morgan, Lewis & Bockius then did engage plaintiff's services, as evidenced by a letter agreement signed on March 14, 1988.   There thus is substantial evidence of a contract with plaintiff binding on defendant.

There is ample evidence that plaintiff performed substantial services of benefit to defendant in pursuing the Florida litigation.   Plaintiff provided defendant with a detailed accounting of the services rendered, the time consumed, the billing rates and the sum thus due.   Thereafter, plaintiff sent regular invoices to defendant for many months.   Defendant paid plaintiff nothing.   This supports a finding defendant breached the contract.

On September 11, 1989, Bowman wrote to plaintiff.   He stated defendant “does not appear to have been consulted nor did it participate in determining whatever services you were to do for Morgan, Lewis & Bockius,” and “did not receive even a single page of analysis at the time your services apparently were performed.”   In conclusion, Bowman said plaintiff “should properly look to [the law] firm for payment of whatever invoices you claim are due.”   The clear import of this letter is to deny that there is a contract obligating defendant to pay plaintiff for services rendered.

This denial takes two forms.   First, the letter implies, inasmuch as defendant never received any work product from plaintiff's purported efforts and was not consulted about and did not participate in Morgan, Lewis and Bockius' decision to engage plaintiff's services, defendant does not even know whether plaintiff actually was engaged to and did perform services on defendant's behalf.   Second, the letter implies, inasmuch as defendant was not consulted and did not participate in the decision to engage plaintiff's services, Morgan, Lewis & Bockius was not authorized to do so.   In both respects, the letter denies the existence of a contract binding on defendant.

Moreover, the letter is not susceptible of any other reasonable interpretation.   Bowman does not advise plaintiff to seek payment from Morgan, Lewis & Bockius for those aspects of its services which exceed the scope of the law firm's authorization.   There is no hint of acknowledgement that the firm was authorized to engage plaintiff's services to a limited extent and defendant therefore will pay for those limited services.   Accordingly, the letter cannot be interpreted simply as a complaint that defendant never authorized or intended that plaintiff perform such extensive services.   Additionally, Bowman does not state or imply that defendant's personal receipt of plaintiff's work product was a condition of its obligation to compensate plaintiff.   Consequently, the letter cannot be viewed as a simple denial of liability under a contract acknowledged to be binding on defendant.

There is considerable evidence defendant's asserted grounds for denying the existence of a binding contract were false and Bowman knew them to be false.   As noted on page 14, ante, there is evidence defendant expressly authorized Morgan, Lewis & Bockius to engage plaintiff's services to assist in defending against the Florida litigation.   Moreover, while Morgan, Lewis & Bockius could not establish with certainty that it forwarded to defendant a copy of its agreement with plaintiff, it did establish that as a matter of custom and practice it would have done so.   Bowman acknowledged in writing on April 22 that plaintiff was rendering litigation-related services.

Until his departure from defendant, its general counsel, Dunker, was briefed on the work done by plaintiff.   Indeed, on one occasion, he spoke directly with Roger Jenkins of plaintiff, who informed Dunker fully of the status of plaintiff's ongoing investigation.   Moreover, on March 30, 1988, Morgan, Lewis & Bockius distributed to Bowman and three other executives of defendant a case assignment agenda which expressly states plaintiff was retained in February 1988 to assist in assessing responses to discovery demands, review and explain Florida Fuels' accounting and related financial documents and define Florida Fuels' interrelationships with affiliated entities.   Bowman and two of these executives received additional information on the services plaintiff was rendering at an April 8, 1988 meeting.   When these revelations were made, defendant made no objection to the use of plaintiff's services or to the extent to which plaintiff was providing services.

Plaintiff provided all of its work product to Morgan, Lewis & Bockius, who then provided all of plaintiff's work product directly to defendant or to the law firm's successor, Fulbright & Jaworski.   Defendant ultimately made use of substantial portions of plaintiff's work.

It reasonably may be inferred that a principal who asserts its agent has not bound it by a contract, in that there is no evidence the contract exists and the agent in any event acted without authorization, knowing those assertions to be false, lacked any reasonable ground for denying the existence of the obligation and did so in bad faith.   Accordingly, there is substantial evidence defendant denied, in bad faith and without probable cause, the existence of a contract obligating it to pay plaintiff for services rendered.   (See, e.g., Air–Sea Forwarders, Inc. v. Air Asia Co., Ltd., supra, 880 F.2d at p. 188.)   That is the question posed on appeal, not, as defendant would have it, whether there is countervailing evidence which would support a conclusion defendant had probable cause for denying the existence of the obligation.

III

Defendant contends the trial court erred prejudicially in using Questions Nos. 1 and 2 in Part I of the special verdict, in that the evidence established defendant's authorization of the engagement of plaintiff's services was quite limited, and the second question suggests any ratification of plaintiff's rendition of services was a ratification of all of it.   Question No. 1 of Part I of the special verdict asks:  “Did Defendant authorize Morgan, Lewis & Bockius to retain Plaintiff on Defendant's behalf to assist in the defense of Defendant in the Florida Fuels litigation?”   Defendant argues this question is erroneous, in that the evidence demonstrates Dunker authorized Morgan, Lewis & Bockius to retain plaintiff's services only to review Florida Fuels' financial statements.

It is undisputed that defendant expressly conferred authority upon Morgan, Lewis & Bockius to defend it in the Florida Fuels litigation.   The law confers upon an agent the authority to do everything necessary and proper or usual in the ordinary course of business for effecting the purpose of his agency.   (Civ.Code, § 2319, subd. 1.)   Accordingly, the jury was instructed with BAJI No. 13.01 that “[i]t is not necessary that a particular act ․ be expressly authorized by the principal to bring it within the scope of the agent's authority.   Such conduct is within the scope of his authority if it occurs while the agent is engaged in the duties which he was employed to perform and relates to those duties.   Conduct for the benefit of the principal which is incidental to, customarily connected with or reasonably necessary for the performance of an authorized act is within the scope of the agent's authority.”   That Smaltz, in obtaining Dunker's permission to retain plaintiff, only told Dunker he wanted plaintiff to assist in reviewing Florida Fuels' financial statements therefore is irrelevant to the determination of whether defendant authorized Morgan, Lewis & Bockius to retain plaintiff's services in defense of the Florida Fuels litigation.²

Special verdict questions must call for ultimate facts, not evidentiary facts or conclusions of law.  (7 Witkin, Cal.Procedure (3d ed. 1985) Trial, § 322, p. 323;  see also Neal v. Montgomery Elevator Co. (1992) 7 Cal.App.4th 1194, 1199, 9 Cal.Rptr.2d 497.)   As posed, Question No. 1 is correct.   There was no narrower issue of authorization.   In any event, the wording of Question No. 1 is identical to that which defendant proposed in its special verdict form.   The trial court would have been justified in rejecting defendant's belated objection to the question on this ground alone.  (Cf. Morris v. Frudenfeld (1982) 135 Cal.App.3d 23, 34, 185 Cal.Rptr. 76.)

Question No. 2 of Part I of the special verdict asks:  “Did Defendant ratify Morgan, Lewis and Bockius' retention of Plaintiff to assist in the defense of the Florida Fuels litigation?”   It is unnecessary to consider the merits of defendant's challenge to this question.   The jury was instructed to skip Question No. 2 if it answered “Yes” to Question No. 1, as it did.   Accordingly, any error in the phrasing of Question No. 2 could not possibly have prejudiced defendant.

IV

Defendant further asserts the trial court erred prejudicially in refusing its Special Instructions Nos. 8 and 19c and instructions on ratification, and in instructing the jury on bad faith denial of the existence of a contract.   Defendant's Special Instruction No. 8 concerned the parties' mutual consent as an essential element of a contract.   Defendant argues it was error to refuse to give this instruction, in that there was a factual issue as to whether Dunker had sufficient knowledge or information to give binding consent to the work Morgan, Lewis & Bockius actually instructed plaintiff to perform.   This is a nonissue.   The question was not whether Dunker freely consented to the contract with plaintiff, but whether Morgan, Lewis & Bockius was authorized, as defendant's agent, to retain plaintiff's services.

As noted in Part III, ante, the jury found it unnecessary to reach the issue of ratification.   The trial court's refusal to give defendant's requested instructions on this issue therefore was harmless.   There is no possibility that refusal became a factor in the jury's verdict.  (Williams v. Carl Karcher Enterprises, Inc. (1986) 182 Cal.App.3d 479, 489, 227 Cal.Rptr. 465.)

Defendant's Special Instruction No. 19c provided:  “No inference should be drawn from the failure of either party to call Mr. Dunker as a witness.”   The trial court clearly was correct to refuse this instruction.

Dunker was defendant's general counsel, from whom Smaltz testified he received authorization to retain plaintiff's services.   To dispute Smaltz's testimony, Bowman, Dunker's replacement, testified Dunker told him he had not authorized this act.   Bowman had easy access to Dunker and, according to defendant's counsel, he was available.   His testimony would have been far stronger evidence on the question of authorization than was Bowman's.   Accordingly, it was appropriate to instruct the jury that the weaker evidence actually presented should be viewed with distrust (West v. Johnson & Johnson Products, Inc. (1985) 174 Cal.App.3d 831, 873–874, 220 Cal.Rptr. 437), and Special Instruction No. 19c would have been an incorrect statement of the law.

Defendant argues no adverse inference was permissible from its failure to call Dunker, in that he was equally available to plaintiff, but defendant's counsel made it clear at trial that any attempt to call Dunker would be met with a claim of privilege.   Accordingly, while he was readily available to defendant, he was not equally available to plaintiff.

Defendant's challenge to the trial court's refusal to instruct on the necessity for a special relationship to prevail on a claim for bad faith denial of the existence of a contract has been disposed of in Part I, ante.   Defendant also challenges the trial court's refusal to instruct the jury that a denial of liability under a contract is not the same as denying the contract exists, and is not a basis for tort liability.   As formerly noted, there was no evidentiary basis for such an instruction.   Defendant's consistent trial strategy had been to deny Morgan, Lewis & Bockius' authority to retain plaintiff's services and thus to deny the existence of any contract binding on defendant.

V

Defendant contends there is no substantial evidence it acted with malice, oppression or fraud.   Defendant's sole ground for raising this contention is its assertion the evidence demonstrates it had probable cause to deny the existence of a binding obligation to plaintiff, an assertion rejected in Part II, ante.   Moreover, the same evidence delineated as supporting a finding defendant acted without probable cause and in bad faith also supports plaintiff's entitlement to punitive damages.   Defendant denied the existence of a binding obligation to plaintiff, knowing its reasons for doing so were false.   It also may be inferred defendant realized its denial would substantially increase plaintiff's burden of proof in the litigation sure to follow, thus substantially increasing plaintiff's legal expenses and notably delaying or precluding plaintiff's recovery.   This supports a conclusion defendant knowingly made an intentional misrepresentation, thereby intending to deprive plaintiff of its legal rights and thus was guilty of fraud.   (Civ.Code, § 3294, subd. (c)(3).)

VI

Defendant further contends the trial court erred prejudicially in excluding evidence of its settlement offer and the testimony of its president on the issue of whether it acted with malice, oppression or fraud.

Settlement Offer

In phase two of the trial in which the jury considered whether and in what amount punitive damages should be awarded, defendant offered evidence that shortly after receiving through the discovery process copies of the work product plaintiff had supplied to Morgan, Lewis & Bockius, defendant offered to settle the case for $50,000.   Plaintiff objected to the introduction of this evidence on several grounds, including its irrelevance to the reprehensibility of defendant's conduct in denying in September 1989 the existence of a contract obligating defendant to compensate plaintiff.   The trial court sustained the objection.

As defendant notes, notwithstanding the inadmissibility of settlement offers to prove the offering party's liability (Evid.Code, § 1152, subd. (a)), such evidence, if relevant, is admissible for other purposes.  (White v. Western Title Ins. Co. (1985) 40 Cal.3d 870, 887, 221 Cal.Rptr. 509, 710 P.2d 309 [relevant to whether insurance claim processed in good faith];  Warner Constr. Corp. v. City of Los Angeles (1970) 2 Cal.3d 285, 296, 85 Cal.Rptr. 444, 466 P.2d 996 [relevant to whether there was a good faith attempt to reach a prelitigation agreement];  Young v. Keele (1987) 188 Cal.App.3d 1090, 1093–1094, 233 Cal.Rptr. 850 [relevance in examination of judgment debtor];  Lemer v. Boise Cascade, Inc. (1980) 107 Cal.App.3d 1, 11–12, 165 Cal.Rptr. 555 [principal's prelitigation offer of rescission relevant to punitive damages issue if made in response to complaints of agents' fraud].)   However, these cases provide no assistance to defendant.

Defendant argues the settlement offer is relevant to consideration of the reprehensibility of its conduct.   In assessing the amount of punitive damages to be awarded, one factor to be considered “is the particular nature of the defendant's acts in light of the whole record;  ․ the more reprehensible the act, the greater the appropriate punishment, assuming all other factors are equal.  [Citations.]”  (Neal v. Farmers Ins. Exchange (1978) 21 Cal.3d 910, 928, 148 Cal.Rptr. 389, 582 P.2d 980.)   The reprehensibility of defendant's conduct may be assessed only by examining the nature of its acts and the information known to it when it denied the existence of the contract it had with plaintiff.   The existence of the contract did not hinge on whether defendant had plaintiff's work product in its possession.   Accordingly, that defendant offered to settle the matter upon receiving copies of that work product well after plaintiff filed suit was irrelevant to the reprehensibility of its conduct in denying the existence of the contract.   Clearly, the trial court did not err in excluding this evidence.

Espino Testimony

Albert Espino, defendant's president, testified he was very concerned about the jury's verdict, about the company's image and also about the money liability of the company.   Defense counsel asked him whether he had any plans or had had an opportunity to discuss steps the company might take in response to the jury's finding the company acted improperly in denying the contract.   Mr. Espino responded, “No,” over opposing counsel's simultaneous objection to the relevance of the question.   The court sustained the objection.   Defense counsel then approached the bench and argued that whether an award of punitive damages was necessary to deter future conduct was highly relevant.   The court rejected the argument.   Defense counsel later asked Mr. Espino whether litigating this matter had entailed unusual expense.   Opposing counsel again objected on the ground of irrelevance;  the trial court sustained the objection.

In support of its argument the trial court should have admitted testimony concerning steps the company planned to take to prevent a wrongful denial of the existence of a contract from occurring again, defendant relies on Gagnon v. Continental Casualty Co. (1989) 211 Cal.App.3d 1598, 260 Cal.Rptr. 305.   Citing a variety of cases, the Gagnon court notes that whether the defendant's conduct likely will harm persons other than the plaintiff is a relevant consideration in fixing the amount of any award of punitive damages.   (At p. 1602, 260 Cal.Rptr. 305.)   The cases cited involve the existence of a pattern or practice or other circumstances likely to lead to a multiplicity of claims, matters which clearly are pertinent in determining the amount of deterrence necessary.  (See, e.g., Moore v. American United Life Ins. Co. (1984) 150 Cal.App.3d 610, 636–637, 197 Cal.Rptr. 878;  Vossler v. Richards Manufacturing Co. (1983) 143 Cal.App.3d 952, 968–969, 192 Cal.Rptr. 219;  Grimshaw v. Ford Motor Co. (1981) 119 Cal.App.3d 757, 812, 174 Cal.Rptr. 348.)   Quite reasonably, nothing in any of these cases suggests testimony a defendant promises not to do it again is a factor the jury should consider in mitigation.   If such protestations were sufficient evidence that a deterrent effect already had taken hold, our prisons would be less crowded.

Even if the evidence could be considered marginally relevant, Mr. Espino answered the question whether he had discussed preventative steps negatively, so defendant could not have been harmed by the exclusion.   Moreover, as previously noted, Mr. Espino was permitted to testify the company viewed the jury's verdict most seriously and wished to avoid a repetition.

Defendant relies on Pacific Mutual Life Insurance Co. v. Haslip (1991) 499 U.S. 1, 111 S.Ct. 1032, 113 L.Ed.2d 1 for the proposition that a defendant's litigation cost is a relevant matter for the jury's consideration.   In assessing the constitutionality of Alabama's procedure for imposing and reviewing punitive damages, the United States Supreme Court noted a number of factors the courts were to consider in reviewing a jury's award, including all costs of litigation, and approved these factors as imposing meaningful restraint on jury discretion.  (At pp. 21–22, 111 S.Ct. at p. 1045.)   In delineating the factors, the court notes that some of them are to be considered in mitigation;  it does not include litigation costs in this category.  (Id. at p. 22, 111 S.Ct. at p. 1045.)   This suggests it is either only the plaintiff's litigation costs or those of all parties which are pertinent to the inquiry.   Moreover, nothing in Haslip suggests this would be an appropriate matter for the jury's consideration.   The trial court thus did not err in excluding evidence of defendant's litigation costs.³

VII

Finally, defendant asserts the award of attorney's fees is not supported by substantial evidence.   Following trial, the court heard and granted a motion to award plaintiff attorney's fees and expenses as a sanction pursuant to Code of Civil Procedure sections 128.5 and 2033, subdivision (o ).   The court granted the motion, awarding plaintiff $212,891.04 in fees and expenses.

Code of Civil Procedure section 128.5, subdivision (a), permits the trial court to order a party, the party's attorney or both “to pay any reasonable expenses, including attorney's fees, incurred by another party as a result of bad-faith actions or tactics that are frivolous or solely intended to cause unnecessary delay.”   Those actions or tactics which may incur sanctions where appropriate “include, but are not limited to, the making or opposing of motions or the filing and service of a complaint․”  (Subd. (b)(1).)   Such actions or tactics are frivolous if they are “(A) totally and completely without merit or (B) for the sole purpose of harassing an opposing party.”  (Subd. (b)(2).)  Code of Civil Procedure section 2033, subdivision (o ), permits a trial court to award attorney's fees and costs incurred in proving true facts the opposing party has refused to admit in response to requests for admissions unless the refusing party had a justifiable basis for believing it would prevail on the matter.

The trial court possesses broad discretion to impose sanctions pursuant to section 128.5;  it is entitled to “ ‘guard against inept procedures and unnecessary indulgences which would tend to hinder, hamper or delay the conduct and dispatch of its proceedings.’  [Citation.]”  (Ellis v. Roshei Corp. (1983) 143 Cal.App.3d 642, 648–649, 192 Cal.Rptr. 57;  accord, Brewster v. Southern Pacific Transportation Co. (1991) 235 Cal.App.3d 701, 710, 1 Cal.Rptr.2d 89.)   While it is important not to deter zealous advocacy, it also is essential that the courts guard against the abuse of the system by irresponsible litigants.  (Ellis, supra, 143 Cal.App.3d at p. 649, 192 Cal.Rptr. 57.)

The trial court's order is presumed correct, and error must be shown affirmatively.   Where there is conflicting evidence, this court will not disturb the trial court's factual findings.  (Brewster v. Southern Pacific Transportation Co., supra, 235 Cal.App.3d at p. 713, 1 Cal.Rptr.2d 89;   Winick Corp. v. County Sanitation Dist. No. 2 (1986) 185 Cal.App.3d 1170, 1176, 230 Cal.Rptr. 289.)   A decision to impose sanctions will not be set aside unless the court clearly has abused its discretion in a manner that results in a manifest miscarriage of justice.  (Rice v. Dean Witter Reynolds, Inc. (1991) 235 Cal.App.3d 1016, 1030, 1 Cal.Rptr.2d 265;  Brewster, supra, 235 Cal.App.3d at p. 712, 1 Cal.Rptr.2d 89.)   Whether sanctions are appropriate depends upon an evaluation of all relevant circumstances.  (Weisman v. Bower (1987) 193 Cal.App.3d 1231, 1236, 238 Cal.Rptr. 756.)

In arguing the trial court abused its discretion in awarding attorney's fees as a sanction, defendant relies on the tenet that a principal will not be liable on a contract if the circumstances show the other party intended to bind only the agent who made the contract.  (Pacific Ready–Cut Homes, Inc. v. Seeber (1928) 205 Cal. 690, 696, 272 P. 579.)   As evidence that it reasonably believed it could assert this position and therefore avoid liability, defendant looks solely to the terms of the letter agreement between plaintiff and Morgan, Lewis & Bockius.

There was a wealth of additional evidence concerning the intent of the parties.   Morgan, Lewis & Bockius obtained express authorization from defendant's general counsel before engaging plaintiff's services, and Dunker understood that plaintiff would be performing services on defendant's behalf.   There was evidence the letter agreement was couched in language stating Morgan, Lewis & Bockius was engaging plaintiff's services in an attempt to bring plaintiff's work within the attorney-client work product privilege.   Morgan, Lewis & Bockius' retainer agreement with defendant stated clearly that defendant would be billed for expenses incurred in obtaining accountants' and experts' services and might well be asked to pay the providers directly.   Moreover, there was evidence defendant honored an identical contract with an economic consulting firm, n/e/r/a.   In view of the latter evidence, the trial court reasonably could conclude that defendant's reliance on the literal language of the letter agreement between plaintiff and Morgan, Lewis & Bockius was hypertechnical, unjustified and undertaken in bad faith.

Quite apart from the foregoing, the trial court had ample additional grounds upon which to base its order.   Defendant filed a clearly specious motion to quash service, then unjustifiably petitioned for a writ when the motion was denied.   In its discovery responses, defendant falsely claimed Smaltz of Morgan, Lewis & Bockius first sought authorization to engage plaintiff's services on April 8, 1988.   Defendant maintained this position at trial and additionally asserted falsely that it first learned plaintiff had worked on the Florida litigation weeks after the work concluded.   Defendant asserted spurious claims of attorney-client privilege to deny plaintiff access to documentary evidence relevant to Morgan, Lewis & Bockius' authority to engage plaintiff's services and defendant's executives' knowledge of that work.   Even after a motion to compel production was granted and defendant unsuccessfully pursued two writ petitions, defendant obstructed plaintiff's efforts to depose Dunker and attempted to withhold Bowman's April 22, 1988 letter to Morgan, Lewis & Bockius.

Additionally, defendant filed a baseless motion to continue the trial indefinitely—until the final resolution of the Florida Fuels litigation.   When that motion was denied, defendant filed a meritless writ petition and petition for hearing before the Supreme Court.   Defendant filed a motion for contempt against plaintiff in the Florida courts for purportedly violating a sealing order issued in the Florida litigation, a motion the Florida court denied summarily.

The foregoing evidence provides ample support for the conclusion defendant routinely engaged in bad faith, frivolous actions and tactics designed to harass plaintiff or to delay the resolution of the instant matter.   Accordingly, it cannot be said the trial court's conclusion is so clearly wrong as to amount to a manifest miscarriage of justice.  (Winick Corp. v. County Sanitation Dist. No. 2, supra, 185 Cal.App.3d at p. 1176, 230 Cal.Rptr. 289.)

DISPOSITION

I would reverse the judgment and direct the trial court to retry the compensatory and punitive damages issues in accordance with the views expressed in this dissent.   I would affirm the order denying plaintiff's motion to amend to add a cause of action for fraud.

FOOTNOTES

1.   Part I of the special verdict asked several questions about Freeman & Mills' breach of contract cause of action;  Part II asked whether there had been a bad faith denial of contract;  Part III asked about malice, oppression and fraud;  and Part IV asked about quantum meruit.   Only Question No. 5 of Part I required the jury to fill in a dollar amount.

2.   Perhaps the court reporter dropped a word or two or three and the explanation, as actually stated, made more sense than it does as quoted above.   From our perspective, we do not see how this could have answered the question, which was whether an award of $77,538.13 was “implied” by reason of the jury's answer to some other question.

3.   Under this judgment (which was consistent with the jury's verdicts), Freeman & Mills was awarded $25,000 in compensatory damages on its breach of contract claim, plus $477,538.13 in punitive damages.

4.   Presumably, Freeman & Mills recognized it was not entitled to $25,000 over and above the $77,538.13 in contract damages.   As it suggested in its motion for “correction” of the verdict, the jury apparently intended to give Freeman & Mills “the full amount of the contract claim plus $25,000 as some form of general damages for the breach of contract.”   But Freeman & Mills wasn't ready to relinquish the $25,000 and thus asked the trial court to add it onto the punitive damage award (by moving the $77,538.13 to compensatory damages and the $25,000 to punitives).   As will appear, this is not what the trial court did.

5.   It is impossible to determine how the jury could have thought its award of $25,000 was in addition to any amount.   Although the attorneys seemed to think, during the first phase, that the jury thought it was to award one amount for each cause of action, the special verdict form included only one blank for an amount (the one in Question No. 5).   Nevertheless, the jury's question during the second phase makes it clear that at least one of the 12 jurors believed that Freeman & Mills would receive $77,538.13 plus the $25,000 awarded during the first phase as compensatory damages.   The inclusion of the $77,538.13 in the punitive damage award doesn't explain what the $25,000 was for—although perhaps it was for attorneys' fees, since that was clearly the other subject of discussion during the second phase deliberations.   Of course, we know of no reason why Freeman & Mills could not have asked the trial court to request clarification from the jury before it was discharged.   Unfortunately, that wasn't done.

6.   The cases relied on by Freeman & Mills are inapposite—all involve ambiguous verdicts and the trial court's power to interpret inconsistent findings.  (See e.g., Brand v. Norris (1953) 121 Cal.App.2d 367, 263 P.2d 456;  West v. Duncan (1962) 205 Cal.App.2d 140, 22 Cal.Rptr. 833;  Woodcock v. Fontana Scaffolding & Equip. Co. (1968) 69 Cal.2d 452, 72 Cal.Rptr. 217, 445 P.2d 881;  Crain v. Sumida (1922) 59 Cal.App. 590, 211 P. 479;  Clark v. McClurg (1932) 215 Cal. 279, 9 P.2d 505;  Snodgrass v. Hand (1934) 220 Cal. 446, 31 P.2d 198.)   There is absolutely nothing ambiguous or inconsistent about the verdicts in this case—the jury awarded $25,000 in contract damages and $477,538.13 in punitives.   There was no need for interpretation or clarification, and there was no uncertainty.   Accordingly, the trial court had no authority to correct the judgment.

7.   Several subsequent cases have ignored the unique facts of Seaman's, treating it as a case where a party to a contract, instead of performing it (by supplying goods, selling real property or whatever), refuses to perform on the ground it was never obligated to do so because (it claims) there was no contract.   In Seaman's, the denial of the contract was extraneous to Standard Oil's obligation to supply fuel—it followed Seaman's appeal to the federal agency and the agency's determination that Seaman's could have its exemption if it could persuade a court that a valid contract existed between Seaman's and Standard Oil.   That was when Standard Oil said, “See you in court.”   Presumably (the opinion is not clear on subsequent events), Seaman's was unable to obtain a prompt judicial determination of the existence of the contract and it therefore was unable to obtain the exemption, as a result of which (assuming there was a contract) Standard Oil was not authorized to deliver the fuel required by the contract.

8.  . Koehrer “extended the expressly circumscribed cause of action established in Seaman's based on denial of the existence of the contract, to find a tort cause of action when the dispute related to a contract term, namely the necessity for good cause as a basis for termination.”  (Foley v. Interactive Data Corp. (1988) 47 Cal.3d 654, 688–689, 254 Cal.Rptr. 211, 765 P.2d 373.)  Foley holds that “tort remedies are not available for breach of the implied covenant in an employment contract to employees who allege they have been discharged in violation of the covenant.”  (Id. at p. 700, 254 Cal.Rptr. 211, 765 P.2d 373.)

9.   It is important to remember that, in Seaman's, the Supreme Court did not say whether there was a special relationship between Seaman's and Standard Oil.   All the court said was that, when “we move from ․ 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.”  (Seaman's Direct Buying Service, Inc. v. Standard Oil Co., supra, 36 Cal.3d at p. 769, 206 Cal.Rptr. 354, 686 P.2d 1158.)   After a brief discussion of the rights of parties to commercial contracts, the court found it “unnecessary to decide the broad question which Seaman's poses” (ibid.) and thus avoided the issue altogether.

10.   Harris cites Foley v. Interactive Data Corp., supra, 47 Cal.3d 654, 688–689, 254 Cal.Rptr. 211, 765 P.2d 373, to show the Supreme Court's intent to limit Seaman's to “the expressly circumscribed cause of action established in Seaman's based on denial of the existence of the contract․”  (Harris v. Atlantic Richfield Co., supra, 14 Cal.App.4th at p. 80, 17 Cal.Rptr.2d 649.)   In Careau & Co. v. Security Pacific Business Credit, Inc. (1990) 222 Cal.App.3d 1371, 1401, fn. 26, 272 Cal.Rptr. 387, Division Three of our District suggests “it is fair to say that [the Supreme Court in Foley ] did express considerable skepticism about the viability of a tort recovery which was based upon a defendant's bad faith conduct in asserting a stonewall (‘see you in court’) defense to an ordinary commercial contract.”   In Careau & Co., however, the court defined bad faith denial of a contract without reference to a special relationship or an extraneous act, identifying the elements as (1) an underlying contract, (2) which is breached by the defendant, (3) who then denies liability by asserting that the contract does not exist, (4) in bad faith and (5) without probable cause for such denial.  (Careau & Co. v. Security Pacific Business Credit, Inc., supra, 222 Cal.App.3d at p. 1401, 272 Cal.Rptr. 387.)   No petition for review was filed in Careau.

1.   Fletcher v. Western National Life Ins. Co. (1970) 10 Cal.App.3d 376, 89 Cal.Rptr. 78, in which the insurer denied liability under the policy by asserting without any reasonable ground for doing so that the insured had made a misrepresentation of material fact.  (At p. 396, 89 Cal.Rptr. 78.)

2.   Defendant has never argued that Morgan, Lewis & Bockius acted beyond the limited authority given it to retain plaintiff's services, a position which might call into question the propriety of this instruction.   Defendant's consistent tactic has been to deny the law firm had any authority at all to retain those services.

3.   Defendant also argues the award of punitive damages was so excessive as to be unconstitutional.   As noted in part I of the majority opinion, in which I concur, the judgment must be reversed inasmuch as the trial court exceeded its jurisdiction in purportedly “correcting” the “mistake” in the award of compensatory and punitive damages.   Accordingly, the merits of this argument need not be considered.

MIRIAM A. VOGEL, Associate Justice.

ORTEGA, J., concurs.