Seaman's Direct Buying Serv., Inc. v. Standard Oil Co. - 36 Cal. 3d 752, 206 Cal. Rptr. 354, 686 P.2d 1158 (1984)

Rule:

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.

Facts:

Plaintiff ship supply dealer and the defendant oil supplier signed a letter agreement under which the defendant supplier was to supply the plaintiff dealer's fuel requirements in connection with the dealer's lease of city marina property. When the defendant oil supplier subsequently denied the existence of a binding contract, the plaintiff dealer sued the defendant supplier for breach of contract, tortious breach of the implied covenant of good faith and fair dealing, fraud, and intentional interference with a contractual relationship. A jury returned a verdict for plaintiff dealer on all but the fraud cause of action. Defendant supplier appealed. 

Issue:

1. Was the letter agreement signed by the parties sufficient to satisfy the Statute of Frauds, thereby rendering the agreement binding and enforceable? 
2. Was the defendant’s denial of the existence of a binding contract tortious, thereby warranting the recovery of damages for tortious breach of the implied covenant of good faith and fair dealing? 

Answer:

1) Yes. 2) No.

Conclusion:

The Supreme Court affirmed the judgment in favor of the dealer for breach of contract, but reversed the judgments for intentional interference with contractual relations and breach of the duty of good faith and fair dealing with directions to conduct further proceedings. It held that a letter between the parties, which was signed by both was sufficiently specific as to the material terms of the contract to satisfy both the general statute of frauds (Civ. Code, § 1624) and that applicable to sales of goods (Cal. U. Com. Code, § 2201). However, as to the claim for intentional interference with contractual relations, the trial court committed reversible error in instructing the jury that the oil supplier was deemed to have acted intentionally if it knew that its conduct would interfere with the contract between the dealer and the city. There was no evidence that the oil supplier acted with the purpose or design of causing the dealer to breach its contract with the city. The court held 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 existed. However, the trial court committed reversible error in instructing the jury that where a binding contract has been agreed upon, the law implied a covenant that neither party will deny the existence of a contract. The oil supplier's denial of the existence of a binding contract was not tortious if made in good faith. Since the degree of conflict in the evidence on the issue of the oil supplier's bad faith was high, the dealer's counsel's argument to the jury may have contributed to the misleading effect of the instructional error, the jury's verdict was close, and no other instructions remedied the error, it was probable that the jury may have imposed liability on the oil supplier as a result of the instructional error.