Pacific Gas & Electric Co. v. Bear Stearns & Co., S004037

• Decision Date: 07 June 1990
• Docket Number: No. S004037,S004037
• Court: California Supreme Court
• Parties: , 791 P.2d 587 PACIFIC GAS AND ELECTRIC COMPANY, Plaintiff and Appellant, v. BEAR STEARNS & COMPANY et al., Defendants and Respondents.

Page 1

270 Cal.Rptr. 1

50 Cal.3d 1118, 791 P.2d 587

PACIFIC GAS AND ELECTRIC COMPANY, Plaintiff and Appellant, v. BEAR STEARNS & COMPANY et al., Defendants and Respondents.

No. S004037.

Supreme Court of California,

In Bank.

June 7, 1990.

Howard V. Golub, Douglas A. Ogelsby, Shirley A. Sanderson and Randall J. Litteneker, San Francisco, for plaintiff and appellant.

Janice E. Kerr, Michael B. Day and Suzanne Engelberg, San Francisco, as amici curiae, on behalf of plaintiff and appellant.

Thelen, Marrin, Johnson & Bridges, Paul R. Haerle, Steven L. Hock, San Francisco, Greve, Clifford, Diepenbrock & Paras, Claire H. Greve, Sacramento, Mudge, Rose, Guthrie, Alexander & Ferdon, Los Angeles, Thomas W. Evans and Audrey Strauss, for defendants and respondents.

BROUSSARD, Justice.

We are called upon to decide whether a cause of action in tort may be stated for intentional interference with contractual relations or intentional interference with prospective economic advantage when it is alleged defendant induced a party to a contract to seek a judicial determination whether it may terminate the contract according to its terms.

We have concluded that to allow either cause of action to be stated when the only interference alleged is that defendant induced the bringing of potentially meritorious litigation would be an unwarranted expansion of the scope of these torts and a pernicious barrier to free access to the courts. We therefore reverse the judgment of the Court of Appeal.

I.

Pacific Gas and Electric Company (PG & E) sued Bear Stearns & Company (Bear Stearns), an investment brokerage firm, for interfering with its long-term contract for the purchase of hydroelectric power from Placer County Water Agency (Agency). It alleged intentional interference with contractual relations, intentional interference with prospective business advantage, and attempted inducement of breach of contract. Bear Stearns demurred successfully, and the complaint was dismissed. The Court of Appeal reversed the trial court's order as to the first two causes of action.

The facts pleaded in PG & E's second amended complaint are as follows. In April 1963, PG & E entered into a power purchase contract with the Agency to buy all of the hydroelectric power to be generated by its Middle Fork American River Project. The contract provided that the agreement would terminate in 2013 or at the end of the year in which the Agency completed retirement of its project bonds, whichever occurred first.

As energy prices rose, the Agency wished it could terminate the contract and sell its hydroelectric power in a more favorable market, but felt it could not do so without a breach. Bear Stearns approached the Agency and spent several years overcoming the Agency's resistance to making any effort to terminate the contract. Finally it succeeded, and in May 1983, the Agency entered into a contingent fee agreement with Bear Stearns, in which Bear Stearns agreed to pay for legal, engineering, and marketing studies on the feasibility of terminating the power contract, in return for 15 percent of any resulting increase in the Agency's revenues above $2.5 million for 20 years.

Bear Stearns retained legal counsel to draw up a plan by which the Agency could retire its project bonds, and to litigate the question whether the Agency could terminate the contract. It also retained an engineer, and conducted a marketing campaign to solicit buyers for the Agency's power. It agreed to pay half of the fees of the Agency's independent counsel.

In December 1984, the Agency served a demand for arbitration under the power contract on PG & E, to resolve the question whether the Agency could terminate the contract before 2013 by retiring its project bonds. PG & E responded by filing several lawsuits, including the first complaint in this one. The Agency withdrew the demand for arbitration and sought a declaratory judgment that the contract could be terminated early by retiring the project bonds. The trial court entered a judgment on the pleadings in favor of the Agency. The Court of Appeal reversed, finding that the trial court had erred in failing to consider certain extrinsic evidence showing that the parties did not intend the contract to be terminable before 2013. ¹ That action is still pending.

The complaint in the present action alleged disruption of the contractual relation in that the Agency has breached the promises made in its official statement accompanying its bond issue, and in its bond resolution, that the contract would continue in effect until 2013. In addition, PG & E alleged its own performance has been made more expensive and burdensome because of legal expenses incurred in litigation to protect its rights under the power contract, the official statement, and the bond resolution and because it has lost assurance that the Agency will continue to perform. It alleged irreparable injury in that the Middle Fork American River Project is irreplaceable, termination of the power contract may cause a substantial increase in the cost of electricity it provides its customers, and Bear Stearns lacks the capital to reimburse PG & E for its damages if the contract is terminated. The complaint sought an injunction restraining Bear Stearns from continuing to encourage, finance or participate in the Agency's efforts to terminate the contract, and restraining Bear Stearns from continuing to solicit future buyers for the Agency's power, and damages according to proof.

PG & E alternatively sought to state a cause of action for intentional interference with prospective economic advantage, alleging that regardless of the terms of the contract, it had an expectancy that the power sales would continue until 2013, and that Bear Stearns interfered with this valuable expectancy by inducing the Agency to seek to terminate the contract.

The trial court sustained Bear Stearns's demurrer without leave to amend. The Court of Appeal reversed the order sustaining the demurrer as to the causes of action for intentional interference with contractual relations and with prospective economic advantage. It acknowledged that no breach of contract was threatened, but held that either cause of action may be stated without alleging an actual or threatened breach. It drew an analogy between this case and those in which conduct that induces the termination of an at-will contract is deemed actionable. There, too, the outsider's interference is actionable, though the disruption of the existing or prospective contractual relationship it causes does not amount to a breach of contract.

II.

In reviewing the sufficiency of a complaint, we accept as true all the properly pleaded allegations stated in the complaint. (J'Aire Corp. v. Gregory (1979) 24 Cal.3d 799, 803, 157 Cal.Rptr. 407, 598 P.2d 60; Buckaloo v. Johnson (1975) 14 Cal.3d 815, 828, 122 Cal.Rptr. 745, 537 P.2d 865.) With this rule in mind, we consider whether an allegation that defendant induced a contracting party to seek a judicial determination whether it can terminate the contract according to its terms adequately states a cause of action for interference with contractual relations or intentional interference with prospective economic advantage.

It has long been held that a stranger to a contract may be liable in tort for intentionally interfering with the performance of the contract. (Lumley v. Gye (1853) 2 El. & Bl. 216 ; Imperial Ice v. Rossier (1941) 18 Cal.2d 33, 112 P.2d 631, and cases cited.) The elements which a plaintiff must plead to state the cause of action for intentional interference with contractual relations are (1) a valid contract between plaintiff and a third party; (2) defendant's knowledge of this contract; (3) defendant's intentional acts designed to induce a breach or disruption of the contractual relationship; (4) actual breach or disruption of the contractual relationship; and (5) resulting damage. (See Seaman's Direct Buying Service, Inc. v. Standard Oil Co. (1984) 36 Cal.3d 752, 765-766, 206 Cal.Rptr. 354, 686 P.2d 1158; Ramona Manor Convalescent Hospital v. Care Enterprises (1986) 177 Cal.App.3d 1120, 1130, 225 Cal.Rptr. 120; Farmers Ins. Exchange v. State of California (1985) 175 Cal.App.3d 494, 506, 221 Cal.Rptr. 225.)

The tort of interference with prospective economic advantage protects the same interest in stable economic relationships as does the tort of interference with contract, though interference with prospective advantage does not require proof of a legally binding contract. (Buckaloo v. Johnson, supra, 14 Cal.3d 815, 823, 122 Cal.Rptr. 745, 537 P.2d 865.) ² The chief practical distinction between interference with contract and interference with prospective economic advantage is that a broader range of privilege to interfere is recognized when the relationship or economic advantage interfered with is only prospective. (Environmental Planning and Information Council v. Superior Court (1984) 36 Cal.3d 188, 194, 203 Cal.Rptr. 127, 680 P.2d 1086; Buckaloo v. Johnson, supra, 14 Cal.3d at p. 823, fn. 6, 122 Cal.Rptr. 745, 537 P.2d 865.)

The parties have raised two questions under the settled law we have recited. The first is whether inducing a party to a contract to seek to terminate the contract according to its terms is ever actionable interference with contractual or prospective economic relations. The second question is whether actual interference is adequately alleged when the interference consists of inducing litigation on the contract. Considering the established boundaries of the tort, we conclude that it may be actionable to induce a party to a contract to terminate the contract according to its terms. On the second point, we acknowledge that interference which makes enjoyment of a contract more expensive or burdensome may be actionable, and that PG & E alleges its rights under the contract have been made more expensive because it has incurred significant costs in defending itself...