Racine & Laramie, Ltd. v. Department of Parks & Recreation

• Decision Date: 14 December 1992
• Docket Number: No. D015011,D015011
• Citation: 11 Cal.App.4th 1026,14 Cal.Rptr.2d 335
• Court: California Court of Appeals Court of Appeals
• Parties: RACINE & LARAMIE, LTD., INC., Plaintiff and Respondent, v. CALIFORNIA DEPARTMENT OF PARKS AND RECREATION, Defendant and Appellant.

Page 335

14 Cal.Rptr.2d 335

11 Cal.App.4th 1026

RACINE & LARAMIE, LTD., INC., Plaintiff and Respondent, v. CALIFORNIA DEPARTMENT OF PARKS AND RECREATION, Defendant and Appellant.

No. D015011.

Court of Appeal, Fourth District, Division 1, California.

Dec. 14, 1992.

As Modified on Denial of Rehearing Jan. 6, 1993.

Review Denied March 25, 1993.

Daniel E. Lungren, Atty. Gen., Roderick E. Walston, Chief Asst. Atty. Gen., Walter E. Wunderlich, Acting Asst. Atty. Gen., Douglas B. Noble, Supervising Deputy Atty. Gen., James E. Ryan, Deputy Atty. Gen., for defendant and appellant.

Jack H. Kaufman, San Diego, for plaintiff and respondent.

FROEHLICH, Associate Justice.

Racine & Laramie, Ltd., Inc. (Racine) is a concessionaire occupying and operating premises in Old Town San Diego State Historic Park under a contract, which bears many attributes of a long-term lease, with the California Department of Parks and Recreation (Department). The contract was executed in 1974 for a term of 40 years, thus extending until the year 2014. Over a period of several years in the 1980s Racine negotiated with the Department for modifications in the concession contract which would permit expanded operations of the premises. Originally limited to the operation of a tobacco shop and wine tasting facility, the negotiations contemplated operation of a restaurant and the on-premises sale of alcoholic beverages.

When negotiations broke down in 1988, Racine brought suit against the Department. Of the several initial causes of action, only one survived demurrers: a cause of action denominated "Breach of Implied Covenant of Good Faith and Fair Dealing." Tried to a jury, the case was submitted on special verdicts. The jury found that the Department was guilty of "breach [of] the covenant of good faith and fair dealing in its negotiations of an amendment/new contract to the concession agreement with the plaintiff" and that as a result of such breach Racine had been damaged in the sum of $592,110.

Department appeals the judgment on two grounds: (1) there can be no breach of the covenant of good faith by a refusal to enter into a new contract, and (2) the damage

award is speculative and excessive. Since we rule in favor of Department as to its first contention, we do not reach the damage issue.

CONTROLLING FACTS

A very detailed examination of the parties' relationship and negotiations was presented to the jury. Since we are bound to accept the jury's determination of fact, assuming it to be supported by substantial evidence, we have no need of close focus on the history of the case. We therefore review the factual background summarily. Modification of a concession contract such as that here involved requires action by several state entities. The concessionaire deals with employees of the Department: Racine commenced doing this as early as 1980. Any contract which would permit on-premises sale of alcoholic beverages must, however, receive approval by the State Park and Recreation Commission (Commission) (Pub. Resources Code, § 5080.20), which is an entity vested with power to establish general policies to guide the Department. (Pub. Resources Code, §§ 530, 539.)

An "impact study" was presented by the Department to the Commission in 1983 which reflected Racine's efforts to establish a restaurant and on-premises liquor sales. On March 31, 1983, the Commission passed a resolution authorizing the Department to permit the expansion of Racine's concession, provided the concession contract be amended to conform to other contracts which had been negotiated with other Old Town concessionaires and include "such other terms as may be required." ¹

Public Resources Code section 5080.20 requires that concession contracts involving certain floor figures of either investment or estimated gross sales, as included in this proposed contract modification, be submitted for review by the Legislature. On July 19, 1983, the Legislature authorized the renegotiation of the existing contract, directing that the Department "attempt to renegotiate the existing rent for the sale of pipes and tobacco products." Although Racine leans heavily on the actions of the Commission and the Legislature as somehow enhancing subsequent relations between Racine and the Department to a higher status than mere negotiations, it is clear that neither action binds the Department in any way. ²

The parties thereafter met at various times from 1983 through August 1985 and circulated various drafts of proposed amendments to the concession contract, but achieved no final agreement. After a hiatus of some 32 months, the parties renewed negotiations, resulting in a new written proposal from Racine, dated June 9, 1988. This proposal was quite different from that contained in the 1983 draft. For instance, instead of a 45 to 70-seat restaurant a 300-seat restaurant was proposed. Also, Racine sought to close the tobacco store operation completely. The Department replied by letter dated August 3, 1988, rejecting The instant lawsuit was then filed by Racine, without further negotiations. No negotiations have since taken place, although the Department in subsequent correspondence professed willingness to reopen the negotiations.

the proposal on several grounds. One ground, for instance, was that the Department felt the members of the then constituted Commission would probably not accept full alcoholic sale privileges. Another illustrative difference of approach was that the Department now favored only a "quick food" operation, as opposed to a full-service restaurant.

Racine's position is that having embarked upon lengthy negotiations over a period of several years, which negotiations resulted in tentative agreement as to some of the prospective changes in the concession contract, the Department was precluded arbitrarily and unilaterally from retreating from such positions. Racine emphasizes the fact that it was in an existing contractual relationship with the Department, and that this relationship explicitly contemplated future negotiations for contract modification. Paragraph 25 of the concession contract provided:

"Notwithstanding any of the provisions of this contract, the parties may hereafter, by mutual consent, agree to modifications thereof or additions thereto in writing which are not forbidden by law. The State shall have the right to grant reasonable extensions of time to Concessionaire for any purpose or for the performance of any obligation of Concessionaire hereunder."

Once having entered into negotiations for a change in the contract, in accordance with paragraph 25 thereof, Racine takes the position that the bargaining had to be conducted in good faith. The Department's alleged reversal of its position on such matters as the full liquor sales privilege and the full restaurant service is characterized by Racine as arbitrary and capricious, and a violation of the covenant of good faith and fair dealing contained by implication in the concession contract.

We do not know exactly what it was in the facts of the case which led the jury to conclude, in its special verdict, that the Department had exhibited bad faith in its negotiations. We do know, however, that the jury was instructed generally on the law of the implied covenant of good faith and fair dealing, deemed to exist in every contract. We also know that counsel for Racine in argument contended that the sudden and arguably arbitrary reversal of negotiating stance taken by the Department constituted a violation of the covenant. We must assume that the jury so found.

We reverse because we conclude that the Department had no obligation to negotiate new terms of the concession contract, that its commencement and continuance of negotiations over a long period of time had no effect upon this lack of obligation, and that its assumption of an arbitrary stance at some point in the negotiations cannot therefore be a breach of any contract term, including implied contract terms of good faith and fair dealing, even though such conduct might be found by a jury to be unreasonable, unfair, or otherwise bad faith negotiation tactics.

Our conclusion in this regard is based, we believe, on rather simple and unassailable contract law principles. The implied covenant of good faith and fair dealing rests upon the existence of some specific contractual obligation. (Foley v. Interactive Data Corp. (1988) 47 Cal.3d 654, 683-684, 689-690, 254 Cal.Rptr. 211, 765 P.2d 373.) "The covenant of good faith is read into contracts in order to protect the express covenants or promises of the contract, not to protect some general public policy interest not directly tied to the contract's purpose." (Id. at p. 690, 254 Cal.Rptr. 211, 765 P.2d 373.) As we stated in Love v. Fire Ins. Exchange (1990) 221 Cal.App.3d 1136 at page 1153, 271 Cal.Rptr. 246: "In essence, the covenant is implied as a supplement to the express contractual covenants, to prevent a contracting party from engaging in conduct which (while not technically transgressing the express covenants) frustrates the other party's rights to the benefits of the contract."

There existed no express contractual obligation here to negotiate a modification of the concession contract. The provision closest to a possible obligation is that contained in paragraph 25 of the contract, which falls far short of the imposition of any obligation on either party to even participate in activity leading to a modification of the concession. Similarly, the actions taken by the Commission and by the Legislature imposed upon the Department no obligation to enter into either contract negotiations or a contract amendment, but simply removed statutory conditions precedent to the Department's doing so if it should so elect.

There is no obligation to deal fairly or in good faith absent an existing contract. (Hess v. Transamerica Occidental Life Ins. Co. (1987) 190 Cal.App.3d 941, 235 Cal.Rptr. 715; Beck v. American Health...