Gomez v. Volkswagen of America, Inc.

Plaintiff David Gomez appeals from an order sustaining without leave to amend a demurrer to a cause of action for the bad faith breach of the covenant of good faith and fair dealing in an express written warranty and from an order granting defendants a new trial; defendants appeal from the judgment for plaintiff and from an order denying their motion for judgment notwithstanding the verdict.

Plaintiff purchased a new 1975 Porsche 914 automobile in January 1975 from defendant Century Porsche-Audi (Century) which is not a party to this appeal. The automobile was manufactured jointly by defendant Dr. Ing. h. c. F. Porsche, A.G. (Porsche) and defendant Volkswagenwerk Aktiengesellschraft (VWAG) in Germany and was imported by defendant Volkswagen of American, Inc. (VWoA). Defendant paid $7,882 in cash. Plaintiff also received a written warranty issued by VWoA reading in significant part as follows:

“Porsche Audi warrants that every 1975 model Porsche vehicle imported by it and sold as a new vehicle to a retail customer will be free from defects in material and workmanship for 12 months after the date of delivery of the vehicle to the original retail customer or until the vehicle has been driven 20,000 miles, whichever comes first. ...”

On May 10, 1975, a Saturday, with about 4,500 miles on the car, fire broke out internally and severely damaged it when plaintiff attempted to start it. At the time plaintiff had no fire insurance. He immediately notified Century and two days later the car was towed to Century’s premises. Defendants gave plaintiff a loaner automobile which he kept free of charge until December 1975. Plaintiff repeatedly demanded that defendants replace or repair his car without cost to him pursuant to the warranty. Defendants refused to do so, contending that the fire was not the result of a “defect” within the meaning of the warranty. In mid-August 1975 plaintiff purchased a replacement Saab automobile.

On May 5, 1976, plaintiff filed his original complaint herein setting forth causes of action in strict product liability, negligence, breach of express warranty, breach of implied warranty and a fifth alleged cause of action entitled “Bad Faith.” In this fifth cause of action plaintiff pleaded that he had purchased and paid for said Porsche, together with the warranty quoted above, from defendants who had designed and manufactured the car defectively, resulting in a dangerously leaking gasoline hose in the engine com

After answering the complaint, the three defendants moved for judgment on the pleadings on the ground that the fifth cause of action failed to state facts sufficient to constitute a cause of action. This motion was granted with 60 days leave to amend.

On February 7, 1980, plaintiff filed his first amended complaint in substantially the same form as the original. The allegations of the fifth cause of action therein were substantively unchanged, being merely paraphrased. This time defendants demurred generally to the fifth cause of action and the trial court sustained the demurrer without leave to amend.

Plaintiff sought a review of the order sustaining the demurrer without leave to amend in this court by petition for an extraordinary writ which was denied by the court with the following order: “The petition filed May 22, 1980, has been considered and is denied for failure to allege facts showing petitioner entitled to extraordinary relief in this court.” A hearing in the Supreme Court was sought and denied without comment. Defendants contend that this constitutes a binding adjudication on appeal. This is so only where the appellate court renders a decision and, in deciding the appeal, states a principle or rule of law necessary to the decision which then becomes the law of the case. Here, the appellate court did not decide anything regarding the merits of plaintiff’s case; it merely ruled that, on the facts set forth in his petition, he was not entitled to extraordinary relief. Defendants’ contention is mistaken. (Hagan v. Superior Court (1962) 57 Cal.2d 767 , 770 [ 22 Cal.Rptr. 206 , 371 P.2d 982 ]; Rosato v. Superior Court (1975) 51 Cal.App.3d 190 , 230 [ 124 Cal.Rptr. 427 ].)

In neither complaint nor in argument was reference made to the Song-Beverly Consumer Warranty Act, chapter 1 of title 1.7 of the Civil Code, sections 1790 to 1795.5 inclusive, enacted in 1970 (Stats. 1970, ch. 1333 § 1, p. 2478). In each instance plaintiff argued only that he had stated a tort cause of action for violation by defendants of the covenant of good faith and fair dealing in the written warranty for which punitive damages might be recovered. At that time, such a tort cause of action had been recognized by California courts only for willful breaches of the covenant in insurance contracts (Egan v. Mutual of Omaha Ins. Co. (1979) 24 Cal.3d 809 [ 169 Cal.Rptr. 691 , 620 P.2d 141 ] and cases cited at p. 818) and in the employment relationship (Tameny v. Atlantic Richfield Co. (1980) 27 Cal.3d 167 ,

This, however, does not resolve the question whether the fifth cause of action also states a tort cause of action which the courts of this state should recognize for wrongful breach of the covenant of good faith and fair dealing in the warranty, a breach for which under appropriate circumstances punitive damages may be awarded under Civil Code section 3294. So far, California has not yet extended this tort remedy to commercial contracts outside the insurance area and the employment relationship. But should it do so as plaintiff urges?

Our Supreme Court has recently given substantial guidance in this area. In Seaman’s Direct Buying Service, Inc. v. Standard Oil Co. (1984) 36 Cal.3d 752 , at pp. 768-770 [ 206 Cal.Rptr. 354 , 686 P.2d 1158 ], the opinion by The Court reviews the present state of the law:

“It is well settled that, in California, the law implies in every contract a covenant of good faith and fair dealing. (1 Witkin, Summary of Cal. Law (8th ed. 1973) Contracts, § 576, p. 493; see, e.g., Egan v. Mutual of Omaha Ins. Co. (1979) 24 Cal.3d 809 , 818 [ 169 Cal.Rptr. 691 , 620 P.2d 141 ]; Gruenberg v. Aetna Ins. Co. (1973) 9 Cal.3d 566 , 573 [ 108 Cal.Rptr. 480 , 510 P.2d 1032 ]; Comunale v. Traders & General Ins. Co. (1958) 50 Cal.2d 654 , 658 [ 328 P.2d 198 , 68 A.L.R.2d 883 ]; Crisci v. Security Ins. Co. (1967) 66 Cal.2d 425 , 429 [ 58 Cal.Rptr. 13 , 426 P.2d 173 ] [‘in every contract, including policies of insurance, there is an implied covenant of good faith and fair dealing . . . .’ (Italics added.)]) Broadly stated, that covenant requires that neither party do anything which will deprive the other of the benefits of the agreement. (1 Witkin, op. cit. supra, at p. 493.)

“California courts have recognized the existence of this covenant, and enforced it, in cases involving a wide variety of contracts. Courts have

“In the seminal cases of Comunale v. Traders & General Ins. Co., supra, 50 Cal.2d 654 , and Crisci v. Security Ins. Co., supra, 66 Cal.2d 425 , 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. (Crisci, supra, at p. 432.)

“While the proposition that the law implies a covenant of good faith and fair dealing in all contracts is well established, the proposition advanced by Seaman’s—that breach of the covenant always gives rise to an action in tort—is not so clear. In holding that a tort action is available for breach of the covenant in an insurance contract, we have emphasized the ‘special relationship’ between insurer and insured, characterized by elements of public interest, adhesion, and fiduciary responsibility. (Egan v. Mutual of Omaha Ins. Co., supra, 24 Cal.3d at p. 820.) 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.

Reversal of the judgment makes it unnecessary to consider plaintiff’s other contentions and the issues raised by the cross-appeal. The trial court is directed to conduct further proceedings consistent with this opinion.

Reversed.

Lillie, P. J., and Thompson, J., concurred.

A petition for a rehearing was denied July 26, 1985, and the petition of plaintiff and appellant for review by the Supreme Court was denied October 24, 1985. Bird, C. J., was of the opinion that the petition should be granted.