Okun v. Morton

Opinion

This litigation arises out of a dispute over the interpretation of an agreement between Milton Okun (plaintiff) and Peter Morton (defendant) which, at its inception, contemplated the development of a restaurant and commercial enterprise known as the Hard Rock Cafe (also Hard Rock). Although the venture proved highly successful, the parties found themselves at odds concerning provisions in the contract covering the exploitation of future business opportunities.

As a result, plaintiff initiated this action for specific performance, declaratory relief, and damages. Alleging that the disputed portion of the agreement was too vague to be enforceable, defendant cross-complained for recision, damages, and other forms of equitable relief. Following a nonjury trial, the court granted plaintiff specific performance and awarded him a total of $354,325 in damages for fraud, breach of contract, and tortious breach of contract. The judgment as rendered also specified the manner in which the parties were to share in all business opportunities utilizing the Hard Rock name and format. This appeal by defendant follows.

Plaintiff first met defendant when the two were residing in England in the early 1970’s. Defendant and a partner, Isaac Tigrett, were operating a popular local restaurant and tourist attraction known as the Hard Rock Cafe. Plaintiff contacted defendant and inquired about investing in the

Plaintiff received a copy of the memorandum but initially rejected the proposal. Sometime later, after it became apparent that HRC could not meet its capital contribution obligations as specified in the private placement memorandum, defendant attempted to rekindle plaintiff’s interest in the business by offering him stock in the general partnership and the right to participate in other opportunities utilizing the Hard Rock name.

In the negotiations which followed, plaintiff demanded a 30 percent interest in HRC in exchange for his payment of $100,000 to the limited partnership. He also insisted on receiving 20 percent of the fees earned by defendant for operating the restaurant despite his expressed desire to have no role in the management of the business. When defendant, through his attorney, Gary Hampar, balked at the proposal, plaintiff agreed to accept a 20 percent interest in the general partnership so long as his financial liability for the venture was confined to narrowly defined circumstances. The parties further agreed that plaintiff’s obligation to pay 100 percent of HRC’s contribution to the limited partnership was unique, and that in future ventures he would be responsible only for capitalization equal to his shareholder interest.

Although during the course of the negotiations neither defendant nor Hampar mentioned that there were any limitations on the use of the Hard Rock name, they did emphasize the possible future investments that could be anticipated and the markets which existed for the opening of other similar restaurants.

The parties executed the agreement which, on March 2, 1982, provided that HRC was to be capitalized for $5,000, $1,000 of which was to be provided by plaintiff in exchange for a 20 percent interest in the general partner. Plaintiff further agreed to advance $99,000 to HRC, which amount would be contributed to capital prior to the closing of the limited partnership offering. In addition to receiving 20 percent of the management fees

Beyond awarding plaintiff in excess of $360,000 in general and punitive damages, the judgment ordered that he receive a proportionate share of stock in ventures from which he had been wrongfully excluded and decreed the manner in which he was to be allowed to participate in all future investments.

On this appeal, defendant first argues that Paragraph 9 of the March 1982 agreement providing for joint exploitation of future business opportunities on a “mutually agreeable basis,” was merely an unenforceable “agreement to agree” which cannot support a decree of specific performance. Plaintiff counters, however, that any ambiguity in the meaning of the contract may be cured by reference either to parol evidence of the events preceding the execution of the agreement or to the subsequent conduct of the parties.

In determining what the parties agreed upon and intended by their agreement, we apply the well-settled rule that the interpretation of a written instrument generally presents a question of law for this court to determine anew. (Parsons v. Bristol Development Co. (1965) 62 Cal.2d 861 , 865 [ 44 Cal.Rptr. 767 , 402 P.2d 839 ]; see also Garcia v. Truck Ins. Exchange (1984) 36 Cal.3d 426 , 439 [ 204 Cal.Rptr. 435 , 682 P.2d 1100 ]; Klingele v. Engelman (1987) 192 Cal.App.3d 1482 , 1485 [ 238 Cal.Rptr. 199 ].) Even where extrinsic evidence was offered in the trial court, a reviewing court is not bound by the trial court’s findings if the extrinsic evidence is not in conflict, is not substantial, or is inconsistent with the only interpretation to which the instrument is reasonably susceptible. (Pasadena Police Officers Assn. v. City of Pasadena (1983) 147 Cal.App.3d 695 , 707 [ 195 Cal.Rptr. 339 ]; United California Bank v. Maltzman (1974) 44 Cal.App.3d 41 , 49 [ 118 Cal.Rptr. 299 ]; Robinson & Wilson, Inc. v. Stone (1973) 35 Cal.App.3d 396 , 407 [ 110 Cal.Rptr. 675 ].) Here, of course, parol evidence was admitted to explain the context in which the 1982 agreement arose and the parties’ conduct following the execution of the contract which cast light on their original intent and the meaning of Paragraph 9. Although defendant and plaintiff dispute the inferences to be drawn from this evidence, the evidentiary facts themselves are not in substantial conflict. We therefore review the pertinent provisions of the contract in the context of the extrinsic evidence and make an independent determination of the meaning of the agreement. (Malmstrom v. Kaiser Aluminum & Chemical Corp. (1986) 187 Cal.App.3d 299 , 315 [ 231 Cal.Rptr. 820 ]; Medical Operations Management,

A contract which leaves an essential element for future agreement of the parties is usually held fatally uncertain and unenforceable. (Coleman Engineering Co. v. North American Aviation, Inc. (1966) 65 Cal.2d 396 , 405 [ 55 Cal.Rptr. 1 , 420 P.2d 713 ]; Robinson & Wilson, Inc. v. Stone, supra, 35 Cal.App.3d at p. 409; Roberts v. Adams (1958) 164 Cal.App.2d 312 , 314 [ 330 P.2d 900 ].) The general rule was explained in Ablett v. Clauson (1954) 43 Cal.2d 280 [ 272 P.2d 753 ], as follows: “ ‘Although a promise may be sufficiently definite when it contains an option given to the promisor or promisee, yet if an essential element is reserved for the future agreement of both parties, the promise can give rise to no legal obligation until such future agreement. Since either party by the terms of the promise may refuse to agree to anything to which the other party will agree, it is impossible for the law to affix any obligation to such a promise.’ [Citation.] The rule is well established in this state [citations], and, in conformity with the weight of authority in other states [citation], it has been held that an option agreement which leaves an essential term to future agreement is not enforceable. [Citations.]” (Id. at pp. 284-285; see also Etco Corp. v. Hauer (1984) 161 Cal.App.3d 1154 , 1158 [ 208 Cal.Rptr. 118 ].)

Although an agreememt cannot be specifically enforced unless the terms are “sufficiently certain to make the precise act which is to be done clearly ascertainable” (Civ. Code, § 3390, subd. 5), the modern trend of the law favors carrying out the parties’ intentions through the enforcement of contracts and disfavors holding them unenforceable because of uncertainty. (California Lettuce Growers v. Union Sugar Co. (1955) 45 Cal.2d 474 , 481 [ 289 P.2d 785 , 49 A.L.R.2d 496 ]; Larwin-Southern California, Inc. v. JGB Investment Co. (1979) 101 Cal.App.3d 626 , 641 [ 162 Cal.Rptr. 52 ]; Burrow v. Timmsen (1963) 223 Cal.App.2d 283 , 288 [ 35 Cal.Rptr. 668 , 100 A.L.R.2d 544 ].) “The defense of uncertainty has validity only when the uncertainty or incompleteness of the contract prevents the court from knowing what to enforce.” (Hennefer v. Butcher (1986) 182 Cal.App.3d 492 , 500 [ 227 Cal.Rptr. 318 ].) At bottom, “[i]f the parties have concluded a transaction in which it appears that they intend to make a contract, the court should not frustrate their intention if it is possible to reach a fair and just result, even though this requires a choice among conflicting meanings and the filling of some gaps that the parties have left. [Fn. omitted.]” (1 Corbin on Contracts (1963) § 95, p. 400.)

With the foregoing standards in mind, we are of the view that the provisions of Paragraph 9 which defendant characterizes as fatally uncertain, are either sufficiently certain on their face, or were made sufficiently

Considered as a whole, the foregoing terms were sufficient to establish from the outset the ways in which future ventures were to be financed, owned, and operated by the parties. The fundamental structure of all such undertakings was to be based on the 20/80 ratio established for the creation of the L.A. Hard Rock. This essential term effectively defined the extent of the parties’ capital contributions and their right to participate in all manner of future investment schemes commensurate with their ownership interest in HRC. Although the agreement admittedly does not deal in specifics, neither law nor equity requires that every term and condition be set forth in the contract. (King v. Stanley (1948) 32 Cal.2d 584 , 588 [ 197 P.2d 321 ]; Burrow v. Timmsen, supra, 223 Cal.App.2d at p. 288.) In light of the fact that neither defendant nor plaintiff could predict with any degree of certainty the success of the Los Angeles operation, it is not surprising that Paragraph 9 was drafted broadly enough to accommodate changing circumstances and unforeseen developments. Because of defendant’s expertise, however, he was left with the discretion to formulate and structure the ownership for each venture so long as he maintained the 20/80 ratio. That he believed himself bound by the agreement needs little discussion. Suffice it to say that the organizational structure and development of HRC II and III alone evidence defendant’s manifest intent to abide by the terms of Paragraph 9.

Defendant nevertheless argues that the agreement is uncertain in several important particulars, including the manner in which liabilities are to be shared between the parties and the effect of offering other investors the opportunity to participate in any given deal. He also points out that there is no provision describing when and how he must offer plaintiff the option to invest. We do not regard any of these omissions of detail as a defect which

Between the formation of HRC II in 1983 and the Chicago offering in 1985, both defendant and plaintiff acted in strict accord with the provisions of the contract. This is not to say that they did not dispute the extent of their responsibilities under Paragraph 9, they did. But regardless of those disagreements, defendant continued to offer to plaintiff the opportunity to become a 20 percent participant in all ventures utilizing the Hard Rock name. Plaintiff, in turn, agreed to contribute 20 percent of the capital requirements of those operations. The presence or absence of other investors had little effect on the parties’ dealings in this respect. At most, the participation of other investors merely served to reduce the capital demands placed on the parties in proportion to their ownership interest in the venture. Under these circumstances, defendant’s concern over his ability to structure future investment opportunities which rely on the participation of others is simply misplaced.

While it may be true that the parties hotly disputed plaintiff’s obligation to contribute to postformation expenses, we think it reasonable to imply, as did the trial court, that the agreement requires him to pay a sum or guarantee an obligation equal to one-quarter the amount so contributed by defendant. This construction is consistent with those provisions of the contract which compel plaintiff, under certain circumstances, to advance to HRC 25 percent of what defendant contributes (see fn. 4, ante). Viewed in the context of plaintiff’s testimony at trial that he had never rejected paying one-fourth of what defendant was required to pay to exploit the Hard Rock name, we can only conclude that the parties intended to be bound by this term in all their dealings. Contrary to the argument advanced by defendant, plaintiff is not a general partner who is jointly responsible for all partnership obligations (see Corp. Code, § 15015, subd. (b)), but rather a shareholder in a corporate general partnership who is liable only to the extent of his obligations under the contract.

Defendant asserts, however, that specific performance should not have been granted because enforcement of the contract will require continuous and protracted judicial supervision. The courts of this state have generally followed the “archaic” rule prohibiting specific enforcement “where the contracts stipulate a succession of continuous acts which require protracted supervision and direction by the court with the exercise of special knowledge, skill and judgment by the parties performing the acts.” (Ellison v. Ventura Port District (1978) 80 Cal.App.3d 574 , 580 [ 145 Cal.Rptr. 665 ]; see also Pacific etc. Ry Co. v. Campbell-Johnston (1908) 153 Cal. 106 , 113 [ 94 P. 623 ]; Thayer Plymouth Center v. Chrysler Motors Corp. (1967) 255 Cal.App.2d 300 , 303 [ 63 Cal.Rptr. 148 ].) Although the rule has been

Having undertaken an independent examination of the 1982 agreement and the record, we are convinced that the trial court’s interpretation of Paragraph 9 is correct. We therefore sustain that interpretation and reject defendant’s argument to the contrary. (Parsons v. Bristol Development Co., supra, 62 Cal.2d 861 , 866; Re v. Wells Fargo Bank (1969) 269 Cal.App.2d 783 , 786 [ 75 Cal.Rptr. 367 ].)

We next turn our attention to that portion of the judgment which awarded plaintiff $200,000 in punitive damages for defendant’s purported bad faith denial of the existence of the contract. Defendant asserts that the evidence adduced at trial on this issue simply fails to support the court’s finding. We have concluded, however, that the award must fall for a more fundamental reason.

Plaintiff’s first amended complaint alleged that defendant had breached the implied covenant of good faith and fair dealing by, among other things, denying “in bad faith and without probable cause that the March [1982] Agreement existed with respect to any right of plaintiff to participate in the Chicago Hard Rock Cafe.” This particular aspect of the cause of action apparently was based on certain language found in Seaman’s Direct Buying Service, Inc. v. Standard Oil Co., supra, 36 Cal.3d 752 , 769, recognizing for the first time that tort liability may arise from the bad faith denial of a contract. The import of that holding can best be understood by examining the context in which the litigation arose.

In 1971, Seaman’s Direct Buying Service, a small marine-fueling station in Eureka, sought to expand its operation by developing a marine-fuel

On appeal, Standard Oil argued that breach of the implied covenant did not give rise to tort liability in the ordinary commercial contract, and urged the Supreme Court to reverse the punitive damage award. In reaching its result, however, the court took a considerably different approach. After acknowledging that it had imposed tort liability for breach of the covenant in insurance contracts, the court pointedly observed that such liability was justified because of the “special relationship” between the insurer and insured, characterized by elements of public interest, adhesion and fiduciary responsibility. (Seaman’s Direct Buying Service, Inc. v. Standard Oil Co., supra, 36 Cal.3d 752 , 768.)

Cautioning against an extension of tort liability beyond parties with special relationships to ordinary commercial contracts, the court noted: “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

Having come to the brink of defining the tort of bad faith outside the realm of insurance contracts, the court found it unnecessary to base its decision on Standard Oil’s alleged breach of the implied covenant. Instead, the court held that a party to a contract may be subject to tort liability 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. (36 Cal.3d at p. 769.) Referring to an Oregon case imposing tort liability on a defendant who used the bad faith threat of suit under a contract to extort payment, the court concluded: “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. [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.” (Seaman’s Direct Buying Service, Inc. v. Standard Oil Co., supra, 36 Cal.3d 752 , 769-770.)

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. (See Putz, Commercial Bad Faith: Attorney Fees—Not Tort Liability—Is the Remedy for “Stonewalling” (1987) 21 U.S.F. L.Rev. 419 ; Cohen, Reconstructing Breach of the Implied Covenant of Good Faith and Fair Dealing as a Tort (1985) 73 Cal.L.Rev. 1291 .) Writing for a unanimous panel in Koehrer v. Superior Court, supra, 181 Cal.App.3d 1155 , 1170, Justice Kaufman stated: “While the court in Seaman ’s stated [that] it was not necessary to base its decision on the implied covenant of good faith and fair dealing [citations], it is difficult otherwise to understand its repeated reference to ‘good faith’ and ‘bad faith’ and a

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. 770), 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. [Fn. Omitted.] [Citation.]” (Italics in original.)

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.” (Seaman’s, supra, 36 Cal.3d 752 , 769.) This is further apparent in the court’s adoption of the principle articulated in Sawyer v. Bank of America, supra, 83 Cal.App.3d at page 139, 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. (Seaman’s, supra, 36 Cal.3d at p. 770.)

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

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. (See e.g., Caplan v. St. Joseph’s Hospital (1987) 188 Cal.App.3d 1193 [ 233 Cal.Rptr. 901 ]; Commerical Cotton Co. v. United California Bank, supra, 163 Cal.App.3d 511 ; Quigley v. Pet, Inc., supra, 162 Cal.App.3d 877 .) 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 agree: ment 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

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.” (See Seaman’s, supra, 36 Cal.3d 752 , 769.) 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.

In our case, plaintiff himself pleaded defendant’s bad faith denial of their contract as part of his cause of action for breach of the implied covenant of good faith and fair dealing. Although the evidence adduced at trial tends to support the finding that defendant acted in bad faith in contesting the validity of the 1982 agreement, and even though there exists a type of fiduciary relationship between the parties, because of the way in which the investment was structured, we are of the opinion that the relationship was not that “special” to justify awarding plaintiff punitive damages on his claim for tortious breach of contract. We are not convinced the concept of tortious breach should be extended outside the narrowly defined realm of insurance and employment contracts to the commercial field generally, and thus agree with the observation in Seaman’s that courts should tread lightly when fashioning tort remedies for breaches of the implied covenant of good faith and fair dealing.

The parties were not in unequal bargaining positions at the time they negotiated Paragraph 9 or any other term of the agreement. Indeed, plaintiff was a sophisticated investor who was fully capable of protecting his rights under the contract. Both he and defendant were represented by counsel during most phases of the negotiating process, and each had the opportunity to consult with their advisers at length before executing the agreement. While there may have been some pressure on plaintiff to finalize the deal before the limited partner offering expired, he was far from coerced into accepting any of defendant’s proposals. The pace at which the bargaining

A misrepresentation of fact is material if it induced the plaintiff to alter his position to his detriment. (Bezaire v. Fidelity & Deposit Co. (1970) 12 Cal.App.3d 888 , 893 [ 91 Cal.Rptr. 142 ].) Stated in terms of reliance, materiality means that without the misrepresentation, the plaintiff would not have acted as he did. (Adkins v. Wyckoff (1957) 152 Cal.App.2d 684 , 689 [ 313 P.2d 592 ].) “It must be shown that the plaintiff actually relied upon the misrepresentation; i.e., that the representation was ‘an immediate cause of his conduct which alters his legal relations,’ and that without such representation, ‘he would not, in all reasonable probability, have entered into the contract or other transaction.’ [Citations.]” (5 Witkin, Summary of Cal. Law, Torts, supra, §711, p. 810.)

Applying these principles to the case at bench, the record makes it clear that plaintiff did not rely on defendant’s representations concerning Tigrett’s trademark claims in deciding to execute the agreement. When asked at trial whether he would have entered into the contract had he known that defendant’s right to exploit the Hard Rock name in the United States was limited by a preexisting agreement with Tigrett, plaintiff replied, “I don’t know. I probably would have.” Although he now argues that he would have answered differently had the question been more specific, plaintiff had more than an adequate opportunity to explain his reply or otherwise rehabilitate himself at trial. He did not do so. In any event, his answer was consistent with the fact that the geographic limitations resulting from defendant’s 1981 telex agreement with Tigrett did not materially alter what he expected to receive under the terms of the contract. While it may be true that plaintiff paid in excess of $35,000 in litigation costs because of defendant’s trademark suit against Tigrett, he assumed that expense voluntarily after being advised by his legal counsel that he was not required to do so

That portion of the judgment decreeing specific performance and declaring the parties’ rights and obligations under the March 1982 agreement is affirmed. The award of compensatory and punitive damages for defendant’s bad faith denial of the contract and for fraud is reversed. The remainder of the judgment is affirmed. Defendant to bear costs on appeal.

Roth, P. J., and Gates, J., concurred.

A petition for a rehearing was denied September 7, 1988, and appellants’ petition for review by the Supreme Court was denied November 9, 1988.