Opinion
A149868
06-08-2018
DILLARD TRUCKING, INC., Plaintiff and Appellant, v. SANTA CLARA VALLEY WATER DISTRICT, Defendant and Respondent.
NOT TO BE PUBLISHED IN OFFICIAL REPORTS
California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication or ordered published for purposes of rule 8.1115. (San Mateo County Super. Ct. No. CIV537925)
Appellant Dillard Trucking (Dillard) appeals from an order sustaining a demurrer in favor of Respondent Santa Clara Valley Water District (District). Dillard sued District for breach of a services contract, alleging termination of the contract without good cause and in violation of public policy. Seeing no error, we affirm.
I. BACKGROUND
Through the public bidding process, District issued a written purchase order to Dillard, the lowest responsive and responsible bidder, for the transportation of approximately 17,000 tons of contaminated soil. The total purchase order amount came to $2,150,500. Shortly thereafter, Dillard entered into a written subcontract with Waste Solutions Group (WSG) to assist in the transportation and disposal of the waste. Several weeks later, after Dillard and WSG had transported 8,462.15 tons of the waste, District suspended transportation under the purchase order until further notice.
District then terminated its contract with Dillard and subsequently solicited bids from other contractors to perform the remainder of the work. Pursuant to Section 15 of the purchase order, District terminated the contract effective immediately via written correspondence on January 16, 2015. District asserted the following "significant problems with [Dillard's] performance": the waste transport containers were improperly marked; approximately 298 manifests contained the wrong shipping name; Dillard failed to appropriately weigh the shipments; and Dillard failed to notify the District that the waste would be separated and distributed among several different rail cars.
Section 15 of the purchase order between Dillard and District states: "Termination: The Purchase Order may be terminated by mutual consent of both parties or by District at its discretion. District may cancel the Purchase Order at any time with written notice to Contractor, stating the extent and effective date of termination. Upon receipt of this written notice, Contractor shall stop performance under the Purchase Order as directed by District. If the Purchase Order is so terminated, Contractor shall be paid in accordance with the terms of the Purchase Order for work performed and accepted."
After terminating the purchase order with Dillard, District hired Clean Harbors to perform the remainder of the work. Dillard alleges Clean Harbors had previously been determined by District to be a non-responsive bidder during the initial invitation to bid. The record is unclear as to whether District determined Clean Harbors to be the lowest responsive and responsible bidder during the invitation to bid after Dillard's termination.
WSG filed a complaint against Dillard for breach of contract, alleging Dillard had failed to pay WSG the amount owed pursuant to the contract. In response, Dillard filed an answer and a cross-complaint against WSG and District alleging breach of contract. Dillard sought to recover lost profits from either WSG or District under two alternative theories: (1) WSG failed to adequately perform, causing Dillard to lose its contract with District; or (2) District improperly terminated the contractual relationship with Dillard. Dillard seeks lost profits in the sum of $209,177.33, incurred as a result of the termination.
District successfully demurred to Dillard's cross-complaint, Dillard was granted leave to amend, and following an amendment, District again prevailed in securing an order sustaining its demurrer to the amended cross-complaint. Finding the termination clause provided an absolute defense to Dillard's breach of contract claim, the trial court sustained District's demurrer to the amended cross-complaint without leave to amend. The trial court ruled there was no basis for applying the implied covenant of good faith and fair dealing because the purchase order was unambiguous and supported by adequate consideration. This timely appeal followed.
WSG is not a party to the present appeal.
II. DISCUSSION
"We review a trial court's ruling on demurrer de novo [citation], giving ' "the complaint a reasonable interpretation, reading it as a whole and viewing its parts in context. [Citations.] We deem to be true all material facts properly pled. [Citation.] We must also accept as true those facts that may be implied or inferred from those expressly alleged." ' " (Mahan v. Charles W. Chan Ins. Agency, Inc. (2017) 14 Cal.App.5th 841, 847.)
A. The Termination Clause Did Not Render the Purchase Order Illusory Because It Required Written Notice and Payment for All Work Performed and Accepted.
A binding contract must be mutual in obligation. (Mattei v. Hopper (1958) 51 Cal.2d 119, 122.) Mutuality of obligation requires both parties to assume some legal obligations under the contract. (Ibid.) Without mutuality of obligation, any promise made under the contract is deemed illusory in nature and is unenforceable. (Ibid.) "A contract is unenforceable as illusory when one of the parties has the unfettered or arbitrary right to modify or terminate the agreement or assumes no obligations thereunder." (Harris v. TAP Worldwide, LLC (2016) 248 Cal.App.4th 373, 385.)
A discretionary right to terminate, however, does not render a contract illusory when the termination right is supported by sufficient consideration. (See Thrifty Payless, Inc. v. Mariners Mile Gateway, LLC (2010) 185 Cal.App.4th 1050, 1063-1064 (Thrifty Payless).) "A cancellation provision may be valid if conditioned on notice of cancellation, even though the right may be exercised at any time. Superficially, this appears to give an unqualified right to cancel; but, because the party is bound unless and until notice is given, there is mutuality of obligation." (1 Witkin, Summary of Cal. Law (11th ed. 2017) Contracts, § 236, pp. 262-263.) Because the courts do not favor arbitrary cancellation clauses, " 'the tendency is to interpret even a slight restriction on the exercise of the right of cancellation as constituting such legal detriment as will satisfy the requirement of sufficient consideration.' " (County of Alameda v. Ross (1939) 32 Cal.App.2d 135, 144 (County of Alameda).) For example, sufficient consideration will be found where the reservation of right to cancel is for cause, or by written notice, or after a definite period of notice, or upon the occurrence of some extrinsic event or other objective standard. (Id. at pp. 144-145.)
Here, we consider whether District's unilateral discretionary termination power was supported by sufficient consideration. We conclude that it was; that as a result there was mutuality of obligation; and thus that the termination clause does not render the contract illusory. Despite District's ability to exercise its right to terminate at any time and for any reason pursuant to the termination clause, that right is not unqualified because it is conditioned on providing written notice and requires District to pay Dillard for all work performed and accepted.
Dillard cites Third Story Music, Inc. v. Waits (1995) 41 Cal.App.4th 798 (Third Story), in support of its argument that the termination clause renders the purchase order illusory. That case is distinguishable. In Third Story, the appellate court held the promise by a record label to market a songwriter's music, or to refrain from doing so at the record label's election, would render the contract illusory if that promise was the only consideration provided by the record label. (Id. at p. 808.) But because the record label also promised to pay a guaranteed minimum amount irrespective of the efforts undertaken, the court held the contract was binding and did not require an implied covenant of good faith and fair dealing. (Id. at pp. 808-809.) The court found an enforceable and non-illusory contract where the parties were bound by the contract to perform in some way—whether it was to market music or pay a minimum amount. (Ibid.)
Dillard reads Third Story narrowly, attempting to limit it to its specific facts because the purchase order at issue there was required to have a "second promise" or a penalty provision. In the case before us, District is not promising to perform under the contract "at [its] election"; rather, District is promising to perform (i.e. pay for all work performed) until it chooses to exercise its discretionary termination power. (Third Story, supra, 41 Cal.App.4th at p. 808.) Like the second promise in Third Story to pay a minimum amount, District is bound to perform (pay) under the contract. (Ibid.) Contrary to Dillard's assertion, and unlike in Third Story, where an additional promise was necessary to maintain mutuality of obligation, District's promise to pay until it might elect to terminate is sufficient consideration and does not render the contract illusory. (Ibid.)
Moreover, written notice is a sufficient condition for a discretionary termination power to maintain mutuality of obligation. (1 Witkin Summary of Cal. Law, supra, § 236 at pp. 262-263; compare Bionghi v. Metropolitan Water Dist. (1999) 70 Cal.App.4th 1358, 1368-1369 (Bionghi) [termination clause requiring written notice provided sufficient consideration to maintain its validity] with County of Alameda, supra, 32 Cal.App.2d at pp. 144-145 [license revocable without providing written notice found invalid for lack of consideration and mutuality of obligation].) Because District was bound by the contract until written notice of termination was provided, that alone supplies mutuality of obligation. (See Thrifty Payless, supra, 185 Cal.App.4th at pp. 1063-1064 [The court held the contract was not illusory because "until notice of termination was provided, there was mutuality of obligation. . . . The lease was binding until it was terminated according to its terms."].)
B. Because the Termination Clause Expressly Allowed Unilateral Termination by District, the Implied Covenant of Good Faith and Fair Dealing Cannot Be Used to Disallow Exercise of that Right.
" ' "Every contract imposes upon each party a duty of good faith and fair dealing in its performance and its enforcement." ' " (Carma Developers (Cal.), Inc. v. Marathon Development California, Inc. (1992) 2 Cal.4th 342, 371 (Carma).) The covenant of good faith, however, is not a font of authority for courts to add or revise terms different than the terms the parties agreed upon. " 'The general rule [regarding the covenant of good faith] is plainly subject to the exception that the parties may, by express provisions of the contract, grant the right to engage in the very acts and conduct which would otherwise have been forbidden by an implied covenant of good faith and fair dealing. . . . [¶] This is in accord with the general principle that, in interpreting a contract "an implication . . . should not be made when the contrary is indicated in clear and express words." ' " (Carma, supra, 2 Cal.4th at p. 374.) " 'As to acts and conduct authorized by the express provision of the contract, no covenant of good faith and fair dealing can be implied which forbids such acts and conduct.' " (Ibid.) "[T]he covenant is not susceptible to firm definition but must be examined on a case-by-case basis. Instead of defining what is consistent with good faith and fair dealing, it is more meaningful to concentrate on what is prohibited." (Carma, supra, 2 Cal.4th at p. 372.) "It is universally recognized the scope of conduct prohibited by the covenant of good faith is circumscribed by the purposes and express terms of the contract." (Id. at p. 373.)
In determining whether "given conduct is within the bounds of a contract's express terms," and thus not amenable to supplementation by implied covenant, "it is enough that the conduct is either expressly permitted or at least not prohibited." (Carma, supra, 2 Cal.4th at p. 373.) For example, in Bionghi, the court considered whether a cancellation clause that allowed for termination upon 30 days' written notice required the covenant of good faith and fair dealing be applied. (Bionghi, supra, 70 Cal.App.4th at p. 1361.) In following the above principle, the court held that when the terms of a contract are unambiguous and expressly provide for a discretionary right to terminate, the covenant of good faith and fair dealing shall not be implied. (Id. at pp. 1368-1369.) The court found a termination clause "which [expressly] provides that it may be terminated on specified notice cannot reasonably be interpreted to require good cause as well as notice for termination[.]" (Id. at p. 1369.)
Here, the purchase order, like the contract in Bionghi, expressly granted District the discretionary power to terminate. (Bionghi, supra, 70 Cal.App.4th at p. 1361.) In fact, Dillard admits section 15 of the purchase order provided District the unilateral right to "terminate the Purchase Order at any time at its discretion," but nevertheless argues the covenant of good faith and fair dealing bars Dillard's termination. (Bionghi, supra, 70 Cal.App.4th at p. 1369.) We disagree. The express terms of the contract and the parties' evident intentions at the time of contracting would be directly contradicted if, as Dillard seeks, the covenant of good faith were implied to require good cause for termination. "The implied covenant 'is designed to effectuate the intentions and reasonable expectations of parties reflected by mutual promises within the contract.' [Citations.] For this reason, it is well established that an implied covenant cannot create an obligation inconsistent with an express term of the agreement." (Nein v. HostPro, Inc. (2009) 174 Cal.App.4th 833, 852; accord Spinks v. Equity Residential Briarwood Apartments (2009) 171 Cal.App.4th 1004, 1033.)
Dillard argues "[i]n order to create what the parties obviously intended to be a binding contract, this Court must impose the covenant of good faith and fair dealing and require the District to exercise that discretion in good faith." (Footnote omitted.) This, however, is an inaccurate depiction of the parties' intent at the time of contracting. Although it is clear from the purchase order that the parties intended to enter into a binding contract, the parties' evident intentions do not end there. It is also clear from the express terms of the contract that the parties intended to provide for certain termination rights, including District's discretionary termination power. Contrary to Dillard's assertion, implying the covenant would outwardly contradict, not effectuate, the parties' intent at the time of contracting. A discretionary right to terminate "is not on its face reasonably susceptible to meaning that there can be no termination except on good cause." (Bionghi, supra, 70 Cal.App.4th at p. 1366.) Dillard offers no evidence that a good cause requirement was discussed at the time of contracting, nor any evidence that the parties discussed the scope of the termination clause. (See, e.g., id. at pp. 1366-1367.) In the absence of evidence showing a different intent by the parties at the time of contracting or a special use or definition of the term "discretion," the covenant of good faith is not to be implied into an express and unambiguous discretionary termination clause. (Id. at p. 1369.)
Dillard next cites Hensler v. Los Angeles (1954) 124 Cal.App.2d 71 (Hensler), for the proposition that District is not permitted to "simply terminate the contract so it may give the work to another contractor." But Hensler is distinguishable. There, the appellate court found the City improperly exercised its express right to "make changes in the quantities of work" in a manner that contradicted the terms of the contract and the parties' intent. (Id. at p. 78.) The City's power to delete work from the contract was subject to the express condition: " 'as may be considered necessary or desirable to complete fully and acceptably the proposed construction in a satisfactory manner.' " (Ibid.) Thus, the court found that City did not have an "absolute right," as Dillard argues, but had a conditional right that was evident from the language of the contract and the parties' intent. (Id. at pp. 78-79.) In contrast, this case does not involve a comparably conditional right; District's termination power was not conditioned, as it was in Hensler, on any language reasonably interpreted to limit District's termination power. As the court did in Hensler, we too, of course, determine a party's right based on the language of the contract and intent of the parties. (Id. at p. 77 ["In construing a contract, the primary object is to ascertain and give effect to the intention of the parties. [Citations.] That intention must . . . be derived from the language of the contract."].)
As Dillard itself asserts, "[t]he purchase order clearly provide[d] . . . that the District could terminate the purchase order at its convenience upon written notice." "In the case of a discretionary power, it has been suggested the covenant requires the party holding such power to exercise it 'for any purpose within the reasonable contemplation of the parties at the time of formation—to capture opportunities that were preserved upon entering the contract, interpreted objectively.' " (Carma, supra, 2 Cal.4th at p. 372.) Here, District appropriately preserved its discretionary termination right at the time of contracting and subsequently made use of that "capture[d] opportunity" by exercising its termination power and providing Dillard with written notice. (See Carma, supra, 2 Cal.4th at pp. 372, 374.) The parties were free to contract and negotiate the terms to their benefit, and Dillard's failure to do so does not impose a requirement of good cause for termination by way of implication. "It is not enough to say that without the proposed implied covenant, the contracts would be improvident or unwise or would operate unjustly. Parties have the right to make such agreements. The law refuses to read into contracts anything by way of implication except upon grounds of obvious necessity." (Third Story, supra, 41 Cal.App.4th at p. 809.)
The final strand of Dillard's attempt to rescue its breach of contract claim is that District lacked any valid, good faith reasons for terminating the contract and thereby committed a breach by terminating without cause. Here again we cannot agree. Dillard's breach of contract claim fails for the same reason its implied covenant theory fails. Because the purchase order is not illusory, and because the termination clause expressly and unambiguously provided for District's unilateral discretionary power to terminate, good cause is not required for cancellation of the purchase order. (See Bionghi, supra, 70 Cal.App.4th at p. 1369; see also Carma, supra, 2 Cal.4th at p. 376.) There can be no valid breach of contract claim on the alleged basis that District terminated the contract without cause where District acted pursuant to the express terms of the purchase order. "[I]f defendants were given the right to do what they did by the express provisions of the contract there can be no breach." (Carma, supra, 2 Cal.4th at p. 374.) Similarly, when a termination power is exercised in accordance with the express terms of the contract, such conduct does not violate the implied covenant of good faith and fair dealing. (Id. at p. 376.) Thus, because there is no breach of contract, there is also no breach of the implied covenant of good faith and fair dealing, and any such claim may be disregarded as duplicative. "[I]f the plaintiff's allegations of breach of the covenant of good faith 'do not go beyond the statement of a mere contract breach and, relying on the same alleged acts, simply seek the same damages or other relief already claimed in a companion contract cause of action, they may be disregarded as superfluous as no additional claim is actually stated.' " (Bionghi, supra, 70 Cal.App.4th at p. 1370.)
C. Public Policy Does Not Restrict an Employer's Express Discretionary Termination Power.
Dillard argues District undermined the competitive bidding process by terminating the purchase order for pretextual reasons, in violation of public policy. (See Tameny v. Atlantic Richfield Co. (1980) 27 Cal.3d 167 (Tameny).) In Tameny, the California Supreme Court held that an employer's otherwise unrestricted termination power may nevertheless be restricted by public policy considerations, and said violation could subject the employer to tort liability. (Id. at p. 170.) The case specifically dealt with an at-will employment contract whereby the plaintiff-employee was fired due to his refusal to commit an illegal act at the employer's request. (Id. at pp. 170-171.) Although the at-will contract at issue gave the employer wide latitude to terminate, the court held that the employer's freedom to act was limited by public policy. (Id. at pp. 172, 178.) We see no public policy basis for asserting a Tameny claim here. Tameny said that an employer's discretionary power over its employees, which is "traditional[ly] broad authority," is only to be restricted by public policy considerations when the alleged violation is based on a statute or undermines "a firmly established principle of public policy." (Id. at p. 172.) "[E]mployees who assert Tameny claims must show that the important public interests they seek to protect are 'tethered to fundamental policies that are delineated in constitutional or statutory provisions.' " (Green v. Ralee Engineering Co. (1998) 19 Cal.4th 66, 71.)
Here, Dillard has failed to assert a fundamental public policy violation premised on a statutory or constitutional provision. The assertion that District's termination "circumvented" the requirement for public entities to engage in the competitive bidding process does not rise to the level required by Tameny for several reasons. First, Dillard has failed to cite any particular authority in support of its public policy allegation. In general, we reject Tameny public policy claims that are " 'largely unaccompanied by citations to specific statutory or constitutional provisions.' " (Green, supra, 19 Cal.4th at p. 83.)
Second, although Dillard asserts it is not seeking a tort action as was authorized by Tameny, Dillard's reliance on Tameny for the general proposition that an employer's termination power is restricted by public policy is inappropriate. By citing Tameny in support of its public policy argument while disclaiming any effort to seek tort relief, Dillard is fundamentally misapplying the holding in Tameny, and attempting to convert it into a basis for breach of contract remedies. But Tameny is unequivocally premised on the difference between a breach of duty arising out of the contract (ex delicto) and claims arising from a breach of an implied or express promise set forth in the contract (ex contractu). (Tameny, supra, 27 Cal.3d at p. 175.) Because a wrongful discharge claim arises from a duty grounded in public policy, our Supreme Court said in Tameny, the remedy is in tort. (Id. at p. 176.) Thus, since, as Dillard insists, this is not a tort case but simply a breach of contract case, Tameny is inapplicable.
Third, Dillard's allegations are insufficiently specific to show that District violated some public policy embodied in statutory or constitutional provisions. Generally, cities and public agencies are required to put significant contracts out for competitive bidding and to award the contract to the lowest responsible bidder. (MCM Construction, Inc. v. City and County of San Francisco (1998) 66 Cal.App.4th 359, 368; Pub. Contract Code § 20162.) District is a public agency. (Gov. Code, § 4401.) District does not dispute it is required to award contracts on the basis of competitive bids. (See Pub. Contract Code, § 20162.) Although District terminated a purchase order that was awarded through the public bidding process, such termination is lawful when made pursuant to an express termination clause in the contract. (1 Witkin Summary of Cal. Law, supra, § 1033 at pp. 1078-1079, citing Pub. Contract Code, § 7105, subd. (d) and Gov. Code, § 11010.5.) It makes no sense to say, as Dillard does, that District's actions were "pretextual" when they were openly based on lawfully exercised contractual authority. (See, e.g., Bionghi, supra, 70 Cal.App.4th at pp. 1364, 1369 [the reasons for defendant water district's termination were immaterial for a breach of contract claim because when a contract provides for termination upon written notice, good cause is not required for termination].)
In fact, permitting recovery of lost profits in this case would be against public policy. "Competitive bidding provisions must be read in the light of the reason for their enactment, or they will be applied where they were not intended to operate and thus deny municipalities authority to deal with problems in a sensible, practical way. [Citation.] Thus, [laws] requiring competitive bidding are not to be given such a construction as to defeat the object of insuring economy and excluding favoritism and corruption." (Domar Electric, Inc. v. City of Los Angeles (1994) 9 Cal.4th 161, 173.) Competitive bidding statutes are not enacted for the benefit or enrichment of bidders, but for the benefit of property holders and taxpayers and should be administered and construed with sole reference to the public interest. (Ibid.) Allowing Dillard to recover lost profits would punish the tax-paying public by requiring double payment for a public works project that was lawfully terminated. (See Kajima/Ray Wilson v. Los Angeles County Metropolitan Transportation Authority (2000) 23 Cal.4th 305, 317.) If lost profits were recoverable, the possibility of significant monetary gain alone might encourage frivolous litigation and further expend public resources. (Ibid.)
III. DISPOSITION
The judgment is affirmed. Respondent shall recover its costs.
/s/_________
Streeter, Acting P.J. We concur: /s/_________
Reardon, J. /s/_________
Smith, J.
Judge of the Superior Court of California, County of Alameda, assigned by the Chief Justice pursuant to article VI, section 6 of the California Constitution. --------