Racine & Laramie, Ltd. v. Department of Parks & Recreation
14 Cal. Rptr. 2d 335, 92 Cal. Daily Op. Serv. 10081, 11 Cal.App.4th 1026 (1992)
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Rule of Law:
The implied covenant of good faith and fair dealing, which exists in every contract, does not create a duty for parties to negotiate a new or amended contract in good faith, absent a specific contractual agreement to do so.
Facts:
- In 1974, Racine & Laramie, Ltd. (Racine) entered into a 40-year concession contract with the California Department of Parks and Recreation (Department) to operate a tobacco shop and wine tasting facility in a state park.
- The contract contained a clause stating that the parties could mutually agree in writing to modifications or additions.
- Beginning in the 1980s, Racine and the Department engaged in protracted negotiations to amend the contract to allow Racine to operate a restaurant with on-premises alcohol sales.
- In 1983, both the State Park and Recreation Commission and the Legislature passed resolutions authorizing, but not requiring, the Department to proceed with negotiating such a contract modification.
- After several years of discussions and exchanging drafts, negotiations stalled in 1985.
- When negotiations resumed in 1988, Racine submitted a new proposal for a much larger, 300-seat restaurant.
- The Department rejected the 1988 proposal, reversing its earlier tentative positions and stating a new preference for a 'quick food' operation rather than a full-service restaurant, effectively ending the negotiations.
Procedural Posture:
- Racine & Laramie, Ltd. sued the Department of Parks and Recreation in a state trial court.
- The primary surviving cause of action was for Breach of the Implied Covenant of Good Faith and Fair Dealing.
- The case was tried to a jury, which returned a special verdict finding that the Department had breached the covenant.
- The jury awarded Racine damages in the amount of $592,110.
- The trial court entered a judgment in favor of Racine based on the verdict.
- The Department, as appellant, appealed the judgment to the Court of Appeal of California, Fourth Appellate District, with Racine as the respondent.
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Issue:
Does the implied covenant of good faith and fair dealing in an existing contract create an obligation for a party to negotiate a proposed modification to that contract in good faith?
Opinions:
Majority - Froehlich, J.
No. The implied covenant of good faith and fair dealing does not impose an obligation on parties to negotiate a new or amended contract in good faith. The covenant protects the express promises of an existing contract; it does not create new, independent obligations not contemplated by the original agreement. The court reasoned that the covenant's purpose is to prevent a party from acting in a way that frustrates the other party's rights to the benefits of the contract as it currently exists. Since there was no express contractual obligation to negotiate or to agree to a modification, the Department's conduct during negotiations, even if arbitrary, could not breach the implied covenant. The court explicitly rejected the European doctrine of 'culpa in contrahendo' (fault in negotiating), noting it is not a part of Anglo-American law. A duty to bargain in good faith can arise, but only from special circumstances such as an explicit agreement to negotiate in good faith (e.g., a letter of intent) or a situation justifying promissory estoppel, neither of which existed here.
Analysis:
This decision reinforces the traditional common law view that parties are free to negotiate or to cease negotiations for any reason, without liability for bad faith, unless they have expressly agreed otherwise. It clearly distinguishes between the duty of good faith in performing an existing contract and the freedom of contract in forming a new one. The ruling limits the reach of the implied covenant, preventing it from becoming a tool to compel parties into new agreements they do not wish to make. This provides certainty in commercial dealings by ensuring that the act of entering negotiations does not, by itself, create an enforceable duty to bargain fairly.
