Bay Development, Ltd. v. Superior Court

EAGLESON, J.,

Dissenting.—Although I have joined the Chief Justice’s concurring opinion to reflect my concern with the majority’s treatment of the jurisdictional issue in this case, I find it necessary to write separately to express my further disagreement with the majority’s decision of the underlying indemnity issue.

The majority concludes a settlement determined by a trial court to be in good faith under Code of Civil Procedure section 877.6 bars a claim for implied contractual indemnity. 1 Duly considered, the facts reveal that the majority frames the issue too broadly. The indemnity claim in this case has two components: equitable indemnity and implied contractual indemnity. Both are based on alleged misrepresentations by Home Capital Corporation (Home) as to the number of parking spaces at the Mission Village Condominium Project. Bay Development, Ltd. (Bay), and Bowen Company (Bowen) allege in their cross-complaint for indemnity that Home’s misrepresentations were a breach of an implied warranty (as to the number of available parking spaces) in the contract of sale under which Bay and Bowen purchased the condominium project from Home. The cross-complaint alleges that Bay and Bowen’s liability, if any, to the condominium purchasers is the result of Home’s breach of its contract with Bay and Bowen. Their claim is not based on an implied promise to indemnify, but on an implied warranty to provide a specified number of parking spaces. (Bay and Bowen concede their claim for equitable indemnity is barred by the settlement.)

There is a significant difference between a contractual promise to indemnify and a contractual promise to perform in a certain way. The majority does not adequately reflect this distinction. Its holding will preclude a party to a contract from recovering for breach of contract when the breaching party has entered into a good faith settlement with a third party. The majority opinion will mandate this result even when the breach was of an express contractual provision to perform in a specified manner. I find no support for this conclusion in the statute or common sense. 2

*1039 A. Statutory language

The majority does not acknowledge that we are confronted with nothing more than a question of statutory construction—the scope of section 877.6, subdivision (c).* * 3 Faced with this question, we must begin with the fundamental rule that our primary task is to determine the Legislature’s intent. (Brown v. Kelly Broadcasting Co. (1989) 48 Cal.3d 711, 724 [ 257 Cal.Rptr. 708 , 771 P.2d 406 ].) It is axiomatic that we turn first to the statute’s words for the answer. (Ibid.) As with its statement of the key facts, however, the majority opinion merely notes the controlling statute in a footnote with no consideration of the statutory language. (Maj. opn., ante, at p. 1019, fn. 2.)

Section 877.6(c) is unambiguous. It applies to contribution and indemnity claims “based on comparative negligence or comparative fault.” (Italics added.) Bay and Bowen’s claim is based on neither comparative negligence nor comparative fault. Their claim is based on an alleged breach of contract, i.e., an implied warranty. The majority opinion assumes that section 877.6(c) applies to such a claim despite the statutory language to the contrary. I believe due consideration should be given to this threshold, potentially dispositive issue.

The application of section 877.6(c) to contract actions is correct only if an action for breach of contract is properly characterized as being a claim based on “comparative fault.” I am unaware of any support for that characterization. We recently reiterated the principle that “The distinction between tort and contract is well grounded in common law, and divergent objectives underlie the remedies created in the two areas.” (Foley v. Interactive Data Corp. (1988) 47 Cal.3d 654, 683 [ 254 Cal.Rptr. 211 , 765 P.2d 373 ].) Indeed, the distinction is hornbook law. Actions based on tort have long been referred to as being “ex delicto,” meaning in modern phraseology that they are based on fault. (See Black’s Law Dict. (5th ed. 1979) p. 509, col. 1.) Actions for breach of contract have been denominated as being “ex contractu”—from or out of a contract—to distinguish them from actions based on fault, i.e., tort actions. (See Black’s Law Dict., supra, p. 508, col. 1; see also Foley v. Interactive Data Corp., supra, 47 Cal.3d at p. 690 .)

In Bear Creek Planning Com. v. Title Ins. & Trust Co. (1985) 164 Cal.App.3d 1227 [ 211 Cal.Rptr. 172 ], the court correctly explained that “An action for implied contractual indemnity is not a claim for contribu *1040 tion from a joint tortfeasor; it is not founded upon a tort or upon any duty which the indemnitor owes to the injured third party. It is grounded upon the indemnitor’s breach of duty owing to the indemnitee to properly perform its contractual duties.” (Id., at pp. 1238-1239, italics in original; accord County of Los Angeles v. Superior Court (1984) 155 Cal.App.3d 798, 803 [ 202 Cal.Rptr. 444 ].) Likewise here, Bay and Bowen’s claim for indemnity is based on contract, not comparative fault, and is therefore not within the scope of section 877.6(c). 4

B. Prior court decisions

The majority opinion relies heavily on E. L. White, Inc. v. City of Huntington Beach (1978) 21 Cal.3d 497 [ 146 Cal.Rptr. 614 , 579 P.2d 505 ] (hereafter White), as support for the conclusion that implied contractual indemnity is the same as equitable indemnity. Properly read, White does not support that conclusion. The White court noted “two basic forms of indemnity.” (Id., at p. 507.) “First, it may arise by virtue of express contractual language establishing a duty in one party to save another harmless upon the occurrence of specified circumstances. Second, it may find its source in equitable considerations brought into play either by contractual language not specifically dealing with indemnification or by the equities of the particular case.” (Id., at pp. 506-507.) This observation fails in four respects to support the majority opinion.

First, unlike in the present case, the indemnity claim in White was not based on a warranty of performance. The claim arose out of an accident in which a trench collapsed onto two workers. Shortly before the accident, a city inspector and engineer visited the site several times and observed a safety order violation, but they took no action to compel compliance. As the court noted, the indemnity claim was for damages caused by the city’s “active negligence.” There was no allegation the city had any contractual duty to inspect the work site or to ensure its safety. In the present case, the claim is founded on a warranty as to the number of parking spaces.

Second, the White court’s observation was made in response to an argument that, because an express indemnity provision did not apply to the facts before the court, there was no other basis for indemnity. The quoted passage in White (21 Cal. 3d at pp. 506-507) rejected that argument and made clear that a right to indemnity can be found in other sources: (1) contractual language or (2) equities of the case. Unlike the majority, the White court did *1041 not purport to decide those two sources are the same. No such issue was before the court. The majority fails to acknowledge the context in which the White court made its observation.

Third, a study of the authorities cited in White makes clear that the court’s reference to two forms of indemnity was meant to indicate merely a distinction between express and implied indemnity, not a conclusion that all implied indemnity is the same. (As noted above, the latter issue was not before the court.) In Rossmoor Sanitation, Inc. v. Pylon, Inc. (1975) 13 Cal.3d 622 [ 119 Cal.Rptr. 449 , 532 P.2d 97 ], decided shortly before White, we expressly identified three sources of indemnity; This “obligation [indemnity] may be [1] expressly provided for by contract ... [2] it may be implied from a contract not specifically mentioning indemnity ... or [3] it may arise from the equities of particular circumstances . . . . ” (Id., at p. 628, citations omitted.) The two law review articles cited in White, supra, 21 Cal.3d at page 507 , also distinguish between implied contractual indemnity and implied noncontractual indemnity. (Note, Contribution and Indemnity in California (1969) 57 Cal.L.Rev. 490, 492, fn. 12; Conley & Sayre, Indemnity Revisited: Insurance of the Shifting Risk (1978) 22 Hastings L.J. 1201 .) In light of the White court’s citation to these authorities, one cannot reasonably read the White decision to mean that implied contractual indemnity is the same as implied noncontractual indemnity.

Fourth, the majority reads too much into the statement that an indemnity claim “may find its source in equitable considerations brought into play ... by contractual language not specifically dealing with indemnification . . . .” (White, supra, 21 Cal.3d at p. 507 .) As noted above, there was no claim in White of breach of any specific contractual provision to perform in a certain manner. Thus, if the indemnity claim was to arise from contract, the basis had to be in some general equitable consideration arising from the contractual relationship, not from the contract itself. If a putative indemnitee relied on a contract only to show a “general equitable consideration,” he would in effect be admitting that the contract does not provide any basis for relief. He would be relying on equity. In that case, his claim could fairly be denominated as being one for equitable indemnity, and I might agree with the majority that the claim would be barred by a good faith settlement under section 877.6. Bay and Bowen, however, do not rely on any such amorphous consideration. They are relying on a specific (albeit implied) warranty.

In short, I find no support in White, supra, 21 Cal.3d 497 , for the majority’s expansive conclusion. The majority treats the issue before us as if it had been clearly resolved in White . The issue was not even present. The brief excerpt on which the majority depends so heavily is therefore a slender reed *1042 on which to base its broad holding. 5 Indeed, if the issue had been resolved so clearly in White , there was no need for us to grant review in this case.

That White, supra, 21 Cal.3d 497 , does not mandate the majority’s conclusion is demonstrated by the two Court of Appeal decisions the majority disapproves. In County of Los Angeles v. Superior Court, supra, 155 Cal.App.3d 798 , the court was faced, as in this case, with an indemnity claim based on a specific contractual promise to perform in a certain manner. The court fully considered White and concluded that it did not bar the claim. “We find nothing in the underlying purposes of Code of Civil Procedure sections 877 and 877.6 or in the facts of this case to justify impairment of the contract.... Further we find nothing in the language or history of the statutes nor in the case law interpreting those statutes which suggests] that such a result . . . was ever intended by the Legislature.” ( 155 Cal.App.3d at p. 803 .) I agree.

Similarly, in Bear Creek Planning Com. v. Title Ins. & Trust Co., supra, 164 Cal.App.3d 1227 (hereafter Bear Creek), the court correctly observed the distinction between equitable indemnity based on a mere contractual relationship and recovery based on breach of a contractual promise to perform. The right to implied contractual indemnity “ ‘is predicated upon the indemnitor’s breach of such contract, the rationale of the cases being that a contract under which the indemnitor undertook to do work or perform services necessarily implied an obligation to do the work involved in a proper manner and to discharge foreseeable damages resulting from improper performance absent any participation by the indemnitee in the wrongful act precluding recovery.’ ” (Id., at p. 1237, quoting Great Western Furniture Co. v. Porter Corp. (1965) 238 Cal.App.2d 502, 517 [ 48 Cal.Rptr. 76 ].) 6 The majority opinion ignores the source of the indemnity claim in this case. The source is contract, not equity. The principles that apply to equitable indemnity are inapposite.

C. Conflict with Civil Code section 3300 and other statutes

The majority’s conclusion is especially troubling because it directly conflicts with Civil Code section 3300, which states: “For the breach of an *1043 obligation arising from contract, the measure of damages, except where otherwise expressly provided by this code, is the amount which will compensate the party aggrieved for all the detriment proximately caused thereby, or which, in the ordinary course of things, would be likely to result therefrom.” (Italics added.) Although this statute has been in its present form for more than a century (since 1873) and is bedrock California contract law, the majority opinion barely mentions it. (Maj. opn., ante, at p. 1033, fn. 13.) I believe Civil Code section 3300 is relevant to the issue before us.

Under the majority opinion, a good faith settlement under section 877.6 would bar recovery for breach of contract. This result would conflict with Civil Code section 3300’s provision that the injured party is entitled to all damages proximately caused by the breach. A brief example illustrates the point: A bolt maker contracts with an aircraft manufacturer to supply bolts. This contract expressly requires that the bolts be of a certain specification. The manufacturer, in turn, contracts with an airline company to deliver an aircraft that meets certain specifications contained in their contract. The bolt maker breaches its contract by supplying nonconforming bolts. The manufacturer incorporates them into an aircraft. As a result, the plane crashes. The victims sue the airline, the manufacturer, and the bolt maker. If the bolt maker enters into a good faith settlement with the victims under section 877.6, the majority opinion will preclude the manufacturer from recovering for the bolt maker’s breach of contract. This result conflicts with Civil Code section 3300. If the manufacturer can show that its damages were proximately caused by the component maker’s breach of their contract, section 3300 should allow the manufacturer to recover all those damages.

The majority opinion also conflicts with California Uniform Commercial Code sections 2714 and 2715, which allow a buyer of goods to recover incidental and consequential damages for a seller’s breach of contract. Under the majority’s expansive holding, these sections, like Civil Code section 3300, would have no effect if the breaching seller entered into a good faith settlement with an injured third party under section 877.6.

Nothing in section 877.6 suggests the Legislature intended to abrogate Civil Code section 3300 or California Uniform Commercial Code sections 2714 and 2715. All presumptions are against a repeal by implication. (Western Oil <6 Gas Assn. v. Monterey Bay Unified Air Pollution Control Dist. (1989) 49 Cal.3d 408, 419 [ 261 Cal.Rptr. 384 , 777 P.2d 157 ].) Moreover, Civil Code section 3300 states that it governs “except where otherwise *1044 expressly provided by this code” (italics added), i.e., the Civil Code. Section 877.6 is in the Code of Civil Procedure. 7

The majority creates an unnecessary conflict between section 877.6 and other statutes. I see no reason to do so.

D. Unconstitutional impairment of contract

Article I, section 9 of the California Constitution states, “A bill of attainder, ex post facto law, or law impairing the obligation of contracts may not be passed.” As construed by the majority, section 877.6(c) clearly impairs the obligation of existing contracts and therefore runs afoul of the state Constitution. 8 Therefore, even if the majority’s construction of section 877.6 were otherwise correct, application of the proposed rule to the contract at issue in this case (or to any other contract existing at the time of our decision) violates article I, section 9. In County of Los Angeles v. Superior Court, supra, 155 Cal.App.3d 798 , the court noted this constitutional restriction as one of the reasons why the court was rejecting the construction of section 877.6 now adopted by the majority. ( 155 Cal.App.3d at p. 803 .) The majority opinion, however, fails even to acknowledge the constitutional restriction.

Absent section 877.6 (as construed by the majority), it is undisputed that Bay and Bowen could maintain an action for the alleged breach of an implied warranty in their contract with Home. Stated simply, they would have a remedy for the breach. We long ago made clear that, “The remedy, where it affects substantial rights, is included in the term ‘obligation of contract’, and the remedy cannot be altered so as to materially impair such obligations.” (Brown v. Ferdon (1936) 5 Cal.2d 226, 231 [ 54 P.2d 712 ]; County of Los Angeles v. Jessup (1938) 11 Cal.2d 273, 280-282 [ 78 P.2d 1131 ].) The majority rule will eliminate entirely any remedy because it precludes Bay and Bowen from recovering damages proximately incurred by Home’s breach of contract. We recently referred to the “inviolate rights that characterize private contracts.” (Calfarm Ins. Co. v. Deukmejian (1989) 48 Cal.3d 805, 830 [ 258 Cal.Rptr. 161 , 771 P.2d 1247 ], italics added.) Less than one year later, the majority opinion reflects a view that such rights are not worthy of protection.

*1045 To avoid a construction of section 877.6(c) that renders it unconstitutional, the majority should limit its proposed rule to contracts not yet in existence as of the date of our decision.

E. Practical effects of the majority decision

Apparently in recognition of the great potential for unfairness under its rule, the majority advises trial courts they “must take into account any contractual relationship between the settling and nonsettling defendants.” (Maj. opn., ante, at p. 1034.) I believe the majority’s cautionary note is insufficient. For example, the majority opinion states that, when the nonsettling defendant is primarily responsible for the plaintiff’s damages, “ . . . the court should find the settlement in good faith only if the settlement requires the settling defendant to bear an appropriate share of the damages and leaves the nonsettling defendant with a remaining liability that is not grossly disproportionate to its own responsibility for the loss.” (Maj. opn., ante, at p. 1034, italics added.) This is troublesome in two respects. First, it is a mere suggestion and does not reflect the reality of litigation. There are extreme pressures on trial courts to dispose of as many cases as possible by settlement. Faced with even a remotely colorable claim of good faith, many trial courts will be disposed to view it favorably and approve settlement under section 877.6. Under the majority’s “should” language, a trial court can approve a settlement even if the settling defendant does not bear an appropriate share of the damages.

Second, the phrase “appropriate share of the damages” provides no guidance. The term is not defined or even explained. Moreover, where, as in this case, the nonsettling defendant is found to have no responsibility for the loss, I do not see how any damages sustained by the nonsettling defendant can be said to be “appropriate.” For the same reason, I also question the majority’s observation that a trial court “may decline” to find good faith if the nonsettling defendant’s liability to plaintiff is wholly attributable to the settling defendant’s breach. (Maj. opn., ante, at pp. 1034-1035.) I do not see how a trial court could possibly find good faith in that situation. As a matter of logic and fairness, the party without fault should not be required to pay anything. For example, if the breaching party settles with the third party by paying 90 percent of its damages, the nonbreaching party would be liable to the third party for the remaining 10 percent. The majority opinion, however, would allow the trial court to bar the nonbreaching party from recovering this 10 percent from the breaching (settling) party. This result would be grossly and fundamentally unfair. The majority opinion should make clear that the trial court in that situation must not deem a settlement to be in good faith. In short, the majority opinion leaves too much room for grossly unfair results.

*1046 The majority opinion also interjects an element of whimsy into contract law, the very essence of which is to allow contracting parties to plan for the future. (Cf. Phillippe v. Shapell Industries (1987) 43 Cal.3d 1247, 1269 [ 241 Cal.Rptr. 22 , 743 P.2d 1279 ] [noting the business community’s desire for certainty and predictability].) The aircraft bolt example used above helps to illustrate. (See discussion at p. 1043, ante.) Assume the aircraft manufacturer incorporates the defective bolts into an aircraft and delivers it to an airline company. The airline has to replace the defective bolts and recovers from the manufacturer for breach of contract. Even if the contract between the manufacturer and bolt maker contains no express indemnity provision, the manufacturer can recover its damages, including the amount paid to the third party purchaser, from the bolt maker for its breach of warranty. This is the result the parties anticipated when they negotiated and entered into their contract, i.e., recovery of damages for a breach of warranty.

Assume, however, the airline does not discover the defective bolts, and the plane crashes. The victims sue the manufacturer, the airline, and the bolt maker. If the bolt maker enters into a good faith settlement with the victims under section 877.6, the majority opinion would preclude the manufacturer from recovering for the breach of its contract with the bolt maker. The manufacturer would be deprived of the benefit of a freely negotiated and bargained-for performance provision in the contract. 9 Thus, whether the manufacturer can recover for breach depends entirely on events beyond its control. In short, the majority will render some contracts illusory. It holds in effect, “Contracts may mean what they say, but then again they may not. It just depends.” This ignores the far-reaching effects the majority opinion will have on commercial contracts in California.

All further section references are to the Code of Civil Procedure unless otherwise indicated.

For convenience, I will hereafter refer to section 877.6, subdivision (c) as section 877.6(c).

The majority contends the phrase “equitable apportionment or allocation of loss” may be more descriptive than section 877.6(c)’s use of the phrase “comparative negligence or comparative fault.” (Ante, p. 1029, fn. 10.) The majority’s phrase is perhaps more descriptive, but it is not the language employed by the Legislature.

Nor am I persuaded by the two Court of Appeal decisions on which the majority relies. (IRM Corp. v. Carlson (1986) 179 Cal.App.3d 94, 109-110 [ 224 Cal.Rptr. 438 ]; Stratton v. Peat, Marwick, Mitchell & Co. (1987) 190 Cal.App.3d 286, 291-292 [ 235 Cal.Rptr. 374 ].) Those decisions, in turn, rely on White, supra, 21 Cal.3d 497 . As explained above, that reliance is misplaced.

The majority opinion faults the court in Bear Creek, supra, 164 Cal.App.3d 1227 , for not citing our decision in White, supra, 21 Cal.3d 497 . As in this case, White is inapposite to a claim of implied contractual indemnity, so there was no need for the Bear Creek court to discuss the decision. In any event, the court did consider Rossmoor Sanitation, Inc. v. Pylon, Inc., supra, 13 Cal.3d 622 , the only case on which the White court relied.

Aside from the placement of the two statutes in different codes, it is questionable whether the Legislature could limit Civil Code section 3300 by implication in light of its statement that it applies “except where otherwise expressly provided.” (Italics added; see Western Oil & Gas Assn. v. Monterey Bay Unified Air Pollution Control Dist., supra, 49 Cal.3d 408, 419, fn. 15 .)

The United States Constitution, article I, section 10, contains a similar proscription. Thus, the majority’s result is infirm under both the state and federal Constitutions.

This result is particularly anomalous because, if the manufacturer had merely been required to replace the bolts (or pay the airline to do so), it could have recovered on its contract with the bolt maker. As a result of the crash, which will give rise to much greater damages, the manufacturer loses any right to recover.