Con-Torts

Los Angeles Daily Journal, June 1998

by Lawrence C. Waddington

    Traditional distinctions between tort and contract were refined in two cases decided by the Court of Appeal. In North American Chemical Co. v. Superior Court, 59 Cal.App.4th 764, (hereinafter North) plaintiff contracted with defendant to package and ship plaintiff's goods to a third party. Defendant shipped the goods in contaminated containers causing the third party financial loss which they subsequently recovered from the plaintiff. Plaintiff sued the defendant to recover damages paid to the third party, alleging the defendant negligently performed the contract. In sustaining a demurrer to the complaint, the trial court held that plaintiff was limited to damages for breach of contract and could not recover in tort for negligent performance.

    The appellate court began its analysis by acknowledging the distinction between the law of contracts, which enforces the intentions of the parties to an agreement, and tort law which vindicates social policy. But the court held that implied in every contract is a duty to perform with care, skill and knowledge. According to the North court, this rule applies to any contract by a party who agrees to perform professional or business engagements and gives rise to a duty of care requiring that such services by performed in a competent and reasonable manner. Failure to observe any of those conditions qualifies not only as a breach of contract but negligence as well. Non performance of any condition of the contract, as distinct from negligent performance, will not import this rule; Wilmington Liquid Bulk Terminals, Inc. v. Somerset Marine Inc., 53 Cal.App.4th 186.

    Establishing a negligence theory did not resolve the damages issue. In suing the defendant for its negligent conduct, plaintiff could only establish financial loss generally barred by the "economic loss" rule which disallows tort damages in the absence of personal injury or property damage. Tracing the origin of this rule, North confirmed its applicability in product liability causes of action or negligent conduct in performing commercial transactions. But in contracts for performance of services, said the court, the Commercial Code has no relevance.

    Citing a 1979 case decided by the California Supreme Court, J'Aire Corp. v. Gregory, 24 Cal.3d 799, the North court quoted language in that decision approving recovery of economic loss for negligent performance of a contract if a "special relationship" exists between the parties, the risk of harm was foreseeable and closely connected with the defendant's conduct, and the injury not part of plaintiff's ordinary business risk. A plaintiff who can establish these facts has stated a cause of action for negligence, negligent interference with economic advantage, and can plead tort damages. Moreover, said J'Aire, physical injury or property damage is not a condition for recovery in this context. The key, emphasized the court, is "foreseeability" and a "special relationship" between the parties. The absence of physical injury or property damage is immaterial if the contract requires performance of services.

    To establish a "special relationship" between the parties, J'Aire identified six criteria, closely resembling the standard for "duty" in the law of negligence long established in California; Rowland v. Christian, 68 Cal.2d 108. One major distinction in pleading and proving a negligent performance of contract for services cause of action, as distinct from ordinary negligence, is "the extent to which the transaction was intended to affect the plaintiff;" J'Aire at p.804, citing Biakanja v. Irving, 49 Cal.2d 647. Most contracts intend to mutually benefit both parties, and it would seem unusual for any contract not to fit into this rubric. In which case, the elements of foreseeability, proximate cause and an injury unrelated to plaintiff's ordinary business risk become paramount.

    In Vandenberg v. Superior Court, 59 Cal.App.4th 898, the lessor of real property obtained a judgment for contractual breach of a lease in collateral litigation against lessee Vandenberg [plaintiff] for contaminating the leased land during the course of operating his business. Plaintiff Vandenberg sued his insurance carriers alleging their refusal to defend that litigation. Defendant carriers obtained summary judgment on grounds that plaintiff's general liability insurance policy only provided coverage for property damage, not contract damages as reflected in the judgment obtained by the lessor (confirming an arbitration award). Property damage generally requires physical injury or destruction of tangible property , and "economic damages" i.e., payment of the judgment, are excluded under this definition.

    The Vandenberg court agreed that an insured's non performance of contractual obligations is not with the ambit of coverage. But the court stated that the focus of insurance coverage for property damage is the property itself, and the economic loss suffered by the insured may provide a measure of damages attributable to property loss or harm within policy coverage. Contamination of property, said the court, is obviously injury to tangible property, and the type of injury and the nature of the risk that caused the injury are factors for the court to consider in determining whether coverage exists. That the lessor's complaint against Vandenberg sought economic damages does not foreclose the possibility of coverage for damage to property. Resolution of that issue will depend on policy language, not merely a rule prohibiting coverage for economic loss.

    Both cases were decided on procedural grounds, North on demurrer and Vandenberg on summary judgment. Although each case alleged economic loss, the basis for recovery differs. The plaintiff in North can now allege economic loss for breach of contract requiring performance of services as well as a tort theory for negligent performance of the contract. Pursuant to North, if the complaint alleges negligent performance of services resulting in economic loss under the contract, plaintiff can escape dismissal on demurrer. Resolution of a motion for summary judgment in North will turn upon the terms of the contract requiring the performance of services and the attendant duty of care, evidence of criteria establishing the "special relationship" between the parties, the negligent performance, foreseeability of harm, legal causation and the extent of damages.

    Under the North court's analysis, the parties must be in a "special relationship." The parties in North entered into a conventional contract relationship, the defendant promising to ship goods to a third party. Assuming this "service contract" includes the right to potentially recover economic loss for negligent performance, the question remains whether the legal categorization between the parties qualifies as "a special relationship." Generally speaking, a judicially recognized "special relationship" includes elements of fiduciary duties, or doctor-patient, lawyer-client relationships evidencing elements of trust or confidence. Whether North can establish that element remains for trial.

    The plaintiff lessee in Vandenberg can now allege he incurred economic loss to the lessor which may qualify as property damage contingent upon the specific terms of the insurance contract. The Vandenberg complaint, which asserted insurance coverage and a subsequent refusal by the carriers to defend or indemnify, survives dismissal on demurrer if it alleges economic loss occasioned by injury or destruction to property covered by the risk or peril assumed as stated in the terms of the policy. On summary judgment, the language of the policy will control whether the plaintiff can establish an indemnifiable loss.

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