Racine & Laramie Ltd. v. Department of Parks & Recreation

California Court of Appeal · Contracts

Contractsgood faith and fair dealingcontract modificationnegotiationsagreement to agreeletter of intentpromissory estoppeldiscretionary powers

Facts

Racine operated premises in Old Town San Diego State Historic Park under a 40-year concession contract with the Department executed in 1974. Beginning in the 1980s, the parties negotiated possible modifications that would expand Racine's operations from a tobacco shop and wine tasting facility to include a restaurant and on-premises alcohol sales, but they never reached a final agreement. Paragraph 25 of the concession contract stated that the parties may, by mutual consent, agree in writing to modifications or additions not forbidden by law. In 1988, after the Department rejected Racine's new proposal, Racine sued, alleging the Department acted in bad faith by reversing positions during negotiations.

Issue

Does the implied covenant of good faith and fair dealing in an existing contract require a party to negotiate in good faith toward a new or amended contract when the contract does not expressly obligate either party to negotiate or agree to modifications?

Rule

The implied covenant of good faith and fair dealing protects the express covenants or promises of an existing contract and cannot create obligations not contemplated by the contract. Accordingly, absent special circumstances such as an express agreement to negotiate in good faith, a contractually vested discretionary power requiring good-faith exercise, promissory estoppel, or a statutory duty, California law imposes no obligation to bargain in good faith for a new or amended contract.

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One of 10 multiple-choice questions for this case. Pick an answer to see why.

Sierra Market LLC leases retail space from Harbor Point Properties in Sacramento under a 20-year lease. The lease states that the parties may modify permitted uses only by mutual written agreement, and they spend two years discussing a plan to add a bakery before the landlord abruptly ends talks.

If Sierra Market sues for breach of the implied covenant of good faith and fair dealing based solely on the landlord's conduct during those failed negotiations, what is the best result?

Explanation. The implied covenant protects benefits grounded in specific contractual obligations; it does not create new duties not contemplated by the contract. A provision saying the parties may modify by mutual consent merely permits amendment and does not require either party to negotiate or reach agreement. Therefore, failed amendment talks alone do not support implied-covenant liability.