W2007 La Costa Resort v. Sephora
Filed 4/17/13 W2007 La Costa Resort v. Sephora USA CA4/1
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and parties from citing or relying on opinions not certified for publication or
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COURT
OF APPEAL, FOURTH APPELLATE DISTRICT
DIVISION
ONE
STATE
OF CALIFORNIA
W2007 LA COSTA RESORT CO., LLC,
Plaintiff and Appellant,
v.
SEPHORA USA, INC.,
Defendant and Respondent.
D060414, D061018
(Super. Ct.
No.
37-2009-00060693-CU-BC-NC)
APPEALS
from a judgment and order of the Superior
Court of
County, Earl H. Maas, III, Judge. Affirmed.
Defendant
Sephora USA, Inc. (Sephora) entered into a contract with plaintiff W2007 La
Costa Resort Co., LLC (La Costa) that provided Sephora would hold its 2009
store director conference (SDC) at La Costa's hotel, the La Costa Resort &
Spa (the hotel). The contract also
provided that, subject to Sephora's right to cancel under a contractual clause
(the performance clause), which is the focus of this action, Sephora would also
hold its 2010 SDC at the hotel. However,
after the 2009 SDC, Sephora canceled the contract for the 2010 SDC at the
hotel, citing its right to do so under the performance clause, and La Costa
filed this action alleging Sephora breached its contract with La Costa.
The trial
court, after hearing conflicting evidence
of the etiology of the performance clause, ruled the intent of the clause was
to give Sephora the right to cancel the 2010 SDC if it, in the exercise of its
sole judgment, was not satisfied with La Costa's performance in connection with
the 2009 SDC and believed the deficient performance materially impacted the
SDC. However, the court recognized there
was evidence from which a trier of fact could conclude Sephora canceled the
contract for the 2010 SDC for reasons unrelated to Sephora's judgment as to La
Costa's performance in connection with the 2009 SDC. Because the implied
required that Sephora base its decision to cancel on its dissatisfaction with
La Costa's performance at the 2009 SDC, and barred Sephora from using the
performance clause as a pretext for canceling the 2010 SDC for reasons
unrelated to its judgment as to La Costa's performance at the 2009 SDC, the
court adopted a special verdict form that tendered to the jury whether
Sephora's cancellation breached the contract with La Costa. The jury found in Sephora's favor, and La
Costa appeals.
La Costa
contends we must reverse the judgment because the special verdict form deprived
the jury of the opportunity to adjudicate La Costa's claim alleging Sephora
breached the implied covenant of good faith and fair dealing when it canceled
the 2010 contract. La Costa also appears
to contend the trial court's foundational determination--that the intent of the
clause was to give Sephora the right to cancel if in the exercise of its sole
judgment it was not satisfied with La Costa's performance in connection with
the 2009 SDC and believed the deficient performance materially impacted the
SDC--is without substantial evidentiary support.
II
FACTUAL
BACKGROUND
A. The Contract Negotiations
Sephora, a
national retailer of cosmetics and fragrances, annually holds a multi-day event
(the SDC) at a resort location to bring together corporate management, store
managers, brand representatives and others.
The SDC, which averages around 600 attendees and costs approximately $1
million, is designed to allow Sephora to share strategic information with its
field organization and to train and motivate its employees.
Sephora
held the SDC at a resort in Scottsdale, Arizona,
for many consecutive years, but outgrew that facility and was searching for a
new location starting with the 2009 SDC.
Sephora consulted with a hospitality company (TPG) to find this new
location and to assist in negotiating contract terms, and TPG presented the hotel
for Sephora's consideration.
At the
relevant time, the persons at Sephora with primary responsibility for site
selection, contract negotiation and the operational aspects of the SDC were
Elizabeth Green and Mary Herald. Green,
who reported to Herald, was Sephora's manager for corporate events, with
day-to-day responsibility for planning and executing the SDC. Herald, an executive vice president of retail
operations for Sephora, had overall responsibility for the SDC for the previous
11 years. The persons representing La
Costa in the sales and contract negotiations were Megan Warzeniak (La Costa's
regional sales director for group sales) and Marti Coons, a group sales manager
on site at the hotel.
La Costa
pushed for a multi-year agreement.
However, Sephora wanted a one-year contract, as they always had when
contracting for prior SDC's (even though Sephora ultimately returned for many
consecutive years to the same resort), in part because this was the first time
Sephora had been to the hotel and did not want to overcommit to a facility with
which it might not be happy. Green
specifically told La Costa representatives about Sephora having a disappointing
experience at an event held at a Utah resort, at which Sephora had also
declined the resort's request for a multi-year arrangement, and explained
Sephora was glad it had not been required to return to the Utah site. Green told La Costa that Sephora did not want
to be locked into a two-year commitment.
In February
2008 La Costa sent a draft of a contract to Sephora's agent, TPG, using the
standard form contract it uses for group meeting events. The standard form does not contain a
performance clause, and the draft contract sent to TPG (and thereafter to
Sephora when it assumed the negotiations from TPG and removed TPG as Sephora's
negotiating agent) did not contain any performance clause.
Warzeniak
met with Green on March 5, 2009, to review the draft contract. Green, reiterating the need for a performance
clause,
told Warzeniak about Sephora's unhappy experience with the Utah resort. Green also told Warzeniak that Herald did not
want to be locked into a multi-year contract, and any multi-year agreement
would have to include a performance-based cancellation clause to alleviate
Herald's fear of being locked into a two-year commitment.
La Costa
responded with a first draft of a proposed performance clause.
because it did not adequately reflect the protections it sought and was
inconsistent with what Warzeniak promised to include, because Green had been
assured Warzeniak had no problem including a performance clause permitting
Sephora to cancel if it was unhappy with the 2009 SDC. Green had told Warzeniak that
whether it was happy with the hotel's performance, not the hotel or anyone else, and she told Warzeniak the clause was
unacceptable. Green's e-mail to
Warzeniak, after stating Herald was "dead set against" a two-year
commitment, explained it was "[n]ot that she doesn't want to stay
somewhere for 2 or more years, she just doesn't want to be stuck to 2 years if
she isn't 100% satisfied. So we either
really need to change the wording of the contract or look at what it's going to
cost doing it 1 year at a time. . . ." Warzeniak, who knew Herald and Green were
scheduled to arrive at the hotel the next day for a site visit to inspect the
hotel, raised no objection to a clause accommodating Herald's demand for
protection. Warzeniak understood Herald
"owned the program" and Herald "didn't put down 80 percent or 90
percent. When people are wanting to be
100 percent satisfied, they say 100 percent satisfied."
After the
site visit by Green and Herald was successful, La Costa redrafted the
performance clause.
title="">[3] Because the redrafted clause represented a
change to its standard contract, it was necessary for La Costa's director of
sales (Mr. Allen) to approve the language.
La Costa revised the performance clause to provide:
"[Sephora] reserves the right to cancel this
contract without penalty based upon the performance of the hotel for the 2009
Program. Should [Sephora] in its sole
opinion determine that the Hotel's performance was not satisfactory and[,] as a
result, materially impacted the success of the program, [Sephora] may cancel
this contract within 30 days of the operation of the 2009
Program . . . ."
When Coons
presented this language to Mr. Allen, she explained La Costa "need[s] to
add a looser performance clause to [Sephora] in order for them to sign a 2 year
contract." At the time this clause
was drafted, Sephora had not indicated it would accept anything other than
Herald's "100 percent satisfaction" standard. After Mr. Allen approved the language, Coons
expressed pleasure and stated that "[w]e now have one week to get this
signed--let's go for it!
name="_ftnref4" title="">[4]"
On March
18, 2008, Coons e-mailed the language of the revised performance clause quoted
above, stating "here is the revised performance clause that is much more
flexible. Please let me know what you
think." This was the first
communication Sephora received after Green had told Warzeniak that any
multi-year contract needed to be conditioned on Herald's 100 percent
satisfaction with the hotel's performance, and Green understood the language
was meant to meet Herald's requirement, i.e. Sephora could cancel the contract
for the 2010 SDC if, in Sephora's sole opinion, the hotel's performance was not
satisfactory and, in Sephora's sole opinion, that performance negatively
impacted the success of the program. As
Green explained at trial, La Costa assured her "they would do--anything to
make us comfortable."
On March
20, 2008, Warzeniak (apparently responding to an inquiry from either Coons or
Allen asking, "How are we doing on Sephora for month end?") reported
she had met with Green that morning to finalize the contract and Green thought
the performance clause "looked great." Green testified she still understood the
performance clause gave Sephora the discretion to determine whether the hotel's
performance was satisfactory and whether it materially impacted the program,
and she expressed appreciation to Warzeniak about inclusion of the clause. Warzeniak assured Green that La Costa was not
concerned about the performance clause because La Costa was not worried about
any performance issues, and Warzeniak was eager to get the contract signed by
the end of March. Green testified
Warzeniak never suggested the language contained any limitations on Sephora's
discretion, and instead had reassured Green that Sephora was protected but that
Warzeniak wasn't worried Sephora would ever have to exercise it.
contract to hold the SDC for 2009 and 2010 at the hotel.
B. The Attempts to Scale Back the 2009 SDC
After the
contract was signed, the recession of 2008 began, and Sephora was looking at
all avenues to reduce costs to "ride out [the] recession with hopefully
all of our people intact," including renegotiating to reduce the costs of
the 2009 SDC. Herald told Green to cut
the SDC budget and that it was in danger of being canceled if Sephora was
unable to reduce the costs. Green began
cost discussions with La Costa and, as a first step, exercised its allowable
"attrition" under the contract, telling Coons the budget for the 2009
SDC had been cut by $400,000. Green also
advanced proposals that would release certain contract benefits and meeting
spaces in exchange for La Costa's help in reducing the overall budget.
La Costa
countered with various proposals offering concessions, but was also
"pressing hard to remove" the performance clause, which was
unacceptable to Sephora. Herald's review
of La Costa's proposals led her to conclude Sephora would not be realizing any
significant cost savings for the 2009 SDC, and Green characterized the
proposals as not being "really genuine offers." Herald informed La Costa there had been
"no real effort to work with us on bringing down the cost of this
meeting," and she was "hopeful that you can put together a more
sincere proposal." However, the
negotiations ultimately bore no fruit, and Sephora decided to go forward with
the 2009 SDC under the existing contract.
On April 9, 2009, Herald informed La Costa Sephora would go forward with
the 2009 SDC under the existing contract and "[u]pon completion of the
2009 program we will evaluate our rights under the contract with regard to the
2010 program." Herald informed Mr.
Suliteanu (Sephora CEO and President) of her inability to successfully
negotiate any cognizable concessions from La Costa, characterizing La Costa's
negotiators as "not reasonable people (quite disrespectful
actually)," and he replied that he was sure Herald had done
"everything you could. Guess these
guys won't be seeing our smiling faces in '10." Suliteanu testified this was not a directive
to cancel the contract for the 2010 SDC.
selection process, did not know whether there was a single contract covering
multiple years or separate contracts, did not participate in drafting the
contract in this case, had not seen the contract with La Costa during this time
frame, and only learned there was a contract with La Costa for the 2010 SDC
when the present lawsuit was filed.
C. The 2009 SDC and Its Aftermath
Sephora
presented evidence that the hotel's performance during the 2009 conference was
not satisfactory.
title="">[8] The check-in procedures were unduly long,
with some guests waiting up to 45 minutes in line before checking in, resulting
in complaints from guests. Although La
Costa's group reservations coordinator apologized for the problem, Green testified
the first day sets the tone for the conference, and also explained how the
check-in problems had a significant negative impact on the program. The hotel also apparently disregarded
Sephora's instructions that guests checking in without credit cards should be
allowed to do so, with any incidentals billed through Sephora's master account;
instead, the hotel did not permit the guests to check in without a credit card,
which embarrassed these attendees and delayed their ability to check in. As a result of these (and other) first-day
snafus, some attendees were late for or entirely missed an important
educational session schedule on the first day, and others missed the
complimentary lunch and therefore attended the session while hungry and tired
after a long day of travel.
The hotel
also mishandled the arrival of a keynote speaker (and prospective partner of
Sephora), who was so displeased with the room and the hotel's response to her
complaints that she packed up and was about to leave the hotel (as well as
threatening to cancel the speech and to terminate the partnership negotiations)
when Green first learned of the problem.
Green explained that, although she was able to salvage the situation,
Sephora was still dealing with the repercussions of that snafu nearly two years
later. Sephora also produced evidence of
other problems encountered during the conference, including problems with the
food and beverage service, the audio-visual equipment, and privacy concerns.
Following
the 2009 SDC, Herald and Green met and extensively discussed their concerns
regarding the hotel's performance and decided Sephora "did not want to go
with a second year with [La Costa]."
Thereafter, on September 18, 2009, Herald sent notice to La Costa that
Sephora was exercising the performance clause because "Sephora has
determined in its sole opinion that La Costa's performance was not satisfactory
and, as a result, materially impacted the success of the 2009
program." Green then began for the
first time to explore and pursue other options for the 2010 SDC.
II
PROCEDURAL
BACKGROUND
A. The
Complaint
In October
2009, La Costa filed its complaint, alleging claims for breach of contract and
breach of the covenant of good faith and fair dealing. The separate claims apparently rested on
different underpinnings. The claim
outlined in La Costa's first cause of action, denominated as a claim for
"breach of express contract," was rooted in the express terms of the
performance clause: it alleged that the performance clause only became operable
if the hotel's performance "materially
impacted the success of the program," and that because the hotel's
alleged unsatisfactory performance "did not objectively 'materially [impact] the success of the 2009
Program[,]' [¶] . . . Sephora's invocation of the [performance
clause] to terminate the August 2009 Contract constitutes a breach of
contract." (Italics added.)
The claim
outlined in La Costa's second cause of action, denominated as a claim for
"breach of the covenant of good faith and fair dealing," alleged an
alternative theory of recovery. This
claim was apparently rooted in the theory that, even assuming the performance
clause gave Sephora sole discretion to assess both whether the hotel's performance was unsatisfactory
performance materially impacted the success of the program, Sephora
"subjectively lacked the good faith belief that the Resort's performance
was 'not satisfactory and[,] as a result, materially impacted the success of
the program,' " and therefore the cancellation amounted to a
"failure to act fairly and in good faith," thereby breaching the
implied covenant of good faith and fair dealing. As more specifically developed at trial, La
Costa's theory was that even if both the satisfactory performance and material
impact determinations were within Sephora's sole discretion, the implied
covenant mandated that those decisions be made honestly and in good faith. La Costa asserted that, if the jury concluded
Sephora had already decided to cancel before the 2009 SDC was held, Sephora's
stated reasons for canceling were a pretext and in breach of the implied
covenant because Sephora canceled for reasons unrelated to its opinion on
whether the hotel's performance was satisfactory or whether such unsatisfactory
performance materially impacted the program.
B. The
Evolution of the Jury Instructions and Verdict Form
Because La
Costa's appellate claims rest largely on the instructions and verdict form
given to the jury, we detail the evolution of those issues. Prior to trial, the parties submitted their
revised list of jury instructions. La
Costa did not request CACI No. 325, the approved jury instruction on the
implied covenant of good faith and fair dealing, but instead submitted proposed
special pinpoint instructions purporting to encapsulate the implied covenant of
good faith and fair dealing claim.
Concurrently, Sephora moved for judgment on the pleadings on La Costa's
claim for breach of the implied covenant of good faith and fair dealing,
arguing that under Carma Developers (
Inc. v. Marathon Development California, Inc. (1992) 2 Cal.4th 342 (
claim failed as a matter of law because the contract specifically provided
Sephora a discretionary right to cancel, and La Costa's implied covenant claim
sought improperly to hold Sephora liable under an implied covenant for doing
what Sephora was expressly permitted to do under the contract. The court exercised its discretion and elected
not to rule on Sephora's motion, stating it would hear it on request as a
directed verdict motion if the facts developed at trial warranted such a
motion.
During
trial, the parties again conferred with the court regarding jury instructions,
and Sephora, resurrecting its argument under Carma, filed a motion for nonsuit.
On June 1, 2011, the court heard arguments concerning the jury
instructions. La Costa's counsel argued
the instructions were incomplete because there was no instruction informing the
jury that a breach of the implied covenant would constitute a breach of
contract.
title="">[10] The court, after hearing argument, determined
it would give CACI No. 325 to cover La Costa's claim for breach of the implied
covenant. La Costa's counsel expressed
concern that CACI No. 325 did not expressly state that, if the jury found
Sephora violated the implied covenant, that also comprises a breach of
contract, and asked that "one sentence . . . be shoved into one
of these instructions" explaining that concept. The court assured La Costa that, once it determined
the legal issues before the court, "we're going to have to craft a special
instruction based on whatever the Court rules that tells the jury what they are
supposed to do," and La Costa reiterated its concern that "we need
the jury to understand that [if] Sephora decided they were canceling
. . . '10 before '09 began[,] [t]hat's a violation of the duty of
good faith and fair dealing. It's a
separate matter. So I am asking for that
one sentence some place."
After the
court instructed counsel to draft proposed instructional language based on CACI
No. 325, the court turned to the special verdict form, indicating it was
inclined to give Sephora's version that more closely tracked CACI No. VF-300,
which is designed for breach of contract cases.
La Costa objected, stating its position as to the special "tracks
[our] previous objection in regard to the instructions. We believe that the special verdict form
lacks in its questions anything relative to pretext. . . . [I]f the jury [concludes the] 2010 meeting
was going to be canceled before the 2009 meeting ever began, there's nothing
here . . . that directs [the jurors] if they so find that that's a
breach [of contract] and that they should then go to the damage
question. . . ."
On June 3,
2011, the court issued its order resolving the legal issue of the proper
interpretation of the performance clause, finding the evidence supported
Sephora's proffered construction that whether the hotel's performance was
satisfactory and whether the performance impacted the success of the program
were both subject to Sephora's sole judgment.
However, the court went on to reject Sephora's nonsuit motion premised
on Carma, explaining:
"The testimony is undisputed . . . that
some actual material impact to the conference had to occur and that
pre-conference financial disputes would not qualify to invoke the termination
right. The jury will determine, based
upon the admitted evidence, whether the decision was made to terminate the
contract before the 2009 conference, or whether [Sephora's] invocation of the
performance clause was legitimately exercised.
"The Court proposes the following language to
instruct the jury:
"The Court has ruled that the performance clause
was subject to [Sephora's] sole satisfaction and that there is no 'objective'
component. However, the election to
terminate the 2010 conference must have been based upon the performance during
the 2009 conference, and may not have been based on events which occurred
before the conference. If you find that
the decision to terminate the 2010 conference was made before the beginning of
the 2009 conference, then [Sephora] was not authorized to invoke the
performance clause, and would be in breach of the contract."
Although
Sephora objected to the language of the proposed instruction, La Costa was
satisfied with that language, stating "your instruction says it exactly
right." The court ruled it would
give this instruction over Sephora's objection.
It then determined it would employ Sephora's special verdict form patterned
on CACI No. VF-300. When La Costa
objected that "there's no question [on the form] about whether [Sephora]
breached the contract," Sephora noted that question 3 on the form (asking
whether the defendant did something the contract prohibited it from doing)
covered La Costa's concern, and the court agreed.
C. The Final
Jury Instructions and Verdict Form
The court
gave the CACI standard jury instructions for breach of contract and the
elements governing the implied covenant of good faith and fair dealing, and
gave special instructions on the performance clause, explaining:
"The multi-year performance clause in the parties'
contract granted [Sephora] the right to cancel the 2010 event . . .
should [Sephora] in its sole opinion determine that [La Costa's] performance
for the 2009 event was not satisfactory and[,] as a result, materially impacted
the success of the event.
"The Court has ruled that the multi-year
performance clause was subject to [Sephora's] sole satisfaction and that there
is no 'objective' component. However,
the election to terminate the 2010 conference must have been based upon the
performance during the 2009 conference, and may not have been based on events
which occurred before the conference. If
you find that the decision to terminate the 2010 conference was made before the
beginning of the 2009 conference, [then Sephora] was not authorized to invoke
the performance clause, and would be in breach of contract."
The court
also gave special instructions (1) specifying that Sephora's subjective
determination as to La Costa's performance must have been made in good faith,
(2) defining good faith, and (3) explaining that good faith or its absence
involves a factual inquiry into a person's subjective state of mind.
The
relevant portion of the verdict form employed by the court, and the jury's
responses, were as follows:
"1. Did
plaintiff and defendant enter into a contract?
"[Answer:] Yes.
"If your answer to question 1 is 'Yes,' proceed to
question 2. If you answered 'No,' stop
here, answer no further questions, and have the presiding juror sign and date
this form.
"2. Did all
the conditions occur that were required for defendant's performance?
"[Answer:] Yes.
"If your answer to question 2 is 'Yes,' proceed to
question 3. If you answered 'No,' stop
here, answer no further questions, and have the presiding juror sign and date
this form.
"3. Did the
defendant do something that the contract prohibited it from doing?
"[Answer:] No.
"If your answer to question 3 is 'Yes,' proceed to
question 4. If you answered 'No,' stop
here, answer no further questions, and have the presiding juror sign and date
this form. . . ."
In accordance with the special verdict, the court entered
judgment in favor of Sephora, and La Costa timely appealed.
III
ANALYSIS
A. The Contract Interpretation Claim
One of the
principal issues in dispute at trial was the proper interpretation of the
performance clause. Sephora contended
the parties intended the clause to give Sephora the right to cancel if it
subjectively determined (1) La Costa's performance was unsatisfactory,
materially impacted as a result. La
Costa contended the parties intended the clause to give Sephora the right to
cancel if two distinct conditions were satisfied: first, that Sephora
subjectively determined La Costa's performance was unsatisfactory, and second,
the success of the SDC was materially impacted as determined by an objective
observer. The trial court ruled in favor
of the former interpretation, and La Costa challenges that determination.
Contract
Interpretation and Standard of Review
The rules governing the role of
the court in interpreting a written instrument are well established. The interpretation of a contract is a
judicial function. (Pacific Gas & E. Co. v. G.W. Thomas Drayage etc. Co. (1968) 69
Cal.2d 33, 39-40, (Pacific Gas &
Electric).) In engaging in this function, the trial court
seeks to "give effect to the mutual intention of the parties as it
existed" at the time the contract was executed. (Civ. Code, § 1636.) Ordinarily, the objective intent of the
contracting parties is a legal question determined solely by reference to the
contract's terms. (Civ. Code,
§ 1639 ["[w]hen a contract is reduced to writing, the intention of
the parties is to be ascertained from the writing alone, if possible"];
Civ. Code, § 1638 [the "language of a contract is to govern its
interpretation"].)
a court generally may not consider extrinsic evidence varying or contradicting
the clear and unambiguous terms of a
written, integrated contract (cf. Principal
Mutual Life Ins. Co. v. Vars, Pave, McCord & Freedman (1998) 65
Cal.App.4th 1469, 1478), extrinsic evidence is admissible to interpret an
agreement when a material term is ambiguous.
(Pacific Gas & Electric,
supra, 69 Cal.2d at p. 37 [if extrinsic evidence reveals that apparently
clear language in the contract is, in fact, susceptible to more than one
reasonable interpretation, then extrinsic evidence may be used to determine the
contracting parties' objective intent].)
disputed, the trial court engages in a three-step process. First, it
provisionally receives any proffered extrinsic
evidence relevant to prove a meaning to which the language of the
instrument is reasonably susceptible. (
If, considering the extrinsic evidence, the language is reasonably
susceptible to the interpretation urged, the extrinsic evidence is then
admitted to aid the court in its role in interpreting the contract. (Id.
at pp. 39-40.)
On appeal,
"[o]ur review of the trial court's interpretation of the agreement is
governed by the settled rule that where extrinsic evidence has been properly
admitted as an aid to the interpretation of a contract and the evidence
conflicts, a reasonable construction of the agreement by the
by substantial evidence will be upheld."
(In re Marriage of Fonstein (1976) 17 Cal.3d 738, 746-747; Roddenberry v. Roddenberry (1996) 44 Cal.App.4th 634, 651.) Accordingly, we defer to the trial court's
construction if it was a reasonable construction of an ambiguous clause, and is
supported by substantial evidence, when the trial court's ruling was based on
conflicting evidence as to the intention of the contracting parties.
Analysis
The trial court examined a clause susceptible
to more than one reasonable interpretation: the performance clause stated Sephora could cancel if "
and[,] as a result, materially impacted the success of the program,"
without explicitly stating whether the italicized language applied only to the
determination of whether the hotel's performance was unsatisfactory (as
contended by La Costa) or whether it also applied to the determination of
whether "as a result, [the unsatisfactory performance] materially impacted
the success of the program" (as contended by Sephora). The
trial court, on conflicting evidence, interpreted the contract to intend that
Sephora's "sole opinion determines" both determinations, and La Costa
cites no authority suggesting an interpretation that falls squarely with the
range of semantically permissible interpretations is an unreasonable
interpretation to which an appellate court will not defer.
La Costa's
claim on appeal instead appears to assert that we should accord no deference to
the trial court's interpretation because it was not based on conflicting
evidence, and therefore asserts we should review de novo the interpretation of
the contract. La Costa quotes a segment
from the trial court's June 3, 2011, ruling, in which the trial court observed
"the testimony is undisputed, however, that some actual material impact to
the conference had to occur," to assert the trial court's ultimate
construction of the contract--that Sephora had sole discretion to determine
whether there had been a material impact on the success of the SDC--was fatally
flawed and should be reviewed de novo because it was an interpretation based on
undisputed facts.
We are not
persuaded by La Costa's effort to skew the record, and thereby inject error
into the ruling, because our review of the ruling as a whole convinces us the
segment quoted by La Costa has been extracted from it proper context. In the June 3, 2011, ruling, the trial court
ruled on two distinct issues: whether
the contract was intended to give Sephora sole discretion over both
satisfactory performance and material impact; and, if so, whether a grant of a
sole discretionary determination was fatal under Carma to La Costa's claim for breach of the implied covenant of
good faith and fair dealing. In ruling
on the former, the court stated
"the testimony regarding intent of the parties [as to the performance
clause] is inconsistent"
(italics added), but the court concluded the evidence supported the
interpretation that "both the performance and material impact requirements
were subject to [Sephora's] sole satisfaction." Far from finding the evidence was undisputed
regarding the intended scope of Sephora's discretionary judgments, the court
explicitly observed it was inconsistent.
trial court stated "the testimony is undisputed, however, that some actual
material impact to the conference had to occur," was made in connection
with the second issue--whether a
grant of a sole discretionary determination was fatal to Sephora's claim for
breach of the implied covenant of good faith and fair dealing. The trial court concluded it was not fatal,
because the ruling (read as a whole) was that "the testimony is
undisputed, however, that some actual material impact to the conference had to
occur and that pre-conference financial
disputes would not qualify to invoke the termination right." When placed in the context from which La
Costa extracted the quote, the "undisputed" evidence referred to by
the trial court was that the discretionary determination as to whether Sephora
was satisfied with the hotel's performance had to be based on the hotel's
handling of the 2009 SDC rather than La Costa's handling of Sephora's efforts
to scale back the 2009 SDC.
name="_ftnref13" title="">[13]
Because we
conclude the trial court's construction of the language is a reasonable one and
was based on conflicting evidence, we uphold that interpretation as long as it
is supported by substantial evidence. (
re Marriage of Fonstein, supra, 17 Cal.3d at pp.
746-747.) La Costa does not appear to
assert that, given the evidentiary conflicts, there was no substantial evidence
to support the interpretation adopted by the trial court,
and we affirm the construction adopted by the trial court.
B. The Special
Verdict Form Claim
the special verdict form employed by the trial court "barred the jury from
deliberating on" its claim for breach
of the implied covenant of good faith and fair dealing, and this error requires reversal. Before examining La Costa's claim, we first
outline the relevant legal principles.
promise of good
faith and
that each party will not do anything to unfairly interfere with the right of
any other party to receive the benefits of the contract. (Carson v. Mercury Ins. Co. (2012) 210 Cal.App.4th 409,
429). However, it is well established
that the implied
promise of good
faith and
cannot create obligations inconsistent with the terms of the contract. (Nein
v. HostPro, Inc. (2009) 174 Cal.App.4th 833, 852.) Although breach of a specific contractual
provision is not a prerequisite to asserting this cause of action (Carma, supra, 2 Cal.4th at p. 373)
prohibited by the covenant
of good faith is circumscribed by the purposes and express terms of the
contract. [Citations.] . . .
[U]nder traditional contract principles, the implied covenant of good faith is read into
contracts 'in order to protect the express covenants or promises of the contract,
not to protect some general public policy interest not directly tied to the
contract's purpose.' " (Ibid.) " 'In essence, the covenant is implied as a supplement to the
express contractual covenants, to prevent a contracting party from engaging in conduct
which (while not technically transgressing the express covenants) frustrates the other
party's rights to the benefits of the contract.' " (Racine
& Laramie, Ltd. v. Department of Parks & Recreation (1992) 11
Cal.App.4th 1026, 1031-1032.) It exists
"merely to prevent one contracting party from unfairly frustrating the
other party's right to receive the benefits
of the agreement actually made.
[Citation.] The
cannot ' "be endowed with an existence independent of its contractual
underpinnings." '
[Citations.] It cannot impose
substantive duties or limits on the contracting parties beyond those
incorporated in the specific terms of their agreement." (Guz v.
Bechtel National, Inc. (2000) 24 Cal.4th 317, 349-350.)
Although
breaches of distinct contractual obligations may properly be pleaded as
separate counts, and a breach of the implied covenant is commonly pleaded as a
separate count, "a breach of the implied covenant is necessarily a breach
of contract." (Digerati Holdings, LLC v. Young
Money Entertainment, LLC
(2011) 194 Cal.App.4th 873, 885.)
Special Verdict
Principles
"In all cases the court may
direct the jury to find a special verdict in writing, upon all, or any of the
issues . . . ."
(Code Civ. Proc., § 625.)
"The special verdict must present the conclusions of fact as
established by the evidence, and not the evidence to prove them; and those
conclusions of fact must be so presented as that nothing shall remain to the
Court but to draw from them conclusions of law." (Code Civ. Proc., § 624.)
A special
verdict form is fatally defective if it does not allow the jury to resolve
every controverted issue raised by the pleadings. (Saxena v. Goffney (2008) 159 Cal.App.4th 316,
325 (Saxena).) For example, in Saxena, the plaintiff pleaded claims for negligence and battery,
which the court recognized were separate causes of action. The former cause of action was based on the
claim the defendant doctor had not obtained the patient's "informed
consent" to the procedure, "which sounds in negligence [and] arises
when the doctor performs a procedure without first adequately disclosing the
risks and alternatives. In contrast, a
battery is an intentional tort that occurs when a doctor performs a procedure
without obtaining any consent." (
the patient gave his "informed consent" to the procedure, to which
the jury answered "no," but did not require the jury to answer
"the separate and distinct question of whether [the doctor] performed the
procedure with 'no consent' at all," an essential element of the battery
claim. (Id. at p. 326.)
form employed there was fatally flawed because it did not address every
controverted issue of fact raised by the pleadings. (Id.
at p. 326.) Other courts have reached
similar conclusions.
name="_ftnref15" title="">[15]
Analysis
La Costa asserts the special
verdict form, which largely tracked the approved special verdict form (CACI No.
VF-300) for breach of contract cases, was fatally defective because it did not
address La Costa's claim for breach
of the implied covenant of good faith and fair dealing.
title="">[16] The verdict form did ask "Did [Sephora] do something that the contract
prohibited it from doing?" but La Costa claims it was fatally defective
because it did not specifically rephrase that question to be whether Sephora
" 'unfairly interfered with [the plaintiff's] right to receive the
benefits of the contract,' " and therefore La Costa claims the form
did not submit a controverted issue raised by its claim for breach of the
implied covenant.
name="_ftnref17" title="">[17]
We conclude
the record as a whole shows the special verdict form did not deprive La Costa
of the right to have the jury resolve the controverted issues raised by its
claim for breach of the implied covenant.
We are satisfied the jury understood this form required them to resolve
the issues encompassed by the only
claim submitted to the jury: the claim that Sephora breached its contract
and fair dealing.
name="_ftnref18" title="">[18] The jury was instructed, using CACI approved
instructions modified to fit the facts of this case, that:
"[La Costa] and [Sephora] entered into contracts to
hold [Sephora's] Store Director Conference at La Costa in 2009 and 2010. [¶]
[La Costa] claims that [Sephora] breached
the contract by lacking a good faith belief that [La Costa's] performance
during the 2009 Store Director Conference was unsatisfactory and by canceling
the 2010 Store Director Conference, even though nothing actually occurred which
materially impacted the success of [Sephora's] program.
[¶] . . . [¶] [Sephora] denies it breached the
contact. [Sephora] also claims the
cancellation was proper under the terms of the contract.
"To recover damages from [Sephora] for breach of
contract, [La Costa] must prove all of the following:
"1. That [La Costa] and [Sephora] entered into a
contract;
"2. That [La Costa] did all, or substantially all,
of the significant things that the contract required it to do;
"3. That all conditions required by the contract
for [Sephora's] performance had occurred;
"4. That [
"5. That [La Costa] was
harmed . . . ."
(Italics added.)
The court
then gave a series of special instructions, including "Additional
Instruction No. 1" and "Additional Instruction No. 8," which
together instructed the jury that:
"The multi-year performance clause in the parties'
contract granted [Sephora] the right to cancel the 2010 event at La Costa
should [Sephora] in its sole opinion determine that [La Costa's] performance
for the 2009 event was not satisfactory and[,] as result, materially impacted
the success of the event. [¶] The Court has ruled that the multi-year
performance clause was subject to [Sephora's] sole satisfaction and that there
is no 'objective' component. However,
the election to terminate the 2010 conference must have been based upon the performance during the 2009 conference,
and may not have been based on events which occurred before the
conference. If you find that the decision to terminate the 2010 conference was made
before the beginning of the 2009 conference, [then Sephora] was not
authorized to invoke the performance clause, and would be in breach of the
contract."
The court,
expanding on the relevant considerations, also gave special instructions (1)
specifying that Sephora's power under the multi-year performance clause to make
a purely subjective decision as to La Costa's performance and any material
impact must have been a decision made in good faith, (2) defining good faith using
the language proposed by La Costa, and (3) explaining that good faith or its
absence involved a factual inquiry into a person's subjective state of mind,
including whether the actor believed the decision was valid and what was the
intent or purpose in making that decision.
We presume
the jury understood and followed the instructions given by the court (
Cal.4th 780, 803), and understood how to apply those instructions to the
questions posed by the special verdict form, particularly when the court had
expressly directed the jury that "if you find that the decision to
terminate the 2010 conference was made before the beginning of the 2009
conference, then [Sephora] was not authorized to invoke the performance clause,
and would be in breach of contract." Moreover, even assuming there was some hint
of ambiguity whether question 3, asking if the jury found Sephora "did
something that the contract prohibited it from doing," was the pivotal
question around which La Costa's claims of breach of the implied covenant
turned, that ambiguity was dispelled by La Costa's closing argument. During closing argument, La Costa's attorney
extensively argued that the evidence showed Sephora's decision to cancel the
2010 SDC was not based on the hotel's
performance during the 2009 SDC or any alleged impacts on the success of the
2009 program. La Costa's attorney noted,
if the jury concluded the decision was made before the 2009 program occurred,
the judge's instructions required the jury to find in favor of La Costa, and
argued the evidence showed the decision was made before the 2009 program
occurred. He also noted, although
Sephora could cancel the 2010 SDC if it believed the hotel's performance during
the 2009 SDC was not satisfactory and impacted the success of the 2009 program,
that decision had to be reached in good faith and not to evade the spirit of
the bargain reflected in the contract, and argued that even if the jury did not
find Sephora decided to cancel before the 2009 SDC, La Costa was still entitled
to prevail because the evidence showed Sephora's decision to cancel had been
made in bad faith for reasons unconnected to the hotel's performance. La Costa's counsel then concluded his argument
by saying, "Let's talk about some of
the forms you have to complete" (referring to the special verdict
form) and, after noting there was "no dispute" about the first three
items, explained La Costa also was required "to prove that Sephora did
something that the contract prohibited them from doing, and we have done that
over and over again." Moreover, if
there is any doubt about how the verdict form operated, La Costa's counsel in
rebuttal argued that if the jury agreed Sephora either decided to cancel before
the 2009 meeting or acted in bad faith when it later decided to cancel, it was
required to award La Costa damages in line number six of the verdict form,
noting:
"[Y]ou have got to answer the questions that get
you to line six in a way that get[s] you there.
Did the parties enter into a contract? Yes. Did all [of the] conditions occur that were
required for [Sephora's] performance?
What does that mean? Were we
willing to host 2010? Were we ready to
host 2010? Those were the conditions that were required, and we met those
conditions.
"Number three, did [Sephora] do something that the
contract prohibited it from doing?
That's what the whole case is about the judge is instructing you. That good faith governs all of their
actions. When they . . .
decided to cancel 2010 before 2009 occurred, they did something the contract
prohibited them from doing. . . ."
In
Mountain, LLC v. Fallbrook Public Utility Dist. (2006) 143 Cal.App.4th 333, this
court reached a similar conclusion under analogous circumstances. In Red
Mountain, the trial court tendered to a jury by special verdict the issue
of whether there were any damages to a property owner from the utility
district's (Fallbrook) actions, and Fallbrook contended the trial court
prejudicially erred by refusing to include
jury about Fallbrook's contract defense of impossibility
or impracticability of performance in the special verdict. This court concluded the trial court's
refusal to include specific questions about impossibility or impracticability
of performance in the verdict form was neither an abuse of discretion nor
prejudicial error, because "the jury was instructed to find that
Fallbrook's performance of the contract was excused and the contract discharged
if Fallbrook met its burden of proving that its performance became 'impossible
except at impractical, excessive, unreasonable expense or risk of injury not
contemplated by the parties at the time the contract was made.' We presume that the jury followed the
instructions it was given [citation] and that it would not have found that
Fallbrook breached its
agreement to grant the access easement if it had found that Fallbrook's
performance was impossible or impracticable." (Id.
at pp. 364-365, fn. omitted.)
Moreover,
this court also noted that "[w]hen
Fallbrook's counsel asked the trial court to include the defense of
impossibility or impracticability in the verdict form, the court noted that the
defense was covered by a jury instruction and advised counsel that it was his
job to argue the defense as a basis for answering 'no' to the special verdict
question of whether Fallbrook had breached the contract to grant the access
easement. During closing argument,
Fallbrook's counsel quoted the above noted instruction regarding impossible or
impractical performance and argued that the jury should find that Fallbrook had
not breached the contract . . . ." (Red
Mountain, LLC v. Fallbrook Public Utility Dist., supra, 143 Cal.App.4th at
p. 365, fn. 21.) Similar facts exist
here: the claim La Costa argues was omitted was fully covered by the court's
instructions, and La Costa's counsel both fully argued that claim and explained
in detail how the jury should signify its acceptance of La Costa's claim within
the confines of the special verdict form before it.
The cases
relied on by La Costa are inapposite to the analysis of whether the verdict
form here was fatally defective. La
Costa cites numerous cases for the proposition that a set of jury instructions
themselves complete and correct cannot save a defective special verdict
form. (See, e.g., Myers, supra, 13
Cal.App.4th at p. 960; Fuller‑Austin, 135
Cal.App.4th at p. 1005.) However, those
cases are inapposite.
For
example, in Myers, the builder
asserted claims in contract and in tort (for fraud and breach of fiduciary duty);
the special verdict form contained questions pertaining only to the contract
claim but provided no place for the jury to find in favor of the builder on his
tort claims. (Myers, supra, 13 Cal.App.4th at pp. 956-958.) The jury found in favor of the builder on the
contract claim but also awarded punitive damages, and the Court of Appeal was
required to strike the punitive damages award because "[n]o special
verdict findings were submitted to the jury on any cause of action except
breach of contract" (id. at p.
958), and the punitive damages award could not be sustained because the jury
"was neither requested to nor [made] the necessary factual findings"
for a tort verdict. (
court, rejecting the argument that the punitive damage award was sustainable
because the jury was properly instructed concerning the elements of a fraud
claim, and there was substantial evidence to support a finding of fraud,
explained that "a finding of fraud, however, was never expressly or impliedly
made by the jury in its special verdict which found only that [owner] had
breached its contract with [builder]. A jury instruction alone does not constitute
a finding. Nor does the fact that the
evidence might support such a finding constitute a finding. . . . [W]ithout an actual verdict by the jury on a
fraud (or other tort) cause of action, the instructions and evidence cannot
support the punitive damage award."
(Id. at p. 961, fns.
omitted.) In contrast to
the jury on a single claim--breach of
contract based on violation of the implied covenant of good faith and fair
dealing--and the jury was asked to find whether Sephora was liable because it
done "something the contract prohibited them from doing," and the
instructions focused the jury's attention on the single cause of action.
Here, the
jury was asked to decide whether Sephora "did something that the contract
prohibited it from doing." Because
the court ruled, and instructed the jury, that Sephora was not prohibited from canceling the contract if cancellation was
based on Sephora's good faith opinion that La Costa's performance at the 2009
event was unsatisfactory and materially impacted the success of the event, the
only issue submitted to the jury was whether Sephora did something the contract
prohibited it from doing, e.g. canceling for reasons other than its good faith opinion that La Costa's performance at
the 2009 event was unsatisfactory and materially impacted the success of the
event. We conclude the special verdict
form adequately required the jury to resolve the controverted issues raised by
La Costa's claim for breach of the implied covenant.
DISPOSITION
The
judgment is affirmed. Sephora is
entitled to costs on appeal.
McDONALD,
J.
WE CONCUR:
BENKE,
Acting P. J.
NARES, J.
name="_ftn1" title="">[1] TPG had previously told Warzeniak that a performance clause
would be necessary because Sephora was nervous about committing for two years,
but such clauses are rare and La Costa had decided internally that it would not
include that clause in the original draft.
Indeed, when Warzeniak's boss (Coons) first saw that an iteration of a
performance-based cancellation clause was to be included in the contract, Coons
asked Warzeniak whether Sephora had asked for a performance clause (because La
Costa had decided not to offer it) and expressed concern that it would expose
La Costa to a major cancellation were the clause exercised. However, Warzeniak stated the clause was
"always on the table."
name="_ftn2" title="">[2] The clause stated Sephora could cancel if the hotel
"fails to materially adhere to the performance standards in place at the
time this contract is signed and/or loses more than fifty percent of the
designations awarded by the meetings press . . . ."
