In Seaman's Direct Buying Service, Inc. v. Standard Oil CO., the California Supreme Court affirmed its position that an insurance carrier may risk tort liability for breach of the implied covenant of good faith and fair dealing in addition to contract damages. Moreover, Seaman's enabled the court to explore such liability in the context of an ordinary commercial contract in which "parties of roughly equal bargaining power are free to shape the contours of their agreement." The Seaman's majority deemed it unnecessary to find tort liability on the breach of the implied covenant issue. Instead the court created a more limited area of tort liability - the so-called tort of "stonewalling" - in which the breaching party denies, in bad faith and without probable cause, the existence of a contract to shield itself from liability. This narrowly defined tort may well have ramifications on freedom of contract and affect the future of commercial contract negotiation. The essence of freedom of contract lies in the parties assuming responsibility for making enforceable contracts. This freedom also permits the parties to breach their contracts, resulting in liability to the other party for compensatory damages. Parties in an ordinary commercial contract who have mutually agreed on their obligations and expectations subject to specified covenants, conditions and remedies may not look favorably upon the imposition of tort liability for breach of contract in addition to traditional contract damages.
Alisa J. Kim,
Seaman's Direct Buying Service, Inc. v. Standard Oil Co.: Scaling the Stonewall Tort, 17 Golden Gate U. L. Rev.