Filed 12/4/13
CERTIFIED FOR PUBLICATION
IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
THIRD APPELLATE DISTRICT
(Sacramento)
AVIDITY PARTNERS, LLC, as Trustee, etc., C070255
Plaintiff and Appellant, (Super. Ct. No. 34-2009-
00042016-CU-BC-GDS)
v.
STATE OF CALIFORNIA,
Defendant and Respondent.
APPEAL from a judgment of the Superior Court of Sacramento County, Raymond
Cadei, Judge. Affirmed.
Pillsbury Winthrop Shaw Pittman, Robert L. Wallan, John M. Grenfell and
Kimberly L. Buffington for Plaintiff and Appellant.
Kamala D. Harris, Attorney General, Kathleen A. Kenealy, Senior Assistant
Attorney General, Robert W. Byrne, Denise Ferkich Hoffman, Supervising Deputy
Attorneys General, Daniel S. Harris and Jan Zabriskie, Deputy Attorneys General for
Defendant and Respondent.
This case involves the historic Headwaters Agreement (Agreement) between
Pacific Lumber Company (Pacific Lumber), the federal government, and the State of
California (defendant or State) pursuant to which Pacific Lumber transferred 7,000 acres
of old growth redwood forestland to State in exchange for other forestland and $495.5
1
million dollars. The Agreement was negotiated over the course of three years and
included specified regulatory approvals required for Pacific Lumber’s harvest of its
forestland. The complaint was originally filed by Pacific Lumber and Scotia Pacific
Company, LLC, a wholly owned subsidiary of Pacific Lumber. Plaintiff Avidity
Partners, LLC, (Avidity) is the litigation trustee for the bankruptcy estate of Scotia
Pacific Company, LLC.
Avidity’s complaint for damages for breach of contract is based upon the claim
that defendant State promised Pacific Lumber it would be able to harvest the trees on its
remaining 211,000 acres of timberland at an average level of 176.2 million board feet per
year during the first decade of the Agreement. The breach of the covenant of good faith
and fair dealing claim is based upon Avidity’s argument that in order for Pacific Lumber
to harvest at that rate, defendant had to consider and approve Pacific Lumber’s timber
harvest plans in a timely manner, and that the delay in processing the timber harvest plans
denied Pacific Lumber the contemplated benefits of the Agreement. Avidity’s
promissory estoppel claim is an alternative claim, by which Avidity argues State’s
promises can be enforced even if we determine the promises were not supported by
consideration.
Avidity’s arguments are based on the premise that the State has exercised its
legislative and environmental powers to circumvent the promises made to it by the State
in the Agreement, thereby breaching the Agreement and entitling it to damages. (United
States v. Winstar Corp. (1996) 518 U.S. 839 [135 L.Ed.2d 964] (Winstar).) We find it
unnecessary to reach these arguments because the State’s contracts with Pacific Lumber
do not contain a promise that Pacific Lumber could harvest at the rate of 176.2 million
board feet per year for the first ten years.
The trial court granted State’s motion for summary judgment. Avidity appeals
from the ensuing judgment.
2
We shall affirm the judgment. The express terms of the Agreement do not
promise Pacific Lumber a particular harvest level. The covenant of good faith and fair
dealing does not operate to supply a term that the express contract does not otherwise
contain. The term Avidity seeks to imply, a guaranteed harvest level, was specifically
rejected in negotiations.1 Moreover, such term is not necessary to prevent the Agreement
from being illusory or unenforceable. Finally, the claim of promissory estoppel fails
because Pacific Lumber’s alleged reliance was the bargained-for consideration it
promised as its part of the Agreement, making this case unsuited to a claim of promissory
estoppel.
1 At oral argument, Avidity denied it is claiming that the Agreement guaranteed Pacific
Lumber a certain harvest level. Avidity alleged the State prevented Pacific Lumber from
“realizing the regulatory certainty and harvest volumes assured to it under the
Headwaters Agreement . . . .” We fail to see how the claim may be construed as one
other than a guarantee that the State would not prevent Avidity from reaching that level.
Avidity stated at oral argument that far from allowing it to harvest at the contracted level,
the State did not allow it to harvest at all. This was not a claim made in the complaint to
which the summary judgment was addressed. Rather, the complaint alleged that the State
breached the contract by “prohibiting Pacific Lumber from harvesting at the
economically viable level set forth in the [Sustained Yield Plan];” by “seeking to impose
a lesser rate of harvest on Pacific Lumber’s property and to foreclose harvesting
altogether in certain additional areas;” and by “precluding Pacific Lumber from obtaining
timely approved [Timber Harvest Plans] in compliance with the [Sustained Yield
Plan] . . . .”
3
FACTUAL AND PROCEDURAL BACKGROUND2
We begin with a few background facts as related in the Supreme Court opinion
Environmental Protection Information Center v. California Dept. of Forestry & Fire
Protection (2008) 44 Cal.4th 459 (EPIC), an earlier case arising out of the Agreement.
Pacific Lumber owned “approximately 211,000 acres of timberland in Humboldt County
that have been used for commercial timber production for some 120 years. In 1986
Pacific Lumber was acquired by Maxxam Incorporated, and in order to pay off
Maxxam’s debt for the buyout, Pacific Lumber began cutting down old growth redwoods
at a faster rate than ever before. The deforestation led to litigation and considerable local
protest. [¶] In the 1990’s, as a result of federal and state litigation, Pacific Lumber was
enjoined from harvesting a particular stand of old growth timber that served as the habitat
for the marbled murrelet, an endangered bird. Pacific Lumber, in turn, filed lawsuits
alleging an unlawful taking by the state and federal governments of the land declared
unusable for timber production and harvesting. [¶] To resolve the existing controversies,
2 For convenience we list the acronyms in the opinion.
ACP Aquatics Conservation Plan
CDF California’s Department of Forestry and Fire Protection
HCP Habitat Conservation Plan
ITP Incidental Take Permit
SYP Sustained Yield Plan
THP Timber Harvest Plan
TMDL’s Total Maximum Daily Loads
WDR’s Waste Discharge Requirements
WWDR’s Watershed-wide WDR’s
4
Pacific Lumber entered into the Headwaters Agreement of 1996 with the State of
California and the United States. The Agreement provided for the sale of some 7,000
acres of Pacific Lumber’s timberland to the federal government and the State of
California, and for Pacific Lumber to obtain . . . various regulatory approvals . . . for its
remaining 211,000 acres.” (EPIC, supra, 44 Cal.4th at pp. 472-473.)
The Agreement contemplated the approval of a Habitat Conservation Plan (HCP),
an Incidental Take Permit (ITP), and a Sustained Yield Plan (SYP). The approvals
expressly contemplated by the Agreement did not include a Timber Harvest Plan (THP).
As explained in EPIC, “A[n SYP] is a kind of master plan for logging a large area,
authorized by statute (Pub. Resources Code, § 4551.3) and regulation (Cal. Code Regs.,
tit. 14, §§ 1091.1–1091.14), designed to achieve the Forest Practice Act’s objective of
obtaining the maximum timber harvest consistent with various short- and long-term
environmental and economic objectives. (Z’berg–Nejedly Forest Practice Act of 1973;
Pub. Resources Code, § 4511 et seq.) . . . [T]he SYP does not replace the more specific
timber harvest plan (THP), but inasmuch as the SYP adequately analyzes pertinent issues,
a THP may rely on that analysis. Although SYP’s are usually voluntary at the option of
the landowner, in this case the SYP was required by the Headwaters Agreement.[3]”
(EPIC, supra, 44 Cal.4th at p. 471, fn omitted.)
3 The SYP was declared invalid in 2008 by the Supreme Court in EPIC, supra, 44
Cal.4th at p. 526, because there was no identifiable final SYP, and because it did not
include the required individual watershed planning analyses. (Id. at pp. 491-497, 500-
504.) EPIC also held that the ITP’s no-surprises clauses were inconsistent with Pacific
Lumber’s statutory duty to fully mitigate the impacts of its incidental take as set forth in
Fish and Game Code section 2081, subdivision (b)(2). (Id. at pp. 506-514.) State argues
Pacific Lumber failed to perform a material condition of the SYP approval when it did
not prepare a single document based on a harvest yield of 176.2 million board feet per
year. It argues that because EPIC, supra, declared the SYP invalid on this basis, the SYP
was invalid ab initio. For the purposes of this opinion, we will assume the validity of the
SYP.
5
“Also required . . . under federal law was a[n HCP]. Although the ‘taking’ of a
federally listed endangered species, i.e., the killing, capturing or harming of such species
(16 U.S.C. § 1532(19)), is generally unlawful (id., § 1538), a permit for the taking of a
species incidental to an otherwise lawful activity, known as an [ITP], may be issued when
an applicant submits to the Secretary of the Interior a[n HCP]. (16 U.S.C.
§ 1539(a)(2)(A).) The plan is to specify, among other things, the impacts that will likely
result from the taking and the steps the applicant intends to employ to minimize and
mitigate those impacts. (Ibid.) . . . In addition to a federal [ITP], Pacific Lumber in this
case was required to obtain a state [ITP] for species listed as endangered or threatened
under the California Endangered Species Act (Fish & G. Code, § 2050 et seq.). [¶] In
conjunction with approval of the HCP, the United States Fish and Wildlife Service,
Pacific Lumber, and various state agencies entered into an Implementation Agreement for
the HCP, defining the obligations of each party under the HCP.” (EPIC, supra, 44
Cal.4th at pp. 471-472.) The deadline for obtaining the regulatory approvals necessary to
close the Agreement was March 1, 1999. (EPIC, supra, at p. 470.)
The 1996 Agreement was entered into by Maxxam, Inc., Pacific Lumber, the
United States, and the State, and was signed on behalf of the State by Douglas Wheeler,
who was then the Secretary of Resources. The Implementation Agreement was entered
into by various agencies of the federal government, California’s Department of Fish and
Game,4 California’s Department of Forestry and Fire Protection (CDF),5 and Pacific
4Effective January 1, 2013, California’s Department of Fish and Game was renamed the
Department of Fish and Wildlife. (Fish & G. Code, §37; Stats. 2012, ch. 559. § 5.)
5 California’s Department of Forestry and Fire Protection’s acronym was recently
changed from CDF to CAL FIRE. We use CDF here, because that is the acronym the
agency was known by during the administrative review process and throughout this
litigation.
6
Lumber. A letter of approval (the Approval Letter) was sent to Pacific Lumber’s
president and CEO by Richard Wilson, the Director of CDF on March 1, 1999.
Escrow instructions for the Agreement were executed on February 28, 1999. The
instructions required that the parties deposit into escrow, inter alia, the Implementation
Agreement, the Agreement, the SYP, and the HCP. These documents, together with the
Approval Letter are the documents on which Pacific Lumber relies in this action.
General Allegations
Avidity’s second amended complaint alleged the following. The federal and state
agencies provided written assurances that the implementation of the HCP and SYP would
allow harvest levels that were acceptable to Pacific Lumber, and that the harvest level in
the SYP was “approved at 176.2 mmbf [(million board feet)]” per year. Avidity also
alleged that since 1987, the state and regional water boards have waived waste discharge
requirements (WDR’s) for timber harvesting, and have taken the position that timber
harvesting operations were not subject to WDR’s because the Forest Practice Rules
constituted best management practices. Avidity claims this position was relied upon by
the parties in negotiating and carrying out the Headwaters Agreement.
A few months after the Agreement closed, the Legislature passed Senate Bill No.
390 (1999-2000 Reg. Sess.), requiring that all waivers of WDR’s that were in place in
1999 to sunset on January 1, 2003, and limiting the duration of any new waivers to five
years or less. (Wat. Code, § 13269.) The North Coast Regional Water Quality Control
Board (Regional Water Board) thereafter ordered Pacific Lumber to submit applications
for WDR’s for timber harvesting, and drafted and adopted eligibility requirements for
categorical waivers of WDR’s that effectively excluded Pacific Lumber from the waiver,
even for its THP’s that had already been approved.6
6The Forest Practice Act (Z’berg–Nejedly Forest Practice Act of 1973; Pub. Resources
Code, § 4511 et seq.) requires “ ‘that logging be carried out only in conformance with a
7
The Implementation Agreement contained an adaptive management provision, the
purpose of which was “to provide a mechanism to ensure that HCP prescriptions are
implemented in a manner that reflects sound science, taking into account new data and
analysis. Adaptive management also provides flexibility by allowing alternative
approaches for achieving biological goals under certain circumstances, in order that the
HCP can be implemented in a manner that is sensitive to both economic concerns and
biological necessities.” The Implementation Agreement’s adaptive management section
provided: “[Pacific Lumber] may at any time propose changes to elements of the
Aquatics Conservation Plan [(ACP)] that are not in conflict with [Assembly Bill No.]
1986[7] as part of adaptive management. At [Pacific Lumber]’s request, any such
changes proposed . . . shall be promptly reviewed by the peer review panel established
pursuant to Section 3.1.3.1(k) of this Agreement.[8] . . . The Wildlife Agencies will
consider [Pacific Lumber]’s proposed changes, the peer review panel’s written
evaluation, if any, and other available information. The Wildlife Agencies shall approve
[Pacific Lumber]’s proposed changes that are not in conflict with [Assembly Bill] 1986
unless they find, in writing, that [Pacific Lumber]’s proposed changes will impair the
ability of the plan to maintain or achieve, over time, properly functioning aquatic habitat
conditions.”
timber harvesting plan (THP or plan) submitted by the timber owner or operator and
approved by the [D]epartment [of Forestry and Fire Protection] after determining, with an
opportunity for input from state and county agencies and the general public, that the
proposed operations conform to the [Forest Practice] Act and rules and regulations.
([Pub. Resources Code,] §§ 4581-4582.75, 4583; [citations].)’ ” (EPIC, supra, 44
Cal.4th at p. 481.)
7 Assembly Bill No. 1986 (1997-1998 Reg. Sess.; hereafter Assembly Bill 1986) is the
legislation that authorized the State to enter into the Agreement. (Stats. 1998, ch. 615.)
8 This is apparently a reference to section 3.1.3.1. (xi) of the Implementation Agreement.
8
The complaint alleged that all of the agencies taking part in the watershed analysis
for the Freshwater Creek watershed except the Regional Water Board agreed to modify
certain prescriptions that had previously limited the areas that could be harvested, finding
harvest activities to be insignificant contributors of sediment in the watershed. The
complaint asserted that the Regional Water Board recommended to the peer review panel
that the prescriptions on harvesting be heightened, rather than relaxed, but that the peer
review panel did not adopt the Regional Water Board’s recommendations. The Regional
Water Board did not accept the resolution of the peer review panel and continued to
unilaterally seek to impose the conditions it had proposed to the peer review panel.
In 2003 the Legislature passed Senate Bill No. 810 (2003-2004 Reg. Sess.;
hereafter Senate Bill 810) (Pub. Res. Code § 4514.3), which gave the Regional Water
Board an additional mechanism to influence timber harvesting plans. Prior to the passage
of Senate Bill 810, timber operations were exempt from specified waste discharge
requirements if the federal Environmental Protection Agency certified that provisions of
the Forest Practice Act constituted the best management practices for silviculture
pursuant to the Federal Water Pollution Control Act. (Stats. 2003, ch. 900, § 1, p. 6592.)
Senate Bill 810 provided that both the State Water Resources Control Board and the
federal Environmental Protection Agency must certify that provisions of the Forest
Practice Act constitute best management practices for silviculture. (Pub. Resources
Code, § 4515.3, subd. (a).)
The complaint alleged that in December 2003, the Regional Water Board called
for the development of watershed-wide WDR’s (WWDR’s) for Pacific Lumber’s
scheduled operations in the Elk River and Freshwater Creek watersheds, even though
other timber companies were given a categorical waiver of WDR’s for their THP’s.
While the WWDR’s were being prepared, Pacific Lumber sought coverage for some of
its approved THP’s under the general WDR’s. The complaint alleged that the Regional
Water Board agreed to grant coverage to only a reduced number of Pacific Lumber’s
9
THP’s, thereby preventing Pacific Lumber from proceeding with scheduled operations
under THP’s already approved by the CDF as consistent with the HCP and SYP.
The complaint alleged that in December 2005, the Regional Water Board informed
Pacific Lumber that no further THP’s would be approved under the general WDR’s until
the WWDR process was complete and told Pacific Lumber to refrain from filing any
THP’s. It also alleged that the Regional Water Board stated it would veto any THP’s
filed by Pacific Lumber.
Key to the dispute is the State’s failure to approve Pacific Lumber’s THP’s.
Logging may be “ ‘carried out only in conformance with a [THP] submitted by the timber
owner or operator and approved by [CDF] after determining, with an opportunity for
input from state and county agencies and the general public, that the proposed operations
conform to the [Forest Practice] Act and rules and regulations. . . . Since 1976, the THP
preparation and approval process developed under the [Forest Practice] Act has been
certified as the functional equivalent to, and hence an adequate substitute for, the full
environmental impact report (EIR) process required by CEQA. [Citations.]’ [Citation.]”
(EPIC, supra, 44 Cal.4th at p. 481.)
Defendant moved for summary judgment as to the breach of contract cause of
action on the grounds: (1) the Agreement did not promise economic viability or
regulatory certainty, (2) the HCP and SYP9 did not assure economic viability, (3)
defendant’s only duty to defend the Agreement was against third parties, (4) the
enactment and enforcement of water quality laws is an exercise of the State’s police
power, and (5) the California Resources Agency director who signed the Agreement did
not have the authority to exempt Pacific Lumber from legislative actions or from actions
of the state or regional water boards.
9 Note that the SYP was ruled invalid in EPIC. (See ante, fn. 3.)
10
Defendant moved for summary judgment as to the breach of covenant of good
faith and fair dealing cause of action on the grounds: (1) the cause of action was
duplicative of the breach of contract claim; (2) there were no substantive duties beyond
the specific terms of the Agreement; (3) any alleged promise was not so clearly within
the contemplation of the parties that they deemed it unnecessary to express it; (4) a
promise pertaining to the exercise of police powers had to be explicit, unambiguous, and
in writing; and (5) Pacific Lumber had no reasonable expectation that the defendant
would exempt it from environmental regulations and guarantee its economic viability
when defendant repeatedly rejected Pacific Lumber’s requests to include such provisions.
Defendant moved for summary judgment on the cause of action for promissory
estoppel on the grounds: (1) Pacific Lumber did not perform any act that was different
from the act it performed as consideration for the contractual promise, (2) there was no
clear and unambiguous promise, and (3) applying estoppel would effectively nullify a
strong rule of policy adopted for the benefit of the public (protecting water quality).
The trial court appointed a discovery referee in the action and authorized the
referee to hear any motions for summary judgment. The referee recommended the denial
of the motion for summary judgment. As to the breach of contract cause of action, the
referee rejected defendant’s position that the only agreement the complaint alleged to
have been breached was the actual Agreement executed in 1996. The referee reasoned
that Avidity’s claim that the Agreement together with the closing documents reflected the
final terms of the agreement was adequately pled in the complaint, and since there was
substantially one transaction, the documents were to be taken together. Citing various
provisions in the Implementation Agreement and a letter to Pacific Lumber from the
federal government with which the CDF and Department of Fish and Game concurred in
part, the referee determined the defendant failed to show that the breach of contract claim
could not be established. The referee also rejected defendant’s summary judgment
11
motion as to the breach of the implied covenant of good faith and fair dealing and
promissory estoppel causes of action.
Defendant objected to the referee’s recommendation and requested that the trial
court independently review the motion. The trial court held a hearing on defendant’s
objection, and initially issued a tentative ruling adopting the recommendation in full to
deny defendant’s motion. However, after a hearing, the trial court reversed course and
declined to adopt the referee’s ruling. The court granted the motion for summary
judgment on the ground the Implementation Agreement included an express provision
waiving the right of either party to recover monetary damages for a breach of the
Agreement, a ground not specifically tendered by defendant in its notice of motion. The
trial court concurred with the referee’s conclusion that the Agreement should be
considered to include the closing documents for purposes of the motion.
DISCUSSION
Avidity’s arguments are based on the premise that the State has exercised its
legislative and environmental powers to circumvent the promises made to it by the State
in the Agreement thereby breaching the Agreement. In particular the complaint alleged
that all of the agencies taking part in the watershed analysis for the Freshwater Creek
watershed except the Regional Water Board agreed to modify certain prescriptions that
had previously limited the areas that could be harvested, finding harvest activities to be
insignificant contributors of sediment in the watershed. As a result the Regional Water
Board refused to sign the timber harvesting plans necessary to harvest at the level of
176.2 million board feet per year. It alleges that the federal and state agencies provided
written assurances that the implementation of the HCP and the SYP would allow harvest
levels that were acceptable to Pacific Lumber, and that the harvest level in the SYP was
“approved at 176.2 mmbf [(million board feet)]” per year.
The SYP was declared invalid in 2008 by the Supreme Court in EPIC, supra, 44
Cal.4th at p. 526, and statutory authority granted its agencies after the Agreement
12
impeded Avidity from reaching its agreed-upon harvest levels. Avidity’s arguments are
based upon the view that while an agreement to limit the future exercise of the State’s
police power may be unenforceable, the government nevertheless is liable in damages for
breaching the Agreement. In Winstar, supra, 518 U.S. 839, the court held that the
contracts at issue were enforceable in damages as long as the enforcement did not bar the
exercise of the government’s sovereign power. (Id. at p. 880.) The State argues that a
promise to limit the future exercise of police power cannot be enforced by a suit for
damages.10
We find it unnecessary to reach these arguments because the State’s contracts with
Pacific Lumber do not contain a promise that Pacific Lumber could harvest “176.2 mmbf
[(million board feet)]” of timber per year. The analysis follows.
I
Standard of Review
We review the trial court’s order granting summary judgment de novo. (Guz v.
Bechtel National, Inc. (2000) 24 Cal.4th 317, 334.) We review the issues framed by the
10 One of State’s arguments is that a promise to limit the future exercise of police power
(in this case compliance with water quality laws) cannot be enforced by a suit for
damages. Avidity argues that while an agreement to limit the future exercise of police
power may be unenforceable, the government is nevertheless liable in damages for
breaching the agreement. The case it cites is Winstar, supra, 518 U.S. 839. In that case,
three savings and loan associations contracted with the federal government to purchase
other failing savings and loans, and the government agreed to give the purchasing entities
certain favorable accounting treatment. (Id. at p. 858.) When federal rules changed, the
acquiring entities immediately fell out of compliance with regulatory capital
requirements, and two of the entities were seized and liquidated by thrift regulators. (Id.
at pp. 857-858.) The court held that the contracts were enforceable in damages as long as
such enforcement did not bar the exercise of the sovereign power. (Id. at p. 880.) State
argues that Winstar is a product of federal jurisprudence and does not apply to California
law, which holds that a contract which has as its object to exempt anyone from
responsibility for violation of the law is against public policy. (Civ. Code, § 1668.) I n
any event, our conclusion that the contracts do not contain an agreement that Pacific
Lumber could harvest at least a certain number of board feet make analysis of this
argument unnecessary.
13
pleadings to determine the scope of the issues tendered and to determine whether the
moving party has established facts negating the opponent’s claim and justifying a
judgment in the moving party’s favor. (AARTS Productions, Inc. v. Crocker National
Bank (1986) 179 Cal.App.3d 1061, 1064-1065.) In so doing we determine whether the
opposition to the motion demonstrates the existence of a triable issue of material fact.
(Ibid.) We review the evidence in the light favorable to the opposition to the motion, and
liberally construe the opposition’s evidence, while strictly scrutinizing the successful
party’s evidence and resolving any evidentiary ambiguities in the opposition’s favor.
(Saelzler v. Advanced Group 400 (2001) 25 Cal.4th 763, 768.) We are not bound by the
trial court’s reasons for granting summary judgment because we review the trial court’s
ruling, and not its rationale. (Kids’ Universe v. In2Labs (2002) 95 Cal.App.4th 870,
878.)
II
Breach of Contract
A. Damages Waiver
Avidity alleged that the State agreed Pacific Lumber would be able to manage and
harvest its timberland in an economically viable manner, and that no additional water
quality restrictions above those contained in the HCP would be imposed, except through
the adoption of TMDL’s (total maximum daily loads)11 or the approval of THP’s under
the SYP. Avidity alleged defendant breached this agreement by prohibiting Pacific
Lumber from harvesting at the level set forth in the SYP, by seeking to impose a lesser
rate of harvest on Pacific Lumber’s property, by precluding Pacific Lumber from
11 “A TMDL defines the maximum amount of a pollutant that can be discharged or
‘loaded’ into the relevant water segment from all sources. A TMDL must be established
at a level that will implement the applicable water quality objective.” (San Joaquin River
Exchange Contractors Water Authority v. State Water Resources Control Bd. (2010) 183
Cal.App.4th 1110, 1115.)
14
obtaining timely approval of THP’s, by imposing additional restrictions beyond those
contained in the Agreement, by frustrating Pacific Lumber’s ability to operate under the
THP’s approved by CDF, by imposing conditions on Pacific Lumber’s operation that
denied it the benefits of the HCP’s watershed analysis and adaptive management
provision, and by failing to enforce the terms of the Agreement.
The trial court granted the defendant’s motion for summary judgment on the
ground that a clause in the Implementation Agreement, which waives monetary damages,
applies to the whole agreement and precludes a claim of contract damages. The trial
court reasoned that since the Agreement consists of several documents, one of which is
the Implementation Agreement, and that the damages waiver applies to claims regarding
any of the documents.
We shall conclude that the damages waiver does not apply to every agreement
entered into between Pacific Lumber and the State, contrary to the trial court’s finding,
but it does apply to its own terms and to the HCP.
The damages waiver is found in the Implementation Agreement. Avidity claims
the waiver applies only to breaches of the Implementation Agreement and not to the
provisions on which it bases its claim. Several provisions of the Implementation
Agreement bear on this question.
The damages waiver provides:
“No Party shall be liable in damages to any other Party or other person for
any breach of this Agreement, any performance or failure to perform a
mandatory or discretionary obligation imposed by this Agreement or any
other cause of action arising from this Agreement. Notwithstanding the
foregoing sentence:
“(i) Retention of Liability. Each Party shall retain whatever liability
it would possess for its present and future acts or failure to act without
existence of this Agreement.” (Italics added.)
The term “this Agreement” is defined in the Implementation Agreement as the
“Agreement Regarding the Implementation of the [Pacific Lumber] Habitat Conservation
15
Plan by and among USFWS [(United States Fish and Wildlife Service)], NMFS
[(National Marine Fisheries Service)], CDFG [(California’s Department of Fish and
Game)], CDF and [Pacific Lumber].” However, the Implementation Agreement also says
its purpose is “to ensure implementation of each of the terms of the HCP [(Habitat
Conservation Plan)]” and to “describe remedies ... should any party fail to perform its
obligations as set forth in the HCP” and the Implementation Agreement. The
Implementation Agreement incorporates the conservation and management measures in
section six of the HCP, concerning aquatics conservation and watershed analysis, a key
portion of the Agreement that Avidity alleges the Regional Water Board, and
consequently the State, violated.
“ ‘A contract may validly include the provisions of a document not physically a
part of the basic contract. . . . “It is, of course, the law that the parties may incorporate by
reference into their contract the terms of some other document. [Citations.] But each
case must turn on its facts. [Citation.] For the terms of another document to be
incorporated into the document executed by the parties the reference must be clear and
unequivocal, the reference must be called to the attention of the other party and he must
consent thereto, and the terms of the incorporated document must be known or easily
available to the contracting parties.” ’ [Citations.] [¶] The contract need not recite that it
‘incorporates’ another document, so long as it ‘guide[s] the reader to the incorporated
document.’ (Compare Baker v. Aubry [(1989)] 216 Cal.App.3d [1259,] 1264 with Chan
v. Drexel Burnham Lambert, Inc. (1986) 178 Cal.App.3d 632, 644 [223 Cal.Rptr. 838].)”
(Shaw v. Regents of University of California (1997) 58 Cal.App.4th 44, 54.)
We conclude the HCP was incorporated into the Implementation Agreement. As
indicated, part of the HCP was expressly incorporated. Furthermore, the Implementation
Agreement was for the purpose of implementing all of the terms of the HCP, and for
describing the remedies for failure to perform the HCP. The damages waiver is part of
16
the description of remedies for failure to perform the HCP. Thus, the damages waiver
applies to the Implementation Agreement and the HCP.
B. The Headwaters Agreement Contains No Assured Harvest Level
Avidity attempts to construct an agreement guaranteeing a set harvest level out of
various documents in the record as well as the SYP. Avidity denies it is claiming the
State “guaranteed” Pacific Lumber’s harvest level, but it asserts Pacific Lumber had the
absolute right, barring circumstances outside the State’s control, to cut 176.2 million
board feet per year. The SYP is not in the record and was invalidated in EPIC on the
ground it could not be determined of what documents it was composed. As noted, we
proceed on the assumption that there is a viable SYP.
There is no express provision in any of the tendered documents assuring the State
would allow Pacific Lumber to harvest a set amount, nor is there any provision from
which such an assurance can be implied. Avidity places substantial reliance on the
referee’s recommendation to supply evidence of an express or implied term guaranteeing
Pacific Lumber a minimum harvest level. As we shall demonstrate, the contract
provisions cited in the referee’s recommendation were either: (1) taken from the
Implementation Agreement, thus subject to the damages waiver; (2) from the Letter
Agreement, which exclusively related to clarification of aspects of the HCP and the
Implementation Agreement--both subject to the damages waiver; or (3) a quote from the
referee’s own report, and not evidence of any contract term whatsoever.
Avidity alleged that defendant agreed Pacific Lumber’s timber harvesting would
be regulated by an HCP and SYP in a form and substance acceptable to Pacific Lumber.
It further alleged that this contract term “meant that no additional water quality
restrictions above those contained in the HCP would be imposed except through the
adoption of TMDLs (or in approving THPs under the SYP).” Avidity argues the state
agreed that Pacific Lumber would be able to operate its forestry business “economically”
and that the authorized harvest level would be “economically viable.”
17
However, Avidity asserts in its reply brief that it never argued that the Agreement
guaranteed Pacific Lumber’s economic viability or exempted Pacific Lumber from State
water quality laws. Instead, it argues that the Agreement assured Pacific Lumber the
right to log 176.2 million board feet per year during the first decade of the Agreement.
We take Avidity at its word and address only that allegation as the basis of the breach of
contract cause of action.12
1. The Documents Making up the Headwaters Agreement
We examine the individual documents Avidity Claims constitute the entire
agreement between the parties.
a. The 1996 Headwaters Agreement
The 1996 Agreement provided for the development of an HCP, SYP, and ITP.
The State agreed to use its best good faith efforts to achieve expedited development and
processing of an SYP, and to review and approve the SYP. The 1996 Agreement
contains no promises as to harvest level.
b. The SYP
As indicated, the SYP is not a part of the record, so it is impossible to tell whether
it contained the contract term Avidity alleges, and moreover it was invalidated in EPIC,
supra, 44 Cal.4th at p. 526. In any event, Avidity does not point to any particular
language in the SYP containing a promise that Pacific Lumber had the right to log 176.2
million board feet per year during the first decade of the Agreement. Indeed, an SYP is
not itself an agreement at all. It is a plan that may be submitted by the landowner for the
purpose of “addressing long-term issues of sustained timber production, and cumulative
12 Avidity’s waiver and our determination that there was no contract term assuring
Pacific Lumber it could reach a definite harvest level makes it unnecessary for us to
consider State’s argument that CDF and the Department of Fish and Game were not
authorized to exempt Pacific Lumber from the state’s water quality laws and that the SYP
and HCP do not exempt Pacific Lumber from the state’s water quality laws.
18
effects analysis which includes issues of fish and wildlife and watershed impacts on a
large landscape basis.” (Cal. Code Regs., tit. 14, § 1091.1, subd. (b).) The SYP
addresses “issues of sustained timber production, watershed impacts and fish and
wildlife . . . .” (Cal. Code Regs., tit. 14, § 1091.2.) The SYP is a demonstration by the
landowner as to how it “will achieve maximum sustained production . . . while giving
consideration to regional economic vitality and employment at planned harvest levels
during the planning horizon.” (Cal. Code Regs., tit. 14, § 1091.45, subd. (a).) The role
of the CDF director is to review and approve or disapprove the SYP. (Cal. Code Regs.,
tit. 14, § 1091.10.) In doing so, the director considers whether the SYP satisfies the
requirement of maximum sustained production and whether the SYP identifies potentially
significant adverse impacts and includes feasible measures necessary to mitigate or avoid
such impacts. (Cal. Code Regs., tit. 14, § 1091.10.)
Avidity claims the SYP/HCP ended up as Appendix Q to the final Environmental
Impact Statement/Environmental Impact Report. Appendix Q is included in the record.
It states that the six volume SYP/HCP is incorporated by reference. Appendix Q is a
“crosswalk” of the key components of the SYP/HCP. The closest Appendix Q comes to
the promise Avidity claims is a table entitled “Inventory, Growth, and Harvest Volume
Estimates.” It shows an estimated harvest for Period 1 (an undefined period) as
“1,761,516 mbfn/Decade.”
The fact that CDF approved a plan that would allow a certain maximum rate of
timber harvesting in no way constitutes an assurance by CDF that the landowner would
be able to harvest at that rate. Approval of the SYP is simply an acknowledgement that
the plan complies with the Forest Practice Rules and that the plan will permit a certain
annual rate of harvest. But, as CDF was careful to point out in its approval letter, the
permitted amount was the “maximum amount” allowed. (Italics added.) This cannot be
construed as an unqualified approval by the State that Pacific Lumber could harvest that
amount. As CDF made clear in the Approval Letter, the harvest volume in the SYP was
19
a “limitation[,]” there was a “possibility of further constraints on harvesting based on
site-specific analysis[,]” and Pacific Lumber would be “required to submit Timber
Harvest Plans (THPs) to CDF” which would be “subject to environmental review under
the California Environmental Quality Act (CEQA).”
c. The HCP
Avidity claims that the HCP, to which the damages waiver applies, included
adaptive management provisions allowing the HCP to be implemented in a manner
sensitive to Pacific Lumber’s economic concerns and that committed the state to consider
Pacific Lumber’s operations needs. In fact, the HCP did allow the use of adaptive
management. The HCP explains that its effectiveness will be assessed to determine
whether, over time, management of the aquatic habitat is maintaining or achieving proper
functioning. The HCP provided that the following circumstances would warrant a
change in the plan: (1) the plan is not substantially moving the aquatic habitat toward
achieving properly functioning habitat conditions; (2) a more cost-effective technique
exists to attain the same outcome; (3) Pacific Lumber can gain flexibility in the
prescriptions and still attain the same conditions; and (4) adaptive management will
ensure that the plan maintains or achieves the goal of a properly functioning aquatic
condition.
The HCP provided that the wildlife agencies (which included CDF and the
Department of Fish and Game) would approve Pacific Lumber’s proposed changes under
adaptive management, as long as they were not in conflict with Assembly Bill 1986, the
legislation authorizing the Agreement, and would not impair the ability to maintain or
achieve properly functioning aquatic habitat conditions.13 However, while the adaptive
13 Assembly Bill 1986 is the legislation authorizing the purchase of Pacific Lumber’s
property, appropriating funds for that purpose, and imposing mitigation measures to
20
management provisions in the HCP were sensitive to Pacific Lumber’s economic
concerns, they did not provide assurances that Pacific Lumber could harvest at a
particular level.
Avidity’s claim that the HCP “committed the State to consider [Pacific Lumber]’s
operational needs and a cost-benefit analysis to ‘determine whether the benefits of
protective measures being implemented by [Pacific Lumber] in the field are proportional
to the costs to the company’ ” are not quite accurate. The HCP merely stated that cost-
benefit effectiveness studies are needed to make such a determination, and that such
studies could identify alternate approaches that would cost Pacific Lumber less. Again,
the State did not commit to assure Pacific Lumber could operate at a lower cost.
In fact, evidence was adduced that Pacific Lumber attempted to negotiate an
override in the HCP that would guarantee it a certain harvest level, but the federal
government would not agree to an override at any level.14 Thus, while the state and
federal governments attempted to build flexibility into the HCP which might have
allowed Pacific Lumber to harvest at the maximum level predicted, there was no
agreement to any particular harvest level. Furthermore, the HCP is subject to the
damages waiver, so breach of any of its terms would not be a basis for a breach of
contract cause of action.
counteract the effects of Pacific Lumber’s logging operations. (EPIC, supra, 44 Cal.4th
at p. 474.)
14 David Hayes, who was the lead negotiator for the United States in the Headwaters
negotiations, testified in his deposition that Pacific Lumber negotiators were looking for
an override to the HCP. “As I recall, they were requiring -- were saying that they needed
to have a guaranteed harvest of X number of board feet and that they wanted the HCP to
either guarantee them that amount of board feet or, if that amount of board feet could not
be produced, the HCP would be back to the drawing board, something to that effect.”
Hayes was asked if the federal government ever agreed to an override at that level. He
replied, “No. We would not agree to an override at any level -- a per se override. This
was a science-based Habitat Conservation Plan. It was designed to protect the species.”
21
d. The Implementation Agreement
As indicated, the Implementation Agreement was entered into between various
federal agencies, CDF, the Department of Fish and Game, and Pacific Lumber. The
Implementation Agreement was executed for the purpose of implementing the HCP, and
to describe the remedies for failing to perform any obligations under the HCP and the
Implementation Agreement. As indicated, the Implementation Agreement expressly
excluded from such remedies any liability for damages. As there can be no breach of
contract cause of action for a violation of any term of the Implementation Agreement, we
need not further search its terms for a promise of a certain harvest level.
e. The Approval Letter
Avidity argues that the March 1, 1999, letter from CDF approving the SYP (the
Approval Letter) is “arguably . . . the most important part of the Headwaters
Agreement . . . .” Avidity argues that the letter approved Pacific Lumber’s use of SYP
alternative 25, which specified a harvest level of 176.2 million board feet per year.
Avidity claims the March 1, 1999, letter gave Pacific Lumber the right to harvest 176.2
million board feet of timber in the first decade of the Agreement. Not so. The letter finds
that alternative 25 to the SYP is “in conformance with Forest Practice Rules . . . .”
Alternative 25 is not in the record; however, EPIC stated that under alternative 25, “the
long-term sustained yield was set at 190 mmbf [(million board feet)] per year, and the
projected conifer harvest level in the first decade was 178.8 mmbf [(million board feet)]
per year – similar to the projections found in appendix Q to the final EIS/EIR
[(Environmental Impact Statement/Environmental Impact Report)].” (EPIC, supra, 44
Cal.4th at p. 476.) Alternative 25 “was based on assumptions about results of the
required watershed analysis that were more optimistic” than the alternative previously
approved by CDF. (Ibid.)
Assuming the language of the Approval Letter finding alternative 25 “in
conformance with Forest Practice Rules” can be read as approval of alternative 25, this
22
does not constitute an agreement on the part of the State that Pacific Lumber was assured
the right to harvest at that level. As earlier noted, the letter itself stated that CDF’s
finding was subject to the conditions described in the letter, and specifically stated that
the volume described in alternative 25 was a “limitation[,]” was “the maximum amount
of volume[,]” and that further constraints were possible. Thus, the March 1, 1999,
Approval Letter cannot be construed as a right to harvest at a certain level.
Avidity also claims there was a signed agreement that the State “expected” Pacific
Lumber to harvest 176.2 million board feet, not that this figure was the maximum harvest
expected. However, the record pages cited by Avidity for this statement do not contain
any such agreement. We need not consider a party’s statement that is unsupported by
proper reference to the record. (Regents of University of California v. Sheily (2004) 122
Cal.App.4th 824, 827, fn. 1.) We also do not view any state policy encouraging
maximum sustained yield levels of timber harvest to constitute an agreement assuring
Pacific Lumber it could harvest at a particular level.
2. The Referee’s Recommendation
Avidity finally makes a brief reference to the referee’s recommendation, and
claims that it disproves the State’s theory that there was no evidence to support a contract
claim. We therefore turn to the referee’s recommendation.
The following were set forth by the referee as a “non-exclusive list of statements,
which either contain the alleged express promises or may support a finding of similar
implied promises . . . .”
a. From the Implementation Agreement:
i. “The purpose of this Section 6.2.3 is to provide Pacific Lumber ‘No Surprises’
like assurances consistent with [Department of Fish and Game] regulations given the
conservation and mitigation measures provided pursuant to the HCP and other relevant
factors.” The “no surprises” assurances are provisions that limit in advance Pacific
Lumber’s obligation to mitigate various impacts on endangered and threatened species.
23
(EPIC, supra, 44 Cal.4th at p. 507.) EPIC held that the “no surprises” clause in Pacific
Lumber’s ITP were inconsistent with state law. (Id. at p. 506-514.)
ii. “[Department of Fish and Game] further agrees that unless [Pacific Lumber]
otherwise consents, Attachment No. 4 to the HCP contains the complete and exclusive
list of conservation and mitigation measures and planned response that may be required
of [Pacific Lumber] to respond to each Changed Circumstance.”
iii. “If additional conservation and mitigation measures are deemed necessary by
[Department of Fish and Game] to respond to a Changed Circumstance and such
measures were not provided for pursuant to the HCP, [Department of Fish and Game]
will not require any new, additional or different conservation and/or mitigation measures
from [Pacific Lumber] in addition to those provided for pursuant to the HCP without the
consent of [Pacific Lumber].”
iv. “The purposes of [the Implementation] Agreement are (1) to ensure
implementation of each of the terms of the HCP; . . . and (3) to provide long term
assurances to [Pacific Lumber] that as long as the terms of the HCP, the Federal Permit,
the State Permit and this Agreement are fully performed, no additional conservation or
mitigation will be required of [Pacific Lumber] to minimize and mitigate the impacts of
the Take of the Covered Species on the Covered Lands except as provided in the HCP
and this Agreement or required by law.”
v. “[Pacific Lumber] is agreeing to substantial commitments of land, natural
resources, money and other property for the conservation of the Covered Species and
their habitats, and is agreeing to other substantial restrictions on the use of the Covered
Lands based on the assurances provided by the Agencies in this Agreement.”
vi. “These commitments would not have been made by [Pacific Lumber] but for
the assurances of the Agencies provided in the HCP and this Agreement.”
The above statements are apparently cited by Avidity in support of its argument
that the State, in particular the Regional Water Board, had no authority under the
24
Agreement to require additional or different conservation or mitigation measures, and
that by requiring such measures, it breached the Agreement.
b. From a March 1, 1999, letter to Pacific Lumber from the United States Fish and
Wildlife Service and the National Oceanic and Atmospheric Administration, which was
agreed to in part by CDF and the Department of Fish and Game (the Letter Agreement),
the referee cited the following:
i. “The HCP includes an adaptive management provision that explicitly takes
economic factors into account.”
ii. “The provision allows [Pacific Lumber], at any time, to propose changes that
are consistent with Assembly Bill 1986 to any of the plan’s prescriptions based on
information which may be related to the cost effectiveness of particular measures or to
[Pacific Lumber]’s ability to choose among equally effective prescriptions.”
iii. “In applying the adaptive management provision, the Services will be guided
by the [Endangered Species Act] permit issuance criteria, and to the extent changes
proposed by [Pacific Lumber] will not result in jeopardy, the Services will consider their
practicability, which includes cost to [Pacific Lumber] and economic feasibility and
viability.”
iv. “Finally, we point out that the project evaluated by the Services in their joint
biological opinion assumes a harvest volume of 176.2 mmbf/yr [(million board feet per
year)] over the first ten years of the permit, the volume identified in Appendix Q of the
Final Environmental Impact Statement/Environmental Impact Report.”
These statements relate to Avidity’s argument that State promised Pacific Lumber
it could harvest an average of 176.2 million board feet per year, because this was the
level that was acceptable to Pacific Lumber.
c. The referee’s report and recommendation also includes the following statement,
which it claims is taken from the Implementation Agreement, the March 1, 1999,
Approval Letter, or the March 1, 1999, Letter Agreement:
25
i. “On March 1, 1999, CDF approved [Pacific Lumber]’s Sustained Yield Plan
(SYP) with a maximum harvest volume limitation of 176.2 million board feet per year for
the first decade.”
In fact, this statement is a quote from the referee’s own report. The report cites the
March 1, 1999, Approval Letter as the source. The particular sentence quoted is not in
the Approval Letter. Rather, the Approval Letter stated:
“The harvest volume limitation in the SYP is the maximum amount
of volume that may be harvested, based on a ten year rolling average. This
volume reflects a range of outcomes that would be generated by
prescriptions contained in the HCP during the first ten years covered by the
SYP. It is recognized that the range of outcomes also includes the
possibility of further constraints on harvesting based on site-specific
analysis.
“Pursuant to this SYP, [Pacific Lumber] will be required to submit
Timber Harvesting Plans (THPs) to CDF. These plans will be reviewed for
conformance with the Forest Practice Rules and will be subject to
environmental review under the California Environmental Quality Act
(CEQA).” (Italics added.)
First, to the extent the Implementation Agreement or HCP contain any express or
implied agreement to assure Pacific Lumber economic viability, or entitlement to a
certain harvest level, or exemption from water quality laws, the trial court was correct in
concluding Pacific Lumber can claim no damages as a result of any express or implied
promise in the Implementation Agreement or HCP because of the express waiver of
damages. This means none of the statements in 2. a., above, are actionable.
Second, although the statements from the March 1, 1999, Letter Agreement
indicate a willingness on the part of the government entities to work with Pacific Lumber
to allow it to harvest the maximum amount possible in the circumstances, the language
cannot be interpreted as either an express or implied assurance to Pacific Lumber of a
certain harvest level, of economic viability, or of an exemption from further
environmental review. Even if we could construe them as such, the Letter Agreement
26
stated that its purpose was to address concerns with the administration of the HCP, and
that it served to “clarif[y] certain aspects of the HCP in the Implementation
Agreement . . . .” As previously stated, both the HCP and the Implementation Agreement
are subject to the damages waiver. The Letter Agreement, which was for the purpose of
clarifying those documents, could not confer a separate promise unencumbered by the
damages waiver.
Third, the statements in the March 1, 1999, Approval Letter from CDF, written the
same day as the Letter Agreement, clarify that the harvest volume allowed by the SYP is
the maximum volume that could be harvested, that there could be further constraints on
harvesting, and that there would be further environmental review.
Finally, we do not find an agreement to assure Pacific Lumber a minimum harvest
level when there is no explicit agreement to that effect in any of the documents making
up the Agreement. The parties were sophisticated players with knowledgeable legal
counsel engaged in high-profile negotiations. We have no doubt they knew how to draft
a provision assuring a minimum harvest level and foreclosing any further regulatory
review if that was their mutual intent. That they did not draft such a provision is a clear
indication there was no mutual agreement on the issue, and we will not cobble together
such an agreement from miscellaneous provisions in the documents tendered in this
action.
III
Breach of the Covenant of Good Faith and Fair Dealing
Rests upon the Existence of a Specific Contractual Obligation, and There Was None
Avidity alleged in its complaint that defendant has “defaulted on its obligations,
unfairly interfered with Pacific Lumber’s right to receive the benefits of the contract, and
materially breached its obligation to act fairly and in good faith toward Pacific
Lumber . . . .”
27
The complaint alleged in part that the Regional Water Board delayed a hearing for
the approval of WDR’s which were necessary for the approval of Pacific Lumber’s
THP’s. The complaint alleged that the Regional Water Board’s actions were designed to
delay Pacific Lumber’s operations. Avidity argues that in order for Pacific Lumber to
harvest at the rate it expected under the Agreement, defendant had to consider Pacific
Lumber’s THP’s in a timely manner, and that the delay in processing the THP’s denied
Pacific Lumber the contemplated benefits of the Agreement.
To the extent Avidity argues the State breached the implied covenant of good faith
and fair dealing by failing to allow Pacific Lumber to harvest at the rate of 176.2 million
board feet per year, we may disregard the claim as superfluous since it relies on the same
alleged acts and seeks the same relief claimed in Avidity’s breach of contract cause of
action. (Bionghi v. Metropolitan Water Dist. (1999) 70 Cal.App.4th 1358, 1370.)
However, Avidity argues that in order to achieve its expected harvest, the State
had to consider its THP’s in a timely manner, but instead the State delayed and the Water
Board obstructed the processing and approval of the THP’s. Defendant agrees that the
heart of Avidity’s implied covenant claim is the expectation that a certain number of
THP’s would be approved within a certain period of time. In response to this basis for
claiming breach of the covenant of good faith and fair dealing, defendant argues that the
very terms Avidity seeks to imply into the contract are terms that were rejected during
negotiations between the parties. Quoting Third Story Music, Inc. v. Waits (1995) 41
Cal.App.4th 798, 804, defendant argues, that before we may enforce an implied covenant,
“ ‘it must appear from the language used that [the promise] was so clearly within the
contemplation of the parties that they deemed it unnecessary to express it’ and ‘it can be
rightfully assumed that [the promise] would have been made if attention had been called
to it.’ ”
“The implied promise [of good faith and fair dealing] requires each contracting
party to refrain from doing anything to injure the right of the other to receive the benefits
28
of the agreement.” (Egan v. Mutual of Omaha Ins. Co. (1979) 24 Cal.3d 809, 818.) “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.” (Love v. Fire Ins. Exchange (1990) 221 Cal.App.3d 1136, 1153.)
Although breach of a specific provision of the contract is not a necessary
prerequisite to a claim of breach of the implied covenant, “[i]t is universally recognized
the scope of conduct prohibited by the covenant of good faith is circumscribed by the
purposes and express terms of the contract.” (Carma Developers (Cal.), Inc. v. Marathon
Development California, Inc. (1992) 2 Cal.4th 342, 373, (Carma).) “The implied
covenant of good faith and fair dealing rests upon the existence of some specific
contractual obligation. (Foley v. Interactive Data Corp. (1988) 47 Cal.3d 654, 683–684,
689–690.) ‘The 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.’ (Id. at p. 690.)” (Racine & Laramie,
Ltd. v. Department of Parks & Recreation (1992) 11 Cal.App.4th 1026, 1031-1032.)
The implied covenant of good faith and fair dealing does not impose substantive
terms and conditions beyond those to which the parties actually agreed. (Guz v. Bechtel
National Inc., supra, 24 Cal.4th at p. 349.) “The covenant of good faith and fair dealing,
implied by law in every contract, 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 covenant thus 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.” (Id. at pp. 349-350.)
As recognized in Carma, supra, 2 Cal.4th at p. 373, it is “a simple matter to
determine whether given conduct is within the bounds of a contract’s express terms. . . .
29
Difficulty arises in deciding whether such conduct, though not prohibited, is nevertheless
contrary to the contract’s purposes and the parties’ legitimate expectations.” Fortunately
in this case, the record contains evidence relative to the parties’ legitimate expectations in
the form of contract terms that were proposed, but not included in the final agreement.
Relative to whether the parties contemplated an agreement on the timely approval
of THP’s, it is undisputed that Pacific Lumber attempted, but failed to insert the
following language into the Agreement:
“e. As a result of transfer of the Headwaters Forest by Pacific
Lumber to the United States, together with the Preserved Elk River
Property retained by the United States, acknowledgement by the United
States and California that there is no need for other mitigation for any
present or future timber-related activities on the Resulting Pacific Lumber
Timber Property, same to be evidenced by written instruments in form and
substance satisfactory to Pacific Lumber.
“f. The United States and California providing written assurances to
Pacific Lumber that the approval of any otherwise lawful timber harvest
plan filed by Pacific Lumber or its assignees with respect to the Resulting
Pacific Lumber Timber Property will not be denied, restricted or otherwise
delayed by reason of any law or rule of law, or any judicial or
administrative interpretation thereof, of the United States or California, or
any subdivision thereof, with respect to habitat, critical habitat, threatened
or endangered species or similar matters, all such assurances to be in form
and substance satisfactory to Pacific Lumber.
“g. The United States and California providing Pacific Lumber with
instruments in form and substance satisfactory to Pacific Lumber wherein
the United States and California agree to use their best efforts and take all
necessary and appropriate actions to cause each timber harvest plan with
respect to the Resulting Pacific Lumber Timber Property to be approved by
the applicable agency or authority within ___ days after such plan is filed
by Pacific Lumber.” (Italics added.)
As Robert Baum, who was involved in the negotiations on behalf of the United
States, testified in his deposition, “we weren’t going to negotiate along those lines.”
Baum admitted that they agreed to work with Pacific Lumber and their biologists to come
up with an acceptable HCP, but that they would not agree to Pacific Lumber’s language.
30
It is also undisputed that a few days before the Agreement was executed, Pacific
Lumber proposed including in the Agreement a requirement that the parties agree to THP
language. This provision was not included in the executed Agreement. Importantly, the
parties agreed in the executed Agreement to use their best efforts “to achieve expedited
development and submission . . . and processing . . . of an [ITP]” and an SYP. They also
agreed to certain procedures with regard to the development of an HCP, including that
the HCP would be subject to the Department of the Interior’s “No Surprises” policy.15 A
“no surprises” clause limits in advance the obligation to mitigate various impacts on
endangered and threatened species. (EPIC, supra, 44 Cal.4th at p. 507.) The Agreement
provided that the United States Fish and Wildlife Service and the National Marine
Fisheries Service would “expedite” consideration of an ITP and decide on Pacific
Lumber’s application for an ITP “as soon as practicable. . . .” The Agreement also
provided that the State would “expedite” consideration of an SYP, and that the State
would “use its best efforts to review and approve the SYP.” There was no similar
language regarding the contents or procedure for consideration and issuance of a THP.
The evidence thus indicates that the wording and timing of the approval of THP’s
was a subject of negotiation between the parties, but that the governmental entities did
not agree to Pacific Lumber’s proposals on that score. Therefore, the parties did not
contemplate as a part of the contract that Pacific Lumber’s THP’s would not require
further mitigation, that the State would assure timely approval of Pacific Lumber’s
THP’s, or that the THP’s would be approved within a certain number of days. The
implied covenant of good faith and fair dealing cannot be extended to create an obligation
not intended by both parties. (See Pasadena Live v. City of Pasadena (2004) 114
Cal.App.4th 1089, 1094 (Pasadena Live).)
15 As indicated in part II A, the terms of the HCP are subject to the damages waiver.
31
“The covenant of good faith finds particular application in situations where one
party is invested with a discretionary power affecting the rights of another.” (Carma,
supra, 2 Cal.4th at p. 372.) In such cases, the covenant will be implied when one party is
given absolute discretion over whether or not to perform. (Third Story Music, Inc. v.
Waits, supra, 41 Cal.App.4th at p. 803.) The benefits of the contract in such cases equal
the performance of the other party’s obligations under the contract. Courts imply a
covenant of good faith and fair dealing in such contracts to create a binding contract in
the face of a claim that the contract is illusory. (Storek & Storek, Inc. v. Citicorp Real
Estate, Inc. (2002) 100 Cal.App.4th 44, 57.) However, no covenant of good faith and fair
dealing is imposed where the contract is adequately supported by adequate consideration
regardless of the discretionary power. (Ibid.)
The two cases on which Avidity primarily relies are cases involving the
discretionary power of one party to perform its part of the bargain.
In Pasadena Live, supra, 114 Cal.App.4th at p. 1094, the agreement provided that
the plaintiff would pay for improvements to a city-owned amphitheater, and in return the
city would give the plaintiff credit against the license fees paid to the city for plaintiff’s
productions. In this manner, plaintiff had the opportunity to recoup its investment. (Id.
at p. 1093.) The agreement expressly provided that the city would not promise or
guarantee that it would approve the plaintiff’s applications. The court held that the city
could not refuse to consider the plaintiff’s proposals without violating the covenant of
good faith and fair dealing. (Ibid.)
Locke v. Warner Bros., Inc. (1997) 57 Cal.App.4th 354 (Locke), involved a
contract between a film director and Warner Brothers studio. The contract provided for a
“ ‘first look’ ” deal in which the director would, for an annual fee, submit any picture she
was interested in developing to Warner before submitting it to any other studio. (Id. at p.
358.) The contract also provided the studio could either use the director’s services, or
pay the director an agreed upon sum. (Ibid.) The director adduced evidence that the
32
studio breached the agreement by refusing to consider any of her proposed projects. The
court held that “when it is a condition of an obligor’s duty that he or she be subjectively
satisfied with respect to the obligee’s performance, the subjective standard of honest
satisfaction is applicable.” (Id. at p. 363.) The court concluded that the evidence raised a
triable issue as to whether the studio breached its agreement by not considering the
director’s proposals on their merits. (Id. at p. 364.)
Both of these cases involved agreements where the performance of one party’s
obligation (i.e., waiving license fees, or producing movies) was dependent on that party’s
own discretion. The holding in both cases was that the party whose performance was
discretionary could not completely and arbitrarily withhold its discretion. Thus in
Pasadena Live, supra, 114 Cal.App.4th 1089, the court stated that the plaintiff should
have had the opportunity to submit production proposals, but that the city had barred
plaintiff’s submissions. (Id. at p. 1093.) Likewise in Locke, supra, 57 Cal.App.4th 354,
the court held that the plaintiff had adequately alleged that the studio deprived Locke of
the benefit of her bargain by refusing to consider her proposals. (Id. at p. 363, fn. 3.)
These cases are dissimilar from the one before us in two ways. First, the essential
part of State’s performance under the Agreement was not the approval of THP’s, but the
payment of a significant amount of money and timberland. These payments were not
subject to the State’s discretion. As stated, no covenant of good faith and fair dealing is
imposed where the contract is adequately supported by adequate consideration regardless
of the discretionary power. (Storek & Storek, Inc. v. Citicorp Real Estate, Inc., supra,
100 Cal.App.4th at p. 57.)
Second, the parties attempted to describe the limits of Pacific Lumber’s ability to
harvest its remaining lands by adopting certain long-range environmental documents. By
all accounts the specific terms of these documents were negotiated in minute detail. Not
only did the parties fail to include any obligation on the part of the State to approve
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Pacific Lumber’s THP’s in any particular time frame, there was evidence Pacific Lumber
wanted such an agreement but was unable to obtain it.
Before an implied covenant may be imposed: “ ‘ “(1) the implication must arise
from the language used or it must be indispensable to effectuate the intention of the
parties; (2) it must appear from the language used that it was so clearly within the
contemplation of the parties that they deemed it unnecessary to express it; (3) implied
covenants can only be justified on the grounds of legal necessity; (4) a promise can be
implied only where it can be rightfully assumed that it would have been made if attention
had been called to it; (5) there can be no implied covenant where the subject is
completely covered by the contract.” ’ [Citations.]” (Third Story Music, Inc. v. Waits,
supra, 41 Cal.App.4th at p. 804.) We cannot assume that the State would have promised
to approve Pacific Lumber’s THP’s in a timely manner if its attention had been called to
the issue, when there is evidence that the issue was actually considered and rejected as
part of the agreement. Pacific Lumber could have had no justifiable expectations in that
regard. Also, there is no legal necessity to imply such a covenant because the agreement
is otherwise supported by adequate consideration and is not illusory.
IV
Promissory Estoppel Applies
Only When Consideration is Lacking
In the third cause of action, Avidity alleged that Pacific Lumber reasonably relied
on various promises and assurances made by defendant to Pacific Lumber’s detriment.
Specifically, “Pacific Lumber agreed to significant limitations on its conduct of timber
operations in reliance upon Defendant’s promises that Pacific Lumber would be allowed
to harvest as provided under the HCP and SYP.”
The trial court granted summary judgment on this cause of action because it
concluded that promissory estoppel is not applicable unless no actual consideration was
given by the promisee. It found “plaintiffs’ agreement to submit to significant regulatory
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limitations on the conduct of its timber operations was a critical part of the exchange of
promises between the parties that was memorialized in the Headwaters Agreement and
the closing documents. As alleged in the breach of contract cause of action, it was the
performance that defendant requested and bargained for in exchange for its alleged
promise to provide regulatory assurances that plaintiffs could harvest at an economically
viable level, and thus constituted consideration for defendant’s promise.” Because the
complaint alleged consideration for the defendant’s alleged promise, promissory estoppel
is inapplicable. We agree.
Promissory estoppel is a doctrine which binds a promisor if the promisor should
reasonably have expected a substantial change of position in reliance on the promise, and
if injustice can be avoided only by the enforcement of the promise. (Youngman v.
Nevada Irrigation Dist. (1969) 70 Cal.2d 240, 249.) “The purpose of this doctrine is to
make a promise binding, under certain circumstances, without consideration in the usual
sense of something bargained for and given in exchange. If the promisee’s performance
was requested at the time the promisor made his promise and that performance was
bargained for, the doctrine is inapplicable.” (Ibid., italics added.) “In other words, where
the promisee’s reliance was bargained for, the law of consideration applies; and it is only
where the reliance was unbargained for that there is room for application of the doctrine
of promissory estoppel.” (Healy v. Brewster (1963) 59 Cal.2d 455, 463.)
Avidity’s promissory estoppel cause of action alleged that Pacific Lumber acted in
reliance on certain alleged promises when it agreed to significant limitations on its
conduct of timber operations. In its breach of contract cause of action, Avidity alleged
that Pacific Lumber’s duties under the Agreement were to accept substantial restrictions
on its conduct of timber operations, as well as to dismiss pending litigation and to transfer
the Headwaters Forest to the United States. Because Pacific Lumber’s reliance in
accepting substantial restrictions on its conduct of timber operations, in dismissing
pending litigation, and in transferring the Headwaters Forest was bargained for, it was
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consideration for the promises made by defendant, and the doctrine of promissory
estoppel is inapplicable.
Avidity argues its promissory estoppel claim is alternative to its breach of contract
cause of action, and that it is asserting that the State’s promises can be enforced even if
we determine that the promises of harvest-level certainty were not supported by
consideration. However, our conclusion is that promises of harvest-level certainty were
never made, not that they were unsupported by consideration on the part of Pacific
Lumber. There is no question that Pacific Lumber gave consideration for the Agreement
by agreeing to limitations on the conduct of its business, and by transferring the
Headwaters Forest to the United States.16 Avidity’s claim of promissory estoppel fails
because the reliance it claims was bargained-for consideration under the Agreement.
DISPOSITION
The judgment granting the summary judgment motion is affirmed. Respondent
shall recover costs on appeal. (Cal. Rules of Court, rule 8.278(a)(1), (2).)
BLEASE , Acting P. J.
We concur:
ROBIE , J.
DUARTE , J.
16 Because we conclude summary adjudication of the promissory estoppel cause of
action was correct on the ground Pacific Lumber’s reliance was a bargained-for
exchange, we do not address defendant’s additional arguments that promissory estoppel
does not apply to future exercises of police power and the alleged promise was not clear
and explicit.
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