## Facts

- In 1974, Racine & Laramie, Ltd., Inc. entered a 40-year concession contract with the California Department of Parks and Recreation to operate a tobacco-related business in Old Town San Diego State Historic Park.
- The contract included a clause stating the parties may modify the agreement by mutual consent in a written amendment.
- In the early 1980s, Racine sought to expand into a larger operation, including food service and on-premises alcohol sales, which required governmental approvals under statutes governing park concessions.
- In 1983, the Park and Recreation Commission authorized the Department to permit expansion, conditioned on amending the concession contract to conform to other concession contracts and to include additional required terms.
- The Legislature authorized renegotiation and directed the Department to attempt to renegotiate the rent for Racine’s existing tobacco-related sales.
- From 1983 to 1985, the parties exchanged draft amendments and negotiated, but no written amendment was executed.
- After negotiations resumed in 1988, Racine proposed a substantially larger expansion (including a 300-seat restaurant and closure of the tobacco store), which the Department rejected based on operational and alcohol-service preferences.
- Racine sued, alleging the Department breached the implied covenant of good faith and fair dealing by acting in bad faith during negotiations and reversing its negotiating position.
- A jury found for Racine and awarded damages based on alleged bad-faith negotiation conduct; the Department appealed.

## Issues

1. Whether the implied covenant of good faith and fair dealing in an existing contract permits damages for alleged bad-faith conduct during negotiations over a proposed modification that was never executed.
2. Whether a contract provision allowing future modifications by mutual written consent creates a duty to negotiate in good faith toward agreement on new terms.

## Decision

- The Court of Appeal reversed the judgment for Racine.
- The court held the implied covenant of good faith and fair dealing governs performance and enforcement of the existing contract, not negotiations for new or expanded contractual rights.
- Because no written, mutually agreed amendment was executed, there was no enforceable modified contract to which the implied covenant could attach regarding the proposed expansion.
- The Department could not be liable for refusing to agree to a modification or for changing its bargaining position during negotiations.

## Legal Principles

- The implied covenant of good faith and fair dealing is limited to protecting the benefits of the contract actually made; it does not create duties beyond the agreement’s express terms.
- A provision stating the parties may modify a contract by mutual written consent preserves discretion to agree or refuse; it does not impose an obligation to reach agreement on proposed modifications.
- Where a proposed modification requires a written amendment and none is executed, negotiations and preliminary approvals do not create enforceable contractual duties regarding the unconsummated terms.
- Governmental authorizations to renegotiate or permit expansion, conditioned on later agreement, do not themselves constitute a contractual promise to accept specific new terms.

## Conclusion

The court set aside the jury’s damages award because the implied covenant could not be used to impose liability for bargaining conduct in uncompleted negotiations over a contract modification that required, but never received, mutual written consent.


Racine & Laramie, Ltd., Inc. v. Dep’t of Parks & Recreation, 11 Cal. App. 4th 1026, 14 Cal. Rptr. 2d 335 (Ct. App. 1992)