DANIEL D. FOLEY, Plaintiff and Appellant, v. INTERACTIVE DATA CORPORATION, Defendant and Respondent, 47 Cal. 3d 654

Opinion LUCAS, C. J. After Interactive Data Corporation (defendant) fired plaintiff Daniel D. Foley, an executive employee, he filed this action seeking compensatory and punitive damages for wrongful discharge. In his second amended complaint, plaintiff asserted three distinct theories: (1) a tort cause of action alleging a discharge in violation of public policy (Tameny v. Atlantic Richfield Co. (1980) 27 Cal.3d 167 [164 Cal.Rptr. 839, 610 P.2d 1330, 9 A.L.R.4th 314]), (2) a contract cause of action for breach of an implied-in-fact promise to discharge for good cause only (e.g., Pugh v.

See’s Candies, Inc. (1981) 116 Cal.App.3d 311 [171 Cal.Rptr. 917] [all references are to this case rather than the 1988 posttrial decision appearing at 203 Cal.App.3d 743]), and (3) a cause of action alleging a tortious breach of the implied covenant of good faith and fair dealing (e.g., Cleary v. American Airlines, Inc. (1980) 111 Cal.App.3d 443 [168 Cal.Rptr. 722]). The trial court sustained a demurrer without leave to amend, and entered judgment for defendant.

The Court of Appeal affirmed on the grounds (1) plaintiff alleged no statutorily based breach of public policy sufficient to state a cause of action pursuant to Tameny, (2) plaintiff’s claim for breach of the covenant to discharge only for good cause was barred by the statute of frauds; and (3) plaintiff’s cause of action based on breach of the covenant of good faith and fair dealing failed because it did not allege necessary longevity of employment or express formal procedures for termination of employees. We granted review to consider each of the Court of Appeal’s conclusions.

We will hold that the Court of Appeal properly found that plaintiff’s particular Tameny cause of action could not proceed; plaintiff failed to allege facts showing a violation of a fundamental public policy. We will also conclude, however, that plaintiff has sufficiently alleged a breach of an “oral” or “implied-in-fact” contract, and that the statute of frauds does not bar his claim so that he may pursue his action in this regard. Finally, we will hold that the covenant of good faith and fair dealing applies to employment contracts and that breach of the covenant may give rise to contract but not tort damages.

Facts Because this appeal arose from a judgment entered after the trial court sustained defendant’s demurrer, “we must, under established principles, assume the truth of all properly pleaded material allegations of the complaint in evaluating the validity” of the decision below. (Tameny v. Atlantic Richfield Co., supra, 27 Cal.3d 167, 170; Alcorn v. Anbro Engineering, Inc. (1970) 2 Cal.3d 493, 496 [86 Cal.Rptr. 88, 468 P.2d 216].) According to the complaint, plaintiff is a former employee of defendant, a wholly owned subsidiary of Chase Manhattan Bank that markets computer-based decision-support services.

Defendant hired plaintiff in June 1976 as an assistant product manager at a starting salary of $18,500. As a condition of employment defendant required plaintiff to sign a “Confidential and Proprietary Information Agreement” whereby he promised not to engage in certain competition with defendant for one year after the termination of his employment for any reason.

The agreement also contained a “Disclosure and Assignment of Information” provision that obliged plaintiff to disclose to defendant all computer-related information known to him, including any innovations, inventions or developments pertaining to the computer field for a period of one year following his termination. Finally, the agreement imposed on plaintiff a continuing obligation to assign to defendant all rights to his computer-related inventions or innovations for one year following termination. It did not state any limitation on the grounds for which plaintiff’s employment could be terminated.

Over the next six years and nine months, plaintiff received a steady series of salary increases, promotions, bonuses, awards and superior performance evaluations. In 1979 defendant named him consultant manager of the year and in 1981 promoted him to branch manager of its Los Angeles office. His annual salary rose to $56,164 and he received an additional $6,762 merit bonus two days before his discharge in March 1983. He alleges defendant’s officers made repeated oral assurances of job security so long as his performance remained adequate.

Plaintiff also alleged that during his employment, defendant maintained written “Termination Guidelines” that set forth express grounds for discharge and a mandatory seven-step pretermination procedure. Plaintiff understood that these guidelines applied not only to employees under plaintiff’s supervision, but to him as well. On the basis of these representations, plaintiff alleged that he reasonably believed defendant would not discharge him except for good cause, and therefore he refrained from accepting or pursuing other job opportunities.

The event that led to plaintiff’s discharge was a private conversation in January 1983 with his former supervisor, Vice President Richard Earnest. During the previous year defendant had hired Robert Kuhne and subsequently named Kuhne to replace Earnest as plaintiff’s immediate supervisor. Plaintiff learned that Kuhne was currently under investigation by the Federal Bureau of Investigation for embezzlement from his former employer, Bank of America.

Plaintiff reported what he knew about Kuhne to Earnest, because he was “worried about working for Kuhne and having him in a supervisory position . . . , in view of Kuhne’s suspected criminal conduct.” Plaintiff asserted he “made this disclosure in the interest and for the benefit of his employer,” allegedly because he believed that because defendant and its parent do business with the financial community on a confidential basis, the company would have a legitimate interest in knowing about a high executive’s alleged prior criminal conduct.

In response, Earnest allegedly told plaintiff not to discuss “rumors” and to “forget what he heard” about Kuhne’s past. In early March, Kuhne informed plaintiff that defendant had decided to replace him for “performance reasons” and that he could transfer to a position in another division in Waltham, Massachusetts. Plaintiff was told that if he did not accept a transfer, he might be demoted but not fired.

One week later, in Waltham, Earnest informed plaintiff he was not doing a good job, and six days later, he notified plaintiff he could continue as branch manager if he “agreed to go on a ‘performance plan.’ Plaintiff asserts he agreed to consider such an arrangement.” The next day, when Kuhne met with plaintiff, purportedly to present him with a written “performance plan” proposal, Kuhne instead informed plaintiff he had the choice of resigning or being fired. Kuhne offered neither a performance plan nor an option to transfer to another position. Defendant demurred to all three causes of action.

After plaintiff filed two amended pleadings, the trial court sustained defendant’s demurrer without leave to amend and dismissed all three causes of action. The Court of Appeal affirmed the dismissal as to all three counts. We will explore each claim in turn. I. Tortious Discharge in Contravention of Public Policy We turn first to plaintiff’s cause of action alleging he was discharged in violation of public policy. Labor Code

section 2922 provides in relevant part, “An employment, having no specified term, may be terminated at the will of either party on notice to the other. . . .” This presumption may be superseded by a contract, express or implied, limiting the employer’s right to discharge the employee. (Strauss v. A. L. Randall Co. (1983) 144 Cal.App.3d 514, 517 [194 Cal.Rptr. 520]; Drzewiecki v. H & R Block, Inc. (1972) 24 Cal.App.3d 695, 703 [101 Cal.Rptr. 169]; see also cases cited in

part 11(

B) of this opinion, post, p. 680 et seq.) Absent any contract, however, the employment is “at will,” and the employee can be fired with or without good cause. But the employer’s right to discharge an “at will” employee is still subject to limits imposed by public policy, since otherwise the threat of discharge could be used to coerce employees into committing crimes, concealing wrongdoing, or taking other action harmful to the public weal. Petermann v. International Brotherhood of Teamsters (1959) 174 Cal.App.2d 184 [344 P.2d 25], first stated the foregoing principle.

There, the plaintiff, a union business agent, alleged he was discharged when he refused to testify falsely to a state legislative committee. The trial court granted judgment on the pleadings to defendant. The Court of Appeal found the plaintiff was an employee-at-will (see Lab.

Code, § 2922) but noted that “the right to discharge an employee under such a contract may be limited by statute [citations] or by considerations of public policy.” (174 Cal.App.2d at p. 188.) Overruling the trial court, the Court of Appeal declared: “It would be obnoxious to the interests of the state and contrary to public policy and sound morality to allow an employer to discharge any employee, whether the employment be for a designated or unspecified duration, on the ground that the employee declined to commit perjury,

an act specifically enjoined by statute.” (Id., at pp. 188-189.) Similarly, Tameny v. Atlantic Richfield Co., supra, 27 Cal.3d 167, 178, declared that a tort action for wrongful discharge may lie if the employer “condition[s] employment upon required participation in unlawful conduct by the employee.” In Tameny, the plaintiff alleged he was fired for refusing to engage in price fixing in violation of the Cartwright Act and the Sherman Antitrust Act. (Id., at p. 170.) We held the trial court erred in sustaining Atlantic Richfield’s demurrer to plaintiff’s tort action for wrongful discharge.

Writing for the majority, Justice Tobriner concluded that “an employer’s authority over its employee does not include the right to demand that the employee commit a criminal act to further its interests .... An employer engaging in such conduct violates a basic duty imposed by law upon all employers, and thus an employee who has suffered damages as a result of such discharge may maintain a tort action for wrongful discharge against the employer.” (Id., at p. 178.) Tameny arose from facts quite similar to Petermann-, in both cases, an employee was discharged for his refusal to violate a penal statute.

The plaintiff in Petermann, however, had framed his complaint in contract, and sought only back wages; the Tameny plaintiff sought tort damages.

In upholding the claim in Tameny, we explained that the cause of action was not dependent on an express or implied promise in the employment contract, “but rather reflects a duty imposed by law upon all employers in order to implement the fundamental public policies embodied in the state’s penal statutes.” (27 Cal.3d at p. 176.) We noted also that the existence of a contractual relationship would not bar an injured party from seeking relief through tort remedies when the “employer’s discharge of an employee contravenes the dictates of public policy.” (Id., at pp. 175, 177.) Summarizing this authority, the Court of Appeal in Koehrer v.

Superior Court (1986) 181 Cal.App.3d 1155 [226 Cal.Rptr. 820], stated at page 1166: “As Tameny explained, the theoretical reason for labeling the discharge wrongful in such cases is not based on the terms and conditions of the contract, but rather arises out of a duty implied in law on the part of the employer to conduct its affairs in compliance with public policy .... [T]here is no logical basis to distinguish in cases of wrongful termination for reasons violative of fundamental principles of public policy between situations in which the employee is an at-will employee and [those] in which the employee has a contract for a specified term.

The tort is independent of the term of employment.” Other state courts have on occasion failed to draw the distinction between contract-based causes of action and those based on policies extrinsic to the terms of the agreement. For example, the Wisconsin Supreme Court adopted a “narrowly circumscribed public policy exception” to the employment-at-will doctrine.

Nonetheless, it relied on the fact that the remedies usually available for wrongful discharge under the relevant statutes were limited to contractual remedies, such as reinstatement and backpay, to conclude that such contractual remedies “are the most appropriate remedies for public policy exception wrongful discharges since the primary concern in these actions is to make the wronged employee ‘whole.’ ” (Brockmeyer v.

Dun & Bradstreet (1983) 113 Wis.2d 561 [335 N.W.2d 834, 840-841].) This characterization of the nature of the action contrasts with our Tameny analysis, in which we deemed the public-policy-based cause of action as “ex delicto,” or arising “from a breach of duty growing out of the contract,” rather than “from a breach of a promise set forth in the contract” or “ex contractu.” (27 Cal.3d at p. 175.) As we explained, “an employer’s obligation to refrain from discharging an employee who refuses to commit a criminal act does not depend upon any express or implied ‘ “promise[s] set forth in the [employment] contract” ’ [citation], but rather reflects a duty imposed by law upon all employers in order to implement the fundamental public policies embodied in the state’s penal statutes.

As such, a wrongful discharge suit exhibits the classic elements of a tort cause of action.” (Id., at p. 176.) Thus, the Wisconsin court focused on contract remedies on the assumption that the underlying interest was to compensate the employee, whereas California cases have focused on the general social policies being advanced by recognition of the public-policy-based cause of action.

In Tameny, because there was no statute specifically barring an employer from terminating an employee who refused to act illegally, the court was required to consider whether, without the authority of an express prohibition on the reasons for discharge, the plaintiff’s action could proceed.

We concluded that “even in the absence of an explicit statutory provision prohibiting the discharge of a worker on such grounds, fundamental principles of public policy and adherence to the objectives underlying the state’s penal statutes require the recognition of a rule barring an employer from discharging an employee who has simply complied with his legal duty and has refused to commit an illegal act.” (27 Cal.3d at p. 174, fn. omitted.) The public policy to which we looked thus was one about which reasonable persons can have little disagreement, and which was “firmly established” at the time of discharge.

The employee in Tameny claimed his termination was based on his refusal to engage in statutorily forbidden conduct at his employer’s behest. We mentioned generally that an employer’s ability to discharge at will “ ‘may be limited by statute . . . or by considerations of public policy.’ ” (27 Cal.3d at p. 172.) Several subsequent Court of Appeal cases have limited our holding to policies derived from statute. (See Shapiro v. Wells Fargo Realty Advisors (1984) 152 Cal.App.3d 467, 477 [199 Cal.Rptr. 613]; Gray v. Superior Court (1986) 181 Cal.App.3d 813, 819 [226 Cal.Rptr. 570]; Tyco Industries, Inc. v.

Superior Court (1985) 164 Cal.App.3d 148, 159 [211 Cal.Rptr. 540].) The Court of Appeal in the present case asserted, “[t]o successfully plead a cause of action under the [Tameny] theory, plaintiff must allege that he was terminated in retaliation for asserting his statutory rights, or for his refusal to perform an illegal act at the request of the employer, or that his employer directly violated a statute by dismissing him.” At least three other Court of Appeal decisions addressing the issue of where policy giving rise to an action may be found have concluded in dicta that public policy, as a basis for a wrongful discharge action, need not be policy rooted in a statute or constitutional provision. (See Koehrer v.

Superior Court, supra, 181 Cal.App.3d 1155, 1165, 1167; Garcia v. Rockwell Internat. Corp. (1986) 187 Cal.App.3d 1556, 1561 [232 Cal.Rptr. 490]; Dabbs v. Cardiopulmonary Management Services (1987) 188 Cal.App.3d 1437, 1443-1444 [234 Cal.Rptr. 129].) We do not decide in this case whether a tort action alleging a breach of public policy under Tameny may be based only on policies derived from a statute or constitutional provision or whether nonlegislative sources may provide the basis for such a claim.

Even where, as here, a statutory touchstone has been asserted, we must still inquire whether the discharge is against public policy and affects a duty which inures to the benefit of the public at large rather than to a particular employer or employee. For example, many statutes simply regulate conduct between private individuals, or impose requirements whose fulfillment does not implicate fundamental public policy concerns.

Regardless of whether the existence of a statutory or constitutional link is required under Tameny, disparagement of a basic public policy must be alleged, and we turn now to determining whether plaintiff has done so here. In the present case, plaintiff alleges that defendant discharged him in “sharp derogation” of a substantial public policy that imposes a legal duty on employees to report relevant business information to management. An employee is an agent, and as such “is required to disclose to [his] principal all information he has relevant to the subject matter of the agency.” (2 Witkin,

Summary of Cal. Law (9th ed. 1987) Agency & Employment, § 41, p. 53; see Loughlin v. Idora Realty Co. (1968) 259 Cal.App.2d 619, 629 [66 Cal.Rptr. 747]; Jolton v. Minster Graf & Co. (1942) 53 Cal.App.2d 516, 522 [128 P.2d 101].) Thus, plaintiff asserts, if he discovered information that might lead his employer to conclude that an employee was an embezzler, and should not be retained, plaintiff had a duty to communicate that information to his principal. It is unclear whether the alleged duty is one founded in statute.

No enactment expressly requires an employee to report relevant information concerning other employees to his employer, and none prohibits discharge of the employee for so doing. The 1872 Civil Code, however, attempted to codify the common law of master-servant relations; its provisions, now in the Labor Code, provide that “[o]ne who, for a good consideration, agrees to serve another, shall perform the service, and shall use ordinary care and diligence therein, so long as he is thus employed.” (Lab.

Code, § 2854.) It is not clear whether the duty to communicate relevant information is subsumed under the statutory duty of ordinary care, or is a separate duty not codified by the 1872 Legislature. Whether or not there is a statutory duty requiring an employee to report information relevant to his employer’s interest, we do not find a substantial public policy prohibiting an employer from discharging an employee for performing that duty.

Past decisions recognizing a tort action for discharge in violation of public policy seek to protect the public, by protecting the employee who refuses to commit a crime (Tameny, supra, 27 Cal.3d 167; Petermann, supra, 174 Cal.App.2d 184), who reports criminal activity to proper authorities (Garibaldi v. Lucky Food Stores, Inc. (9th Cir. 1984) 726 F.2d 1367, 1374; Palmateer v. International Harvester Co., supra, 421 N.E.2d 876, 879-880), or who discloses other illegal, unethical, or unsafe practices (Hentzel v.

Singer Co. (1982) 138 Cal.App.3d 290 [188 Cal.Rptr. 159, 35 A.L.R.4th 1015] [working conditions hazardous to employees]). No equivalent public interest bars the discharge of the present plaintiff. When the duty of an employee to disclose information to his employer serves only the private interest of the employer, the rationale underlying the Tameny cause of action is not implicated. We conclude that the Court of Appeal properly upheld the trial court’s ruling sustaining the demurrer without leave to amend to plaintiff’s first cause of action. II.

Breach of Employment Contract Plaintiff’s second cause of action alleged that over the course of his nearly seven years of employment with defendant, the company’s own conduct and personnel policies gave rise to an “oral contract” not to fire him without good cause. The trial court sustained a demurrer without leave to amend on two grounds: that the complaint did not state facts sufficient to give rise to such contract, and that enforcement of any such contract would be barred by the statute of frauds. The Court of Appeal affirmed, relying on the latter ground alone.

We consider both grounds, discussing the statute of frauds issue first. A. Statute of Frauds Defense Civil Code

section 1624, subdivision (a), invalidates “[a]n agreement that by its terms is not to be performed within a year from the making thereof’ unless the contract “or some note or memorandum thereof, [is] in writing and subscribed by the party to be charged or by the party’s agent.” In White Lighting Co. v.

Wolfson (1968) 68 Cal.2d 336 [66 Cal.Rptr. 697, 438 P.2d 345], we held that this portion of the statute of frauds “applies only to those contracts which, by their terms, cannot possibly be performed within one year.” (Id., at p. 343.) In that case the employee alleged the breach of an express oral agreement whereby the defendant promised to employ him on a “permanent” basis and pay him a fixed commission on an “annual basis.” We concluded that the trial court erroneously sustained the defendant’s demurrer because, although the agreement contemplated employment on a “permanent” basis, the statute does not apply to an employment contract of indefinite duration “unless its terms foreclose the employee’s completion of the performance of the contract within one year . . . .” (Id., at p. 341.) Relying exclusively on its own decision in Newfield v.

Insurance Co. of the West (1984) 156 Cal.App.3d 440 [203 Cal.Rptr. 9], the Court of Appeal here nevertheless held that plaintiff’s alleged employment contract, if modified to include a promise to discharge him for cause only, is barred by the statute of frauds. Neither Newfield nor the opinion below distinguishes, or even cites, the rule in White Lighting, supra, 68 Cal.2d 336. The rationale of both opinions is summed up in the following passage from Newfield: “[A]llegedly only [employee] had the right to terminate the contract.

Equality or justice between the parties would no longer exist in this alleged kind of oral contract.[] [i|] Appellant cannot have it both ways.

Either his employment relationship was a contract in which both parties had equal rights to terminate at will (in which case it was not in violation of the statute of frauds), or it was a contract where the employer did not have the right to terminate at will, and there was a reasonable expectation of employment for more than one year (in which case the statute of frauds does apply, barring this action).” (156 Cal.App.3d at p. 446.) Newfield is irreconcilable with the rule in White Lighting.

Even if the original oral agreement had expressly promised plaintiff “permanent” employment terminable only on the condition of his subsequent poor performance or other good cause, such an agreement, if for no specified term, could possibly be completed within one year. (See White Lighting, supra, 68 Cal.2d at pp. 343-344.) Because the employee can quit or the employer can discharge for cause, even an agreement that strictly defines appropriate grounds for discharge can be completely performed within one year—or within one day for that matter.

Our courts have consistently held that such contracts are not within the statute of frauds. (See, e.g., Plumlee v. Poag (1984) 150 Cal.App.3d 541 [198 Cal.Rptr. 66]; Bondi v. Jewels by Edwar, Ltd. (1968) 267 Cal.App.2d 672 [73 Cal.Rptr. 494]; Wescoatt v. Meeker (1944) 63 Cal.App.2d 618 [147 P.2d 41]; Lloyd v. Kleefisch (1941) 48 Cal.App.2d 408 [120 P.2d 97].) Decisions from other states uniformly hold that a good-cause termination clause does not render an employment agreement unenforceable under the statute of frauds. (E.g., Weiner v.

McGraw-Hill, Inc. (1982) 57 N.Y.2d 458 [457 N.Y.S.2d 193, 443 N.E.2d 441, 33 A.L.R.4th 1101]; Toussaint v. Blue Cross & Blue Shield of Mich. (1980) 408 Mich. 579 [292 N.W.2d 880]; Hardison v. A.H. Belo Corp. (Tex.Civ.App. 1952) 247 S.W.2d 167.) These authorities support the general rule that if a condition terminating a contract may occur within one year of its making, then the contract is performable within a year and does not fall within the scope of the statute of frauds.

This is true even though performance of the contract may extend for longer than one year if the condition does not occur. (See generally, 1 Witkin,

Summary of Cal. Law (9th ed. 1987) Contracts, § 282, p. 274.) Other courts have pointed out that within a year an employee such as plaintiff could have (1) been discharged for cause (see, e.g., Rowe v. Noren Pattern and Foundry Co. (1979) 91 Mich.App. 254 [283 N.W.2d 713]); (2) retired, died or voluntarily left employment (see, e.g., Martin v. Federal Life Ins. Co. (1982) 109 Ill.App.3d 596 [440 N.E.2d 998]); or (3) been terminated if declining profitability compelled a general layoff or cessation of business altogether (see, e.g., Stauter v.

Walnut Grove Products (Iowa 1971) 188 N.W.2d 305). “Interpreting the allegations of the complaint liberally, as we must, we cannot say as a matter of law that the contract. . . could not be performed within a year.” (Plumlee v. Poag, supra, 150 Cal.App.3d 541, 549.) Defendant attacks these precedents as performing “legalistic gymnastics,” and calls instead for enforcement of Civil Code

section 1624 according to the fair import of its language. That proclamation ignores a considerable piece of history. More than 60 years ago a British court declared that “[i]t is now two centuries too late to ascertain the meaning of [the statute of frauds] by applying one’s own mind independently to the

interpretation of its language. Our task is a much more humble one; it is to see how that

section has been expounded in decisions and how the decisions apply to the present case.” (Hanau v. Ehrlich (1911) 2 K.B. 1056, 1069.) The decision in White Lighting, supra, 68 Cal.2d 336, follows a long line of precedent. In 1897, the Supreme Judicial Court of Massachusetts rejected an employer’s contention that the statute of frauds invalidated an oral agreement for “permanent employment” so long as the plaintiff, an enameler, performed his work satisfactorily.

The majority, including Chief Justice Field and Justice Holmes, rejected the employer’s defense. “It has been repeatedly held that, if an agreement whose performance would otherwise extend beyond a year may be completely performed within a year on the happening of some contingency, it is not within the statute of frauds. [Citations.] In this case, we say nothing of other contingencies. The contract would have been completely performed if the defendant had ceased to carry on business within a year.” (Carnig v. Carr (1897) 167 Mass. 544 [46 N.E. 117, 118].) The Legislature, which in 1872 enacted Civil Code

section 1624, was aware of precedent limiting the reach of the one-year provision of the statute of frauds. The Code Commissioners’ notes specifically advised that “in a similar statute in New York these words have been construed as applying only to contracts which cannot possibly be executed within a year, under any contingency. ...

To bring a contract within the statute relating to parol agreements, not to be performed within one year, it must appear to be necessarily incapable of performance within that time.” (Italics in original.) When the Legislature enacts language that has received definitive judicial construction, we presume that the Legislature was aware of the relevant judicial decisions and intended to adopt that construction. (See Buchwald v.

Katz (1972) 8 Cal.3d 493, 502 [105 Cal.Rptr. 368, 503 P.2d 1376].) This presumption gains further strength when, as in this case, it is clear that the Legislature was explicitly informed of the prior construction. In sum, the contract between plaintiff and defendant could have been performed within one year of its making; plaintiff could have terminated his employment within that period, or defendant could have discharged plaintiff for cause. Thus, the contract does not fall within the statute of frauds and the fact that it was an implied or oral agreement is not fatal to its enforcement. B.

Sufficiency of the Allegations of Oral or Implied Contract Although plaintiff describes his cause of action as one for breach of an oral contract, he does not allege explicit words by which the parties agreed that he would not be terminated without good cause. Instead he alleges that a course of conduct, including various oral representations, created a reasonable expectation to that effect. Thus, his cause of action is more properly described as one for breach of an implied-in-fact contract.

As noted, the Court of Appeal did not reach the question of the sufficiency of plaintiff’s allegations to state a cause of action for breach of an implied-in-fact contract term not to discharge except for good cause, because it disposed of the issue by erroneously applying the statute of frauds.

Nonetheless, the court extensively criticized the reasoning of Pugh, supra, 116 Cal.App.3d 311, stating that it “destroys the centuries-old solid and settled principle of vast and demonstrated value to employer and employee, to the world of commerce and to the public of a contract which either can terminate at will.” Before this court, defendant urges that we disapprove precedent permitting a cause of action for wrongful discharge founded on an implied-in-fact contract and require instead an express contract provision requiring good cause for termination, supported by independent consideration.

Alternatively, defendant requests that we distinguish Pugh and its progeny from the present case. We conclude, however, that Pugh correctly applied basic contract principles in the employment context, and that these principles are applicable to plaintiff’s agreement with defendant.

The plaintiff in Pugh had been employed by the defendant for 32 years, during which time he worked his way up the corporate ladder from dishwasher to vice president. (116 Cal.App.3d at p. 315.) When hired, he had been assured that “if you are loyal . . . and do a good job, your future is secure.” {Id., at p. 317.) During his long employment, the plaintiff received numerous commendations and promotions, and no significant criticism of his work. Throughout this period the company maintained a practice of not terminating administrative personnel without good cause.

On this evidence, the Court of Appeal concluded that the jury could determine the existence of an implied promise that the employer would not arbitrarily terminate the plaintiff’s employment. {Id., at p. 329.) Pugh has been followed in numerous decisions in this state. (See, e.g., Steward v. Mercy Hospital, supra, 188 Cal.App.3d 1290, 1296; Robinson v. Hewlett-Packard Corp. (1986) 183 Cal.App.3d 1108, 1123 [228 Cal.Rptr. 591]; Hentzel v. Singer Co., supra, 138 Cal.App.3d 290, 304 [same]; Walker v. Northern San Diego County Hospital Dist. (1982) 135 Cal.App.3d 896, 904-905 [185 Cal.Rptr. 617]; cf. Shapiro v.

Wells Fargo Realty Advisors, supra, 152 Cal.App.3d 467, 479-482 [confirming but distinguishing Pugh, supra, 116 Cal.App.3d 311].) A review of other jurisdictions also reveals a strong trend in favor of recognizing implied contract terms that modify the power of an employer to discharge an employee at will. (See, e.g., Hoffman-La Roche, Inc. v. Campbell (Ala. 1987) 512 So.2d 725, 729-733 [implied promise to abide by employee manual guidelines contractually enforceable]; Thompson v. St.

Regis Paper Co., supra, 685 P.2d 1081, 1087-1088 [if employer “creates an atmosphere of job security and fair treatment with promises of specific treatment in specific situations and an employee is induced thereby to remain on the job” those promises will be enforced (italics in original)]; Pine River State Bank v. Mettille (Minn. 1983) 333 N.W.2d 622, 626-629 [same]; Toussaint v. Blue Cross & Blue Shield of Mich., supra, 292 N.W.2d 880, 892-893 [“contractual obligations can be implicit in employer policies and practices”]; see also Duldulao v.

Saint Mary of Nazareth Hosp. (1987) 115 Ill.2d 482 [505 N.E.2d 314, 317] [listing 25 jurisdictions recognizing contractually binding force of employee handbooks]; but see Sabetay v. Sterling Drug, Inc. (1987) 69 N.Y.2d 329 [514 N.Y.S.2d 209, 506 N.E.2d 919, 923] [requiring express agreement to limit employer’s “unfettered right to terminate at will”].) Thus the rule defendant asks us to disapprove is one that has achieved widespread acceptance in recent years.

We begin by acknowledging the fundamental principle of freedom of contract: employer and employee are free to agree to a contract terminable at will or subject to limitations. Their agreement will be enforced so long as it does not violate legal strictures external to the contract, such as laws aifecting union membership and activity, prohibitions on indentured servitude, or the many other legal restrictions already described which place certain restraints on the employment arrangement. As we have discussed, Labor Code

section 2922 establishes a presumption of at-will employment if the parties have made no express oral or written agreement specifying the length of employment or the grounds for termination. This presumption may, however, be overcome by evidence that despite the absence of a specified term, the parties agreed that the employer’s power to terminate would be limited in some way, e.g., by a requirement that termination be based only on “good cause.” (Drzewiecki v. H & R Block, Inc., supra, 24 Cal.App.3d 695, 704; Millsap v.

National Funding Corp. (1943) 57 Cal.App.2d 772, 775-776 [135 P.2d 407].) The absence of an express written or oral contract term concerning termination of employment does not necessarily indicate that the employment is actually intended by the parties to be “at will,” because the presumption of at-will employment may be overcome by evidence of contrary intent.

Generally, courts seek to enforce the actual understanding of the parties to a contract, and in so doing may inquire into the parties’ conduct to determine if it demonstrates an implied contract. “[I]t must be determined, as a question of fact, whether the parties acted in such a manner as to provide the necessary foundation for [an implied contract], and evidence may be introduced to rebut the inferences and show that there is another explanation for the conduct.” (Silva v. Providence Hospital of Oakland (1939) 14 Cal.2d 762, 774 [97 P.2d 798]; see Marvin v.

Marvin (1976) 18 Cal.3d 660, 684 [134 Cal.Rptr. 815, 557 P.2d 106]; Hillsman v. Sutter Community Hospitals (1984) 153 Cal.App.3d 743, 753-756 [200 Cal.Rptr. 605]; Newberger v. Rifkind (1972) 28 Cal.App.3d 1070, 1074 [104 Cal.Rptr. 663, 57 A.L.R.3d 1232]; 1 Witkin,

Summary of Cal. Law, Contracts, op cit. supra, § 119, p. 145.) Such implied-in-fact contract terms ordinarily stand on equal footing with express terms. (Rest.2d Contracts, supra, §§ 4, 19.) At issue here is whether the foregoing principles apply to contract terms establishing employment security, so that the presumption of Labor Code

section 2922 may be overcome by evidence of contrary implied terms, or whether such agreements are subject to special substantive or evidentiary limitations. Defendant contends that courts should not enforce employment security agreements in the absence of evidence of independent consideration and an express manifestation of mutual assent.

Although, as explained below, there may be some historical basis for imposing such limitations, any such basis has been eroded by the development of modern contract law and, accordingly, we conclude that defendant’s suggested limitations are inappropriate in the modern employment context. We discern no basis for departing from otherwise applicable general contract principles. The doctrine that special limitations should be placed on the enforceability of employment security agreements arose during the late 19th century in the context of

interpretation of contracts which promised “permanent” employment to the employee. In Lord v. Goldberg (1889) 81 Cal. 596, 601-602 [22 P. 1126], we held that language promising “permanent” employment created employment of no particular duration terminable only “for some good reason.” Later cases developed the rule that “a contract for permanent employment, for life employment, for so long as the employee chooses, or for other terms indicating permanent employment, is interpreted as a contract for an indefinite period terminable at the will of either party . . . .” (See, e.g., Ruinello v.

Murray (1951) 36 Cal.2d 687, 689 [227 P.2d 251]; Speegle v. Board of Fire Underwriters (1946) 29 Cal.2d 34, 39 [172 P.2d 867]; Shuler v. Corl (1918) 39 Cal.App. 195, 198 [178 P. 535].) This rule was not a substantive limitation on the parties’ right to contract, but rather a rule of construction that could be overcome by a showing that the employment security term of the contract was supported by consideration other than the services to be rendered or by “other terms indicating a contrary intention.” (Ruinello v. Murray, supra, 36 Cal.2d at p. 690; Drzewiecki v.

H & R Block, Inc., supra, 24 Cal.App.3d at p. 704.) As the Pugh court explained, a rule imposing a requirement of separate consideration as a substantive limitation on an enforceable employee security agreement would be “contrary to the general contract principle that courts should not inquire into the adequacy of consideration. (See Calamari & Perillo, Contracts (2d ed. 1977) § 4-3, p. 136.) ‘A single and undivided consideration may be bargained for and given as the agreed equivalent of one promise or of two promises or of many promises.’ (1 Corbin on Contracts (1963) § 125, pp. 535-536.) Thus there is no analytical reason why an employee’s promise to render services, or his actual rendition of services over time, may not support an employer’s promise both to pay a particular wage (for example) and to refrain from arbitrary dismissal. (See 1 Corbin on Contracts, op. cit. supra, § 125, p. 536, fn. 68; 1A Corbin on Contracts, op. cit. supra, § 152, pp. 13-17.)” (Pugh, supra, 116 Cal.App.3d at pp. 325-326, fn. omitted; see Drzewiecki v.

H & R Block, Inc., supra, 24 Cal.App.3d 695, 703-704; see also Pine River State Bank v. Mettille, supra, 333 N.W.2d at p. 629; Mauk, supra, 21 Idaho L. Rev. 201, 212-213; Note, Protecting At Will Employees, supra, 93 Harv. L. Rev. at pp. 1819-1820.) The limitations on employment security terms on which defendant relies were developed during a period when courts were generally reluctant to look beyond explicit promises of the parties to a contract. “The court-imposed presumption that the employment contract is terminable at will relies upon the formalistic approach to contract

interpretation predominant in late nineteenth century legal thought: manifestations of assent must be evidenced by definite, express terms if promises are to be enforceable.” (Note, Protecting At Will Employees, supra, 93 Harv. L. Rev. at p. 1825, fns. omitted.) In the intervening decades, however, courts increasingly demonstrated their willingness to examine the entire relationship of the parties to commercial contracts to ascertain their actual intent, and this trend has been reflected in the body of law guiding contract

interpretation. (See Goetz & Scott, The Limits of Expanded Choice: An Analysis of the Interactions Between Express and Implied Contract Terms (1985) 73 CaL.L.Rev. 261, 273-276 [“The (Uniform Commercial) Code, now joined by the Second Restatement of Contracts, effectively reverses the common law presumption that the parties’ writing and the official law of contract are the definitive elements of the agreement.

Evidence derived from experience and practice can now trigger the incorporation of additional, implied terms”].) Similarly, 20 years ago, Professor Blumrosen observed that during the decades preceding his analysis, courts had demonstrated an increasing willingness to “consider the entire relationship of the parties, and to find that facts and circumstances establish a contract which cannot be terminated by the employer without cause.” (Blumrosen, Settlement of Disputes Concerning the Exercise of Employer Disciplinary Power: United States Re port, supra, 18 Rutgers L.Rev. at p.432, fn. omitted.) “This approach has been recognized as consistent with customary

interpretation techniques of commercial contracts permitting ‘gap filling’ by implication of reasonable terms.” (Miller & Estes, Recent Judicial Limitations on the Right to Discharge: A California Trilogy (1982) 16 U.C.

Davis L.Rev. 65, 101, fn. omitted; see also McCarthy, Punitive Damages in Wrongful Discharge Cases (Lawpress 1985) §§ 3.55-3.56, pp. 206-207.) In the employment context, factors apart from consideration and express terms may be used to ascertain the existence and content of an employment agreement, including “the personnel policies or practices of the employer, the employee’s longevity of service, actions or communications by the employer reflecting assurances of continued employment, and the practices of the industry in which the employee is engaged.” (Pugh, supra, 116 Cal.App.3d at p. 327; see Note, Implied Contract Rights to Job Security (1974) 26 Stan.L.Rev. 335, 350-366 [reviewing factors courts have used in implied contract analyses].) Pursuant to Labor Code

section 2922, if the parties reach no express or implied agreement to the contrary, the relationship is terminable at any time without cause. But when the parties have enforceable expectations concerning either the term of employment or the grounds or manner of termination, Labor Code

section 2922 does not diminish the force of such contractual or legal obligations. The presumption that an employment relationship of indefinite duration is intended to be terminable at will is therefore “subject, like any presumption, to contrary evidence.

This may take the form of an agreement, express or implied, that . . . the employment relationship will continue indefinitely, pending the occurrence of some event such as the employer’s dissatisfaction with the employee’s services or the existence of some ‘cause’ for termination.” {Pugh, supra, 116 Cal.App.3d at pp. 324-325, fn. omitted.) Finally, we do not agree with the Court of Appeal that employment security agreements are so inherently harmful or unfair to employers, who do not receive equivalent guaranties of continued service, as to merit treatment different from that accorded other contracts.

On the contrary, employers may benefit from the increased loyalty and productivity that such agreements may inspire. (See Mauk, supra, 21 Idaho L.

Rev. 201, 217.) Permitting proof of and reliance on implied-in-fact contract terms does not nullify the at-will rule, it merely treats such contracts in a manner in keeping with general contract law. (See Note, Defining Public Policy Torts in At-Will Dismissals (1981) 34 Stan.L.Rev. 153, 154-155 [hereafter Defining Torts] [“While the implied contract approach reflects a movement away from the harshness of the at-will rule, it by no means represents a rejection of the rule, since it merely allows employees to rebut more easily the presumption that their employment is terminable at will” (fn. omitted)].) We see no sound reason to exempt the employment relationship from the ordinary rules of contract

interpretation which permit proof of implied terms. Defendant’s remaining argument is that even if a promise to discharge “for good cause only” could be implied in fact, the evidentiary factors outlined in Pugh, supra, 116 Cal.App.3d at page 329, and relied on by plaintiff, are inadequate as a matter of law. This contention fails on several grounds. First, defendant overemphasizes the fact that plaintiff was employed for “only” six years and nine months.

Length of employment is a relevant consideration but six years and nine months is sufficient time for conduct to occur on which a trier of fact could find the existence of an implied contract. (Cf. Gray v. Superior Court, supra, 181 Cal.App.3d 813, 821; Khanna v. Microdata Corp. (1985) 170 Cal.App.3d 250, 262 [215 Cal.Rptr. 860].) As to establishing the requisite promise, “oblique language will not, standing alone, be sufficient to establish agreement”; instead, the totality of the circumstances determines the nature of the contract.

Agreement may be “ ‘shown by the acts and conduct of the parties, interpreted in the light of the subject matter and of the surrounding circumstances.’ ” (Pugh, supra, 116 Cal.App.3d at p. 329.) Plaintiff here alleged repeated oral assurances of job security and consistent promotions, salary increases and bonuses during the term of his employment contributing to his reasonable expectation that he would not be discharged except for good cause.

Second, an allegation of breach of written “Termination Guidelines” implying self-imposed limitations on the employer’s power to discharge at will may be sufficient to state a cause of action for breach of an employment contract. Pugh, supra, 116 Cal.App.3d 311, is not alone in holding that the trier of fact can infer an agreement to limit the grounds for termination based on the employee’s reasonable reliance on the company’s personnel manual or policies. (See, e.g., Robinson v.

Hewlett-Packard Corp., supra, 183 Cal.App.3d at p. 1123 [promise not to terminate without good cause demonstrated by personnel guidelines and individual performance warnings, evaluations and instructions]; Rulon-Miller v. International Business Machines Corp. (1984) 162 Cal.App.3d 241, 251 [208 Cal.Rptr. 524] [factual issue whether termination was for reasons in stated employer policies]; Walker v. Northern San Diego County Hospital Dist., supra, 135 Cal.App.3d at pp. 904-905 [handbook creating right to discharge only for cause and to pretermination hearing]; Toussaint v.

Blue Cross & Blue Shield of Mich., supra, 292 N.W.2d at p. 892 [personnel manual provisions can give rise to contractual rights without showing of express mutual agreement]; Morris v. Lutheran Medical Center (1983) 215 Neb. 677 [340 N.W.2d 388, 390-391] [employer bound by published “Policy and Procedures”]; cf. Hepp v.

Lockheed-California Co. (1978) 86 Cal.App.3d 714, 719 [150 Cal.Rptr. 408] [unwritten but “well established” policy regulating rehiring of employees laid off for lack of work is enforceable].) Finally, unlike the employee in Pugh, supra, 116 Cal.App.3d 311, plaintiff alleges that he supplied the company valuable and separate consideration by signing an agreement whereby he promised not to compete or conceal any computer-related information from defendant for one year after termination.

The noncompetition agreement and its attendant “Disclosure and Assignment of Proprietary Information, Inventions, etc.” may be probative evidence that “it is more probable that the parties intended a continuing relationship, with limitations upon the employer’s dismissal authority [because the] employee has provided some benefit to the employer, or suffers some detriment, beyond the usual rendition of service.” (Pugh, supra, 116 Cal.App.3d at p. 326.) In sum, plaintiff has pleaded facts which, if proved, may be sufficient for a jury to find an implied-in-fact contract limiting defendant’s right to discharge him arbitrarily—facts sufficient to overcome the presumption of Labor Code

section 2922. On demurrer, we must assume these facts to be true. In other words, plaintiff has pleaded an implied-in-fact contract and its breach, and is entitled to his opportunity to prove those allegations. III. Breach of the Implied Covenant of Good Faith and Fair Dealing We turn now to plaintiff’s cause of action for tortious breach of the implied covenant of good faith and fair dealing. Relying on Cleary, supra, 111 Cal.App.3d 443, and subsequent Court of Appeal cases, plaintiff asserts we should recognize tort remedies for such a breach in the context of employment termination.

The distinction between tort and contract is well grounded in common law, and divergent objectives underlie the remedies created in the two areas. Whereas contract actions are created to enforce the intentions of the parties to the agreement, tort law is primarily designed to vindicate “social policy.” (Prosser, Law of Torts (4th ed. 1971) p. 613.) The covenant of good faith and fair dealing was developed in the contract arena and is aimed at making effective the agreement’s promises.

Plaintiff asks that we find that the breach of the implied covenant in employment contracts also gives rise to an action seeking an award of tort damages. In this instance, where an extension of tort remedies is sought for a duty whose breach previously has been compensable by contractual remedies, it is helpful to consider certain principles relevant to contract law. First, predictability about the cost of contractual relationships plays an important role in our commercial system. (Putz & Klippen, Commercial Bad Faith-Attorney Fees—Not Tort Liability—Is the Remedy for “Stonewalling” (1987) 21 U.S.F.

L.Rev. 419, 432 [hereafter Putz & Klippen]). Moreover, “Courts traditionally have awarded damages for breach of contract to compensate the aggrieved party rather than to punish the breaching party.” (Note, “Contort”: Tortious Breach of the Implied Covenant of Good Faith and Fair Dealing in Noninsur- anee, Commercial Contracts—Its Existence and Desirability (1985) 60 Notre Dame L.

Rev. 510, 526, & fn. 94, citing Rest.2d Contracts, § 355, com. a [“The purpose[] of awarding contract damages is to compensate the injured party”].) With these concepts in mind, we turn to analyze the role of the implied covenant of good faith and fair dealing and the propriety of the extension of remedies urged by plaintiff. “Every contract imposes upon each party a duty of good faith and fair dealing in its performance and its enforcement.” (Rest.2d Contracts, § 205.) This duty has been recognized in the majority of American jurisdictions, the Restatement, and the Uniform Commercial Code. (Burton, Breach of Contract and the Common Law Duty to Perform in Good Faith (1980) 94 Harv.

L. Rev. 369.) Because the covenant is a contract term, however, compensation for its breach has almost always been limited to contract rather than tort remedies. As to the scope of the covenant, “ ‘[t]he precise nature and extent of the duty imposed by such an implied promise will depend on the contractual purposes.” (Egan v. Mutual of Omaha Ins.

Co. (1979) 24 Cal.3d 809, 818 [169 Cal.Rptr. 691, 620 P.2d 141].) Initially, the concept of a duty of good faith developed in contract law as “a kind of ‘safety valve’ to which judges may turn to fill gaps and qualify or limit rights and duties otherwise arising under rules of law and specific contract language.” (Summers, The General Duty of Good Faith—Its Recognition and Conceptualization (1982) 67 Cornell L. Rev. 810, 812, fn. omitted; see also Burton, supra, 94 Harv. L.

Rev. 369, 371 [“the courts employ the good faith doctrine to effectuate the intentions of parties, or to protect their reasonable expectations” (fn. omitted)].) As a contract concept, breach of the duty led to imposition of contract damages determined by the nature of the breach and standard contract principles. An exception to this general rule has developed in the context of insurance contracts where, for a variety of policy reasons, courts have held that breach of the implied covenant will provide the basis for an action in tort. California has a well-developed judicial history addressing this exception.

In Comunale v. Traders & General Ins. Co. (1958) 50 Cal.2d 654, 658 [328 P.2d 198, 68 A.L.R.2d 883], we stated, “There is an implied covenant of good faith and fair dealing in every contract that neither party will do anything which will injure the right of the other to receive the benefits of the agreement.” (See also Egan v. Mutual of Omaha Ins. Co., supra, 24 Cal.3d 809, 818.) Thereafter, in Crisci v. Security Ins. Co. (1967) 66 Cal.2d 425 [58 Cal.Rptr. 13, 426 P.2d 173], for the first time we permitted an insured to recover in tort for emotional damages caused by the insurer’s breach of the implied covenant.

We explained in Gruenberg v. Aetna Ins. Co. (1973) 9 Cal.3d 566 [108 Cal.Rptr. 480, 510 P.2d 1032], that “[t]he duty [to comport with the implied covenant of good faith and fair dealing] is immanent in the contract whether the company is attending [on the insured’s behalf] to the claims of third persons against the insured or the claims of the insured itself. Accordingly, when the insurer unreasonably and in bad faith withholds payment of the claim of its insured, it is subject to liability in tort.” (Id., at p. 575.) In Egan v. Mutual of Omaha Ins.

Co., supra, 24 Cal.3d 809, we described some of the bases for permitting tort recovery for breach of the implied covenant in the insurance context. “The insured in a contract like the one before us does not seek to obtain a commercial advantage by purchasing the policy—rather, he seeks protection against calamity.” (Id., at p. 819.) Thus, “As one commentary has noted, ‘The insurers’ obligations are . . . rooted in their status as purveyors of a vital service labeled quasi-public in nature.

Suppliers of services affected with a public interest must take the public’s interest seriously, where necessary placing it before their interest in maximizing gains and limiting disbursements. . . . [A]s a supplier of a public service rather than a manufactured product, the obligations of insurers go beyond meeting reasonable expectations of coverage.

The obligations of good faith and fair dealing encompass qualities of decency and humanity inherent in the responsibilities of a fiduciary.’ . . . (Goodman & Seaton, Foreword: Ripe for Decision, Internal Workings and Current Concerns of the California Supreme Court (1974) 62 Cal.L.Rev. 309, 346-347.)” (24 Cal.3d at p. 820.) In addition, the Egan court emphasized that “the relationship of insurer and insured is inherently unbalanced: the adhesive nature of insurance contracts places the insurer in a superior bargaining position.” (24 Cal.3d at p. 820.) This emphasis on the “special relationship” of insurer and insured has been echoed in arguments and analysis in subsequent scholarly commentary and cases which urge the availability of tort remedies in the employment context.

The first California appellate case to permit tort recovery in the employment context was Cleary, supra, 111 Cal.App.3d 443. To support its holding that tort as well as contract damages were appropriate to compensate for a breach of the implied covenant, the Cleary court relied on insurance cases (Egan, supra, 24 Cal.3d 809, and Comunale, supra, 50 Cal.2d 654) without engaging in comparative analysis of insurance and employment relationships and without inquiring into whether the insurance cases’ departure from established principles of contract law should generally be subject to expansion.

Similarly, Cleary's discussion of two previous California employment cases was insufficient. It found a “hint” in Coats v. General Motors Corp. (1934) 3 Cal.App.2d 340, 348 [39 P.2d 838], to support the proposition that “on occasion, it may be incumbent upon an employer to demonstrate good faith in terminating an employee” (111 Cal.App.3d at p. 453), but failed to acknowledge that in Coats, the employee sought recovery of only contract damages (Coats, supra, 3 Cal.App.2d at pp. 344-345; see also Zimmer v.

Wells Management Corp. (S.D.N.Y. 1972) 348 F.Supp. 540 [employment case, also cited in Cleary, which did not involve tort damages]). Next, the Cleary court placed undue reliance on dictum in this court’s Tameny decision, supra, 27 Cal.3d at page 179, footnote 12, which suggested that tort remedies might be available when an employer breaches the implied covenant of good faith and fair dealing. (111 Cal.App.3d at pp. 454-455.) The qualified Tameny dictum was based exclusively on precedent in insurance cases from this state, and two out-of-state employment cases. The out-of-state cases included Monge v.

Beebe Rubber Company (1974) 114 N.H. 130 [316 A.2d 549, 62 A.L.R.3d 264], in which the court permitted an action for wrongful discharge but limited the plaintiff’s recovery to contract damages, specifically excluding recovery for mental distress. {Id., at pp. 551-552.) Moreover, the New Hampshire Supreme Court thereafter confined Monge to cases in which the employer’s actions contravene public policy. (Howard v. Dorr Woolen Co. (1980) 120 N.H. 295 [414 A.2d 1273, 1274].) In the second case, Fortune v.

National Cash Register Co. (1977) 373 Mass. 96 [364 N.E.2d 1251, 1256], the court created a right of action based on breach of the implied covenant, but limited recovery to benefits the employee had already earned under the contract. Subsequent Massachusetts cases have pursued the same limited course. (See, e.g., Maddaloni v. Western Mass.

Bus Lines, Inc. (1982) 386 Mass. 877 [438 N.E.2d 351, 356] [if covenant of good faith and fair dealing breached, employee limited to benefits contemplated or included in contract].) In fact, although Justice Broussard asserts that the weight of authority is in favor of granting a tort remedy (opn. by Broussard, J., at p. 714, fn. 15), the clear majority of jurisdictions have either expressly rejected the notion of tort damages for breach of the implied covenant in employment cases or impliedly done so by rejecting any application of the covenant in such a context.

Both the Tameny dictum and Cleary, supra, 111 Cal.App.3d 443, failed to recognize that imposing tort liability for breach of the implied covenant was unprecedented in the employment area. The Tameny court expressly found it unnecessary to venture into the area of the implied covenant more completely (27 Cal.3d at p. 179, fn. 12) and only briefly touched on the subject. The Cleary court erred in its uncritical reliance on insurance law and its casual extension of Tameny to find tort damages recoverable in the case before it. Dictum in Seaman's Direct Buying Service, Inc. v.

Standard Oil Co. (1984) 36 Cal.3d 752 [206 Cal.Rptr. 354, 686 P.2d 1158] also is not helpful. There, the court focused on a standard commercial contract.

We stated, “[w]hile the proposition that the law implies a covenant of good faith and fair dealing in all contracts is well established, the proposition advanced by Seaman’s—that breach of the covenant always gives rise to an action in tort —is not so clear.” (Id., at p. 768.) We also observed that the propriety of a tort action for breach of the implied covenant in the insurance context was based on the “special relationship” of insurer and insured, and continued, “No doubt there are other relationships with similar characteristics and deserving of similar legal treatment.” (Id., at pp. 768-769.) In a footnote to the last statement, we referred to Tameny, observing that there “this court intimated that breach of the covenant of good faith and fair dealing in the employment relationship might give rise to tort remedies.

That relationship has some of the same characteristics as the relationship between insurer and insured.” (Id., at p. 769, fn. 6.) This allusion to the potential for extending tort remedies for breach of the implied covenant was tentative at best. Most of the other Court of Appeal cases following Cleary suffer from similar failures comprehensively to consider the implications of their holdings. These opinions either merely refused to find a breach of the implied covenant on the facts of the case, or relied uncritically on Cleary or the dicta in Tameny and Seaman’s. (See, e.g., Gray v.

Superior Court, supra, 181 Cal.App.3d 813, 820-821; Rulon-Miller v. International Business Machines Corp., supra, 162 Cal.App.3d at pp. 252-253; Shapiro v. Wells Fargo Realty Advisors, supra, 152 Cal.App.3d at pp. 478-479; Crosier v. United Parcel Service, Inc. (1983) 150 Cal.App.3d 1132, 1137 [198 Cal.Rptr. 361]; cf. Wayte v. Rollins International, Inc. (1985) 169 Cal.App.3d 1, 20 [215 Cal.Rptr. 59].) For example, the Court of Appeal decisions in Koehrer v. Superior Court, supra, 181 Cal.App.3d 1155, 1167-1171 and Khanna v.

Microdata Corp., supra, 170 Cal.App.3d 250, 260-262, although engaging in some analysis, proceed from certain unexplored assumptions about the role of the covenant of good faith and fair dealing and the circumstances in which tort damages may be found permissible. The Ninth Circuit recently followed the path taken in the Koehrer and Khanna decisions, stating that their approach “is more compelling because it does not treat the implied covenant of good faith and fair dealing in employment contracts as a distinct area of the law.” (Huber v. Standard Ins.

Co. (9th Cir. 1988) 841 F.2d 980, 984.) The Huber court, however, did not critically examine the underpinnings of the Court of Appeal decisions. In Koehrer, supra, 181 Cal.App.3d 1155, the court acknowledged that we found it unnecessary to base our decision in Seaman’s on the implied covenant of good faith and fair dealing, but nonetheless concluded that we essentially had done so.

Despite the fact that we carefully limited our holding in Seaman’s to instances in which a party “seeks to shield itself from liability by denying, in bad faith and without probable cause, that the contract exists” (36 Cal.3d at p. 769), the Koehrer court expansively concluded that, “If. . . the existence of good cause for discharge is asserted by the employer without probable cause and in bad faith, that is, without a good faith belief that good cause for discharge in fact exists, the employer has tortiously attempted to deprive the employee of the benefits of the agreement, and an action for breach of the implied covenant of good faith and fair dealing will lie.” (181 Cal.App.3d at p. 1171.) Koehrer thus extended the expressly circumscribed cause of action established in Seaman’s based on denial of the existence of the contract, to find a tort cause of action when the dispute related to a contract term, namely the necessity for good cause as a basis for termination.

By this broad stroke, made without analyzing the appropriateness of imposing tort remedies in the employment context, the Koehrer court broached the possibility of obtaining tort damages for the breach of any term of a contract whether for employment or otherwise. Similarly, in Khanna, supra, 170 Cal.App.3d 250, the court used Tameny and Cleary as its starting point and focused primarily on the appropriate factual grounds on which an action for breach of the covenant could be brought without analyzing the propriety of the remedy itself.

The court concluded that the correct inquiry was whether there was sufficient evidence to support a finding that the employer “engaged in bad faith action, extraneous to the contract, with the motive intentionally to frustrate respondent’s enjoyment of his contract rights.” (Id., at p. 263.) It did not, however, focus on the fact that traditionally such a finding justified only contract damages.

Finally, Huber, supra, 841 F.2d at pages 983-985, engaged in no additional exploration of the justification for tort remedies, simply selecting Koehrer and Khanna as presenting the better of two approaches to the necessary elements of the tort described in California cases.

In our view, the underlying problem in the line of cases relied on by plaintiff lies in the decisions’ uncritical incorporation of the insurance model into the employment context, without careful consideration of the fundamental policies underlying the development of tort and contract law in general or of significant differences between the insurer/insured and employer/employee relationships.

When a court enforces the implied covenant it is in essence acting to protect “the interest in having promises performed” (Prosser, Law of Torts, op cit. supra, p. 613)—the traditional realm of a contract action—rather than to protect some general duty to society which the law places on an employer without regard to the substance of its contractual obligations to its employee.

Thus, in Tameny, 27 Cal.3d 167, 175-176, as we have explained, the court was careful to draw a distinction between “ex delicto” and “ex contractu” obligations. (See, ante, at pp. 667-668.) An allegation of breach of the implied covenant of good faith and fair dealing is an allegation of breach of an “ex contractu” obligation, namely one arising out of the contract itself. 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 purposes.

The insurance cases thus were a major departure from traditional principles of contract law. We must, therefore, consider with great care claims that extension of the exceptional approach taken in those cases is automatically appropriate if certain hallmarks and similarities can be adduced in another contract setting. With this emphasis on the historical purposes of the covenant of good faith and fair dealing in mind, we turn to consider the bases upon which extension of the insurance model to the employment sphere has been urged.

The “special relationship” test gleaned from the insurance context has been suggested as a model for determining the appropriateness of permitting tort remedies for breach of the implied covenant of the employment context. One commentary has observed, “[jjust as the law of contracts fails to provide adequate principles for construing the terms of an insurance policy, the substantial body of law uniquely applicable to insurance contracts is practically irrelevant to commercially oriented contracts. . . .

These [unique] features characteristic of the insurance contract make it particularly susceptible to public policy considerations.” (Louderback & Jurika, Standards for Limiting the Tort of Bad Faith Breach of Contract (1982) 16 U.S.F.

L.Rev. 187, 200-201, fns. omitted.) These commentators assert that tort remedies for breach of the covenant should not be extended across the board in the commercial context, but that, nonetheless, public policy considerations suggest extending the tort remedy if certain salient factors are present. (Id., at pp. 216-218.) “The tort of bad faith should be applied to commercial contracts only if four of the features characteristic of insurance bad faith actions are present.

The features are: (1) one of the parties to the contract enjoys a superior bargaining position to the extent that it is able to dictate the terms of the contract; (2) the purpose of the weaker party in entering into the contract is not primarily to profit but rather to secure an essential service or product, financial security or peace of mind; (3) the relationship of the parties is such that the weaker party places its trust and confidence in the larger entity; and (4) there is conduct on the part of the defendant indicating an intent to frustrate the weaker party’s enjoyment of the contract rights.” (Id., at p. 227.) The discussion of these elements includes an assumption that a tort remedy should be recognized in employment relationships within the stated limitations.

Others argue that the employment context is not sufficiently analogous to that of insurance to warrant recognition of the right to tort recovery. (See, e.g., Miller & Estes, supra, 16 U.C.

Davis L.Rev. 65, 90-91; Note, Defining Torts, supra, 34 Stan.L.Rev. at pp. 164-167.) They contend that (1) inequality in bargaining power is not a universal characteristic of employment contracts, standardized forms are often not used, and there is often room for bargaining as to special conditions; (2) employers do not owe similar fiduciary duties to employees who are themselves agents of the employer and obligated to act in the employer’s interests; and (3) unlike insurance companies, employers are not “quasi-public entities” and they “seldom have government-like functions, and do not serve primarily, if at all, to spread losses across society.” (Note, Defining Torts, supra, 34 Stan.L.Rev. at pp. 165-167; Miller & Estes, supra, 16 U.C.

Davis L.Rev. at p. 91.) In contrast to those concentrating on the match between insurance and employment relationships, yet another

article suggests, “The fundamental flaw in the ‘special relationship’ test is that it is illusory. It provides a label to hang on a result but not a principled basis for decision. . . . The qualifying contracts cannot be identified until the issue has been litigated, which is too late.” (Putz & Klippen, supra, 21 U.S.F.

L.Rev. at pp. 478-479.) The authors assert that “ ‘public interest, adhesion and fiduciary responsibility,’ are not sufficiently precise to provide a basis for reliable prediction.” (Id., at p. 479, fn. omitted.) Instead, they assert that, “While the ‘special relationship’ test purports to be only a modest extension of the tort of bad faith beyond insurance and employment, it opens the way for pleading a tort cause of action in nearly every contract case, leaving it ultimately to a jury to decide whether or not the parties had a ‘special relationship.’ ” (Id., at p. 480, fn. omitted.) Extension of the test to employment cases would similarly leave the door open to such a claim in every termination case, and readers are cautioned not to infer “that the authors support extension of tort liability beyond insurance through use of the ‘special relationship’ test.” (Id., at p. 461, fn. 163.) Similarly, another commentary argues that the special relationship model fails because (1) it does not explain why it “justifies tort liability” for otherwise legal conduct, or for conduct which may give rise to contract remedies (Comment, Reconstructing Breach, supra, 73 Cal.L.Rev. at p. 1299, fn. omitted), (2) use of the concept “is inadequate to define the scope and application of a tort duty of good faith and fair dealing” (id., at p. 1300), (3) use of the model “fails to distinguish between breach of the implied covenant of good faith and fair dealing and ‘bad faith breach of contract’ ” (ibid., fn. omitted), and (4) the model does not provide justification for imposition of punitive damages and thus “might serve to unfairly chill legitimate conduct” (id., at p. 1301).

After review of the various commentators, and independent consideration of the similarities between the two areas, we are not convinced that a “special relationship” analogous to that between insurer and insured should be deemed to exist in the usual employment relationship which would warrant recognition of a tort action for breach of the implied covenant.

Even if we were to assume that the special relationship model is an appropriate one to follow in determining whether to expand tort recovery, a breach in the employment context does not place the employee in the same economic dilemma that an insured faces when an insurer in bad faith refuses to pay a claim or to accept a settlement offer within policy limits. When an insurer takes such actions, the insured cannot turn to the marketplace to find another insurance company willing to pay for the loss already incurred.

The wrongfully terminated employee, on the other hand, can (and must, in order to mitigate damages [see Parker v. Twentieth Century-Fox Film Corp. (1970) 3 Cal.3d 176, 181-182 [89 Cal.Rptr. 737, 474 P.2d 689, 44 A.L.R.3d 615]]) make reasonable efforts to seek alternative employment. (See Mauk, supra, 21 Idaho L.Rev. 201, 208.) Moreover, the role of the employer differs from that of the “quasi-public” insurance company with whom individuals contract specifically in order to obtain protection from potential specified economic harm.

The employer does not similarly “sell” protection to its employees; it is not providing a public service. Nor do we find convincing the idea that the employee is necessarily seeking a different kind of financial security than those entering a typical commercial contract. If a small dealer contracts for goods from a large supplier, and those goods are vital to the small dealer’s business, a breach by the supplier may have financial significance for individuals employed by the dealer or to the dealer himself.

Permitting only contract damages in such a situation has ramifications no different from a similar limitation in the direct employer-employee relationship. Finally, there is a fundamental difference between insurance and employment relationships. In the insurance relationship, the insurer’s and insured’s interest are financially at odds. If the insurer pays a claim, it diminishes its fiscal resources. The insured, of course, has paid for protection and expects to have its losses recompensed. When a claim is paid, money shifts from insurer to insured, or, if appropriate, to a third party claimant.

Putting aside already specifically barred improper motives for termination which may be based on both economic and noneconomic considerations, as a general rule it is to the employer’s economic benefit to retain good employees. The interests of employer and employee are most frequently in alignment. If there is a job to be done, the employer must still pay someone to do it. This is not to say that there may never be a “bad motive” for discharge not otherwise covered by law.

Nevertheless, in terms of abstract employment relationships as contrasted with abstract insurance relationships, there is less inherent relevant tension between the interests of employers and employees than exists between that of insurers and insureds. Thus the need to place disincentives on an employer’s conduct in addition to those already imposed by law simply does not rise to the same level as that created by the conflicting interests at stake in the insurance context. Nor is this to say that the Legislature would have no basis for affording employees additional protections.

It is, however, to say that the need to extend the special relationship model in the form of judicially created relief of the kind sought here is less compelling. We therefore conclude that the employment relationship is not sufficiently similar to that of insurer and insured to warrant judicial extension of the proposed additional tort remedies in view of the countervailing concerns about economic policy and stability, the traditional separation of tort and contract law, and finally, the numerous protections against improper terminations already afforded employees. Our inquiry, however, does not end here.

The potential effects on an individual caused by termination of employment arguably justify additional remedies for certain improper discharges. The large body of employment law restricting an employer’s right to discharge based on discriminatory reasons or on the employee’s exercise of legislatively conferred employee rights, indicates that the Legislature and Congress have recognized the importance of the employment relationship and the necessity for vindication of certain legislatively and constitutionally established public policies in the employment context.

The Tameny cause of action likewise is responsive to similar public concerns. In the quest for expansion of remedies for discharged workers which we consider here, however, the policies sought to be vindicated have a different origin. The most frequently cited reason for the move to extend tort remedies in this context is the perception that traditional contract remedies are inadequate to compensate for certain breaches. (See, e.g., Putz & Klippen, supra, 21 U.S.F. L.Rev. at pp. 470-471; Traynor, Bad Faith Breach of a Commercial Contract: A Comment on the Seaman’s Case (Cal. State Bar, Fall 1984) 8 Bus. L.

News 1.) Others argue that the quest for additional remedies specifically for terminated workers also has its genesis in (1) comparisons drawn between the protections afforded nonunion employees and those covered by collective bargaining agreements, (2) changes in the economy which have led to displacement of middle-level management employees in “unprecedented numbers,” and (3) the effect of antidiscrimination awareness and legislation that has “raised expectations and created challenges to employer decision making.” (Gould, Stemming the Wrongful Discharge Tide: A Case for Arbitration (1988) 13 Emp.Rel.L.J. 404, 408-410 [hereafter Stemming the Tide].) The issue is how far courts can or should go in responding to these concerns regarding the sufficiency of compensation by departing from long established principles of contract law.

Significant policy judgments affecting social policies and commercial relationships are implicated in the resolution of this question in the employment termination context. Such a determination, which has the potential to alter profoundly the nature of employment, the cost of products and services, and the availability of jobs, arguably is better suited for legislative decisionmaking. (See Wagenseller v. Scottsdale Memorial Hosp., supra, 710 P.2d 1025, 1040; Gould, The Idea of the Job as Property in Contemporary America: The Legal and Collective Bargaining Framework, 1986 B.Y.U. L.

Rev. 885, 898, 908 [hereafter The Idea of the Job]; cf. Sabetay v. Sterling Drug, Inc., supra, 506 N.E.2d at p. 923.) Moreover, as we discuss, the extension of the availability of tort remedies is but one among many solutions posited to remedy the problem of adequately compensating employees for certain forms of “wrongful” termination while balancing the interests of employers in their freedom to make economically based decisions about their work force. It cannot be disputed that legislation at both the state and national level has profoundly affected the scope of at-will terminations.

As noted, regulation of employment ranging from workers’ compensation laws to antidiscrimination enactments, fair labor standards, minimum compensation, regulation of hours, etc., all have significantly impinged on the laissez-faire underpinnings of the at-will rule. (See, ante, p. 665, fn. 4.) Moreover, unionization of a portion of the domestic workforce has substantial implications for the judicial development of employment termination law because the rights of such workers when terminated are often governed exclusively by the terms of applicable collective bargaining agreements.

The slate we write on thus is far from clean. Professor Gould asserts, “[t]he new common law of wrongful discharge has provided employer and employee with the worst of all possible worlds. . . . [Ejmployers are subject to volatile and unpredictable juries that frequently act without regard to legal instructions.

Moreover, the employees who benefit are few and far between, first, because of the difficulties involved in staying the course of a lengthy and expensive judicial process, and second, because of limitations inherent in the legal doctrines adopted by the courts.” (Gould, Stemming the Tide, supra, 13 Emp.Rel.L.J. at p. 413.) Gould advocates exploring arbitration as an alternative, and his emphasis on the sporadic effectiveness of the tort cause of action to remedy perceived inadequacies in employee protection is important to our consideration of the effectiveness of the remedy sought here.

Professor Putz and coauthor Klippen also suggest “tort liability is not the answer to bad faith defense in commercial contract disputes. A more appropriate

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