Summary
In Butler-Rupp v. Lourdeaux (2005) 134 Cal.App.4th 1220, 1228-1229 [ 36 Cal.Rptr.3d 685], the court recently reaffirmed that damages recoverable for the negligent performance of a contract are limited by the reasonable expectations of the parties. "Our consideration of the Erlich decision and related lines of authority leads to the conclusion that the award of damages for emotional distress should be reversed.
Summary of this case from Stop Loss Ins. Brokers, Inc. v. Brown & Toland Medical GroupOpinion
Nos. A102706, A103925.
December 14, 2005.
Superior Court of Sonoma County, No. SCV218869, Laurence K. Sawyer, Judge.
Reed Smith, Peter W. Davis, Kathy M. Banke and Jayne E. Fleming for Plaintiffs and Appellants.
Grant, Genovese Baratta and Lance D. Orloff for Defendants and Appellants.
[CERTIFIED FOR PARTIAL PUBLICATION]
Pursuant to California Rules of Court, rules 976(b) and 976.1, this opinion is certified for publication with the exception of parts B-F of the Discussion.
OPINION
In this litigation arising from a landlord-tenant relationship, the landlords, Roseanna Lourdeaux and Wallace Lourdeaux (hereafter the Lourdeauxs), and their property manager, Evelyn Phelan (hereafter Phelan) appeal a judgment in favor of the tenant, Lili Butler-Rupp (hereafter Butler-Rupp) and Lili Butler Studio, Inc. (hereafter referred to collectively as plaintiff). The plaintiff separately appeals from an order denying a motion for attorney fees. We affirm in part and reverse in part the judgment in favor of plaintiff and reverse the order denying plaintiff's motion for attorney fees.
PROCEDURAL BACKGROUND
Plaintiff filed a complaint on April 10, 1998, against the Lourdeauxs and Phelan alleging breach of contract and several tort causes of action, and later added additional tort causes of action in a second amended complaint filed on July 7, 2000. At the conclusion of a lengthy trial, the court instructed the jury on seven causes of action: breach of contract, promissory fraud, negligent misrepresentation, defamation, interference with tenant's quiet enjoyment, intentional infliction of emotional distress, and negligent infliction of emotional distress.
On March 5, 2003, the jury returned a special verdict, responding to 23 questions, which found the Lourdeauxs liable on all causes of action except promissory fraud and intentional infliction of emotional distress. Phelan was found liable on causes of action for defamation, interference with tenant's quiet enjoyment, and negligent infliction of emotional distress. The jury further found that the Lourdeauxs and Phelan were liable for punitive damages predicated on the defamation verdict and a finding of oppression, malice or fraud.
The special verdict form asked for a single award of damages for the findings of liability for breach of contract, negligent misrepresentation and interference with quiet enjoyment. The jury awarded plaintiff damages of $855,000 on these causes of action. Responding to separate questions in the verdict form, the jury awarded plaintiff damages of $80,000 for defamation and $500,000 for negligent infliction of emotional distress. In a subsequent proceeding, it awarded plaintiff punitive damages against the Lourdeauxs in the amount of $5,000 and against Phelan in the amount of $500.
In postjudgment proceedings, the court denied the motion of the Lourdeauxs and Phelan for a new trial by an order filed June 19, 2003, and denied plaintiff's motion for attorney fees by an order entered August 12, 2003. The Lourdeauxs and Phelan (hereafter appellants) filed a notice of appeal from judgment, and plaintiff filed a separate notice of appeal from the denial of the request for attorney fees. We have consolidated both appeals.
FACTUAL BACKGROUND
Butler-Rupp is a clothes designer and manufacturer based in Sonoma County, California. After early successes as an artist, she began producing monoprints that she sold to local customers at prices appropriate for original works of art. In 1987, she leased a space of 900 square feet in the Lakeville Building in Petaluma, California, which was owned and managed by the Lourdeauxs. The initial lease was for a one-year term and called for a monthly rental of $350; the next year the rental rose to $600. In succeeding years, Butler-Rupp began to achieve a toehold in national markets and developed a line of high-end products for a national market. In 1991, she participated in her first New York fashion show and hired three employees, including an office manager, Anne Sachs.
The business continued to expand rapidly, with sales doubling for several consecutive years. In 1994, Butler-Rupp achieved gross sales of over $1 million, incorporated her business as Lili Butler Studio, Inc., and leased a showroom for the Dallas market. She added a new line of clothes called Tiger Lili and began plans for other lines, called Day Lili and Water Lili, which were targeted at different price ranges and clientele. Her staff continued to increase, reaching a high of 26 employees at one point in the 1990's.
In 1993 Butler-Rupp leased adjacent warehouse space in the Lakeville Building, designated suite 117, which she converted into a showroom and office. Her rent then rose to $1200. She testified that she agreed to lease suite 117 after receiving the assurance of Wallace Lourdeaux that he would upgrade the heating system. Lourdeaux later provided two vents to the room, but Butler-Rupp complained that the heating system still didn't work adequately.
The following year, Butler-Rupp explored the option of moving to another location since she calculated that she needed 3000-4000 square feet of production space to accommodate future business. In an effort to keep her as a tenant, Wallace Lourdeaux offered to convert a small area into a kitchen and to expand the leased area to include a bare, cement-floor warehouse space known as suite G. According to Butler-Rupp, her main concern was the adequacy of the heating system both in suite 117 and in the new suite G, which was then unheated. As an inducement to stay in the building, Lourdeaux represented that he would repair the heating system in suite 117 and "would install a complete heating unit at his own expense" in suite G. Butler-Rupp agreed to enter into the lease on these terms. Wallace Lourdeaux then brought a lease dated March 29, 1995, bearing his signature to her office. The lease was for a five-year term and provided for the lease of two additional areas, suite G and the kitchen, for a total rental payment of $1,660 a month. Butler-Rupp testified that she made clear that she would not enter into the lease unless the deficient heating of suite 117 was "taken care of." In late August, she returned a signed copy of the lease to the Lourdeauxs after being assured that the heating system for suite 117 was "completely renovated."
About the time Butler-Rupp entered the new lease, Roseanna Lourdeaux assumed active management of the building. The next year she hired a tenant, Phelan, to serve as on-site manager. According to Butler-Rupp, her problems with the building and its management, especially with regard to heating, took a turn for the worse in the new lease term, stalling the expansion of her business and leading to the present litigation.
Phelan soon came into conflict with Butler-Rupp by engaging in the practice of walking uninvited into production areas and talking to employees. When Butler-Rupp tried to limit Phelan's contact with employees, Phelan adopted a contentious attitude toward the business, which was expressed in certain statements that will be examined later in the portion of this opinion dealing with the slander verdict.
Butler-Rupp invested in improvements to both suite 117 and suite G with the expectation that they could be converted into working spaces, but the heating problems allowed only very limited use of suite 117. In response to her complaints, Roseanna Lourdeaux repeatedly assured her that "they were working" on the problem and dispatched a series of workmen to make service calls. In December 1997, Butler-Rupp had an opportunity to talk to a heating system technician who had examined the system. He told her that he had "some bad news." The system was undersized to heat suite 117 and would never provide adequate heat. In his words, it was "a stage set."
Being unable to place production employees in unheated space, Butler-Rupp could use only a fraction of the leased space to meet the orders generated by rapidly expanding sales. Compounding these difficulties, the first six months of 1998 were marked by a series of conflicts and disputes with the Lourdeauxs and Phelan that signaled a breakdown in cooperation and communication between the parties. In January, the Lourdeauxs issued a notice of rent increase that treated the unheated suite 117 as office space and inflated the calculation of the rent obligation by employing a disputed calculation of the square footage of the leased area. When Butler-Rupp raised objections, she was told that the increase was "nonnegotiable." She paid the increase under protest after retaining a lawyer. The building manager, Phelan, scheduled electrical maintenance that would have deprived Butler-Rupp's business of power shortly before her critical spring shipment date and continued to demand greater access to the premises. Resisting these demands, Butler-Rupp insisted on 24-hour notice for access into her premises.
Shortly after complaining to the Lourdeauxs about Phelan's management, Butler-Rupp was served with a 30-day notice of termination of her lease. She successfully opposed the notice of termination by relying on the five-year term of the lease, which was not subject to such termination, but the Lourdeauxs pursued other demands: they billed her for common area maintenance charges, though the lease did not provide for them; demanded that she pay monthly parking charges; claimed that she had fallen behind in rental payments based on another disputed interpretation of the lease; and presented her with another notice of rent increase through their attorney.
While she succeeded in meeting her 1998 spring production deadline, Butler-Rupp was forced to send a notice to all customers stating that she was unable to accept new orders. At trial she explained, "We were max'd out in production. We were using all the overtime we could possibly use. We couldn't employ any more people in that space, and we didn't have any space left to expand our production." The rapid sales growth that Butler-Rupp had earlier experienced began to level out in the late 1990's.
In April 1998 Butler-Rupp filed the original complaint in this action alleging violation of her leasehold rights. The Lourdeauxs countered by claiming that she had breached an oral contract to lease a utility closet and served her with two notices to pay rent or quit and a notice to perform covenants or quit. In July, they filed an unlawful detainer action. Recognizing that an eviction would have a devastating impact on her business, Butler-Rupp sought to negotiate a termination of her five-year lease while searching for space elsewhere. Unfortunately, she could not find a suitable space within the time deadline imposed by the Lourdeauxs and a tentative settlement unraveled.
The heating problems of suite 117 were never remedied. Early in 1999, Butler-Rupp retained a mechanical engineer, Daniel Reiter, to study the heating system of suite 117. Reiter testified at trial that the heating equipment had the capacity to provide only about 60 percent of the heat the room needed, and the heat delivered to the unit was further diminished by uninsulated and leaky heating ducts. He measured the temperature in the room during five days in January and found that it never rose to a comfort level. On January 7th, for example, the temperature varied between 56 and 62 degrees during the day.
In 1999, Butler-Rupp continued to search for alternative space but several successive lease negotiations fell through. The unlawful detainer action eventually came up for trial, but the Lourdeauxs then dismissed the action. At trial, Butler-Rupp testified that the Lourdeauxs harassed her employees and poisoned relations with other tenants, but, despite these adverse conditions, she still managed to meet production deadlines. Ultimately, she was able to move out of the premises on January 31, 2000.
DISCUSSION
A. Negligent Infliction of Emotional Distress
Appellants' first assignment of error challenges the award of $500,000 in damages for emotional distress. The seventh cause of action in the second amended complaint alleged that Butler was "damaged by the negligent conduct of defendants . . . in that she has suffered . . . emotional distress as a direct and proximate result of such conduct." The trial court instructed the jury on negligent infliction of emotional distress pursuant to BAJI No. 12.80, but did not offer a general instruction on negligence or an instruction defining the breach of a duty of care required for recovery of damages for emotional distress.
"The plaintiff Lili [Butler-Rupp] also seeks to recover damages based upon a claim of negligent infliction of emotional distress. The elements of such a claim are: 1. The defendant engaged in negligent conduct; 2. The plaintiff suffered serious emotional distress; 3. The defendants' negligent conduct was a cause of the serious emotional distress. Serious emotional distress is an emotional reaction which is not an abnormal response to the circumstances. It is found where a reasonable person would be unable to cope with the mental distress caused by the circumstances."
The jury was asked by question No. 19 of the special verdict form if "negligent infliction of emotional distress cause[d] damage" to Butler-Rupp, and if it answered "yes" to this question, the jury was asked by question No. 22 to determine the amount of damages suffered by Butler-Rupp that was caused by the defendants' conduct. The jury answered "yes" to question No. 19 and awarded damages of $500,000 in response to question No. 22. In other portions of the special verdict, the jury found that defendants did not intentionally inflict emotional distress on Butler-Rupp and awarded $855,000 in damages predicated on breach of contract (question No. 2), negligent misrepresentation (question No. 10) or interference with Butler-Rupp's quiet enjoyment of her lease (question No. 15).
(1) As appellants argue, we consider that the present case is governed by Erlich v. Menezes (1999) 21 Cal.4th 543 [ 87 Cal.Rptr.2d 886, 981 P.2d 978], which reversed an award of damages for emotional distress based on breach of a contract to build a house. The decision first analyzed the award of tort damages in contract cases. Citing Applied Equipment Corp. v. Litton Saudi Arabia Ltd. (1994) 7 Cal.4th 503, 515 [ 28 Cal.Rptr.2d 475, 869 P.2d 454], the court noted that "conduct amounting to a breach of contract becomes tortious only when it also violates a duty independent of the contract arising from principles of tort law." ( Erlich v. Menezes, supra, at p. 551; see also Freeman Mills, Inc. v. Belcher Oil Co. (1995) 11 Cal.4th 85, 102 [ 44 Cal.Rptr.2d 420, 900 P.2d 669].) Thus, "[t]ort damages have been permitted in contract cases where a breach of duty directly causes physical injury [citation]; for breach of the covenant of good faith and fair dealing in insurance contracts [citation]; for wrongful discharge in violation of fundamental public policy [citation]; or where the contract was fraudulently induced. [Citation.] In each of these cases, the duty that gives rise to tort liability is either completely independent of the contract or arises from conduct which is both intentional and intended to harm." ( Erlich v. Menezes, supra, at pp. 551-552.)
(2) In the present case, the jury found that defendants did not intention-ally cause emotional distress. The special verdict also precludes any claim that damages for emotional distress can be predicated on negligent misrepresentation. The jury awarded damages for emotional distress solely on the basis of a finding of negligence in response to question No. 19; the finding of negligent misrepresentation supported a distinct award of damages based on the response to question No. 10. In any event, we note that a plaintiff may not recover damages for emotional distress in an action for negligent misrepresentation where the "plaintiff's direct loss resulting from the negligent conduct of the defendant was [only] economic." ( Branch v. Homefed Bank (1992) 6 Cal.App.4th 793, 801 [ 8 Cal.Rptr.2d 182].)
(3) The question therefore becomes whether the jury's finding of negligence can support an award of damages for emotional distress on the present record. The Erlich decision also addresses this issue. The Erlich court observed emotional distress damages are not "`available in every case in which there is an independent cause of action founded upon negligence.' [Citation.]" ( Erlich v. Menezes, supra, 21 Cal.4th 543, 554.) Such damages have generally been allowed where the defendant's conduct caused physical injury. For example, Potter v. Firestone Tire Rubber Co. (1993) 6 Cal.4th 965 [ 25 Cal.Rptr.2d 550, 863 P.2d 795], affirmed a judgment of damages where the plaintiffs suffered from prolonged exposure to a carcinogen. But in the absence of physical injury, the courts have never allowed recovery of damages for emotional distress arising solely from property damage or economic injury to the plaintiff. The injury suffered by the Erlich plaintiffs — the negligent construction of their house — did not cause physical injury and "derive[d] from an inherently economic concern." ( Erlich v. Menezes, supra, at p. 558; see also Lubner v. City of Los Angeles (1996) 45 Cal.App.4th 525, 531-534 [ 53 Cal.Rptr.2d 24]; Camenisch v. Superior Court (1996) 44 Cal.App.4th 1689, 1691 [ 52 Cal.Rptr.2d 450]; Merenda v. Superior Court (1992) 3 Cal.App.4th 1, 7 [ 4 Cal.Rptr.2d 87], disapproved on other grounds in Ferguson v. Lieff, Cabraser, Heimann Bernstein (2003) 30 Cal.4th 1037, 1053 [ 135 Cal.Rptr.2d 46, 69 P.3d 965].) Hence, the court found no precedent for the award of damages for emotional distress based on the finding of the defendants' negligence.
(4) The Erlich holding is consistent with the economic loss rule reviewed in Robinson Helicopter Co., Inc. v. Dana Corp. (2004) 34 Cal.4th 979 [ 22 Cal.Rptr.3d 352, 102 P.3d 268].) The plaintiff, a manufacturer of helicopters, purchased a clutch mechanism from the defendant. When it discovered that the defendant had misrepresented that the clutch conformed to contract specifications, the plaintiff was required to recall all helicopters that it had sold with the faulty clutches. The jury returned a verdict for both compensatory and punitive damages. On appeal, the court considered whether the economic loss rule precluded recovery of a tort measure of damages, i.e., punitive damages. The court explained that "[t]he economic loss rule requires a purchaser to recover in contract for purely economic loss due to disappointed expectations, unless he can demonstrate harm above and beyond a broken contractual promise." ( Id. at p. 988.) The court held, however, that the defendant was properly found liable for intentional misrepresentation on facts independent of its breach of contract, i.e., its affirmative misrepresentation of contract compliance and affirmed the judgment for punitive damage as being predicated on this finding.
The Erlich decision is also consistent with decisions that have restricted the circumstances under which a plaintiff can recover damages for emotional distress under the law of negligence. (E.g., Christensen v. Superior Court (1991) 54 Cal.3d 868, 875 [ 2 Cal.Rptr.2d 79, 820 P.2d 181]; Fluharty v. Fluharty (1997) 59 Cal.App.4th 484, 490-496 [ 69 Cal.Rptr.2d 244].) For example, in Lawson v. Management Activities, Inc. (1999) 69 Cal.App.4th 652 [ 81 Cal.Rptr.2d 745], a group of employees sought damages for emotional distress from the operator of a jet that had crashed close to their place of employment. The court analyzed their claim in terms of the "fundamentals of basic negligence law, that is, the `"traditional elements of duty, breach of duty, causation, and damages"'" and applied "the seven factors traditionally used by our Supreme Court to determine the existence of a duty. . . ." ( Id. at p. 657; see Burgess v. Superior Court (1992) 2 Cal.4th 1064, 1079-1080 [ 9 Cal.Rptr.2d 615, 831 P.2d 1197].) Through this analysis, the court held that "the factors which determine duty weigh, on balance, against liability for emotional distress damages to otherwise unhurt bystanders." ( Lawson v. Management Activities, Inc., supra, at p. 660.)
(5) Our consideration of the Erlich decision and related lines of authority leads to the conclusion that the award of damages for emotional distress should be reversed. The record supports a finding only that defendants negligently performed their contractual duties under the lease, thereby incur-ring liability for breach of contract. No physical injury to the plaintiff is shown by the record and no basis for predicating tort liability on intentional conduct of the defendants. Moreover, we do not find any breach of duty on the part of the Lourdeauxs that would support liability for infliction of emotional distress under the law of negligence. The Lourdeauxs' duties were circumscribed by their obligations under the lease and were confined to fulfilling plaintiff's contractual expectations of economic gain. The damages are therefore predicated on economic injury to plaintiff, which precludes recovery of damages for emotional distress. In our view, the affirmance of the award of damages for emotional distress would blur the distinction between contract and tort, thereby violating the policy underlying the economic loss rule. Since Butler-Rupp's damages derive solely from appellants' failure to perform their contract obligations, she can recover only in contract for the economic losses due to her disappointed contractual expectations.
We recognize that "[r]ecovery of emotional distress damages has been allowed, absent impact or physical injury, in certain specialized classes of cases. Where the negligence is of a type which will cause highly unusual as well as predictable emotional distress, recovery has been allowed." ( Branch v. Homefed Bank, supra, 6 Cal.App.4th 793, 800 [collecting cases in point]; see, e.g., Molien v. Kaiser Foundation Hospitals (1980) 27 Cal.3d 916, 930 [ 167 Cal.Rptr. 831, 616 P.2d 813] [negligent advice that patient had contracted syphilis resulting in distress to husband].) Plaintiff, however, has not cited this authority or identified circumstances that could give rise to such an independent duty of the defendants to avoid infliction of emotional distress.
Butler-Rupp appears to argue that appellants waived error by failing to object to her request for a jury instruction pursuant to BAJI No. 12.85 regarding recovery of damages for emotional distress resulting from substantial financial injury. We see no possibility of waiver. The instruction had doubtful relevance to Butler-Rupp's cause of action for negligent infliction of emotional distress since it was confined to financial injury caused by a defendant's intentional or reckless wrongful conduct. More importantly, "[instructions requested by an adverse party `are deemed to have been excepted to' (Code Civ. Proc, § 647) even though the complaining party made no objection thereto." ( Richardson v. Employers Liab. Assur. Corp. (1972) 25 Cal.App.3d 232, 241 [ 102 Cal.Rptr. 547]; see Lund v. San Joaquin Valley Railroad (2003) 31 Cal.4th 1, 7 [ 1 Cal.Rptr. 3d 412, 71 P.3d 770]; 7 Witkin, Cal. Procedure (4th ed. 1997) Trial, § 315, p. 359.) The decisions that Butler-Rupp cites in an attempt to oppose this familiar rule are not in point. ( Agarwal v. Johnson (1979) 25 Cal.3d 932, 950-951 [ 160 Cal.Rptr. 141, 603 P.2d 58] [failure to request instruction], overruled on other grounds in White v. Ultramar, Inc. (1999) 21 Cal.4th 563, 574, fn. 4 [ 88 Cal.Rptr.2d 19, 981 P.2d 944]; Carrau v. Marvin Lumber Cedar Co. (2001) 93 Cal.App.4th 281, 297 [ 112 Cal.Rptr.2d 869] [objection to form of instruction correctly stating law]; Stevens v. Owens-Corning Fiberglas Corp. (1996) 49 Cal.App.4th 1645, 1653 [ 57 Cal.Rptr.2d 525] [instruction given at appellant's request].)
Other cases on which Butler-Rupp relies are easily distinguishable. She cites Stoiber v. Honeychuck (1980) 101 Cal.App.3d 903 [ 162 Cal.Rptr. 194] as a decision allowing a tenant to recover tort damages from a landlord, but Stoiber applies only to landlords of residential property and has no application to commercial leases. ( id. at pp. 922-925.) The recovery of a tort measure of damages in Stoiber was predicated on the landlord's statutory duty to maintain in a tenantable condition "building[s] intended for the occupation of human beings. . . ." (Civ. Code, § 1941.) Acadia, California, Ltd. v. Herbert (1960) 54 Cal.2d 328 [ 5 Cal.Rptr. 686, 353 P.2d 294] concerned the intentional disruption of plaintiffs water supply under circumstances "closely analogous to a trespass or a nuisance in that it interfered with [their] use and enjoyment of the land. . . ." ( Id. at p. 338.) Rowland v. Christian (1968) 69 Cal.2d 108 [ 70 Cal.Rptr. 97, 443 P.2d 561] involved a personal injury action against a tenant rather than a landlord.
B.-R B. Standing of Corporation
See footnote, ante, page 1220.
Attacking the award of $855,000 in damages for breach of contract, appellants argue that the corporation, Butler Studios, Inc., did not have standing to raise a claim of breach of contract and Butler-Rupp individually could not seek to recover the corporation's lost profit. The argument is premised on the language of the introductory clause of the lease dated March 29, 1995, which states that the lease is "between The Lourdeaux Company (`Landlord') and Lili Butler (`Tenant')." Elsewhere the lease identifies the tenant as "Lili Butler Studio" and the signature line for Lili Butler identified her "title" as "owner." Nevertheless, appellants maintain that the operative language of the lease identifies Butler-Rupp individually as the lessee.
Appellants appear to raise this objection for the first time on appeal. They have not drawn our attention to any place in the trial record where the point was urged. Indeed, appellants' answer to the complaint admits that the "parties" entered into the 1995 lease, a term that literally embraces both Butler-Rupp individually and Butler Studio, Inc. The assignment of error therefore may be properly rejected on the ground that "an objection could have been, but was not, presented to the lower court by some appropriate method." (9 Witkin, Cal. Procedure (4th ed. 1997) Appeal, §§ 394, p. 444.)
We consider that the application of this procedural rule is particularly appropriate on the present record. Appellants' objection labors in the face of much evidence that Butler-Rupp possessed apparent authority to act on behalf of the corporation. She testified that her business was incorporated in 1994. She later paid rent with checks drawn on the corporate account and wrote correspondence to the Lourdeauxs as president of the corporation. For their part, defendants repeatedly referred to their tenant as "Lili Butler Studio." The phrase appears in three-day notices to pay rent or quit, a statement of common area maintenance expenses, a 30-day termination notice, and several letters to Butler-Rupp. The lease itself falls into this category since it also contains an identification of the tenant as Lili Butler Studio. Though appellants never appended a corporate reference to this term and sometimes preceded it with the abbreviation "d.b.a.," these references to Lili Butler Studio are consistent with the assumption that appellants knew that they were dealing with a legal entity as well as with Butler-Rupp individually. In fact, defendants brought the unlawful detainer action against Butler-Rupp and Lili Butler Studio, Inc., and later amended the complaint to identify Lili Butler Studio, Inc. as a California corporation.
The existence of apparent authority of Butler-Rupp to represent the corporation would call for application of the rule that "when an officer's apparent or ostensible authority to execute an agreement on behalf of the corporation has been established, the officer's omission of his or her official designation from the agreement does not negate the corporation's obligation under the agreement." ( Snukal v. Flightways Manufacturing, Inc. (2000) 23 Cal.4th 754, 780, fn. 8 [ 98 Cal.Rptr.2d 1, 3 P.3d 286].) Hence, if appellants had raised in the trial court the objection that they now argue on appeal, the trial court would have been required to consider the mass of evidence bearing on Butler-Rupp's apparent authority, much of it clearly favorable to her claim to have always acted for the corporation. It would be inconsistent with fundamental principles of appellate procedure to undertake such a difficult factual inquiry for the first time on appeal. (9 Witkin, Cal. Procedure, supra, §§ 796, p. 829.)
Our conclusion applies also to appellants' alternative argument that appellants could not have foreseen that their breach of the lease would expose them to liability for corporate lost profits because they contracted solely with Butler-Rupp as an individual and therefore corporate lost profits are not recoverable under the limiting rule of Hadley v. Baxendale (1854) 156 Eng.Rep. 145. (See Millikan v. American Spectrum Real Estate Services Cal., Inc. (2004) 117 Cal.App.4th 1094, 1104 [ 12 Cal.Rptr.3d 459]; Brandon Tibbs v. George Kevorkian Accountancy Corp. (1990) 226 Cal.App.3d 442, 458 [ 277 Cal.Rptr. 40].) This argument again is premised on the claim, raised for the first time on appeal, that appellants contracted only with Butler-Rupp individually.
C. Negligent Misrepresentation
As a variation on the foregoing assignment of error, appellants argue that the judgment of damages for negligent misrepresentation must be reversed for lack of substantial evidence because "the ponderous record contains only the Lourdeauxes' representations to Butler individually, and discloses no instance when either Lourdeaux represented any fact to the corporation." It is an elementary principle, however, that "[a]n agent represents his principal for all purposes within the scope of his actual or ostensible authority, and all the rights and liabilities which would accrue to the agent from transactions within such limit, if they had been entered into on his own account, accrue to the principal." (Civ. Code, §§ 2330.) The rule applies to corporate officers acting as agents for a principal. (See Moore v. Phillips (1959) 176 Cal.App.2d 702, 709 [ 1 Cal.Rptr. 508].)
It follows that "[a] contract made by an agent for an undisclosed principal is for most purposes the contract of the principal. . . ." ( Bank of America v. State Bd. of Equal. (1962) 209 Cal.App.2d 780, 796 [ 26 Cal.Rptr. 348].) "Unless excluded by the terms of the agreement made by the agent, an undisclosed principal may claim the benefits of the contract and may sue or be sued in his or her own name." ( American Builder's Assn. v. Au-Yang (1990) 226 Cal.App.3d 170, 176 [ 276 Cal.Rptr. 262].) While this rule has been applied in suits for breach or enforcement of a contract, it clearly applies also to a suit to recover damages for negligent misrepresentations serving as an inducement to enter a contract.
D. Calculation of Damages
Appellants next contend that the evidence of lost profits was too speculative to support the award of $855,000 in damages. We begin with "the general rule that while a plaintiff must show with reasonable certainty that he has suffered damages by reason of the wrongful act of defendant, once the cause and existence of damages have been so established, recovery will not be denied because the damages are difficult of ascertainment." ( Stott v. Johnston (1951) 36 Cal.2d 864, 875 [ 229 P.2d 348]; Brandon Tibbs v. George Kevorkian Accountancy Corp., supra, 226 Cal.App.3d 442, 458-459.) "`As long as there is available a satisfactory method for obtaining a reasonably proximate estimation of the damages, the defendant whose wrongful act gave rise to the injury will not be heard to complain that the amount thereof cannot be determined with mathematical precision. . . .' [Citations.]" ( DuBarry Internat., Inc. v. Southwest Forest Industries, Inc. (1991) 231 Cal.App.3d 552, 562 [ 282 Cal.Rptr. 181].)
In general, "[l]ost profits to an established business may be recovered if their extent and occurrence can be ascertained with reasonable certainty. . . ." ( Berge v. International Harvester Co. (1983) 142 Cal.App.3d 152, 161 [ 190 Cal.Rptr. 815].) "The extent of such damages may be measured by `the past volume of business and other provable data relevant to the probable future sales.' [Citation.] . . . `It has been frequently stated that if a business is new, it is improper to award damages for loss of profits because absence of income and expense experience renders anticipated profits too speculative to meet the legal standard of reasonable certainty. . . . However, the rule is not a hard and fast one. . . .' [Citations.]" ( Shade Foods, Inc. v. Innovative Products Sales Marketing, Inc. (2000) 78 Cal.App.4th 847, 890 [ 93 Cal.Rptr.2d 364].)
Where an expert presents a lost profit analysis, "criticisms of [the] expert's method of calculation is a matter for the jury's consideration in weighing that evidence." ( Arntz Contracting Co. v. St. Paul Fire Marine Ins. Co. (1996) 47 Cal.App.4th 464, 489 [ 54 Cal.Rptr.2d 888].) "It is for the trier of fact to accept or reject this evidence, and this evidence not being inherently improbable provides a substantial basis for the trial court's award of lost profits. . . ." ( Brandon Tibbs v. George Kevorkian Accountancy Corp., supra, 226 Cal.App.3d 442, 469-470.) "The law requires only that some reasonable basis of computation of damages be used, and the damages may be computed even if the result reached is an approximation." ( GHK Associates v. Mayer Group, Inc. (1990) 224 Cal.App.3d 856, 873 [ 274 Cal.Rptr. 168].)
On the issue of lost profits, plaintiff relied chiefly on the testimony of an expert witness, Bruce Berton, who had experience as a business consultant and entrepreneur in the clothing and textile industry. Berton presented an analysis of lost profits over a seven-year period based on sales that plaintiff might have realized if production activities had been expanded into unheated leased space. He concluded that the total lost profits from such projected sales during this period amounted to $3,272,567. In support of this calculation, he prepared a written report, admitted as a trial exhibit, that calculated lost profits for three separate product lines for each of the seven years and presented an analysis by year and market of the sales growth that plaintiff might have achieved with adequate production space, a breakdown of actual cost of sales, and a calculation of incremental operating expenses for the projected sales.
A second witness, Carol Hoffman, presented testimony that tended to lend credibility to Berton's projections of lost sales. The owner of a buying house in the fashion industry, Hoffman testified that plaintiff's products were consistently well received by retailers because of their high artistic quality and technical competence.
We find no reason to question Berton's qualifications as a witness or the methodology that he employed. Appellants argue that his analysis extended two years beyond the date plaintiff vacated the property and relies heavily on new product lines that plaintiff did not market while occupying the premises. The projection of lost profits from a new product line, they maintain, is subject to the same criticism as calculation of anticipated profits from a new business (see also Maggio, Inc. v. United Farm Workers (1991) 227 Cal.App.3d 847, 870 [ 278 Cal.Rptr. 250]) or from unidentified contract opportunities. ( Lewis Jorge Construction Management, Inc. v. Pomona Unified School Dist. (2004) 34 Cal.4th 960, 971-972 [ 22 Cal.Rptr.3d 340, 102 P.3d 257].) The jury, however, sharply discounted his calculations by awarding damages of $855,000, a fraction of his calculation of total lost profits. Appellants cannot secure reversal of the damage award without showing that this smaller figure is in error.
We consider that, while appellants have made some plausible criticisms of Berton's analysis, they have failed to show that the jury's actual award lacks support in the record. Indeed, they have presented no alternative calculation of lost profits or any quantitative analysis of the Berton analysis. Their contention that the recovery of lost profits rests on projected sales of two clothing lines which did not exist during the term of the lease is inaccurate and clearly overbroad. The Berton analysis rested largely on two lines of clothing (Lili Butler and Day Lili) that in fact did exist during the lease term and generated considerable sales and cost data. A third line (Tiger Lili) mentioned in the Berton report went into limited production in 1999, was suspended for a year, and then renewed in 2001. Berton discussed a later line of clothing (Water Lili) in his testimony but did not include it in his written report. Thus, even if we were to accept appellants' criticism of the Berton report on this ground, it is not clear that their criticism of his projections based on untested new lines of clothing would serve to challenge the award of lost profits in the jury verdict.
We also reject appellants' contrived argument that Berton admitted on the witness stand that his calculations were speculative. The record reveals that Berton testified only that it was a matter of speculation which of two planned collections (Water Lili and Tiger Lili) would generate more profits and he therefore assumed equal success. The remark had only tangential relevance to the evidentiary basis for the jury's award of lost profits.
E. Slander
Defendants maintain that the trial court erred in instructing the jury that "[t]he statement Mexican Sweatshop, or Sweatshop and the statement that the plaintiff falsified the lease are defamatory on their face if untrue." They argue that the former statement is protected by the First Amendment and the latter by the litigation privilege of Civil Code section 47, subdivision (b).
Defendants do not dispute that "the question of whether or not the utterance is reasonably susceptible of a defamatory meaning is a question of law for the court. [Citations.] [¶] When the material published is unambiguous and actionable on its face it is proper to so instruct the jury and to refuse to permit the publisher to show that the utterance was used and understood in an innocent sense." ( Arno v. Stewart (1966) 245 Cal.App.2d 955, 959-960 [ 54 Cal.Rptr. 392]; see also MacLeod v. Tribune Publishing Co. (1959) 52 Cal.2d 536, 546 [ 343 P.2d 36].)
Butler-Rupp testified that the building manager, Phelan, entered her space in the summer of 1997 when the air conditioning system failed and engaged in a discussion of the problem with her and Anne Sachs in the presence of "a lot of employees in the back." Phelan remarked, "Gee, it's so hot in here it's like a Mexican sweat shop." Butler asked her to leave. Sachs and two employees, Huong Ma and Elena Milan, gave very similar accounts of the incident. Sachs recalled that Phelan said, "It's just like a Mexican sweatshop here." Ma testified, "She call us [a] Mexican sweatshop." Milan remembered that Phelan said: "this place is like a Mexican sweatshop."
Both Milan and Sachs testified that they had heard Phelan use this expression on another occasion. According to Milan, while she was having lunch with other employees in a common area of the building, she once overheard Phelan use the phrase, "Mexican sweatshop" while talking to another person. She later asked Butler-Rupp what the phrase meant. Sachs recounted that on one occasion she passed by Phelan as she was showing the building to a person who looked like a prospective tenant and caught the words "Lili Butler" and "sweatshop."
Phelan denied that she ever used the expression "Mexican sweatshop" and claimed to be "shocked" by the accusation. She acknowledged that she did use the expression "sweatshop" on the day that the air conditioning failed but maintained that it was intended humorously: "I do recall making the statement `Boy, this sure brings new meaning to the words [ sic] "sweatshop".' And I was referring to the heat."
The issue regarding a statement of lease falsification comes from the testimony of a real estate developer, Richard Koch, and real estate broker, Bryant Moynihan. Koch testified that he owned a building that Butler-Rupp was negotiating to lease in late 1998. After the negotiations failed, he received a call from Bryant Moynihan, a former business associate, who asked him to talk to Roseanna Lourdeaux. He later spoke with her as requested. When examined by Butler-Rupp's counsel about this conversation, he recalled that Roseanna Lourdeaux explained that she was trying to get rid of Butler-Rupp as a tenant and was having "one hell of a time" doing it. Koch was then asked, "Did Roseanna Lourdeaux tell you that Lili Butler had falsified her lease?" He replied, "Yes." He was again asked, "Did Roseanna Lourdeaux tell you that Lili Butler had altered her lease without their knowledge or consent?" He answered, "Yes." In the course of his trial testimony, Moynihan denied that Roseanna Lourdeaux had told him that Butler-Rupp altered her lease, but he was impeached by prior inconsistent statements on deposition. In his deposition testimony he said that he knew of litigation between the Lourdeauxs and Butler-Rupp and understood alteration of lease was one of the problems. He assumed that Butler-Rupp "had altered the lease."
With regard to the sweatshop statement, appellants do not challenge the defamatory nature of the expression "Mexican sweatshop" and concede that it was untrue. Indeed, their opening brief acknowledges that "Butler's business did not pay low wages, did not require long hours, and provided excellent conditions." They base their assignment of error on First Amendment protections, claiming that the statement was a "non-actionable hyperbolic opinion" as a matter of law.
"The First Amendment protects `statements that cannot "reasonably [be] interpreted as stating actual facts" about an individual.' [Citations.] Courts have extended First Amendment protection to such statements in recognition of `the reality that exaggeration and non-literal commentary have become an integral part of social discourse.' [Citation.] By protecting speakers whose statements cannot reasonably be interpreted as allegations of fact, courts `provide assurance that public debate will not suffer for lack of "imaginative expression" or the "rhetorical hyperbole" which has traditionally added much to the discourse of our nation.' [Citations.]" ( Knievel v. ESPN (9th Cir. 2005) 393 F.3d 1068, 1074.)
Thus, in Greenbelt Pub. Assn. v. Bressler (1970) 398 U.S. 6, 14 [ 26 L.Ed.2d 6, 90 S.Ct. 1537], the Supreme court held that the expression "blackmail," when used to describe a land developer's negotiating stance in a public hearing, "was no more than rhetorical hyperbole, a vigorous epithet used by those who considered [the plaintiff's] negotiating position extremely unreasonable." In Letter Carriers v. Austin (1974) 418 U.S. 264 [ 41 L.Ed.2d 745, 94 S.Ct. 2770], the court reversed a libel judgment against a union that had described plaintiffs as traitors in a newsletter because of their refusal to join the union. The court held that the expression could not be construed as a representation of fact but was "obviously used here in a loose, figurative sense to demonstrate the union's strong disagreement with the views of those workers who oppose unionization." ( Id. at p. 284; see also Rosenaur v. Scherer (2001) 88 Cal.App.4th 260, 280 [ 105 Cal.Rptr. 2d 674] ["use of the words `thief' and `liar' in the course of a chance confrontation with a political foe"].)
Arguing that the statements lie outside constitutional protections, Butler-Rupp relies on the rule that "defamatory statements are not protected if they imply an assertion of [a] false objective fact." ( Gill v. Hughes (1991) 227 Cal.App.3d 1299, 1309 [ 278 Cal.Rptr. 306].) For example, the Gill court found that the statement that the plaintiff was "an incompetent surgeon" implied a knowledge of supporting facts and was "susceptible of being proved true or false." ( Id. at p. 1309.) Weller v. American Broadcasting Companies, Inc. (1991) 232 Cal.App.3d 991 [ 283 Cal.Rptr. 644] held that an antiques dealer could recover damages from a broadcaster for statements that he had sold an item for a grossly inflated price to the de Young Museum. It found that, "although there may have been a range of reasonable valuations, whether the museum had `acquired the candelabra at a grossly inflated price' could be objectively verified." ( Id. at p. 1005.)
"Whether a statement declares or implies a provably false assertion of fact is a question of law for the court to decide [citations], unless the statement is susceptible of both an innocent and a libelous meaning, in which case the jury must decide how the statement was understood." ( Franklin v. Dynamic Details, Inc. (2004) 116 Cal.App.4th 375, 385 [ 10 Cal.Rptr.3d 429].) Though the issue is close, we conclude that the trial court properly instructed the jury that the sweatshop statements were defamatory if untrue. The statements that Butler ran a sweatshop denoted several related facts that were all objectively verifiable, i.e., that she violated labor standards, paid low wages, denied reasonable employee benefits, and maintained poor working conditions. As appellants themselves now concede, Butler-Rupp soundly proved that all the facts were untrue through her testimony and that of employee witnesses.
As employed by the Lourdeauxs' agent, Phelan, the expression "sweatshop" fell outside the sphere of public debate and free expression of opinion protected by the First Amendment. In the discussion with plaintiff and Anne Sachs over air conditioning, Phelan used the statement in a gratuitous and deliberately provocative manner, which had no connection with the subject of their conversation but rather expressed animus toward Butler-Rupp and her business. Phelan was later heard twice to use the expression in describing Butler-Rupp's business to third parties. While we can only speculate as to Phelan's motivations, it is clear enough that she used the expression for the purpose of denigrating Butler-Rupp's business rather than of expressing an opinion or idea. In each instance, the context precludes the claim that the statements constituted rhetorical exaggeration in support of constitutionally protected speech.
Appellants raise for the first time on appeal the claim that the lease falsification statement was privileged under Civil Code section 47, subdivision (b). "For well over a century, communications with `some relation' to judicial proceedings have been absolutely immune from tort liability by the privilege codified as section 47(b). At least since then-Justice Traynor's opinion in Albertson v. Raboff (1956) 46 Cal.2d 375 [ 295 P.2d 405], California courts have given the privilege an expansive reach." ( Rubin v. Green (1993) 4 Cal.4th 1187, 1193-1194 [ 17 Cal.Rptr.2d 828, 847 P.2d 1044], fns. omitted.) Nevertheless, the requirement that the communication have "some relation" to judicial proceedings implies a factual predicate to application of the privilege. A defendant seeking to invoke the privilege has "the burden of establishing the preliminary facts on which they base their affirmative defense of the litigation privilege." ( Edwards v. Centex Real Estate Corp. (1997) 53 Cal.App.4th 15, 37 [ 61 Cal.Rptr.2d 518].)
The record here establishes that Roseanna Lourdeaux spoke to Koch and Moynihan at a time that was contemporaneous, or close in time, to the pendency of the unlawful detainer action filed by the Lourdeauxs against plaintiff, but it does not clearly reveal what, if any, connection her conversation with them had with this litigation. Appellants claim that Roseanna Lourdeaux contacted Koch to discuss testimony that he would give in the unlawful detainer discovery or trial, but Koch testified only that Roseanna told him that she was "trying to get rid" of Butler and Moynihan was even less forthcoming with information about his conversations with Lourdeaux. For her part, Roseanna Lourdeaux testified that she did not remember when she spoke to Koch or whether she discussed the unlawful detainer action with him. On this record, we consider that appellants have not established the factual ground for applying the privilege.
Moreover, in such a case where the factual basis for the litigation privilege is unclear, appellants' failure to raise the privilege in the trial court clearly constitutes a waiver of the privilege. Butler-Rupp was deprived of the opportunity to argue the factual issue, present contrary evidence, and to seek a judicial finding on the connection between the communications and the unlawful detainer action. In this appeal, we will not disturb a judgment in her favor by engaging in a speculation on a factual claim that she did not have an opportunity to rebut. (9 Witkin, Cal. Procedure, supra, §§ 394, p. 444.)
We express no opinion as to waiver of the privilege in other procedural contexts.
F. Award of Attorney Fees
Lastly, we consider plaintiff's appeal from the trial court's order denying an award of attorney fees pursuant to a lease provision. The lease dated March 29, 1995, provided: "In the event that either party hereto shall commence any legal action or proceeding, including an action for Declaratory Relief, against the other by reason of the alleged failure of the other to perform or keep any term, covenant or condition of this Lease, the party prevailing in said action or proceeding shall be entitled to recover, in addition to reasonable court costs, a reasonable attorney's fee to be fixed by the court, and such recovery shall include court costs and attorney's fees on appeal. As used herein, `the prevailing party' means the party who is entitled to recover costs of suit."
Following trial, plaintiff filed a motion for attorney fees in the amount of $510,625, supported by declarations showing in detail the basis for the fee request. The trial court denied the motion in its entirety on the ground that it could not "make a determination that plaintiff obtained an unqualified victory on the contract claim."
We do not perceive any difficulty in determining that plaintiff prevailed on the contract cause of action against the Lourdeauxs. The first two questions in the special verdict asked: "Did defendant Lourdeaux breach their contract with plaintiffs?" "Did the breach cause damage to plaintiffs?" The jury answered "yes" to both questions. Question No. 20 asked: "If you answered yes to Question Nos. 2 [damages from breach of contract], 6 [fraudulent promise], 10 [damages from negligent misrepresentation] or 15 [damages from interference with quiet enjoyment], what was the total amount of damages suffered by plaintiff that was caused by the conduct of defendants." The jury awarded $855,000.
On this record, plaintiff plainly prevailed on a contract claim based on a failure to perform a term, covenant or condition of the lease. It is true that the judgment of damages for breach of contract was independently supported by findings of damages from negligent misrepresentation and interference with quiet enjoyment, but plaintiff's success in these other theories does not alter the fact that the plaintiff prevailed on the contract claim.
In our view, question No. 20 of the special verdict form was appropriately drafted to avoid double recovery, inconsistent verdicts and redundant questions. We find nothing in the record indicating that the Lourdeauxs objected to the verdict form or questioned its assumption that breach of any of the four listed causes of action would give rise to equivalent damages. They are now bound by the jury's findings that plaintiff proved damages for breach of contract in the amount of $855,000. The recovery of this sum by reason of the failure of the Lourdeauxs to perform their contractual obligations under the lease entitled plaintiff to recover from them an award of attorney fees. ( Hsu v. Abbara (1995) 9 Cal.4th 863, 877 [ 39 Cal.Rptr.2d 824, 891 P.2d 804].) We find it unnecessary to reach the question whether the attorney fee provision also encompassed plaintiff's claims for negligent misrepresentation and interference with quiet enjoyment.
We see no merit in appellants' argument that the prevailing party, Lili Butler Studio, Inc., may not recover attorney fees because it was not a party to the lease. The argument effectively reiterates the same arguments that we rejected in connection with the recovery of damages for lost profits.
We express no opinion on the issue of apportionment under Reynolds Metals Co. v. Alperson (1979) 25 Cal.3d 124, 129 [ 158 Cal.Rptr. 1, 599 P.2d 83].)
We can easily distinguish McKenzie v. Kaiser-Aetna (1976) 55 Cal.App.3d 84 [ 127 Cal.Rptr. 275], the decision on which appellants rely. The plaintiff, a contractor, brought an action against the owner of a construction project for which he had furnished services. The case was submitted to the jury on theories of breach of contract, breach of implied warranty, negligent misrepresentations, and restitution. The jury returned a general verdict for the contractor. When the contractor requested attorney fees under a contract provision, the trial court denied the request and the contractor appealed. Affirming the denial, the court noted that the verdict was in the contractor's favor, "but there is no way to ascertain, in the absence of special jury findings, on which of the theories of recovery (breach of contract, negligent misrepresentation, or breach of implied warranty) the jury mainly based its award. . . ." [Italics added.] ( Id. at p. 88.) In contrast, plaintiff here recovered a judgment through a special jury verdict that clearly revealed that the jury based its award of damages for $855,000 on a finding of breach of contract.
DISPOSITION
We reverse the portion of the judgment awarding damages in the sum of $500,000 for negligent infliction of emotional distress but affirm the judgment in all other respects. We reverse the order denying Butler-Rupp's motion for attorney fees and remand the case for a determination of the amount of attorney fees which plaintiff is entitled to recover from the Lourdeauxs. The parties to the appeal are to bear their own costs on appeal.Stein, Acting P. J., and Margulies, J., concurred.