GRANT v. THE AERODRAULICS COMPANY

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District Court of Appeal, Second District, Division 3, California.

GRANT v. THE AERODRAULICS COMPANY et al.

Civ. 16242.

Decided: November 19, 1948

Irwin M. Fulop and Ralph B. Herzog, both of Los Angeles, for appellants. Grivi & Norris, of Los Angeles, for respondent.

This is an appeal by The Aerodraulics Company, a copartnership, and its members both as partners and individually, from a judgment on the pleadings awarding David Grant the sum of $7,000 and cancelling a contract between the parties. It appears to be conceded by both parties that cancellation was properly decreed, and the only substantial question before us concerns the correctness of the money award.

The second paragraph of plaintiff Grant's complaint sets forth in haec verba the terms of a written contract, dated November 8, 1943, whether plaintiff granted to defendant partnership (herein referred to as the Company) an exclusive worldwide license to produce and sell for commercial use only a hydraulic unloading valve invented by plaintiff. By the terms of this contract the Company was obligated to apply for and procure a patent upon the device at its own expense, ‘to diligently expliot, manufacture, use and sell said valve for commercial purposes,’ and to take reasonable measures to promote its use and sale. The Company further was required to pay plaintiff as ‘a minimum guaranteed royalty for said exclusive license for commercial use only, the sum of Ten Thousand Dollars ($10,000.00), whether sales of said valve be made or not.’ This so-called ‘primary royalty’ was to be payable in stated installments pending the outcome of the patent application, with the balance thereof to become immediately due and payable when letters patent were issued by the United States Patent Office. An additional ‘reserve royalty’ based on net sales was also provided for.

In respect to termination of the license, the contract contained the following provisions:

‘12. In the event of the default of any payments of Primary Royalty due or to become due from Company to Inventor by virtue of this agreement, or in the event of default by the Company in the performance of any of the covenants herein contained, the entire consideration due hereunder shall become due and payable to Inventor forthwith, without further notice and the Inventor may sue for and collect the entire indebtedness due him hereunder, and may further, at Inventor's sole option, upon giving notice to the Company in writing, and by depositing the same in the United States mails, cancel and revoke this license, and all rights of the Company hereunder shall then cease and terminate. * * *

‘13. Company may not terminate or revoke this Agreement unless the basic design of said invention is unworkable and cannot be used advantageously, or unless an infringement search discloses that said invention infringes or conflicts with a patent previously filed in the United States Patent Office, or that said invention is not patentable. In such case as set forth herein, Company may cancel this Agreement upon giving notice in writing to the Inventor, and shall pay to Inventor any ‘reserve royalty’, on sales made by Company for commercial use. In the event of cancellation by Company Inventor shall retain all payments previously made to him and Company shall have no right to reimbursement thereof.'

As the first of two separate causes of action, the complaint alleges that letters pattent were issued in respect to the said valve on May 8, 1945; that the balance of the sum of $10,000 as provided in the contract then became due and payable; that defendants have paid $3,000 thereon, leaving a balance of $7,000 due, owing, and unpaid; and that demand in writing for said sum has been made, but defendants have failed and refused to pay said sum in whole or in part. The second cause of action, which was for cancellation of the contract, alleges that the Company has failed and refused to perform the provisions of the contract for the manufacturer and sale of the valve, and is in default in payment of the primary royalty; and that because of said defaults, plaintiff, on August 15, 1946, gave the Company written notice of election to terminate the contract.

By their answer, defendants admit the execution and terms of the written contract as pleaded by plaintiff; admit the issuance of letters patent for plaintiff's device on May 8, 1945; admit the contractual obligation to pay $10,000 guaranteed royalty; admit payment of $3,000 to plaintiff and demand by plaintiff in writing for $7,000; admit that they have not entered into manufacture and sale of the said valve; and admit that plaintiff gave written notice of election to terminate the contract on August 15, 1946. Defendants deny, however, that they are indebted to plaintiff, and as an affirmative defense, allege the following: ‘That during the summer of 1945 plaintiff and defendants orally agreed that in consideration of the payment by the Aerodraulics Company to plaintiff of the sum of One Thousand Dollars ($1000.00), payable Five Hundred Dollars ($500.00) at said time and Five Hundred Dollars ($500.00) in the month of October, 1945, that said agreement described in Paragraph II of plaintiff's complaint, should thereupon be cancelled, terminated and of no further force and effect whatsoever; that The Aerodraulics Company paid to plaintiff at said time the sum of $500.00, and on or about the 17th day of October, 1945 tendered to plaintiff the additional sum of $500.00, as in said agreement provided which sum plaintiff refused to accept.’

As a second affirmative defense, the answer quotes paragraph 13 of the contract as set forth above, alleges that ‘the basic design of plaintiff's invention is unworkable and cannot be used advantageously,’ and alleges that on that ground a written notice of election to cancel the contract was given plaintiff on November 13, 1945.

At the trial, prior to the introduction of any evidence, plaintiff moved for judgment on the pleadings. After argument thereon, defendants moved for leave to amend their answer, which motion was denied and judgment rendered on the pleadings in favor of plaintiff.

The legal principles which must govern our determination as to the correctness of the decision below are not in dispute. It is elementary that a plaintiff is not entitled to judgment on the pleadings if the answer presents any issue as to the material allegations of the complaint, or if it sets up affirmative matter constituting a defense. (21 Cal.Jur. 237–8.) A motion for judgment on the pleadings is in the nature of a general demurrer, and the trial court in ruling thereon must treat the allegations of the challenged pleading as true. MacIsaac v. Pozzo, 26 Cal.2d 809, 161 P.2d 449, and cases cited; 21 Cal.Jur. 240.

We have given consideration to the provisions of paragraph 13 of the agreement which extended to defendant the privilege of cancelling the agreement in certain events, among which was the contingency that the basic design of the invention should be found to be unworkable and incapable of being used advantageously. In view of the allegation in the second affirmative defense that the agreement was cancelled by the company for this reason under the provisions of paragraph 13, the question arises whether such provisions for cancellation were intended to operate retrospectively so as to relieve the company from the duty to pay the unpaid portion of the minimum guaranteed ‘primary royalty.’ As we have seen, the balance of the minimum guaranteed royalty had accrued upon issuance of letters patent in May, 1945, and some six months had elapsed thereafter before the company gave notice of termination pursuant to the provisions of paragraph 13. Construing the allegations of the second affirmative defense in the light most favorable to defendant, we nevertheless cannot give a construction to paragraph 13 which would allow the defendant to escape liability for a minimum royalty that had already accrued. The words ‘terminate,’ ‘revoke’ and ‘cancel,’ as used in the context of paragraph 13 in reference to the written agreement, all have the same meaning, namely, the abrogation of so much of the contract as might remain executory at the time notice is given, and must be sharply distinguished from the word ‘rescind,’ which appears nowhere in the paragraph, and which conveys a retroactive effect, meaning to restore the parties to their former position. Sanborn v. Ballanfonte, 98 Cal.App. 482, 488, 277 P. 152; Winton v. Spring, 18 Cal. 451, 453; Young v. Flickinger, 75 Cal.App. 171, 174, 242 P. 516. According to the settled rule of construction, ‘the exercise of an option to terminate prevents liability for further transactions but does not affect obligations which have already accrued.’ 17 C.J.S., Contracts, § 404, p. 893, and cases cited; see also, Mile v. California Growers Wineries, Inc., 45 Cal.App.2d 674, 679, 114 P.2d 651; Randolph v. Lindsay, 158 Cal. 727, 730, 112 P. 300.

Analysis of the provisions of paragraph 13 makes it clear that the parties intended the usual construction of such clauses to obtain. In the event of termination of the agreement by the company, it would have reminded obligated by the express terms of paragraph 13, to pay any ‘reserve royalty’ that had accrued on account of sales, and this, we think, indicates an intention of the parties to give these provisions of the agreement only prospective operation. Why should the company have been obligated to pay reserve royalties and yet have been excused from payment of the guaranteed minimum primary royalty which fell due unconditionally upon issuance of the letters patent? It would appear to have been in the minds of the parties that each would render full performance up to the time of the exercise of the company's option to terminate the agreement, and that if the termination took place after the issuance of the letters patent it would necessarily also take place after the minimum royalty had been fully paid. The last sentence of the paragraph reads: ‘In the event of cancellation by Company the Inventor shall retain all payments previously made to him and Company shall have no right to reimbursement therefor.’ In giving proper effect to this provision, we think the company must be deemed to have paid the balance of the minimum royalty at the time it fell due, and that it was not the intention of the parties that the company could escape liability for matured royalty obligations by the mere device of not meeting them.

We therefore construe the paragraph as a whole to mean that in the event of termination of the agreement by the company plaintiff would be entitled to retain all moneys that had been paid to him and also to obtain all past due amounts which the company had failed to pay. In its answer and in the proposed amendment set out in its brief it was alleged only that notice of termination was given in November, 1945. It is clear that the termination of the agreement by the company in November could not of itself have relieved the company of its obligation to pay the balance of the minimum guaranteed royalty which accrued in the preceding month of May.

It is evident from what has already been said that the primary issue for our consideration is whether, assuming all the allegations pertaining thereto to be true, the oral agreement to termine the written contract, as set forth in defendants' answer, constitutes a valid defense to the action. In passing, it may be observed that the only alleged effect of the oral agreement was that the written contract ‘should thereupon be cancelled, terminated and of no further force and effect whatsoever.’ The answer nowhere alleges that the oral agreement purported to effect a cancellation or release of the admitted indebtedness of $7,500 then due, for the unpaid balance of which the action was brought by plaintiff, and on this ground might well be open to demurrer for uncertainty. Since, however, this objection might have been cured by an appropriate might have been cured by an purposes of our decision, resolve any uncertainty in favor of defendants and shall assume that the $7,500 debt was intended by the parties to be cancelled by the alleged oral agreement, or by full performance thereunder by the Company. As we shall see from the terms of the proposed amendment set out by defendants in their brief, to be discussed hereafter, this assumption is one which is highly favorable to them.

At the outset, we may dispose of respondent's argument that since the alleged agreement to terminate was not in wring, and was not fully executed, it was, under the provisions of section 1698 of the Civil Code, completely ineffective to accomplish its purported purpose. Section 1698 provides that ‘A contract in writing may be altered by a contract in writing, or by an executed oral agreement, and not otherwise.’ A well-recognized distinction in meaning exists between the alteration and the termination of a contract. An ‘alteration’ is a modification or change in one or more respects which introduces new elements into the details of the contract, or cancels some of them, but leaves the general purpose and effect undisturbed. 40 C.J. 1486; see Guidery v. Green, 95 Cal. 630, 634, 30 P. 786; Cross v. Ramdullah, 9 Cir., 274 F. 762, 767. To ‘terminate’ a contract, on the other hand, means to abrogate so much of it as remains unperformed, thereby doing away with the existing agreement upon the terms and with the consequences agreed upon. Sanborn v. Ballanfonte, 98 Cal.App. 482, 488, 277 P. 152, and cases cited. This distinction has been frequently applied by the California courts, and it is now well-settled that the termination or abrogation of a written contract may be achieved by an oral agreement, whether executed or not, and that in such a case section 1698 of the Civil Code has no application. McClure v. Alberti, 190 Cal. 348, 350, 212 P. 204; Pearsall v. Henry, 153 Cal. 314, 325, 95 P. 154, 159; San Roque Properties, Inc. v. Pierce, 18 Cal.App.2d 379, 380, 63 P.2d 1198; Klein Norton Co. v. Cohen, 107 Cal.App. 325, 331, 290 P. 613. Language to the contrary which may be found in Mulrooney v. Pietro, 79 Cal.App.2d 311, 180 P.2d 62, upon which respondent places reliance, is not only unsupported by citation of authority but is opposed to the otherwise uniform rule of the California decisions.

An oral cancellation, however, is subject to the rules concerning contracts in general and hence must be supported by a sufficient consideration to be enforceable. Haberman v. Sawall, 72 Cal.App. 576, 582, 237 P. 776; Hooke v. Great Western Lumber Co., 54 Cal.App. 681, 683, 202 P. 492. Construing the affirmative defense most favorably to defendants, it appears that the consideration for plaintiff's agreement to terminate the contract and cancel the undisputed debt of $7,500 then due consisted of the payment of one thousand dollars in two equal installments, and a release by the Company of all its rights under the contract. Since the amount of the indebtedness was undisputed, however, payment by the Company of the lesser sum of $1,000 could not constitute a valid consideration for its cancellation, or for the termination of plaintiff's contractual rights against the Company. Civ.Code, sec. 1605; Moore v. Bartholomae Corp., 69 Cal.App.2d 474, 478, 159 P.2d 436; Rogers v. Rogers, 49 Cal.App.2d 366, 369, 121 P.2d 819; Gordon v. Green, 51 Cal.App. 765, 197 P. 955; Rest., Contracts, sec. 76(a); 1 Williston on Contracts, rev.ed., sec. 120. ‘It is an uniform rule of law that a consideration for an agreement is not adequate when it is a mere promise to perform that which the promisor is already legally bound to do.’ General Motors Acceptance Corp. v. Brown, 2 Cal.App.2d 646, 650, 38 P.2d 482, 484.

Appellants contend that ample consideration may be found in the termination of their exclusive world-wide license to manufacture and sell plaintiff's invention. It may be conceded that, as a general rule, a mutual cancellation of executory contractual rights is supported by a valid interchange of consideration. Sistrom v. Anderson, 51 Cal.App.2d 213, 219, 124 P.2d 372; Haberman v. Sawall, supra, 72 Cal.App. 576, 582, 237 P. 776; Hooke v. Great Western Lumber Co., supra, 54 Cal.App. 681, 683, 202 P. 492; Rest., Contracts, sec. 406 and comment a; 1 Williston on Contracts, rev.ed., sec. 102A, pp. 327–8. However, in the foregoing cases and others cited by appellants, the rights which were yielded up were unquestionably of value to the respective parties, and since each was legally privileged to continue to assert those rights prior to the cancellation agreement, each suffered a legal detriment in giving them up.

The facts pleaded by appellants in the present case present an entirely different situation, in which the authorities cited by them are not controlling, for two reasons. First, the elementary rule that a court of law will not inquire into the adequacy of consideration for a contract (see Taylor v. Taylor, 66 Cal.App.2d 390, 398, 152 P.2d 480; Gerson v. Kelsey, 4 Cal.App.2d 158, 162, 40 P.2d 543, 43 P.2d 266; Rest., Contracts, sec. 81) does not preclude the necessity of a showing that the consideration has some value at least. See Rest., Contracts, sec. 80, comment a; Gifford v. Carvill, 29 Cal. 589, 593. Cf. Shipley Co. v. Rosemead Co., 100 Cal.App. 706, 713, 280 P. 1017. It is well settled that something which is completely worthless cannot constitute a valid consideration. Gifford v. Carville, supra; Pacific Rys. Advertising Co. v. Carr, 29 Cal.App. 722, 157 P. 529; Schwarz v. Bohle, 47 Cal.App. 445, 190 P. 819; Shortell v. Evans-Ferguson Corp., 98 Cal.App. 650; Blyth v. Robinson, 104 Cal. 239, 37 P. 904. In accordance with this rule, it has been held that want of consideration is a good defense to an action on a note given in return for the assignment of valueless rights in an invention (Craddick v. Emery, 93 Wash. 648, 161 P. 484), or to an action on a contract for the sale of a void and worthless patent. Herzog v. Heyman, 151 N.Y. 587, 45 N.E. 1127, 56 Am.St.Rep. 646. Turning to defendants' verified answer, and disregarding the second and separate affirmative defense in which it is alleged that the basic design of respondent's device was unworkable and could not be used advantageously, we find a clear implication that the exclusive license granted to the Company was in fact valueless. The answer contains no allegation that the Company was either able or willing to pay the full balance of the primary royalty for which written demand had been made; and it does contain an express admission that the Company had not entered into the manufacture and sale of the value as required by the contract. It was not alleged that the rights surrendered were of any value to either party nor were any facts alleged from which it could be reasonably inferred that they were of value. It would seem to follow from the cases cited above that the termination of the Company's apparently worthless rights, which it has neither intended nor attempted to exercise, does not constitute the giving up of anything of any value, and hence does not meet the requirements of valid consideration.

In the second place, since the Company was admittedly in default, plaintiff, under the provisions of paragraph 12 of the written contract, was privileged to cancel and revoke the license at any time by merely giving notice to the Company. No facts were alleged which tended to show that plaintiff had waived that privilege. When the company orally agreed to terminate its license, therefore, it was merely agreeing to part with rights of which respondent could divest it at will. Since the company appears to have neither desired nor intended to exercise its license, whatever rights it had were clearly illusory in view of respondent's power of immediate cancellation. It cannot be presumed that respondent would have been satisfied with continued nonperformance by the company. Moreover, the fact, which we must assume, that cancellation of the license was the price demanded by respondent for his release of the company, might well be construed not only as indicative of respondent's intention to terminate the contract at once, but also as a substantial fulfillment of the requirement of notice to the company of respondent's section to do so. Respondent's tender of a formal written notice in August, 1946, shortly before the commencement of the action, perhaps for the purpose of fortifying his position, did not add anything to appellants' rights at the time of the oral agreement. Under the particular circumstances presented, we are of the opinion that by the oral agreement, the company conferred no benefit upon respondent which he was not already legally entitled to obtain, and itself incurred no detriment which it was not already legally bound to suffer. Civ.Code, sec. 1605; cf. Neikirk v. Williams, 81 W.Va. 558, 94 S.E. 947, L.R.A.1918F, 665. Accordingly, we hold that the alleged oral agreement was not supported by ‘a sufficient cause or consideration’, Civ.Code, sec. 1550, and could not constitute a valid defense to the action.

Appellants urge that the denial of their motion for leave to amend was an abuse of the trial court's discretion which would justify a reversal of the judgment. It may be conceded that amendments to pleadings are and should be granted liberally in the furtherance of justice (21 Cal.Jur., Pleading, secs. 126–8, pp. 181–6) and that unless a pleading appears on its face to be incapable of proper amendment, denial of leave to amend may constitute a prejudicial abuse of discretion. See King v. Mortimer, 83 Cal.App.2d 153, 188 P.2d 502, and cases cited. Nothing which is before us indicates any material particular in which the answer could be amended to state a valid defense in view of the conclusions we have already reached. Moreover, we do not understand appellants to claim that there was any consideration for the oral agreement of termination other than that alleged in their answer, or that they have any defense other than the said oral agreement and their alleged cancellation of the principal agreement. Appellants set forth in their reply brief a proposed amendment reading:

‘I. During the summer of 1945 plaintiff and defendant orally agreed that in consideration of the payment by The Aerodraulics Company to plaintiff to the sum of $500.00 and the promise of said The Aerodraulics Company to pay to plaintiff an additional sum of $500.00 in the month of October 1945, that said agreement described in Paragraph ‘II’ of the plaintiff's complaint forthwith should be, and the same thereupon was cancelled, terminated and of no further force and effect whatsoever; that The Aerodraulics Company paid to plaintiff at said time the sum of $500.00 (and plaintiff accepted said sum pursuant to said oral agreement), and on or about the 17th day of October, 1945, The Aerodraulics Company tendered to plaintiff the additional sum of $500.00 as in said oral agreement provided, which latter sum plaintiff refused to accept.' This proposed amendment, which we may assume states appellants' defense in the strongest and most favorable light possible, contains no allegations of any new or different consideration for the oral agreement than that alleged originally, and is subject to the same fatal objections as the original pleading. It follows that the denial of leave to amend was neither prejudicial nor an abuse of discretion.

The judgment is affirmed.

SHINN, Presiding Justice.

WOOD, and VALLÉE, JJ., concur.