NEWBY v. ANDERSON

Reset A A Font size: Print

District Court of Appeal, Second District, Division 1, California.

NEWBY v. ANDERSON et al.

Civ. 17253.

Decided: April 20, 1950

Pat A. McCormick, Morrow & Trippet, Hubert T. Morrow, John C. Morrow, Los Angeles, for appellants. Newby, Holder & Newby, Nathan Newby, Los Angeles, for respondent.

Defendants appeal from a judgment against them after trial before the court, sitting without a jury.

Prima Products, Inc., holder of exclusive distribution rights in the United States of the product ‘Aquella’ (a masonry waterproofing compound), entered into an agreement on December 28, 1945, granting to plaintiff and respondent exclusive distribution rights in the western states. On the same day plaintiff entered into an agreement with Allan Greenwood Company whereby the latter undertook distribution of the product and performance of plaintiff's contract with Prima Products, Inc., and agreed to pay plaintiff a royalty of five cents per gallon of Aquella sold.

On April 1, 1946, in an effort to settle certain disputes that had arisen, plaintiff entered into a new distribution agreement with Allan Greenwood Company. On April 12 or 13, 1946, plaintiff entered into a new agreement with Prima Products, Inc. During this same month the defendants, partners doing business as Anderson Sales Organization, undertook, through one Weibert, to pay $32,500 for the franchise held by the Greenwood Company and their unfilled orders. The outcome of the negotiations was the execution of a new agreement dated April 22, 1946, directly between Anderson Sales Organization and Prima Products, and a ‘royalty’ agreement, consented to by Prima Products, whereby Anderson Sales Organization undertook to pay plaintiff a royalty. Under the terms of the royalty agreement, defendants undertook to do nothing which would jeopardize their rights under the agreement with Prima Products. Plaintiff in his complaint charged that defendants breached the royalty agreement by willfully defaulting under the agreement with Prima Products and consenting to the termination of such agreement.

The agreement between Prima Products and the Andersons provided:

‘It is agreed that ‘The Andersons' shall be the exclusive distributor of Aquella in the following enumerated states and that no sales shall be made except through ‘The Andersons', their agents, distributors, salesmen and purchaser. * * *

‘* * * In order to permit ‘Prima’ to plan the orderly production of merchandise needed to fulfill this quota, it is understood and agreed that in order to retain exclusive distribution ‘The Andersons' must purchase 400,000 gallons of Aquella per annum * * *

‘If ‘The Andersons' fail to order the minimum quota of Aquella as herein required, ‘Prima’ shall have the option to sell Aquella direct to purchasers located in said exclusive territory of ‘The Andersons', until said minimum quota requirement shall have been met, but it shall not be obligated to do so. In the event there is a default by ‘The Andersons' to sell said minimum quota of Aquella as herein required, and ‘Prima’ does not exercise its option to sell direct to purchasers in said exclusive territory of ‘The Andersons', then and in that event, but not otherwise, ‘Prima’ may cancel this agreement upon giving to ‘The Andersons' a written notice of cancellation specifying the alleged default, and ‘The Andersons' shall have the ensuing seventy (70) days within which to correct said default * * *.’

The Andersons further agreed to diligently prosecute the sale of the product. A further provision permitted the Andersons to assign the agreement to a corporation, provided they retained control of the corporation and the corporation assumed the terms and conditions of the agreement.

The ‘royalty agreement’ recites that plaintiff is the owner of an exclusive right to sell Aquella in the western states (under the agreement with Prima Products dated April 12, 1946); that plaintiff is willing to cancel his agreement with Prima and permit defendants to make a distribution agreement direct with Prima; that it is the intention of the parties that plaintiff should receive a royalty in consideration of his cancellation of his agreement with Prima; that in consideration of the premises it is agreed: (1) Plaintiff agrees to the cancellation, and the execution of a law agreement between Prima and defendants, a copy of which was submitted to and approved by plaintiff. (2) Defendants agree to pay the stipulated royalty. (3) That the obligation to pay royalty should continue as long as the term of the agreement between Prima and defendants, or until April 12, 1969, and for an additional 15 years. (4) ‘Second Party (defendants) agrees not to do anything which will jeopardize rights of Second Party under said agreement to be entered into with Prima Products, Inc., * * *.’ (Emphasis added.)

The appellants contend that the trial court's interpretation of the agreements was erroneous; that the evidence does not support the findings that defendants breached the royalty agreement and that they ‘wilfully defaulted’ under the Prima agreement; that the contracts are ambiguous, and the court therefore erred in refusing to hear extrinsic evidence as to the intention of the parties and the meaning of the language used in the instruments; and that, assuming a breach of the royalty agreement, there is no evidence to support the award of damages.

Although the trial court received considerable evidence as to the circumstances leading up to and surrounding the execution of the agreements in question, it explicitly rejected several offers by defendants to prove that immediately prior to signing the royalty agreement defendant J. I. Anderson asked plaintiff if it was understood that the Andersons would not be obliged to pay any royalty except when the quotas under the Prima Contract had not only been purchased and received, but delivered and paid for, and that it was on an actual sales basis that the royalties would become due and payable; that plaintiff stated that he understood that to be the fact; that Anderson stated that while they hoped and expected the business would be profitable, he wanted to know whether plaintiff fully understood the Prima contract as providing for certain limited quotas and that unless they made those quotas the agreement was subject to cancellation, and that plaintiff would have to ‘rise or fall’ upon the terms of that contract.

It is settled that the interpretation of a document is a question of law, and that it is the duty of an appellate court to interpret the document independent of the construction given to it by the trier of fact, and to make a final determination in accordance with the applicable principles of law. In re Estate of Norris, 78 Cal.App.2d 152, 159, 177 P.2d 299; In re Estate of Platt, 21 Cal.2d 343, 352, 131 P.2d 825; Western Coal & Mining Co. v. Jones, 27 Cal.2d 819, 826, 827, 167 P.2d 719, 164 A.L.R. 685; Union Oil Co. of California v. Union Sugar Co., 31 Cal.2d 300, 306, 318, 188 P.2d 470; In re Estate of Pearson, 90 Cal.App.2d 436, 438, 203 P.2d 52. However, when the trial court's construction of an ambiguous instrument is supported by substantial extrinsic evidence, legally admissible in aid of interpretation, then the appellate court will adhere to the interpretation placed by the trial court on the writings and the conduct of the parties. See Edwards v. Billow, 31 Cal.2d 350, 359, 188 P.2d 748; Palmtag v. Danielson, 30 Cal.2d 517, 522, 183 P.2d 265; In re Estate of Rule, 25 Cal.2d 1, 11, 152 P.2d 1003, 155 A.L.R. 1319.

A consideration of the two instruments here involved, irrespective of the extrinsic evidence rejected, or of any that was admitted on behalf of defendants, impels the conclusion that the interpretation urged by respondent is not tenable.

Looking at the agreement between Prima Products and the Andersons, we find first a recital that the Andersons are ‘desirous of undertaking a right for the exclusive sale and distribution of Aquella’; then it is agreed that the Andersons shall be the exclusive distributors in certain states, subject to certain limitations not here pertinent It is then ‘understood’ that a minimum quota of 400,000 gallons is essential, and it is agreed that ‘in order to retain exclusive distribution’ the Andersons must purchase 400,000 gallons in quarterly quotas of 100,000 gallons; but this quota, representing 20% of the total sales in the United States, shall be reduced proportionately should the national sales decline.

Paragraph 4 of the agreement specifies two consequences of a failure by Andersons to order the minimum quota. Prima Products might sell direct to purchasers in the Andersons' territory, or, it might elect to cancel the agreement by giving written notice of default, the Andersons then to have 70 days in which to cure the default. The Andersons did not undertake absolutely and at all events to purchase the minimum quota of Aquella, but only that if they failed to do so, their agreement was subject to cancellation. They did undertake, however, to ‘diligently prosecute’ the sale of Aquella and ‘to do all things reasonably necessary to establish the sale of Aquella in all trade centers and through all proper channels of trade.’ So long as they were diligent in their efforts to make sales, they were subject to no penalty for failure to purchase the mimimum quota except cancellation of the agreement or direct competition from Prima Products.

Although the findings recite that the defendants ‘willfully’ defaulted, to evidence was introduced to show that they did not diligently prosecute the sale campaign, and at the trial plaintiff's counsel clearly stated his position—that whether they were diligent was immaterial, as ‘they were under the imperative obligation of keeping the Prima Products contract in good standing by the purchase of at least the minimum amount required’.

Looking now at the royalty agreement, we find a recital that it is the ‘intention of the parties' that as long as Aquella is sold through the Andersons, Newby should be paid a royalty, in consideration of the cancellation of Newby's agreement with Prima Products. Paragraph 2 then provides: ‘In consideration of said cancellation and execution of the new agreement above referred to, the Second Party agrees to pay to First Party a royalty on all ‘Aquella’ or other waterproofing compound which would be a substitute for ‘Aquella’ manufactured by Prima Products, Inc., or sold by Prima Products, Inc., in the eleven Western States through Second Party * * *.' It is further provided that the royalty shall be paid on the tenth of the month following the month in which the merchandise is sold. Paragraph 4 provides that ‘the obligation to pay royalties under this agreement shall last and continue as long as the term of said agreement between Prima Products, Inc., and Second Party, or until April 12th, 1969, and for an additional fifteen years if Second Party is not in default with Prima Products, Inc., and as long thereafter as Second Party shall sell ‘Aquella’ or any substitute therefor manufactured or sold by Prima Products, Inc., through Second Party in this territory.'

By paragraph 6 of the royalty agreement, the Anderson organization agreed ‘not to do anything which will jeopardize rights of Second Party (Andersons) under said agreement to be entered into with Prima Products, Inc., and agrees not to assign the agreement entered into with Prima Products, Inc., except as therein provided in Paragraph 9, Page 5, of said agreement * * *.’

Summarizing the royalty agreement, the Andersons agreed to pay a royalty on Aquella sold in their territory so long as they held their distributorship under the agreement with Prima Products, and agreed further ‘not to do anything that will jeopardize’ their rights under the lastmentioned agreement. The question is, therefore, did their failure to purchase or order the minimum quota, even though they could not with due diligence sell such quota (thus rendering their distributorship agreement subject to cancellation), constitute a breach of their agreement ‘not to do anything that will jeopardize their rights' under their agreement with Prima? We have concluded that their failure did not constitute a breach of the royalty agreement. True, taking the language literally, their failure to purchase the mimimum quota did operate to ‘jeopardize’ their right to a continued exclusive distributorship. But under their agreement with Prima, they were under no obligation to purchase the minimum quota; they had the ‘right’ to decline to do so without penalty other than loss of their distributorship. Although their obligation was to use due diligence, their ‘rights' included the right to decline to purchase more Aquella than they could, using such diligence, sell in their territory.

The provision not to ‘jeopardize’ is too broad and uncertain to be enforceable. Construed as respondent seeks to have it construed, it provides that appellants are unconditionally bound to purchase 20% of the Prima Products' output until 1969 and 15 years thereafter, no matter how slow the market might be in their territory. Every year, until 1984, appellants, in order not to ‘jeopardize their rights', would have to purchase Aquella that they could not sell, and this they would have to do even though their continued purchases added not a nickel to respondent's income, since his royalty is based only on the Aquella sold. A construction which leads to such an unconscionable result should be avoided in favor of a construction which is reasonable, fair and equitable. Lane-Wells Co. v. Schlumberger etc. Corp., 65 Cal.App.2d 180, 187, 150 P.2d 251.

The meaning ascribed by respondent to the disputed terms is at variance with the intentions expressed elsewhere in the royalty agreement—the intention expressed in the preamble that respondent should receive a royalty ‘as long as' Aquella is sold through the Andersons, and the provision that the obligation to pay royalty should continue ‘as long as' the term of the Prima Products agreement, or until April 12th, 1969, and for an additional 15 years ‘if Second Party is not in default.’

The royalty agreement was drawn by respondent, himself an attorney. The uncertainty resulting from a failure to use more express language, particularly with respect to the assumption by the Andersons of such a serious obligation, should be resolved against him. Weil v. California Bank, 219 Cal. 538, 541, 27 P.2d 904; Ezmirlian v. Otto, 139 Cal.App. 486, 493, 34 P.2d 774; Civ.Code, sec. 1654; Rest. Contracts, sec. 236, subd. (d).

We conclude that the only reasonable interpretation of the ‘jeopardize’ clause is that by it the Andersons were bound to use reasonable diligence and good faith in performing under their distributorship contract; but that they were not bound, at whatever cost to themselves, to purchase Aquella that they could not, in the exercise of such diligence, dispose of, in order to preserve respondent's royalty rights. Since no showing of bad faith or lack of diligence was made or attempted, it follows that there was no basis for a recovery against them.

Our conclusion on this point renders discussion of other contentions unnecessary.

The judgment is reversed with directions to enter judgment for the defendants.

WHITE, Presiding Justice.

DORAN and DRAPEAU, JJ., concur.