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District Court of Appeal, First District, Division 2, California.


Civ. 14796.

Decided: February 15, 1952

Fitzgerald, Abbott & Beardsley, Oakland, for appellant. Clark & Heafy, Oakland, Thornton & Taylor, San Francisco, Augustin Donovan, Oakland, for respondents.

Appeal from judgment for plaintiffs in an action for breach of contract.

Plaintiffs own and operate a planing mill in Oakland, California. On June 5, 1939, they entered into a written contract with defendant company whereby defendant agreed to install and maintain in plaintiffs' mill an automatic fire detection system the purpose of which was to assure the early detection of fires and automatic transmission of fire alarm signals to the Oakland Municipal Fire Alarm System. All equipment necessary for the operation of said system was to be leased to plaintiffs for a period of ten years at an annual rental of $180.00 payable in monthly installments of $15.00. Paragraph 11 of this lease provides, ‘It is agreed by and between the parties hereto that the lessor is not an insurer, and that the payments hereinbefore named are based solely on the value of the service in the operation of the system described, and in case of failure to perform such service and a resulting loss its liability hereunder shall be limited to and fixed at the sum of $25.00 as liquidated damages, and not as a penalty, and this liability shall be exclusive.’

On July 8, 1948, plaintiffs' mill was destroyed by fire. The fire was first discovered shortly after 7 a. m. The flames at that time leaping six to nine feet toward the ceiling. At this time the automatic signal had not operated and the first alarm to the fire department was manually transmitted by one of the plaintiffs' employees. The fire house was close to the location of the plant and there was evidence that the fire department reached the scene of the fire within two minutes after receiving the manual alarm.

The plaintiffs filed a breach of contract action against the defendant company for damages resulting from the fire. Trial was had before a jury which returned a verdict in favor of the plaintiffs and assessing damages at $97,437.00. This appeal is from a judgment entered on the verdict.

Defendant concedes that the question of whether or not it properly maintained the detection system as required by the contract was a question of fact and that the jury, upon a conflict in the evidence, impliedly found in favor of plaintiffs. The defendant, however, raises two questions on appeal: first that there was no liability because the plaintiffs at the time of the fire were in default in two monthly rental installments, and secondly that the liability was fixed by the contract at $25.00.

Defendant's first contention is that there is no liability because at the time of the fire plaintiffs were in default in the payment of the monthly rental installments for June and July of 1948 as called for in the agreement. Plaintiffs admit these payments had not been made but claimed a waiver of strict performance. The only provision in the contract covering default in payments provided that in such case the defendant should have the right to enter the premises and remove the fire detection system. In support of the claim of waiver, evidence was introduced without objection to show that over a period of years the plaintiffs on a number of occasions were late in their payments. On these occasions the defendant did not remove the system or discontinue the service nor was there any demand for strict performance. There was also testimony that it was the custom for the defendant to bill the plaintiffs each month and generally payments were made after receipt of the statement. Plaintiffs testified they did not receive statements for either June or July although defendant claimed they had been mailed. During the trial the plaintiffs tendered the unpaid installments for the months in question and they were accepted by the defendant.

Defendant complains that excuse for default cannot be relied upon unless pleaded. However, the case was tried upon the theory that excuse was an issue and considerable testimony was received, without objection, upon that point. The defendant itself offered an instruction to the effect that failure to mail the statements would be a valid excuse for such defaults but that the burden of proof for this issue was on plaintiffs. As stated in Vaughn v. Jonas, 31 Cal.2d 586, 191 P.2d 432, 444, ‘A party cannot permit an issue to be litigated and on appeal escape the consequences by claiming that such issue was not pleaded.’

Where, as here, time is not made of the essence of the contract mere failure to pay or otherwise perform within the time stipulated is not ground for forfeiture. Forgay v. Plum, 99 Cal.App. 524, 279 P. 177; 25 Cal.Jur. 608. It is well settled in this state that even ‘where time is made of the essence of the contract for the payment of rent or other payments of money, and this covenant has been waived by the acceptance of rent or other moneys after they are due, and with knowledge of the facts, such conduct will be regarded as creating ‘such a temporary suspension of the right of forfeiture as could only be restored by giving a definite and specific notice of intention to enforce it.’' Stevinson v. Joy, 164 Cal. 279, 285, 128 P. 751, 753; Boone v. Templeman, 158 Cal. 290, 110 P. 947; Miller v. Modern Motor Co., 107 Cal.App. 38, 290 P. 122; Chin Ott Wong v. Title Ins. & Trust Co., 89 Cal.App.2d 183, 200 P.2d 541. The acceptance of overdue payments constituted a waiver of strict performance and the defendant's contention in this respect is without merit.

Defendant pleaded in its answer and now contends that paragraph 11 of the contract is a valid provision for liquidated damages and is also an agreement limiting liability. However a provision for liquidated damages and an agreement limiting liability are different things and are inconsistent with each other. Seid Pak Sing v. Barker, 197 Cal. 321, 240 P. 765. Limitation of liability is an agreement that the liability shall be limited to a certain amount without regard to the amount of damage actually sustained, while a provision for liquidated damages is an endeavor by the parties to agree in advance upon a fair compensation for the loss which it is anticipated will be sustained. It is therefore necessary to determine which classification this agreement falls within. From the plain language of the parties if loss occurred the defendant's liability should be ‘fixed in the sum of $25.00 as liquidated damages and not as a penalty and this liability shall be exclusive.’ This language is clear and unambiguous. The intent of the parties as stated by them should govern in the absence of something to indicate that a different meaning was intended. Defendant urges that by leaving out the words ‘as liquidated damages' and the words ‘and not as a penalty’ the agreement would read, ‘In case of failure to perform such service and a resulting loss its liability hereunder shall be limited to * * * the sum of $25.00 * * *’ and the provision becomes a limitation of liability. Such an interpretation would require a rewriting of the contract which the court cannot do. If the provision is to be interpreted as a limitation of liability the words ‘as liquidated damages' would be entirely unnecessary and ineffectual. It would appear that this is a provision for liquidated damages and not a limitation of liability.

Under the provisions of Civil Code, §§ 1670 and 1671 an agreement which attempts to fix the amount of damages in the event of breach of an obligation is void except ‘when from the nature of the case, it would be impracticable or extremely difficult to fix the actual damage.’ Defendant contends that at the time the contract was entered into it was impracticable and extremely difficult to fix the damage and this is a valid provision for liquidated damages. Plaintiffs claim that it was neither impracticable nor difficult to assess the damages. This is a question of fact. Rice v. Schmid, 18 Cal.2d 382, 115 P.2d 498, 138 A.L.R. 589; Petrovich v. City of Arcadia, 36 Cal.2d 78, 222 P.2d 231; City of Los Angeles v. Shafer, 53 Cal.App. 458, 200 P. 384; Consolidated L. Co. v. Los Angeles, 33 Cal.App. 698, 166 P. 385. The burden of showing that at the time the contract was entered into it would be impracticable or extremely difficult to fix damages in the event of a breach is upon the person seeking to rely upon the provision. Rice v. Schmid, supra; Robert Marsh & Co. Inc. v. Tremper, 210 Cal. 572, 292 P. 950; Hanlon Drydock, etc., Co. v. McNear, 70 Cal.App. 204, 232 P. 1002; Sherman v. Gray, 11 Cal.App. 348, 104 P. 1004. This issue was submitted to the jury under proper instructions and the jury impliedly found against the defendants.

Furthermore, as stated in Rice v. Schmid, supra [18 Cal.2d 382, 115 P.2d 500], ‘A valid liquidated damage clause must, of course, represent a reasonable endeavor by the parties to estimate fair compensation for the loss sustained.’ Dyer Bros. Iron Works v. Central Iron Works, 182 Cal. 588, 189 P. 445; 3 Williston Contracts, 1936 p. 2192, sec. 779; Restatement of Contracts, sec. 339; 10 Cal.Law Review 8. Under the facts in this case where a large stock of highly combustible and well vented material like piles of lumber are involved and where the damages might run as high as it did in this case there was obviously no reasonable endeavor made to estimate fair compensation in the event of loss. The provision falls short of the requirements of the law.

Where the provision for liquidated damages is found to be void the plaintiff may maintain an action for his actual damages. Los Angeles Olive Growers Assoc. v. Pacific Surety Co., 24 Cal.App. 95, 140 P. 295.

The judgment is affirmed.

PATTERSON, Justice pro tem.

NOURSE, P. J., and GOODELL, J., concur.

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