UNIVERSAL SALES CORPORATION v. CALIFORNIA PRESS MFG CO (1941)

This is an appeal by defendant from certain parts of a judgment in favor of plaintiff.

The action is based on a written contract dated March 2, 1931, between plaintiff, a subsidiary of the San Francisco Milling Co., a producer and distributor of poultry and animal feeds, and defendant, a manufacturer of various types of presses. Because the rights of the parties and the disposition of this cause depend primarily on the contract, it is advisable to set out its more important provisions in some detail. It contains in the first place three introductory ‘Whereas' clauses, which state that the defendant has manufactured and has for sale a certain pellet press; that the defendant believes it has manufactured a machine which will produce the results of a cuber press now operated by the plaintiff, and with a like or greater capacity; and that the defendant desires the plaintiff to purchase and operate said machine so as to be able to demonstrate its advantages. (The cuber press referred to is an English pellet-making machine that at that time was being used by the plaintiff to produce feed pellets.)

It is then agreed that the defendant shall sell and the plaintiff shall purchase the machine for $2,000–$500 payable on delivery and the balance in installments of $500 per month. It is further agreed that if the machine does not operate properly or with sufficient capacity, the plaintiff shall be under no obligation to pay for it, but defendant shall not be liable for consequential damages, and the liability of defendant shall be exclusively limited to accepting from the plaintiff the return of the machine and the refund of payments made. In this connection it is also provided that before rejection of the machine the defendant shall have the privilege, should it so desire, of making such adjustments as will enable it to make the machine operate satisfactorily.

The contract further provides that in consideration of the purchase of the machine and the advantages of demonstration and advertising the defendant will derive from the use of the machine by the plaintiff, the defendant agrees that as to all further sales of presses made by it, based upon the press sold to the plaintiff, and whether such sales be negotiated by the plaintiff or otherwise, 20 per cent of the gross selling price shall belong to the plaintiff. The plaintiff agrees to foster the sales of the manufactured machines. The defendant further agrees to endeavor to patent the machine, or the improvements thereon. If successful in such endeavor, the plaintiff shall have a 20 per cent interest in such patent or patents and in any improvements thereon that may be thereafter made by either party, the expense in prosecuting said patents to be borne 20 per cent by the plaintiff and 80 per cent by the defendant.

The plaintiff operated the machine until December, 1931. The record discloses that the machine never did operate with sufficient capacity to satisfy plaintiff. During the period of operation much effort was put forth by the officers and employees of each of the companies both in repair work and in attempts to increase the productive capacity of the machine, but apparently to no avail. Without attempting to describe in detail the machine delivered to plaintiff, it is sufficient to state that the meal, after being mixed and heated, is fed to a die-plate, through the holes of which the material is extruded in solid form by pressure. The material is fed to and pressed through the perforated dieplate by means of a worm laid horizontally and enclosed in casing. The main difficulty was that the material tended to solidify into a hard cake and would not pass properly or uniformly through the holes of the die, and the machine frequently clogged and had to be taken apart and cleaned numerous times daily.

In July, 1932, the plaintiff notified the defendant of its rejection of the machine, tendered it back and demanded the return of two installments, amounting to $1,000, which had been paid on account of the purchase price. At that time defendant refused to accept the tender or to return the amount paid, although after suit was commenced and by way of an amended answer, defendant conceded the right of rejection and admitted its liability for the $1,000, with interest.

On September 14, 1932, plaintiff instituted this action and in an amended complaint alleged the contract and the other facts related above. Further allegations were that subsequent to the date of the contract defendant had manufactured and sold eight presses under the trade name of California Pellet Mill; that such presses were merely improvements on and were based on the pellet press sold to plaintiff; and that plaintiff had demanded 20 per cent of the gross selling price of the pellet mill presses and a 20 per cent interest in patents obtained thereon, or improvements thereon. In a supplemental complaint plaintiff alleged further sales by defendant of pellet mill presses and asked for an accounting. It is further alleged that plaintiff fully performed all conditions to be performed by it under the contract.

After an extended hearing the trial court found, among other things, that the contract was a mutual agreement of the parties to cooperate and work together and pool their inventive ideas in an endeavor to perfect the pellet press agreed to be sold and the improvements thereon and to manufacture, market and introduce it into general use; and that in the dealings of the parties under the contract, they did so practically construe it in their operations and transactions thereunder. Further findings were that the ‘pellet mill press' was based on the ‘pellet press' originally delivered to plaintiff and any changes were merely improvements on the ‘pellet press'. The court found that plaintiff fully performed all matters and conditions to be performed by it under the contract; that plaintiff at all times acted in accordance with and insisted upon its rights under the terms of the contract; that plaintiff did not fail, refuse or neglect to foster the sales of similar machines; and that plaintiff did not abandon or rescind the contract by the rejection of the original machine and the demand for the return of the installments paid.

Defendant appeals from such portions of the judgment as declare that plaintiff is entitled to a 20 per cent interest (1) in a so-called ‘pellet press', (2) in a so-called ‘pellet mill press', (3) in any patents heretofore or hereafter obtained by defendant thereon, (4) in any patents heretofore or hereafter obtained by defendant on any improvements thereon, (5) in the gross selling price of any and all future sales of both pellet presses or pellet mill presses, and (6) from such portion thereof as awards judgment against defendant for $24,884.70, and interest in the sum of $5,665.69. These sums are made up of 20 per cent of the gross proceeds of machines sold plus the $1,000 paid by plaintiff on the purchase price of the machine delivered to it.

The main difference between the ‘pellet press' originally delivered to plaintiff and the ‘pellet mill press' subsequently developed and sold to others by the defendant lies essentially in the means used to force the mash through the performations in the die-plate. As previously stated, in the press delivered to plaintiff the prepared material was fed to and forced through the perforated die-plate by means of a worm laid horizontally and enclosed in casing. In the new type of press a roller mechanism, standing vertically and without casing, takes the place of the horizontal encased worm. The mash is fed by gravity and forced into the die-plate by rotary action of the roller, which exerts its form of pressure without actual contact with the face of the die. The roller takes the place of the worm and the casing is no longer necessary.

Reference to the memorandum opinion of the trial court appended to the respondent's brief discloses that the trial court considered the primary question in the case to be whether, within the meaning of the contract, the new model is ‘based upon’ the press made for plaintiff so as to be treated as an ‘improvement thereon’, as contended by plaintiff, or embodies, as defendant contends, a new invention which in no way concerns the plaintiff. However, we are of the opinion that a more basic question is whether the action of the plaintiff in rejecting the machine and demanding the return of the installment payments made was not a termination of the contract, thus relieving defendant of all liability under the contract except acceptance of the rejected machine and return of the payments made. The first issue becomes controlling only if the latter question is answered in the negative.

That portion of the judgment decreeing that the plaintiff is entitled to 20 per cent of the gross proceeds of sales made or to be made and a 20 per cent interest in all patents issued or to be issued is apparently based on the finding that ‘under the terms of the said contract it was the mutual agreement of plaintiff and defendant to cooperate and work together and pool their inventive ideas in an endeavor to perfect the ‘pellet press' agreed to be * * * sold and the improvements thereon and to manufacture, market and introduce it into general use; and the Court finds that in the dealings of said parties under said contract, they did so practically construe it in their operations and transactions thereunder; the Court further finds that with the exception of failure on the part of defendant to desclose to plaintiff defendant's ideas and plans with reference to certain improvements in substituting roller pressure for screw pressure in pressing the feed through the die, plaintiff and defendant freely exchanged, for their mutual benefit, their ideas and plans with reference to said ‘pellet press' pursuant to the provisions of said contract, and finds in addition that the above-mentioned ideas and plans were the result of said cooperation and working together of plaintiff and defendant, and of the demonstration of needful changes by plaintiff's use of said ‘pellet press', delivered to plaintiff for the purpose of said contract’.

There is no express provision in the contract for such cooperative plan; therefore, such finding must be based on the testimony of the witnesses and other evidence introduced during the trial of the case. After a thorough review of the record we doubt that the evidence justifies such finding. However, that question need not be considered in any detail here. If a contract is ambiguous or uncertain, then it is not within the proper or legal functions of a court of review to reject the construction given the writing by the trial court, if such construction be a reasonable one, and supplant it by another construction of which the instrument is susceptible. Adams v. Petroleum Midway Co., Ltd., 205 Cal. 221, 270 P. 668; Slama Tire Protector Co v. Ritchie, 31 Cal.App. 555, 161 P. 25. Where the terms or language of the contract raise questions of doubtful construction and the parties themselves have by their acts practically interpreted the contract, the courts should follow that practical construction. Mitau v. Roddan, 149 Cal. 1, 84 P. 145, 6 L.R.A.,N.S., 275; Skousen v. Herz, 135 Cal.App. 116, 26 P.2d 498; Work v. Associated Almond Growers, 102 Cal.App. 232, 282 P. 965. However, such rules apply only in cases where upon the face of the contract itself, there is doubt and evidence is used to dispel that doubt. United Iron Works v. Outer Harbor Dock & Wharf Co., 168 Cal. 81, 141 P. 917; Harrison v. McCormick, 89 Cal. 327, 26 P. 830, 26 Am.St.Rep. 469. The rule stated in section 1860 of the Code of Civil Procedure, to the effect that the circumstances under which a contract was made, including the situation of the subject of the instrument and of the parties to it, may be shown, can only be invoked to explain an ambiguity which appears upon the face of the document itself. Barnhart Aircraft, Inc., v. Preston, 212 Cal. 19, 297 P. 20. The question of whether an uncertainty or imbiguity exists is one of law, and the lower court's finding on this issue is not binding on appeal. If a contract is clear and unambiguous, then the admission of evidence to explain its terms is not permissible, and a trial court's findings based on such evidence of extraneous matters cannot be sustained on appeal. Brant v. California Dairies, Inc., 4 Cal.2d 128, 133, 48 P.2d 13; O'Connor v. West Sacramento Co., 189 Cal. 7, 207 P. 527; Wall v. Equitable Life Assur. Society, 33 Cal.App.2d 112, 91 P.2d 145.

The contract in the instant case is complete, clear and unambiguous. Under its terms the defendant agrees to sell and the plaintiff agrees to purchase a certain machine. In consideration of such purchase, the advantages of demonstration and advertising that the seller will derive from the use of the machine by the purchaser, and the fostering of sales by the purchaser, the seller promises to pay to the purchaser 20 per cent of the gross selling price of machines based on the press sold to the purchaser. In addition the purchaser will be entitled to 20 per cent of any patents obtained on the machine or improvements thereon. There are no express warranties as to the productive capacity of the machine. It is merely stated that the seller believes the machine will produce the results of the cuber press. However, it is provided that if the machine does not operate properly or with sufficient capacity, the purchaser need not pay for it, and the liability of the seller will be limited to the acceptance of the return of the machine and the refund of the payments received. Before any rejection of the machine the seller had the privilege, if it so desired, of making such adjustments as would enable it to make the machine operate satisfactorily.

If the machine had produced satisfactorily as originally constructed or as it might have been improved and if the purchaser had continued to use the machine and foster sales of other machines, then, and only then, would the purchaser have been entitled to the 20 per cent interests under the contract. However, this was not the case here. The machine did not produce satisfactorily and the seller did not exercise its privilege of making such adjustments as would make it operate properly. On the other hand, the purchaser exercised its right of rejection and thus, with the exception of the duty on the part of the seller to accept return of the machine and refund the installments paid, it terminated all the rights and obligations under the contract.

The result of the judgment rendered is due to the erroneous construction of the agreement of the parties by the trial court. Whether or not the new machine is an ‘improvement on’ or is ‘based upon’ the one delivered to the plaintiff, the fact is that the plaintiff never did possess the new machine. Yet if the judgment is allowed to stand, the plaintiff will receive 20 per cent of the gross proceeds of machines sold or to be sold and a 20 per cent interest in any patents on such machines. This will be true even though the contract expressly provides that the 20 per cent interests are in consideration of purchase, advantages of demonstration and advertising, and fostering of sales of the machine. It is impossible to imagine how the purchaser could demonstrate, advertise or foster the sales of a machine it never possessed. It is true that the purchaser used the pellet press for some time, but it is difficult to understand how the defendant profited from the use or advertising of an unsatisfactory machine. The record discloses that plaintiff mentioned certain companies as prospective purchasers to the defendant, and that these companies later purchased the new pellet mill press, but in contacting such prospective purchasers and notifying the defendant, the plaintiff could not have had the new machine in mind because by its own allegations it knew nothing of the new machine until shortly before this action was commenced. But even if there were some way of reconciling this conflict, the actions of the plaintiff prior to the rejection become immaterial because the rejection was a termination of the rights and obligations under the contract, and the liability of the defendant was expressly limited to restoration of the purchase money paid.

The case of Hamer v. MacClatchie, 220 Cal. 720, 32 P.2d 620, 621, relied on by plaintiff, is in no way decisive of the issue involved here. In that case a cooperative plan providing for royalty payments was entered into because it was believed that a device for which one party was making application for patent infringed certain claims of another's in application. There was a written contract between the parties and it was expressly stated therein that ‘* * * the party of the second part * * * agrees to cooperate with and render whatever assistance is necessary respecting the mode and use of said device, and that they further agree to turn over any and all improvements of said inventions, invented or devised by any either or all of them collectively or individually, such improvements to be for the benefit of all the parties herein mentioned, * * *’. The court properly held at page 724 of 220, Cal., at page 621 of 32 P.2d: ‘It [the contract] sets forth the mutual agreement of these parties to co-operate and work together in an endeavor to perfect the device and improvements thereto and to manufacture, market, and introduce it into general use.’ As previously stated, there is no such express provision for a cooperative plan in the instant case. In support of its contention that the contract provided for a ‘pooling’ of inventive ideas, the respondent relies heavily on that portion of the contract providing that ‘The party of the second part (defendant and appellant) does hereby further agree to endeavor to patent said machine, or the improvements thereon, in which event, if successful, the party of the first part shall have a twenty per cent interest in such patent or patents and in any improvements thereon that may be thereafter made by either party; the expense in prosecuting said patents to be borne twenty per cent by first party and eithty per cent by second party’. This provision is clearly not a plan for a cooperative effort on the part of both parties to produce a machine similar to the situation in the Hamer v. MacClatchie case, supra. The 20 per cent interest in patents was to be received ‘in consideration of the purchase of said machine and the advantages of demonstration and advertising that second party will derive from the use of said machine by first party’, and for the further consideration of the fostering of sales by the respondent, just as respondent was to receive a 20 per cent interest in the gross selling price of future machines. The 20 per cent interest in patents provision was obviously dependent on the existence of the contract. The contract having been terminated, such provision can now have no effect.

A contract may provide that it shall come to an end at the option of one or either of the parties. 17 C.J.S., Contracts, p. 888, § 399. Provision for termination by either party is valid and binding. Cline v. Smith. 96 Cal.App. 697, 274 P. 76§. There was provision for termination in the contract being considered here, and there was termination by rejection of the machine and demand for refund of the installments paid. The findings made and the judgment rendered by the trial court are contrary to the express provisions of the contract and cannot be upheld.

This being an action on a written contract, clear on its face, and the contract having been terminated by the actions of the parties, as hereinbefore discussed, nothing could be gained by the granting of a new trial in this case. Therefore, that portion of the judgment appealed from is reversed, with directions to the trial court to enter judgment in favor of the defendant. Fraser v. Carman-Ryles, 8 Cal.2d 143, 64 P.2d 397; Scudder v. Perce, 159 Cal. 429, 114 P. 571. The remainder of the judgment in favor of plaintiff and against defendant for the sum of $1,000, with interest thereon from July 27, 1932, said sum being that amount paid by plaintiff to defendant on account of the contract price of the rejected machine, is in no way affected by the reversal of that portion of said judgment appealed from.

PER CURIAM.