Delta Dynamics, Inc. v. Arioto

446 P.2d 785, 69 Cal. 2d 525, 72 Cal. Rptr. 785, 1968 Cal. LEXIS 262

Opinions

TRAYNOR, C. J.

Plaintiff Delta Dynamics, Inc. developed a trigger lock for use as a safety device on firearms. On March 23, 1961, it entered into a contract with defendants, partners doing business as the Pixey Distributing Co., for the distribution and sale of the locks throughout the United States. The contract was to run for five years from the date of the first delivery of the locks, and Pixey was given an option to renew the contract for another five years. Delta agreed to manufacture or arrange for the manufacture of the locks and to supply them to Pixey, which it appointed as exclusive distributor. Pixey agreed to pay for the locks at specified prices. Pixey promised to promote the locks diligently and “to sell not less than 50,000 units within one year from the date of delivery of the initial order” and not less than 100,000 units in each of the succeeding four years. “Should Pixey fail to distribute in any one year the minimum number of devices to be distributed by it . . . this agreement shall be subject to termination” by Delta on 30 days’ notice. The contract also provided that ‘‘In the event of breach of this agreement by either party, the party prevailing in any action for damages or enforcement of the terms of this Agreement shall be entitled to reasonable attorneys’ fees.”

Pixey ordered and paid for 10,000 locks, and Delta delivered them in August 1961. In October 1961 Pixey executed a written purchase order requesting Delta to supply 10,000 additional locks to be delivered ‘‘as needed.” Pixey never requested delivery of that order, however, and it did not order any of the 30,000 additional locks needed to meet the 50,000 quota for the first year. On October 1, 1962, Delta terminated the agreement. Thereafter it brought this action to recover damages for P'ixey’s failure to purchase the first year’s quota.

After a nonjury trial the court entered judgment for Delta. It interpreted the contract as requiring Pixey to purchase 50,000 locks in the first year, which commenced with the initial delivery of 10,000 locks, and rejected Pixey’s defense that Delta’s exclusive remedy for Pixey’s failure to meet the quota was the right to terminate the contract. Pixey appeals.

We note at the outset that there is no merit in Pixey’s contention that it did not agree to buy 50,000 locks from Delta in the first year, but only to sell that number to third parties. Since Pixey agreed to buy the locks from Delta, the only source of supply, its promise to sell 50,000 locks to third parties clearly implied a promise to buy that number from Delta, and the trial court correctly so found.

Pixey contends, however, that the termination clause made Delta’s right to terminate the contract Delta’s exclusive remedy for Pixey’s failure to meet the annual quota and that the trial court erred in refusing to admit extrinsic evidence offered to prove that the termination clause had that meaning.¹

“The test of admissibility of extrinsic evidence to explain the meaning of a written instrument is not whether it appears to the court to be plain and unambiguous on its face, but whether the offered evidence is relevant to prove a meaning to which the language of the instrument is reasonably susceptible. ’ ’ To determine whether offered evidence is relevant to prove such a meaning the court must consider all credible evidence offered to prove the intention of the parties. ‘ ‘ If the court decides, after considering this evidence, that the language of a contract, in the light of all the circumstances, ‘is fairly susceptible of either one of the two interpretations contended for . . .’ [citations], extrinsic evidence to prove either of such meanings is admissible." (Pacific Gas & Elec. Co. v. G. W. Thomas Drayage etc. Co. (1968) ante, pp. 33, 40 [69 Cal.Rptr. 561, 442P.2d 641].)

In the present case the parties may have included the termination clause to spell out with specificity the condition on which Delta would be excused from further performance under the contract, or to set forth the exclusive remedy for a failure to meet the quota in any year, or for both such purposes. That clause is therefore reasonably susceptible of the meaning contended for by Pixey, namely, that it expresses the parties’ determination that Delta’s sole remedy for Pixey's failure to meet a quota was to terminate the contract. There is nothing in the rest of the contract to preclude that interpretation. It does not render meaningless the provision for the recovery of attorneys’ fees in the event of an action for damages for breach of the contract, for the attorneys’ fees provision would still have full effect with respect to other breaches of the contract.² Accordingly, the trial court eom mitted prejudicial error by excluding extrinsic evidence offered to prove the meaning of the termination clause contended for by Pixey. The judgment must therefore be reversed.

Invoking Newby v. Anderson (1950) 36 Cal.2d 463 [224 P.2d 673], Pixey contends that for the guidance of the trial court on retrial we should hold that in the absence of extrinsic evidence offered to prove a different meaning of the contract, termination is Delta’s sole remedy for Pixey’s failure to meet a quota. In the Newby case the national distributor of a product called “Aquella” had appointed Newby its western distributor. The national distributor was not satisfied with Newby’s performance and transferred the distributorship to the Andersons. To effectuate the transfer, the Andersons signed a distributorship agreement with the national distributor and a royalty agreement with Newby. The distributorship agreement provided that “ ‘in order to retain exclusive distribution “The Andersons” must purchase 400.000 gallons of Aquella per annum’ ” and that “ ‘It is agreed that “The Andersons” shall diligently . . . prosecute the sale of Aquella throughout the entire territory, and do all things reasonably necessary to establish the sale of Aquella in all trade centers. . . .’ ” (Newby v. Anderson, supra, 36 Cal.2d 463, 465.) Later the national distributor terminated the Andersons’ western distributorship because the Andersons did not sell the quota, and Newby brought an action against the Andersons under the royalty agreement. We held that the national distributor’s sole remedy for the Andersons’ failure to meet the quota was to terminate the agreement. The Andersons had only promised, however, diligently to prosecute the sale of Aquella, and had undertaken “no obligation to purchase the minimum quota of Aquella.” (Newby v. Anderson, supra, 36 Cal.2d 463, 469.) Likewise, they had undertaken no obligation to sell the minimum quota to third parties. Under those circumstances, the purchase of 400.000 gallons was only a condition for retaining the distributorship. That condition did not embody a promise for the breach of which an action for damages would lie. In the present case, however, as noted above, Pixey promised to buy the stated quotas from Delta. Normally the breach of such a promise would give rise to an action for damages. Although the termination clause is reasonably susceptible of a meaning that precludes that remedy in the absence of extrinsic evidence, we believe it should not be given that meaning but should be interpreted only as a statement of the condition on which Delta could terminate the contract.

The judgment is reversed.

Peters, J. ,Tobriner, J., and Sullivan, J., concurred.

Footnotes

1

The pretrial conference order stated that one of the issues to be decided was whether "the option given ... to the Plaintiff to terminate the distributorship for failure to sell 50,000 locks within one year [is] the exclusive remedy of the Plaintiff for said failure.” At the trial counsel for defendants called one of his clients and asked, ‘ ‘ During the negotiations that culminated in the execution of this contract between your company and Delta Dynamics, was there any conversation or discussion as to what would happen as far as Pixey Distributing Company is concerned if they failed to meet the minimum quota set up in that contract?” Plaintiff’s counsel objected that the question called for parol evidence. Defendants ’ counsel answered that ‘ ‘ The contract is ambiguous and we are trying to elicit from the testimony of various witnesses what the intentions of the parties were.” The objection was sustained. The offer of proof, taken alone, was too general to provide a ground for appeal. (Stickel v. San Diego Elec. Ry. Co. (1948) 32 Cal.2d 157, 162-164 [195 P.2d 416] ; Douillard v. Woodd (1942) 20 Cal.2d 665, 670 [128 P.2d 6]; see Evid. Code, § 354, subd. (a).) In the context of this trial, however, where, as the pretrial conference order demonstrates, one of the primary issues was whether the contract permitted recovery of damages for the failure to meet a quota, it was obvious that counsel expected his witness to answer that the parties intended termination to be an exclusive remedy. Thus the substance, purpose, and relevance of the offered evidence was made known to the court, and no more complete offer of proof was required. (People v. McGee (1947) 31 Cal.2d 229, 242 [187 P.2d 706] ; People v. Duane (1942) 21 Cal.2d 71, 81 [130 P.2d 123] ; see Evid. Code, § 354, subd. (a).)

2

For example, Pixey might have breached the contract by failing diligently to promote the locks or by not paying for locks that had been delivered. Delta might also have breached the contract in various ways.