Olson v. Biola Cooperative Raisin Growers Assn.

204 P.2d 10, 33 Cal. 2d 664, 12 A.L.R. 2d 112, 1949 Cal. LEXIS 227

• Court: California Supreme Court
• Decided: March 23, 1949
• Docket: S. F. 17401
• Status: Published

Opinions

SPENCE, J.

Following the granting of a rehearing, further consideration of the issues presented on this appeal leads to the conclusion that our former opinion correctly disposed of such issues, and said opinion is therefore adopted as follows:

Biola Cooperative Raisin Growers Association was organized as a nonprofit cooperative marketing association under the laws of the state of California. Plaintiffs—four members of the association—brought this action, a representative suit, against the association and the other sixteen members thereof, including the five directors, to recover liquidated damages alleged to be due by virtue of the delivery of raisins deemed to be substandard under the provisions of the marketing agreement between the association and its various members. Eight of the individually named defendants were found to be so liable in conformity with the theory of plaintiffs' complaint, and judgment accordingly was entered against them in varying amounts computed upon the basis of their substandard tonnage delivery to the association, the total sum being $19,856.79, plus interest, and costs. These defendants have appealed from such judgment, urging, as a principal ground for reversal, that liquidated damages were not properly assessable against them under the record in this case. Consideration of the language of the marketing agreement and the statutory regulations governing the disposition of such damage claim as is here made demonstrates the merit of defendants’ argument distinguishing their default as one in quality rather than in quantity of crop delivery.

The record reveals that on October 20, 1944, plaintiff Chris H. Scheldt, “a grower member of the . . . Association,” entered into an agreement with the association whereby he undertook to process and pack the “raisin crop” of the association “for the year 1944” for a specified sum per ton. He rented the association’s packing house for the season, and the association’s members were obligated to deliver their raisins there “properly cured and in good condition” under the terms of their marketing agreement with the association. Delivery of the raisins to Scheldt at the packing house commenced soon after the date of the packing agreement and was concluded early in 1945. Although the association was empowered under the marketing agreement to set up quality standards regarding “sugar and moisture content” to “be met by all raisins delivered by the Grower[s],” it had not done so. However, it appears that 55 per cent of the raisin crop in question was under contract for sale to the United States Government, and the federal regulations, introduced in evidence, permitted a moisture content of “not more than 18 per cent. ’ ’ Gauged by this standard, there was substantial evidence that some of the raisins delivered by the eight grower members of the association against whom judgment was rendered had a higher moisture content so that they could not be run through the stemmer and processed without further drying. Finding that such raisins “were not properly dried and cured but were too wet and contained too much moisture and were too heavy for processing and marketing,” the trial court determined the exact weight of the defective delivery made by each of the eight defaulting growers and accordingly proportioned against them plaintiffs’ recovery of liquidated damages.

All of the members’ raisins, both wet and dry, were delivered at the packing house, which was under the control of plaintiff Chris H. Scheldt. He received them, knowing at the time of delivery or shortly thereafter that some of them were wet. He did report that fact to the officers of the association but the wet raisins were neither rejected nor returned, and both he and the association continued to permit the delivery and acceptance of wet raisins, all of which were ultimately sold. Some of the growers who had delivered wet raisins offered to remove them from the packing house and properly cure them at their own expense, but they were not permitted to do so. However, it appears that under the government regulations, all of the raisins—both wet and dry—were sold for $180 per ton and each grower received an additional $10 per ton as an “incentive payment” or reward for drying his grapes instead of selling them fresh, so that no one suffered any loss by reason of the delivery of wet raisins.

With these basic factual considerations at hand, the determinative issue is whether plaintiffs, as representative members of the association, may enforce the collection of liquidated damages for the default in question, premised solely upon the allegation that after demand, the directors failed to act because three of them, a majority of the board, were interested parties, having themselves delivered wet raisins to the packing house. The answer to this problem lies in an analysis of certain provisions of the association’s marketing agreement with its members, in the light of applicable language in the Agricultural Code bearing upon the exception of cooperative marketing associations from the rules governing the enforcement of liquidated damage claims under the general law of this state as expressed in sections 1670 and 1671 of the Civil Code.

Section 1 of the marketing agreement reads: “The Association buys and the Grower sells to the Association annually from the date of the signing of the By-Laws of the Association and this agreement all of the raisins owned and grown by the Grower, and agrees to deliver the same and all thereof properly cured and in good condition to the plant of the Association.” (Emphasis added.)

Section 7 of the agreement contains the following stipulation: “In the event that Grower should fail to deliver raisins hereby sold in accordance with terms of this agreement and these By-Laws, such act will injure the Association to an amount that is, and will be impracticable and extremely difficult to determine and fix, and that is, therefore, fixed at the amount of Twenty-five (25%) per cent of the average current seasonal price for each and every ton of raisins that the Grower fails to deliver in accordance with the terms hereof and these By-Laws, and which amount the Grower agrees to pay, and shall pay, to the Association upon demand ...” (Emphasis added.)

And section 13 of the agreement states in part: “It is expressly understood and agreed that Grower has by this agreement agreed, to and will deliver the raisins herein contracted to be delivered to the Association, or in lieu thereof to pay liquidated damages therefor as by this agreement provided for his failure so to do. . . .” (Emphasis added.)

Section 1209 of the Agricultural Code provides: “The by-laws or the marketing contract may fix, as liquidated damages, specific sums to be paid by the member or stockholder to the association upon the breach by him of any provision of the marketing contract regarding the sale or delivery or withholding of products; . . . and such clauses providing for liquidated damages shall be enforceable as such and shall not be regarded as penalties.” (Emphasis added.) And the first paragraph of section 1213 of said code states: “Any provisions of law which are in conflict with this chapter shall not be construed as applying to the associations herein provided for.”

The general rule in this state is that a contract which undertakes to fix the amount of damages in anticipation of a breach of an obligation is void to that extent (Civ. Code, § 1670) except “when, from the nature of the case, it would be impracticable or extremely difficult to fix the actual damage.” (Civ. Code, § 1671.) Accordingly, it is held that a party relying on a liquidated damage clause in a contract must plead and prove the facts validating his right to recover such predetermined amount. (Dyer Bros. Golden West Iron Works v. Central Iron Works, 182 Cal. 588, 593 [189 P. 445]; Robert Marsh & Co., Inc. v. Tremper, 210 Cal. 572, 576 [292 P. 950]; Rice v. Schmid, 18 Cal.2d 382, 385 [115 P.2d 498, 138 A.L.R. 589]; Kekich v. Blum, 43 Cal.App.2d 525, 527-528 [111 P.2d 411].)

However, an important exception to the general rule on the remedy of liquidated damages prevails in the ease of a nonprofit cooperative marketing association, as declared by section 1209 of the Agricultural Code above quoted. This exception permits such an association and its members to stipulate in advance the amount of damages to be paid upon the breach of an obligation in the particulars of “the sale or delivery or withholding of products” forming the object of their agreement. While such statutory language constitutes a grant of power, that power is confined to the three subjects specifically mentioned so that any undertaking on the part of the association to go beyond those stated limits must fall within the provisions of sections 1670 and 1671 of the Civil Code, which, as heretofore noted, permit the recovery of liquidated damages only where it would be impracticable or extremely difficult to estimate actual damages—a matter of pleading and proof resting on the party seeking such redress.

Even in the absence of statute it was well established in this state that a nonprofit cooperative marketing association might contract for the payment by a member of a stipulated sum for the violation of his agreement to deliver all of his product to the association for processing and marketing. (Anaheim Citrus Fruit Association v. Yeoman, 51 Cal.App. 759, 764 [197 P. 959]; Poultry Producers of Central California, Inc. v. Murphy, 64 Cal.App. 450, 455 [221 P. 962]; California Canning Peach Growers v. Downey, 76 Cal.App. 1, 11-12 [243 P. 679]; California Canning Peach Growers v. Harris, 91 Cal.App. 654, 655 [267 P. 572]; see, also, Poultry Producers of Southern California, Inc. v. Barlow, 189 Cal. 278, 280-281 [208 P. 93]; California Bean Growers’ Association v. Rindge Land & Navigation Co., 199 Cal. 168, 183 [248 P. 658, 47 A.L.R. 904].) The validity of such a liquidated damage provision stemmed from the principle that the whole business scheme of the marketing association necessarily depended upon its ability to hold and control the subject matter of its operations, a consideration demonstrating the disrupting effect which a member’s failure to deliver all of his product to the association would have on its successful functioning and the consequent elements of damage which would not be capable of any exact estimation. As was so aptly stated with regard to such breach in delivery to the citrus fruit cooperative involved in the Anaheim ease, supra, at pages 763-764: “The existence and life of the association itself depended upon its being furnished fruit to dispose of in the public market. A reduction in the amount of fruit so handled would not only tend to increase the overhead cost to the non-transgressing members, but, we may assume, to some extent affect the prestige and standing of the association as a marketing concern. The argument would be the same, regardless of the quantity of fruit which might have been delivered by the defendant, whether it composed but a small fractional part or one-half or more of the entire product designed to be marketed by the plaintiff agency [the association]. Enough has been said, we think, to show that the case falls within the class as to which the law permits damages to be liquidated by contract in-advance of their occurrence [Civ. Code, § 1671]. It follows as a necessary conclusion that plaintiff was entitled to recover the exact amount fixed in its contract as the sum per box which defendant should pay by reason of his failure to market [his] fruit in the manner agreed.” The same line of reasoning was followed in Irwindale Citrus Assn. v. Semler, 60 Cal.App.2d 318, 323 [140 P.2d 716].

But all of these cases involved the quantity of the product contracted for delivery to the marketing association and the significance of a member’s breach in that respect, so that a part of his product was released for distribution through other channels in competition with the cooperative enterprise and to the detriment of all the members thereof. The quality of the fruit delivered was not an issue and was not considered. The same distinguishing observations apply with respect to delivery breaches discussed in similar cases from other jurisdictions. (See 25 A.L.R. 1113; supplemented in 33 A.L.R. 247; 47 A.L.R. 936; 77 A.L.R. 405; 98 A.L.R. 1406.) In the instant case the quantity of the raisins delivered is not a point of dispute, as it is admitted that the members delivered all of their raisins to the Association for marketing. Rather here it is the quality of the raisins that is at issue, so that the present problem transcends the scope of the decided cases. However, they are significant because of their discussion of the economic considerations which tend to indicate the design of the statutory law expressive of the legislative policy with regard to the availability of liquidated damages in protecting the integrity of a cooperative marketing association.

Pursuant to these preliminary remarks, there is to be considered at the outset whether or not the grower members of the association who delivered wet raisins to the packing house violated their marketing agreement in any of the particulars specified in section 1209 of the Agricultural Code— that is, in regard to “the sale or delivery or withholding of products,” as those terms are used in said section. Section 1 of the marketing agreement contemplates a sale of the raisins by the grower to the Association when it provides that “the Association buys and the Grower sells to the Association ...” his crop of raisins—a sale with future delivery. This brings into operation the provision of section 1208 of the Agricultural Code that if a contract of sale is made, “it shall be conclusively held that title to the products passes absolutely and unreservedly, except for recorded liens, to the association upon delivery. ’ ’ So here a sale of the raisins occurred and was completed upon delivery to, and acceptance by, the association and the packer Seheidt. In contrast to such “sale” arrangement as here prevails, cooperative marketing agreements frequently provide for an agency relationship, under which the grower agrees to deliver his crop to the association and appoints the association his agent to handle and market the crop for him and to return the net proceeds to him—a mere “delivery” arrangement whereby title to the crop does not pass to the association. But the equal importance of faithful performance of either type of obligation is expressly recognized in section 1209 in the specific mention of “sale or delivery ... of products.” The third reference in section 1209, the “withholding of products,” would appear to apply to any act of the grower in holding back from the association any part of the crop which he has either sold or is otherwise bound to deliver to the association for marketing. As each grower member admittedly turned over all his raisins to the association, and therefore made no default in performance with respect to quantity, we are of the opinion, for the reasons hereinafter stated, that a proper construction of the provisions of said section 1209 leads to the conclusion that plaintiffs failed to show a breach of any of the three conditions enumerated as the premise for the recovery of liquidated damages.

The above view of the qualifying language of section 1209 of the Agricultural Code follows the theory that the right to delivery of its members’ products is the most important right of a cooperative marketing association, a matter that was forcefully adjudicated in this state in the Anaheim and succeeding cases above cited, and which principle of judicial decision presumably governed the Legislature’s correlative statutory action on the subject. (23 Cal.Jur. 783, § 159.) It was the quantity, not the quality, feature of the members ’ delivery that was considered the lifeblood of the cooperative and essential to the maintenance of its place in the competitive market. That such was the Legislature’s concept of the need for liquidated damages as a protective measure for cooperatives appears from other related sections of the Agricultural Code. Thus section 1210 provides that “In the event of any such breach or threatened breach of such marketing contract by a member, the association shall be entitled to an injunction to prevent the further breach of the contract and to a decree of specific performance thereof.” (Emphasis added.) In so making the remedies of injunction and specific performance available to a cooperative marketing association on the same basis as the remedy of liquidated damages—that is, for the type of breach mentioned in section 1209, one “regarding the sale or delivery or withholding of products”—the Legislature must have intended such judicial enforcement with relation to the members’ promised delivery in quantity rather than to have the court undertake detailed supervisory measures to insure delivery not merely as to amount but likewise as to the quality of the product, depending on the performance of various farming operations which would yield the desired standard. Likewise section 1211 provides that “In any action upon such marketing agreements, it shall be conclusively presumed that a landowner or landlord or lessor is able to control the delivery of products produced on his land by tenants or others, . . .; and in such actions, the foregoing remedies for nondelivery or breach shall lie and be enforceable against such landowner, landlord or lessor.” (Emphasis added.) In so recognizing that a grower might attempt to evade his obligation as to delivery under the marketing agreement by leasing his land to another, thus supposedly divesting himself of control over the crop, and in rendering such device ineffectual, the Legislature again evinced its intent that the matter of delivery within the landowner’s control would be the quantity, not the quality dependent on various practices of husbandry that might prevail on the farm. In other words, these provisions all point to the fundamental tenet of exclusive dealing between such association and its members, in the sense of full delivery of the promised product, as the limit of legislative concern, and not the added consideration of variance in the condition of the product delivered with the involvement of multiple details as to farming operations.

While plaintiffs do not cite any section of the Agricultural Code that specifically permits contracting for the recovery of liquidated damages for breach of an agreement as to the quality of the product to be delivered, they claim that such would be within the scope of the reference in section 1209 to any provision of the marketing contract regarding the sale or delivery or withholding of products.” In pursuance of this position, plaintiffs argue that in section 1 of the marketing agreement each grower contracted to deliver his raisins “properly cured and in good condition,” and that this covenant was breached by the delivery of wet raisins; that in section 7 each grower agreed to pay the liquidated damages if he failed to deliver his raisins “in accordance with the terms of this agreement”; that this covenant was broken by the delivery of wet raisins which were neither “properly cured” nor “in good condition”; that thereupon the agreement to pay liquidated damages came into effect and could be enforced within the intent of the “omnibus provisions” of section 1209. They also argue that under the quoted language of section 1213 of the Agricultural Code, the provisions of section 1670 and 1671 of the Civil Code have no application in this case. But to construe section 1209 as an “omnibus” provision would in effect eliminate any premise of limitation consistent with the three particulars mentioned as the basis for the contracting for liquidated damages and would allow such remedy for the breach of “any provision of the marketing contract,” without qualification. However, the statute does qualify the availability of the remedy and, as above construed, it refers to “delivery” as embracing an agency relationship in contrast to a “sale,” as here prevails. Accordingly, the word “delivery” cannot be said to connote there, as plaintiffs contend, “time, place, manner, object, quantity and quality”—an “omnibus” concept which would far exceed the idea of the fact of delivery of the promised amount as a measure of assurance to the cooperative marketing association that its whole scheme of organization would not be nullified by some of the product of its members reaching the public market through outside competitive channels, to its disadvantage and, perhaps, to its ultimate break-up. Since upon the record plaintiffs’ claim involves the quality, not the quantity, of raisins delivered, the provisions of sections 1670 and 1671 are not in conflict with the provisions of the Agricultural Code insofar as the facts of this case are concerned, and section 1213 of the latter code does not aid their position.

Moreover, a study of the entire marketing agreement leads to the conclusion that it was the intention of the contracting parties to provide for the recovery of liquidated damages only when a grower member failed or refused to deliver dll his raisins to the Association. Such overall examination accords with the fundamental rule that the determination of the meaning of a contract depends, in each case, upon the intent of the parties as evidenced by the entire agreement construed in the light of the circumstances under which it was made. (Civ. Code, §§ 1636, 1641; Ogburn v. Travelers Insurance Co., 207 Cal. 50, 52 [276 P. 1004].) In other words, the “ ‘sense and meaning of the parties to any particular instrument should be collected ex antecedentibus et consequentibus-, that is to say, every part of it should be brought into action, in order to collect from the whole one uniform and consistent sense, if that may be done. ’ ” (Balfour v. Fresno Canal & Irrigation Co., 109 Cal. 221, 227 [41 P.876].)

So pertinent are these considerations of language in the parties’ marketing agreement. Section 13 appears to be a summary of the prior provision on the subject of liquidated damages. It conditions the agreement to pay such sum upon the fact of failure to deliver. Likewise section 7, containing the agreed terms for the liquidated damages, suggests that it was intended to apply upon failure to deliver the full amount of the product, and not upon failure in the quality of the product. In addition to other provisions, the section expressly states that it would be “impracticable and extremely difficult to determine and fix” the damages “in the event that Grower should fail to deliver raisins hereby sold in accordance with the terms of this agreement,” and accordingly, the damage liability is related directly to the circumstance of default in the promised tonnage of raisins. It has been held that such declaration is a true statement of a fact in the case of the failure to deliver to a cooperative marketing association, as the subject has been exhaustively discussed in the above-noted decisions in this and other jurisdictions. • But the same result does not prevail in the case of the delivery of substandard raisins for the reason that raisins are graded, and each grade has an ascertainable market value which may vary from season to season and from time to time. Raisins not properly cured, of course, have a less market value than those properly cured. The loss from a violation of the contract specification as to quality may be ascertained and determined under the ordinary rules of the law of damages. (Rice v. Schmid, supra, 18 Cal.2d 382, 385-386.) That the parties had such principle in mind for the assessment of damages in the event of delivery of a substandard lot of raisins appears from their failure to provide in their agreement a variable pecuniary standard, according to the degree of default, for the computation of liquidated damages rather than a flat rate which might be far in excess of the actual damages sustained where the default in quality was slight, and the resultant damage obligation would partake of the nature of a penalty, contrary to “the effort of the law” to “work [an] equitable result” in casting “upon the delinquent party a liability to respond to” a reasonable assessment of damages. (Anaheim Citrus Fruit Association v. Yeoman, supra, 51 Cal.App. 759, 761; Mente & Co., Inc. v. Fresno Compress & Warehouse Co., 113 Cal.App. 325, 330-331 [298 P. 126].) Likewise the flat rate of liquidated damages provided in the marketing agreement might be wholly inadequate if the fruit delivered was greatly below the promised standard or the nature of the defect was such that the substandard lot might contaminate the other lots of raisins of the association with which it was mixed, and so cause a very substantial loss, which the parties could not have reasonably anticipated in predetermining the damage liability as a “fair compensation for the loss sustained.” (Rice v. Schmid, supra, 18 Cal.2d 382, 386.)

In the light of the foregoing discussion, plaintiffs’ position on this appeal cannot be sustained. The provisions of the Agricultural Code do not authorize a contract for the recovery of liquidated damages because of the inferior quality of the product delivered to and accepted by a nonprofit cooperative marketing association; and an analysis of the particular marketing agreement here in question does not show such damage liability to have been within the contemplation of the parties.

The judgment is reversed.

Gibson, C. J., Shenk, J., and Edmonds, J., concurred.