Rudd-Melikian, Inc. v. Henry T. Merritt, Doing Business as Coffee Service Co.

282 F.2d 924, 1960 U.S. App. LEXIS 3597

• Court: Court of Appeals for the Sixth Circuit
• Decided: October 12, 1960
• Docket: 13858
• Status: Published

Opinions

SHACKELFORD MILLER, Jr., Circuit Judge.

Appellee, Henry T. Merritt, doing business as Coffee Service Co., brought this action in the United States District Court for the Western District of Kentucky to' recover damages in the amount of $15,-202.98 for alleged breach of contract on the part of the appellant, Rudd-Melikian, Inc. Jurisdiction was claimed by reason of diversity of citizenship and the amount involved. Section 1332, Title 28 U.S.C.A.

For the purposes of this opinion the following facts are sufficient to present, the issues. By written contract of March. 6, 1953, appellant appointed appellee a distributor and operator of appellant’s-products, namely, coffee vending machines and “Kwik Kafe” coffee. Under the contract appellee agreed to buy 6 0‘ “Coffee Cub” machines to be delivered' and accepted at stated intervals on and, before June 20, 1953. The contract required that appellee make a deposit with appellant of $1,500.00, to be credited on the purchase price of the machines, and, in the event appellee breached the contract, to be retained by appellant as liquidated damages. Appellee agreed to operate or resell, subject to certain restrictions, the machines purchased “in the following described territory only: Jefferson County, State of Kentucky, Clark and Floyd in State of Indiana.” The Indiana counties were directly across the Ohio River from Louisville, Jefferson County, Kentucky. Appellee agreed to install, maintain and render efficient service for all machines sold to him by appellant, and to keep on hand at all times an adequate supply of spare parts and ■commodities sufficient to meet the requirements of its purchasers. Appellant agreed to sell to appellee, at published prices when the supply was available, his total requirements of Kwik Kafe coffee, a blend specially prepared for use in appellant’s coffee dispensing machines. Appellee agreed that he would not sell said coffee except for use in appellant’s coffee dispensing machines sold ■or operated by appellee.

At the time this contract was entered into there was in existence a contract of November 21, 1952, by which a similar franchise was granted by appellant to John L. Manus for Jefferson County, Kentucky, and Clark and Floyd Counties in Indiana. By contract of January 31, 1953, Manus assigned to appellee the right to operate and sell appellant’s equipment in Jefferson County, Kentucky. Appellee bought thirty of appellant's machines from Manus at approximately $625.00 each. In a related agreement to the contract between appellant and appellee involved in the present case, appellant and Manus entered into a written agreement by which the contract with Manus was cancelled and appellee was ■assigned a credit of thirty machines on his obligation to purchase a total of sixty machines, by reason of his purchase of the thirty machines from Manus. This contract also provided that appellant would sell thirty machines to appellee to be operated in the territory previously assigned to Manus.

On April 30, 1953, appellee bought ten more machines from appellant. The contract provided for the delivery and acceptance of ten machines on May 20, 1953, and another ten machines on June 20, 1953.

By letter of May 7, 1953, appellee advised appellant that he had encountered a good deal of resistance to installing the machines where other service existed, that many installations were unsatisfactory, but that the coffee was well liked and would eventually be well received. This letter closed by stating:

"As acceptance of further machines from you would require purchase of a second truck and employment of a second route man, which we are presently unable to finance, please do not ship further machines without our request. We will notify you of our progress and when we are able to extend our operation by accepting more machines.”

Appellant replied by letter of May 18 that it was holding up shipment of units produced for delivery in May, but that it was its policy to grant extensions of 30 days at a time and not to exceed two extensions during a six months contract, and that notice of a desire for extension should be given at least 20 days in advance of the proposed shipping date. The letter also stated:

“I will plan to have our Territory Manager for your area, Mr. Wm. Guthrie, call on you in the near future to assist you in any way possible.

“We trust this will meet with your approval and look forward to hearing from you in the near future.”

Under date of June 16, 1953, appellee wrote appellant, stating:

“Lest there be no misunderstanding about my letter to you of May 17, 1953, we are unable to accept delivery of more machines. When we are in position to accept and operate more I will notify you immediately.”

The date referred to was an incorrect reference to the letter of May 7, 1953.

Thereafter, correspondence was exchanged between the parties over a period of months, in which appellee advised appellant of additional locations which he had obtained, which he considered excellent, the necessity of converting the nickel machines into dime machines, and a gradual increase in the machine gross of the business. By letter of March 30, 1954, appellee advised of his small working capital, the necessity of converting seven machines which operated on two nickels to operation on a dime, and suggested that appellant authorize him to draw against the $1,000.00 on deposit with appellant for parts, cannisters, and conversion mechanisms “in order to improve our service and our revenues.” This request was denied by letter of April 22, 1954, which stated:

“This is to inform you that we will not be able to comply with your request to credit any deposit monies you may have with this company against your purchase of anything but equipment according to the contract. This is a firm policy of our company and, as far as I know, there have been no exceptions to it.”

This correspondence made no reference to a breach or cancellation of the contract.

Under date of October 13, 1954, appellant’s counsel wrote appellee that “your Distributor’s Sales Contract dated March 6, 1953, is considered as being in breach and the deposit moneys thereunder are declared forfeited in accordance with the terms thereof.” Appellee considered the letter as only a forfeiture of his deposit and not as a termination of his franchise. He continued to operate the machines and also continued buying parts from appellant.

In 1955 appellee began to make efforts to sell the business. Appellee testified that in these efforts he was assisted by appellant’s vice-president and his assistant who came from Chicago to Louisville and attempted to interest possible purchasers in taking over appellee’s franchise. This continued through the summer of 1956. About October, 1956, while negotiations were being carried on with the Louisville Grocery Company, which appeared to be an interested prospect, appellee learned that appellant had given a franchise for the Louisville area to Koffee-Break, Inc. This terminated the negotiations with the Louisville Grocery Company. The present action for damages followed.

The case was tried to a jury, which returned a verdict in the amount of $7,044.98 for the appellee. This appeal followed.

In order for appellee to recover, it was necessary that appellee obtained under the contract of March 6, 1953, an exclusive franchise to operate in the Louisville area. The District Judge was of the opinion that the construction of the contract in that respect was a question of law for the Court, which view is concurred in by the parties. The District Judge instructed the jury that from thi language of the contract, the nature of the contract, the restricted territory, and the actions of the parties surrounding the execution of the contract, it was intended to be and was an exclusive contract and gave to the appellee the exclusive right to enjoy the fruits of the franchise within the restricted district.

Appellant contends that this construction of the contract was erroneous and that the franchise given to the appellee was not an exclusive one. It is pointed out that nowhere in the contract is it provided that the franchise was to be an exclusive one. Appellant relies upon the parol evidence rule as prohibiting the Court from adding to the contract provisions not contained in the written instrument itself.

We do not consider this issue as one involving the parol evidence rule. If the contract provided that the franchise was a nonexclusive one, any evidence directed to the fact that the parties had orally agreed that the franchise was to be an exclusive one, would not have been competent in that it would have been an attempt to vary by oral evidence the terms of a written instrument. But the written contract contained no provision as to whether it was an exclusive franchise or a nonexclusive one, and the evidence an this question did not contradict or vary any provision of the written contract. Under the Kentucky law, which is controlling in this ease, a franchise contract can be an exclusive one even though there is no express provision in the written contract to that effect. The White Company v. W. P. Parley & Co., 219 Ky. 66, 292 S.W. 472, 474, 52 A.L.R. 541. In that case the Kentucky Court of Appeals said, “The contract appears to have been prepared by appellant, and does not specifically provide that it is an exclusive contract. Its provisions as a whole, however, are inconsistent with any other view.” In construing the contract in that case as an exclusive one, the Court referred to the limited area in which the appellee, who was the sales agent of the appellant, was authorized to operate, to the fact that the appellee was required not to handle other commercial motor cars and parts therefor except those manufactured by appellant, and to the action of the parties in considering the contract as an exclusive agency during its term.

A contract is to be construed as a whole so as to ascertain and give effect to the true intent of the parties, and the circumstances under which the contract was executed and the conduct of the parties thereafter can be considered by the Court in determining what their intention was, without it being a violation of the parol evidence rule. Holliday v. Sphar, 262 Ky. 45, 48-49, 89 S.W.2d 327; Lincoln National Life Insurance Co. v. Means, 264 Ky. 566, 575, 95 S.W.2d 264. In the determination of the meaning of an indefinite or ambiguous contract, the interpretation placed upon the contract by the parties themselves is given great weight by the Court, not to vary the terms of the written instrument, but to make definite that which the wording of the contract has left indefinite. Jones v. Linkes, Ky., 267 S.W.2d 936; Billips v. Hughes, Ky., 259 S.W.2d 6, 7; Easter v. Johnson, 217 Ky. 639, 641, 290 S.W. 505. As above pointed out, the contract in the present case is silent as to whether the franchise granted was an exclusive one or a nonexclusive one. In Dennis v. Watson, Ky., 264 S.W.2d 858, 860, the Court applied this rule, stating, “When a contract is silent with respect to a matter vital to the rights of the parties, a court, in construing it, is necessarily compelled to resort to a consideration of the surrounding circumstances and the conduct of the participants indicating their interpretation.” See also: Morris Shoe Company v. Coleman, 187 Ky. 837, 840, 221 S.W. 242, in which case the written contract contained no express provision with respect to whether the contract of employment was for the period of a year or terminable at the will of either party.

Appellant has referred us to no Kentucky case in conflict with the ruling in The White Company v. W. P. Farley & Co., supra, and even if we might not be in agreement with the ruling, we are required to accept it for the purposes of the present case. Milan v. Kausch, 6 Cir., 194 F.2d 263, 266; Doggrell v. Southern Box Co., 6 Cir., 208 F.2d 310.

We recognize that what was said in The White Company v. W. P. Farley & Co., supra, was not a ruling on an issue which was in dispute between the parties, but this does not change the ruling into an unnecessary statement by the Court which should be treated as dictum. In order for Farley to recover in that ease, it was necessary that his contract be construed as an exclusive franchise. Disputed or undisputed, it was a necessary ruling that had a controlling effect upon the decision. The fact that counsel did not disagree with a proposed ruling by the Court against him did not change the ruling into an unnecessary statement by the Court to be treated as dictum. Union Pacific R. Co. v. Mason City, etc., Co., 199 U.S. 160, 166, 26 S.Ct. 19, 50 L.Ed. 134; Fouts v. Maryland Casualty Co., 4 Cir., 30 F.2d 357, 359, certiorari denied 279 U.S. 852, 49 S.Ct. 348, 73 L.Ed. 995.

In The White Company v. W. P. Farley & Co., supra, the Court in making its ruling stressed the fact that the contract definitely fixed the area in which the distributor was authorized to operate and that it was considered by the parties as an exclusive agency during its term. In the present case, the area of operation was also expressly limited by the contract, and appellant by its dealings with appellee and Manus, appellee’s predecessor in the Louisville area, at the time appellee took over the Louisville area indicated that it intended to have but one distributor in the Louisville area. Appellee testified with respect to the negotiations about the franchise as follows:

“I made it perfectly clear at that time that if we went that far, we would have to have an exclusive franchise in this area, and he made it perfectly clear to us that if we did take the sixty machines we would have the exclusive franchise in these three areas.

“He made the statement that we would have no competition, and furthermore if we did it would be the competition that we, ourselves, let into this area.”

Appellant’s actions over a period of a number of months in recognizing appellee’s franchise in the Louisville area, even after default in the purchase of the entire sixty machines, and in attempting to arrange a transfer of the franchise to another party strongly indicated that such was the understanding of the parties. As pointed out before, this testimony did not contradict or attempt to change any provision in the written contract. It showed the understanding between the parties with respect to something, about which the contract was silent. Dennis v. Watson, Ky., 264 S.W.2d 858, supra; Bullock v. Young, 252 Ky. 640, 650-652, 67 S.W.2d 941; Hamilton Carhartt Overall Co. v. Short, 303 Ky. 423, 426, 197 S.W.2d 792.

On October 2, 1956, appellant gave a franchise for the Louisville area to Koffee-Break, Inc., which resulted in the present litigation. That contract, like the one in issue in the present case and also like the earlier contract to Manus, did not state whether it was an exclusive or nonexclusive franchise. In view of the ruling in The White Company v. W. P. Farley & Co., supra, we cannot say that because there was no express • provision that the franchise was exclusive, we must consider it nonexclusive. In any event, there is testimony that about April, 1957, it was superseded by a contract which gave the licensee an exclusive franchise for the Louisville area. This contract was not introduced in evidence, and the exact wording of it is not before us. There was testimony that an exclusive franchise was normal in the food vending business. There was also testimony that it was not the normal practice for appellant to grant an exclusive franchise.

Whether we agree or disagree with the District Court’s construction of the contract, we are of the opinion that under the evidence above referred to and the authority of The White Company v. W. P. Farley & Co., supra, it was a permissible one upon a question of local law.

It may be that, notwithstanding the ruling in The White Company v. W. P. Farley & Co., supra, the Kentucky law is uncertain on the question of whether the contract in question .can properly be construed as granting an exclusive franchise. But the rule appears well settled that in diversity cases, where the local law is uncertain under state court rulings, if a federal district judge has reached a permissible conclusion upon a question of local law, the Court of Appeals should not reverse, even though it may think the law should be otherwise. As said in a number of the cases, the Court of Appeals should accept the considered view of the District Judge. National Bellas Hess, Inc. v. Kalis, 8 Cir., 191 F.2d 739, 741; John Hancock Mut. Life Ins. Co. of Boston, Mass. v. Munn, 8 Cir., 188 F.2d 1, 4; Elizabeth Hospital, Inc. v. Richardson, 8 Cir., 269 F.2d 167,170; Bower v. Bower, 9 Cir., 255 F.2d 618, 619; Hamblin v. Mountain States Tel. & Tel. Co., 10 Cir., 271 F.2d 562, note 1, page 564. See: Federal Digest, Courts, <S=3’ 406.2. See also: MacGregor v. State Mutual Life Assur. Co., 315 U.S. 280, 62 S.Ct. 607, 86 L.Ed. 846; Helvering v. Stuart, 317 U.S. 154, 163, 63 S.Ct. 140, 87 L.Ed. 154. We recognized the rule in the following two cases. In re Glassman, 6 Cir., 262 F,2d 857, 859; Boyd v. Gray, 6 Cir., 261 F.2d 914, 915.

After instructing the jury to consider the contract as granting an exclusive franchise to the appellee, the District Judge also told the jury that there was no semblance or pretense that the appellee fulfilled his obligation to take the sixty machines covered by the contract, which was a breach of the contract on his part giving the appellant the right to terminate the contract at that time, and that unless appellant waived the breach, appellee could not recover. He left to the jury the question of whether there was a waiver of the breach and an election by appellant to proceed with the contract despite the breach. We are of the opinion that the evidence was sufficient to take this issue to the jury. Chicago Sugar Co. v. American Sugar Refining Co., 7 Cir., 176 F.2d 1, 7, certiorari denied 338 U.S. 948, 70 S.Ct. 486, 94 L. Ed. 584; O’Bryan v. Mengel Company, 224 Ky. 284, 6 S.W.2d 249; Kentucky Natural Gas Corp. v. Indiana Gas & Chemical Corp., 7 Cir., 129 F.2d 17, 143 A.L.R. 484, certiorari denied 317 U.S. 678, 63 S.Ct. 161, 87 L.Ed. 544; Pasquel v. Owen, 8 Cir., 186 F.2d 263, 270.

No exceptions were taken by appellant to the instructions on the question of waiver, and they are not subject to review at this time. Rule 51, Rules of Civil Procedure, 28 U.S.C.A.

The judgment is affirmed.