Opinion
NOT TO BE PUBLISHED
APPEAL from a judgment of the Superior Court of San Diego County, No. 37-2008-00083222- CU-BC-CTL, Richard E. L. Strauss, Judge.
HUFFMAN, J.
Plaintiff and respondent Hawthorne Machinery Company (Hawthorne) sued defendants and appellants Theo H. Davies & Co., Ltd. (Davies) and its guarantor Jardine Pacific Holdings Limited (Jardine; together Defendants), seeking declaratory relief and damages, under contractual indemnification provisions. (Code Civ. Proc., § 1060 et seq.) In 2004, Hawthorne was the purchaser (from Davies) of a heavy equipment company (Pacific Mechanical, Inc., or PMI), pursuant to a stock purchase agreement (the SPA), which contained detailed provisions for indemnity obligations and claims requirements, should a dispute arise between the parties.
All further statutory references are to the Code of Civil Procedure unless otherwise noted.
When the purchase was completed, PMI became known as Hawthorne Pacific Company (HPC). We refer generally to Hawthorne, unless it is necessary to describe PMI's role in those transactions that took place before the May 2004 completion date of the SPA.
In 2005 such a dispute arose, when Hawthorne discovered that heavy equipment previously supplied by PMI to a general contractor on a Hawaii construction project (radiators delivered as part of a water disinfection facility), was defective, and that claims were being made against Hawthorne, as PMI's successor, for expenses or liquidated damages from delays in the construction process. Eventually, this troubled construction process gave rise to the making of various other claims for money or penalties against other parties, for delay and defective work, including in a related federal court action (as this record reflects).
The federal court action is still pending and a stay is in effect. (Sierra Club et al. v. City of Honolulu, Civ. No. 04-00463 DAE-BMK, D. Hawaii) (Sierra Club or the Hawaii action).)
Hawthorne asserted that under the SPA, it was entitled to indemnity from Defendants for the costs it incurred in carrying out remedial work and eventually settling with and paying liquidated damages to the general contractor. Defendants refused, and this action for damages and declaratory relief was brought. Before trial, settlement negotiations, including Defendants' offer to compromise under section 998, were unsuccessful.
After a bench trial, the trial court issued a statement of decision and judgment awarding to Hawthorne $149,691.62 in net monetary damages and prejudgment interest of $23,701.06, as indemnity to cover liquidated damages for certain construction delays caused by the defective equipment. Further, the court issued declaratory relief stating that Defendants are obligated "to indemnify, defend and hold harmless Hawthorne from and against any future harm or damages beyond the monetary award made above, arising from or relating to" the defective equipment. This declaratory relief was based on findings that Defendants are "in breach of their representations and warranties in the SPA as to (a) lack of any Unknown Contingent Liabilities, (b) disclosure of and lack of breach of all Material Contracts, and (c) lack of breach of any Environmental Laws, concerning the [equipment]." The court retained jurisdiction to hear and decide future issues and enforce the declaratory relief, as required.
On appeal, Defendants do not challenge the damages and monetary awards against them. However, they assert that the grant of declaratory relief was erroneous or an abuse of discretion, because the evidence did not support any finding that Hawthorne had established there was an "actual controversy" within the meaning of section 1060, i.e., one that is subject to "definitive and conclusive relief..., as distinguished from an advisory opinion upon a particular or hypothetical state of facts." (Selby Realty Co. v. City of San Buenaventura (1973) 10 Cal.3d 110, 117 (Selby Realty).)
In particular, Defendants argue that Hawthorne had only proved that it might be subject to "unasserted, potential, future, hypothetical, speculative claims, " arising out of mechanical or environmental problems at the site of the project, that might lead to governmental environmental fines or civil penalties being assessed against or payable by Hawthorne, relating to the defective equipment problems that led to delay in completing the project. Defendants therefore claim that since Hawthorne had failed to meet the specific time limits set by the SPA for asserting any such future claims, there was no existing duty for Defendants to indemnify Hawthorne for such future claims. Instead, Defendants contend on appeal that they should have been entitled to a declaration that any such future claims would be time-barred.
Based upon their substantive indemnity arguments, Defendants also assert the trial court erred in making its determinations about the applicability of section 998, regarding entitlement to postoffer fees and costs. Defendants contend that if this court reverses the declaratory judgment, further proceedings will be required for making new prevailing party determinations (for both before and after their statutory offer was not accepted).
Our review of the substantive indemnity arguments and the record leads us to conclude that the trial court appropriately issued declaratory relief that meets all the requirements of an actual case or controversy under section 1060. The judgment is not merely advisory in nature, there was no legal error or abuse of discretion, and we affirm.
FACTUAL AND PROCEDURAL BACKGROUND
A. Introduction
To introduce the indemnity issues presented, we outline as simply as possible the basic chronology of these events and the contractual arrangements between the various entities that participated in the construction work performed (although only Hawthorne, Davies and Jardine are parties here, on the remaining declaratory relief issues). The basic transactional facts are not disputed and we may summarize them as laid out in the statement of decision. More detailed facts regarding the significant contractual indemnity language, as well as the section 998 attorney fees and costs issues, will be set out separately in the discussion portion of this opinion.
The SPA must be read in the context of the other contracts to which it relates, with regard to the limitations on liability imposed by the parties and those with whom they contracted. In the SPA, clause 8 sets forth representations and warranties made in the transaction. Clause 9 specifies various types of indemnity obligations. As relevant here, clause 9.10 creates indemnity rights regarding "Unknown Contingent Liabilities, " and clause 9.8(b) allows indemnity for losses from proven breaches of "Environmental Laws" (clause 9.8(b)).
Under clause 9.1(a), if a party has failed to make the required disclosures of all "Material Contracts" pursuant to clause 8.1(q), then indemnity rights for resulting losses may be created.
Next, in article 10 of the SPA, claims requirements and limitations periods for assertion of indemnity rights are set forth. First, under clause 10.1(a) of the SPA, pertaining to breach of material contracts, there is no duty to indemnify nor any monetary liability of Defendants, until the aggregate amount of substantiated claims, pursuant to the SPA, exceeds a threshold amount of $300,000.
More importantly here, in clause 10.3, written notice of a claim is required to be given to Defendants (as the vendor of PMI) "before the expiration of the appropriate period...."(Italics added.) For each of the above specified types of indemnity obligations, different time limitations for claims are set forth in subdivisions (a) through (e) of clause 10.3.
Further, under clause 10.10 of the SPA, the specific time requirements in clause 10.3 for bringing a claim are subject to being modified or extended under certain conditions, based on the kind of claim involved, as will be further explained.
Clause 10.10 reads in its entirety (with emphasis on the two parts of its concluding parenthetical phrase): "If the liability under any Claim which, at the time such Claim is made to the Vendor, is contingent only or otherwise not capable of being quantified, then the Vendor shall not be under any obligation to make anypayment in respect of such Claim unless and until such liability ceases to be contingent or becomes capable of being quantified, as the case may be, before the relevant dates referred to in Clause 10.3 (and provided that the date in the first proviso in Clause 10.3 shall be deemed to be extended for the purposes of this Clause 10 (a) for any substantiated, bona fide Claim that is not then capable of being quantified until two months following the date such Claim is quantifiable or (b) by a period of 6 months for any substantiated, bona fide contingent Claim)." (Italics and bolding added.)
B. Transactions and Related Federal District Court Action in Hawaii
At the outset, we list the following contractual arrangements that were brought before the trial court in connection with Hawthorne's request for declaratory relief. The SPA is only one of these.
1. 1999 Facility Contract (Parties: Robison and City of Honolulu)
Beginning in 1999, a general contractor, Robison Construction, Inc. (Robison or RCI; also called Robison/Parsons) was performing a contract with the city of Honolulu (the City) to construct a sewage treatment plant, the Sand Island Disinfection Facility (the facility). The City obtained various environmental permits for the construction, relating to water quality. (Note that a similar facility located at Waipahu was also being constructed, but all the related claims about that other facility have been settled and are not before us.)
PMI also originally contracted with a construction company known as Ebara for some of the equipment, but Robison has assumed those contracts. We need not discuss any issues about Ebara (now known as Sumitomo). Robison (RCI) is also referred to in the record as RCI Parsons. Neither Robison nor Ebara is a party to this action or appeal.
2. 2001 Robison Construction Contract (Parties: Robison and PMI)
In 2001, PMI contracted with Robison to supply radiators and standby power system generators for operation of the facility. Robison and PMI agreed that PMI would assume Robison's liability for any consequential damages or liquidated damages to the City (owner of the facility), incurred in the event of project delays caused by PMI or its vendors. The contract price was approximately $1.677 million.
3. 2003 Original Radiator Contract (Parties: PMI and GEA HEI)
To provide the radiators, PMI contracted with a vendor, GEA HEI, to manufacture the equipment. In that contract, PMI agreed to release the vendor, GEA HEI, from liability for consequential or indirect damages to which PMI might become exposed, such as if the radiators were defective and caused delay in the construction process.
In 2003 PMI delivered the radiators to the facility for installation, but they were not installed until 2005. (At that point, it was discovered that they were defective (undersized and wrong materials used).)
4. 2004 SPA (Parties: Hawthorne and Davies/Jardine)
Meanwhile, in 2004, Davies, a Hawaiian corporation, sold PMI to Hawthorne, utilizing the SPA, and the purchase was completed May 5, 2004. Defendant Jardine, a Bermuda corporation, guaranteed the performance under the SPA. The SPA contains numerous indemnity clauses and claims requirements, to be set forth later. In the SPA, Defendants made representations and warranties about the business that they were selling to Hawthorne, e.g., that there were no (a) "Unknown Contingent Liabilities"; or (b) undisclosed "Material Contracts"; or (c) breaches of any environmental laws, all concerning the radiators, among other things.
5. 2005 Replacement Radiator Contract (Parties: Hawthorne and GEA Rainey)
Once the radiators that had been delivered by PMI in 2003 were installed and tested in 2005, they were found to be defectively constructed and designed. In July 2005, Robison demanded a fix and also sought liquidated damages for delay in construction (over $20,000 per day). The SPA required the parties to act in a commercially reasonable manner to mitigate any losses that might lead to indemnity obligations. (Clause 9.1.)
Hawthorne investigated and found that the manufacturer, GEA HEI, had gone out of business, but ultimately, Hawthorne agreed with a successor company, GEA Rainey, that it would perform under the original contract (the Replacement Radiator Contract). GEA Rainey agreed to fabricate replacement radiators, and to provide a five-year warranty on the radiator units, and to pay Hawthorne $50,000, in exchange for a full release of liability on the project. Hawthorne agreed, and negotiated with the City and Robison to implement this fix. Hawthorne had to pay GEA Rainey overtime costs, which were ultimately offset to the $50,000 GEA Rainey would have been obligated to pay to Hawthorne under that release.
From 2005 forward, Hawthorne requested that Defendants hold Hawthorne harmless under the SPA for any expenses, etc. stemming from any breach by GEA Rainey, or other failure of the repair, or liability for delay damages. (The reader should recall that PMI/Hawthorne had agreed that Robison would not be held liable for any consequential damages to the City for project delays caused by PMI or its vendors; also, Hawthorne had agreed with GEA Rainey and GEA HEI that they would not be liable for consequential damages.) The subject delays were from September 2005 through March 2006. Defendants refused to defend or indemnify.
These requests for defense and indemnification in 2005 and 2006 were treated by the trial court as the giving of notice of claims under the SPA, as was the 2008 filing of this action.
6. Related 2007 ruling of the Federal District Court in Sierra Club lawsuit (Parties: Sierra Club and City)
From 2004 to the present, the Sierra Club, as lead plaintiff, was litigating the related federal district court citizen-plaintiff lawsuit against the City, alleging water quality violations at the facility, based upon environmental permit conditions that were not met by the City. (33 U.S.C. §§ 1251 et seq.; 1365, subd. (a)(1).) The Sierra Club sought orders imposing governmental fines or civil penalties relating to the facility, under Environmental Protection Agency (EPA) regulations. Such civil penalties or fines could have amounted to up to $32,500 per day of proven water quality or permit violations.
In the Sierra Club lawsuit, it was not until 2007 that the federal district court established, through a ruling on a partial summary judgment motion, that the City would be subject to daily monetary penalties for inadequate water treatment for a designated period (i.e., 1, 578 days between July 2002-November 2006). Out of this 1, 578-day penalty period, Hawthorne's remedial work took place during September 2005 through March 2006. In the current trial, the court took judicial notice of the Sierra Club pleadings and orders, as relevant here. (Evid. Code, §§ 452, 459.)
This record shows that the Sierra Club matter is still being litigated, and that in February 2009, pursuant to a global settlement arrangement in that and other related actions, the district court imposed a stay of at least six months on all litigation and discovery, and required negotiation on penalty issues (such as calculation of the City's and/or its contractor's (Robison's) liability for fines and penalties, for delay in implementing water quality treatment at the project).
7. 2007 Robison/Hawthorne Settlement Contract (Parties: Robison/Hawthorne)
By June 2006, all the radiators at the facility were operating properly. Robison continued to demand that Hawthorne pay costs for delays, and reimburse the City for the substandard work and expenses (over $400,000). In 2006, Hawthorne again demanded that Defendants indemnify them for exposure to such damages.
In the statement of decision, the court made findings that the industry standard was that the GEA Rainey warranty would not start to run until the replacement parts were installed in 2005.
After negotiations from late 2007 through 2008, Hawthorne and Robison settled all their disputes, such that Robison accepted consideration from Hawthorne of $170,824.42 (invoice credit toward the amount Robison still owed Hawthorne on the job). Robison agreed to release Hawthorne from all liability and claims arising from the project, with the specific exception that any potential claims by the EPA or other governmental agencies against it for any environmental violations were not released (possibly amounting to $10,000 per day).
Hawthorne continued to request that Defendants indemnify it for all costs of the settlement, as well as Hawthorne's contingent liabilities to the EPA, regarding the radiator problems and delay at the site. Defendants rejected the request in April 2008.
C. California Litigation, Trial and Judgment
In May 2008, Hawthorne filed this action for breach of contract, breach of guaranty agreement (Jardine), misrepresentation, equitable indemnity, and declaratory relief, to obtain damages and legal rulings that Defendants were liable under the SPA to indemnify Hawthorne for loss or damage in regards to the PMI work, including the cost of the settlement with Robison, and continuing exposure to potential claims of the EPA relating to the facility, and potential failure of the repaired radiators there.
Defendants filed their answer, and in June 2009, made a statutory offer to compromise for $210,000, plus reasonable attorney fees and costs up to the time of offer. (§ 998.) The offer was not accepted.
The court received trial briefs and conducted a bench trial in July 2009. The parties stipulated that the issues before the court in interpreting the SPA did not require any parol evidence. They also stipulated to the amount of Hawthorne's damages, if a Defendants' duty to indemnify were found (approximately $171,000 expense for settling with Robison, less several adjustments, so that the amount in issue was approximately $166,324, subject to later tax adjustments).
To explain the factual background of the construction work and the SPA transaction, Hawthorne presented the only witnesses at trial, its engine division manager, Bob Mason, and its general counsel, Steve Wittman, who had participated in the negotiations and transactions on behalf of Hawthorne. In addition to the damages Hawthorne sought for its costs incurred in settling with Robison, Hawthorne took the position that Defendants had to indemnify it for its exposure to potential fines and penalties. In a spreadsheet entitled "Project Delay Costs, " admitted as exhibit 100, the costs for delay that were attributed to Hawthorne for the radiator issues ran for the specific period from September 2005 through March 2006.
Numerous exhibits were lodged and admitted into evidence, including the SPA and the federal district court stipulation for stay in the Sierra Club action, extending through at least August 2009. Under the February 2009 Sierra Club stay order, the parties were under obligation to continue to negotiate in good faith for a six-month period at least, to resolve the pending issues on the fourth cause of action, regarding the amount of civil penalties that would be payable for the environmental and permit violations at the project during the time period that had been established for City liability (from July 2002-November 2006).
The SPA includes definitions of relevant terms, including claims and liabilities (clauses 1.1, 8.1); material contracts and liabilities that had to be disclosed at the time of sale (clause 8.1(q)); and definitions pertaining to environmental matters as used in the indemnity provisions.
After argument, the court issued an oral ruling. With respect to Hawthorne's damages entitlement, the underlying basis for indemnity was proven, so that the stipulated damages amount was awarded. Defendants were ordered to pay Hawthorne damages in a net amount of $149,691.62 (representing reimbursement indemnity for the amount paid to Robison to release Hawthorne from liability arising from the project, as adjusted for tax consequences, but the damages specifically did not include any amount for potential liability for claims arising from EPA violations). Prejudgment interest on a portion of that amount of damages, at the rate of $37.56 per day from February 4, 2008, until entry of judgment, was awarded in the amount of $23,701.06. On appeal, the damages award is not contested.
With respect to declaratory relief, the court made the following key findings. First, the court responded to the parties' dispute about the specific modification of clause 10.3 by clause 10.10 of the SPA. The court said that the first proviso referred to in clause 10.10 of the SPA (in its parenthetical phrase) dealt with the extension of the various appropriate periods for the filing of a claim, as mentioned in clause 10.3 (from two to five years). Otherwise, no timely claim could ever be filed nor any suit could ever be filed for a contingent claim, which did not make sense to the court, since contingent claims were allowed for in the SPA contract.
Regarding "indemnity for the future, " the trial court ruled that these were contractual claims for indemnity, and such claims would have no meaning whatsoever under the SPA, except in the context of dealing with any environmental problems that gave rise to this kind of contingent claims. The court determined that the environmental claims were ripe enough for declaratory relief to be issued regarding Defendants' obligation to indemnify Hawthorne, "because we know that in the Sierra Club case there has already been a determination of delay damages under the environmental act or acts pertaining to the time periods when these radiators were causing a problem." The court noted that it only remained for the federal district court to make orders imposing or allocating such penalties against the City or others.
The court further found that it could be ascertained from the record that there was likely to be some imputation of problems from the delay caused by the radiators, such that Hawthorne might face a question of liability flowing from the environmental problems, to the City, through their various contractors, down to Hawthorne, such that if it related to the radiator problems, the indemnity would be in place. Hawthorne was exposed to liability and could not pass it on to the GEA entities, or to Robison. The SPA did not define what would be a ripe dispute. The court acknowledged that there were still some unanswered questions as to who would be seeking such payments creating any such liabilities, and the questions might be answered in the future. Under section 1060, declaratory relief on indemnification obligations for contingent claims, that could be quantified in the future, was appropriate at this point.
Several drafts of a proposed statement of decision were prepared, following the July 2009 trial. The record does not indicate whether the six-month Sierra Club stay remained in effect, past the original August 2009 expiration date in the stipulated stay order. On October 27, 2009, the trial court issued its statement of decision and judgment in favor of Hawthorne.
On appeal, Defendants challenge the declaratory relief that was issued. The statement of decision adds to the oral analysis the trial court had earlier provided, by stating that the SPA does not exclude declaratory relief claims, and that its definition of "liabilities" fell within the scope of clauses 10.3 and 10.10, to authorize implicitly declaratory relief claims as to unliquidated contingent claims. Hawthorne had met any applicable time limitations on its claims under clause 10.3, whether or not any extension by clause 10.10 applied, because the closing parenthetical of clause 10.10 extended the "appropriate period" under clause 10.3 for making a claim, "depending on how the claim matures."
The SPA defines liabilities in clause 8 as including both accrued and contingent indebtedness or obligations, etc.
The statement of decision analysis continues: "In the case of a Claim that is not capable of being quantified at the end of its 'appropriate period, ' the 'appropriate period' is extended until two months after such Claim is quantifiable." Next, in the case of a substantiated bona fide claim that is contingent, "the time to make a written Claim is extended six months after the 'appropriate period.' " Thus, "[t]he Court finds that to the extent Hawthorne's Claims arising from the radiator issues at [the facility] are quantifiable but contingent, they have been timely made to Defendants, and to the extent such Claims are not yet quantifiable, they have been timely made, as they need not be made until two months after they become quantifiable."
The judgment accordingly provides as follows: "3. The Court declares Defendants have the obligation to indemnify, defend and hold harmless Hawthorne from and against any future harm or damages beyond the monetary award made above, arising from or relating to the inadequately designed radiators PMI supplied for installation at [the facility], except to the extent such harm or damage is caused by the fault of Hawthorne. This Declaratory Judgment is rendered on the basis that Defendants are in breach of their representations and warranties in the SPA as to (a) lack of any Unknown Contingent Liabilities, (b) disclosure of and lack of breach of all Material Contracts, and (c) lack of breach of any Environmental Laws, concerning the radiators delivered by PMI for construction of [the facility]. This Declaratory Judgment includes, but is not limited to, Claims by Hawthorne arising out of (i) the on-going warranty for the replacement radiators at [the facility], or (ii) the levying of any fines or penalties related to [the facility] project delays by any governmental entity, including but not limited to the EPA, the Hawaii Department of Health or any court, or (iii) claims against Hawthorne by the City or any contractors, subcontractors, vendors or the like affiliated with [the facility] related to [the facility] project delays." (Italics added.)
The issues addressed by the italicized language in the judgment, "except to the extent such harm or damage is caused by the fault of Hawthorne, " were discussed with the parties at a posttrial hearing, and the court instructed them to include such language in the statement of decision to distinguish between any fault solely attributable to Hawthorne, for which it could not be indemnified by Defendants, as opposed to claims arising out of fault covered by the GEA Rainey five-year warranty on the replacement radiator work (for which indemnification might not be foreclosed in the future, depending on the performance of the replacement radiators and whether any environmental liability arose from their defective performance at the facility).
Next, the court implemented a damages limitation provision in the SPA, clause 10.1(a) ($300,000 damages threshold for recovery), by stating: "To the extent Defendants' liability under this Declaratory Judgment is predicated on breach of representations and warranties as to disclosure of and lack of breach of Material Contracts, Defendants' indemnity liability shall arise only to the extent that Hawthorne can show that the aggregate amount of substantiated Claims pursuant to the SPA exceeds U.S. $300,000, including substantiated Claims made pursuant to the monetary award in this matter and made pursuant to this Declaratory Judgment. Defendants' liability under this Declaratory Judgment may be predicated on breach of representations and warranties as to lack of violation of Environmental Laws, only to the extent the Claims arise out of allegations of violations of Environmental Laws."
The court next found Hawthorne was the prevailing party under section 998, and awarded costs accordingly: "Hawthorne's recoverable costs include reasonable attorneys' fees and costs incurred in pursuing this claim as provided in paragraph 9 of the [Jardine] Guaranty." Finally, the judgment states: "The Court retains jurisdiction over the case and the parties to hear and decide future issues and enforce its Declaratory Judgment to the extent required."
Defendants appeal.
DISCUSSION
I
INTRODUCTION AND STANDARDS OF REVIEW
Defendants make two closely related contentions about the alleged unavailability of declaratory relief regarding contingent claims. Although they have accepted the damages award based on the existing circumstances, they go on to contend the declaratory relief granted here with respect to contingent claims is erroneous or excessive, both as a matter of contract interpretation, and because it is too speculative. We address the contract issues first, and then Defendants' claim that no sufficiently defined or concrete controversy is presented here. Finally, we will discuss the issues arising under section 998 regarding the properly prevailing party.
"[T]he question whether an indemnity agreement covers a given case turns primarily on contractual interpretation, and it is the intent of the parties as expressed in the agreement that should control. When the parties knowingly bargain for the protection at issue, the protection should be afforded. This requires an inquiry into the circumstances of the damage or injury and the language of the contract; of necessity, each case will turn on its own facts." (Rossmoor Sanitation, Inc. v. Pylon, Inc. (1975) 13 Cal.3d 622, 633(Rossmoor Sanitation).)
Defendants are correct, as a threshold matter, that issues of contract interpretation are subject to a de novo standard of review where the decisive underlying facts are undisputed. (Dolan-King v. Rancho Santa Fe Assn. (2000) 81 Cal.App.4th 965, 974 (Dolan-King).) On such undisputed facts, we are confronted with questions of law in reviewing the propriety of the trial court's declaratory judgment. (Ibid., citing Ghirardo v. Antonioli (1994) 8 Cal.4th 791, 799; Caloca v. County of San Diego (1999) 72 Cal.App.4th 1209, 1217.)
That is not the end of the inquiry, however. "Whether a determination is proper in an action for declaratory relief is a matter within the trial court's discretion and the court's decision to grant or deny relief will not be disturbed on appeal unless it is clearly shown its discretion was abused." (Dolan-King, supra, 81 Cal.App.4th at p. 974.) Here, the trial court's analysis of the legal questions involved important discretionary determinations on (1) the existence of an "actual controversy, " within the meaning of the statute, and (2) related determinations of ripeness and justiciability. (Application Group, Inc. v. Hunter Group, Inc. (1998) 61 Cal.App.4th 881, 892-893; 3 Witkin, Cal. Procedure (5th ed. 2008) Actions, § 21, pp. 84-86.) "Whether an action is justiciable for purposes of Code of Civil Procedure section 1060 is also a matter entrusted to the sound discretion of the trial court." (Application Group, supra, at p. 893.)
Section 1060 provides in relevant part: "Any person interested under a written instrument... or under a contract, or who desires a declaration of his or her rights or duties with respect to another... may, in cases of actual controversy relating to the legal rights and duties of the respective parties, bring an original action or cross-complaint in the superior court for a declaration of his or her rights and duties in the premises, including a determination of any question of construction or validity arising under the instrument or contract. He or she may ask for a declaration of rights or duties, either alone or with other relief; and the court may make a binding declaration of these rights or duties, whether or not further relief is or could be claimed at the time." (Italics added.)
In Alameda County Land Use Assn. v. City of Hayward (1995) 38 Cal.App.4th 1716, the court explains that declaratory relief may be granted for controversies that are " ' "definite and concrete, touching the legal relations of parties having adverse legal interests. [Citation.] It must be a real and substantial controversy admitting of specific relief through a decree of a conclusive character, as distinguished from an opinion advising what the law would be upon a hypothetical state of facts." ' [Citations.]" (Id. at p. 1722; see also City of Cotati v. Cashman (2002) 29 Cal.4th 69, 79 [" 'The fundamental basis of declaratory relief is the existence of an actual, present controversy over a proper subject' "].)
Earlier, in Selby Realty, supra, 10 Cal.3d 110, the court set out this standard for a declaratory judgment: it "must decree, not suggest, what the parties may or may not do." (Id. at p. 117; see BKHN, Inc. v. Department of Health Services (1992) 3 Cal.App.4th 301, 308-309 (BKHN) [denial of declaratory relief proper where the matter lacked the urgency and definiteness necessary to warrant such a declaration, and only hypothetical or speculative conclusions could be drawn about the allocation of certain statutory duties].)
Since this judgment was issued following a statement of decision that analyzed the evidence presented, additional well established rules of review apply: "Where [a] statement of decision sets forth the factual and legal basis for the decision, any conflict in the evidence or reasonable inferences to be drawn from the facts will be resolved in support of the determination of the trial court decision." (In re Marriage of Hoffmeister (1987) 191 Cal.App.3d 351, 358.) With these combined standards of review in mind, we next turn to Defendants' specific challenges to the terms of the ruling.
II
ISSUES PRESENTED ON TIMELINESS OF CLAIMS
As already outlined, Defendants do not contest the trial court's damages award, but instead contend the trial court's reading of the contract was incorrect and cannot support the award of declaratory relief regarding contingent claims. In particular, Defendants argue that under clause 10.3 of the SPA, they were entitled to finality of their exposure to liability for indemnity, because the SPA bars claims that are contingent or unquantifiable unless they cease to be contingent or unquantifiable within the specific time limits under clause 10.3 (two, four or five year periods, running from the SPA completion date, or May 5, 2004). Next, Defendants argue that the trial court erroneously interpreted the contract to find that clause 10.10 operated to extend the time periods in clause 10.3. They therefore argue the declaratory relief does not address any concrete, actual, present controversy over a proper subject.
In full, clause 10.10 reads (see especially the two parts of its concluding parenthetical phrase): "If the liability under any Claim which, at the time such Claim is made to the Vendor, is contingent only or otherwise not capable of being quantified, then the Vendor shall not be under any obligation to make anypayment in respect of such Claim unless and until such liability ceases to be contingent or becomes capable of being quantified, as the case may be, before the relevant dates referred to in Clause 10.3 (and provided that the date in the first proviso in Clause 10.3 shall be deemed to be extended for the purposes of this Clause 10 (a) for any substantiated, bona fide Claim that is not then capable of being quantified until two months following the date such Claim is quantifiable or (b) by a period of 6 months for any substantiated, bona fide contingent Claim)." (Italics and bolding added.)
To address these arguments, we first set forth the texts of clauses 10.3 and 10.10, then read them together, in the context of the entire SPA and its definitions.
A. Clauses 10.3 and 10.10: Structure
Defendants first argue that a de novo reading of the contractual language results in a conclusion that Hawthorne made only untimely claims for indemnification regarding contingent claims, and that the 2005, 2006, and 2008 claims do not suffice. In fact, even though Defendants did not file a cross-complaint, they argue that on appeal, they are entitled to a declaration at this time that any such contingent claim is time-barred.
Under the SPA, timely claims requirements are set forth in clause 10.3, which requires written notice of a claim to be given to Davies (as the vendor of PMI) "before the expiration of the appropriate period" [as set forth in subdivisions (a)-(e) of Clause 10.3]. (Italics added.) The parties agree that since three forms of substantive indemnity entitlements are being sought, under three portions of clause 9 of the SPA, we are here concerned with only three of these "appropriate periods, " as follows, for any substantiated breaches of the representations and warranties in the SPA, in these categories, all concerning the radiators at the facility:
1. In subdivision (b) of clause 10.3, a five-year period from the SPA completion date (May 5, 2004) is allowed to file a claim for indemnity based on breach of the environmental representations and warranties (SPA clause 9.8).
2. In subdivision (c) of clause 10.3, a two-year period from SPA completion is allowed to file a claim for indemnity under representations and warranties, such as lack of full disclosure of any material contracts or of breaches of them (SPA clause 9.1, implementing clause 8.1(q)).
3. In subdivision (e) of clause 10.3, a four-year period from SPA completion is allowed to file a claim for indemnity for "Unknown Contingent Liabilities" (SPA clause 9.10). We discuss these separately, regarding timeliness of claims.
Defendants make a separate argument about subdivision (a) of clause 10.3, which deals with tax issues, by claiming that the parenthetical phrase in clause 10.10 which refers to a proviso must refer tosubdivision (a) of clause 10.3, with respect to extending any time period for claims to be made. As we next discuss, the "proviso argument" does not make any sense when clause 10.3 is read as a whole with clause 10.10. (Civ. Code, § 1641, contracts to be read as a whole.)
B. Preliminary Issues: Timely Filing of Action; "Proviso Argument"
At this point, we address and dispose of two preliminary appellate arguments. To the extent that Defendants are contending that this action, as opposed to the underlying claims, was not timely filed, they are wrong. Hawthorne satisfied the requirement of the second half of the introductory paragraph of clause 10.3, by filing this breach of contract lawsuit within four years of the completion date of the SPA, alleging both liquidated and contingent claims. (That latter portion of the introductory paragraph, regarding the filing of an action, reads, "The Claim shall be deemed to have been withdrawn (if it has not been previously satisfied, settled or withdrawn) nine months after the expiration of the appropriate period, unless legal proceedings in respect of it have commenced by being issued and validly served on the Vendor [Defendants].") Clearly, this action was timely filed, and the only questions are what claims were validly raised within it, and which are properly susceptible to declaratory relief.
We also reject out of hand Defendants' "proviso argument, " which is based upon the theory that clause 10.10 must refer, in its closing parenthetical, only to clause 10.3(a) (and not to any other subdivision of clause 10.3). Clause 10.3, as followed by its subdivision (a), states: "Notwithstanding any other provision of this Agreement, no Claim shall be brought by the Purchaser in respect of a breach of any representation or warranty of Vendor..., under this Agreement or the indemnity provisions of Clause 9 unless written notice of the Claim... has been given to the Vendor before the expiration of the appropriate period.... For these purposes, the 'appropriate period': [¶] (a) is the period ending on the date of expiration of the applicable statute of limitations as established by law for the type of tax involved in respect of Claims under the Tax Indemnity and the representations and warranties of Vendor or the Company contained herein related to Taxation." (Italics added.)
With reference to the "proviso argument, " we repeat clause 10.10 in its entirety, with particular attention to the two halves of its concluding parenthetical phrase: "If the liability under any Claim which, at the time such Claim is made to the Vendor, is contingent only or otherwise not capable of being quantified, then the Vendor shall not be under any obligation to make anypayment in respect of such Claim unless and until such liability ceases to be contingent or becomes capable of being quantified, as the case may be, before the relevant dates referred to in Clause 10.3 (and provided that the date in the first proviso in Clause 10.3 shall be deemed to be extended for the purposes of this Clause 10 (a) for any substantiated, bona fide Claim that is not then capable of being quantified until two months following the date such Claim is quantifiable or (b) by a period of 6 months for any substantiated, bona fide contingent Claim)." (Italics and bolding added.)
In the Oxford English Dictionary Online, as relevant here, the term "proviso" is defined: "A clause in a legal or formal document, making some condition, stipulation, exception, or limitation; a clause upon the observance of which the operation or validity of the instrument depends; gen. a condition or qualification; a stipulation or provision." (Oxford English Dict. Online (3d ed. 2010) [as of Jan. 10, 2011].)
In their "proviso argument" about any extension availability, Defendants would interpret the "first proviso in clause 10.3" (as referred to in clause 10.10), as pertaining only to clause 10.3(a), the tax liability language. With respect to the limitations language in clause 10.3, "unless written notice of the Claim... has been given to the Vendor before the expiration of the appropriate period, " Defendants claim that such an "appropriate period" to be extended under clause 10.10 could only be singular, or only clause 10.3(a) (but not any of the four other "dates" provided in clause 10.3(b), (c), (d) or (e)). That is because the concluding parenthetical of clause 10.10 ("and provided that the date in the first proviso in Clause 10.3 shall be deemed to be extended....") only refers to one date.
Under Defendants' interpretation, the only claim that could be extended under clause 10.10 would have been the tax indemnity type of claim, because otherwise, the two halves of the clause are said to be irreconcilable (because there are restrictions on when Defendants come under an obligation to pay a contingent claim, "unless and until such liability ceases to be contingent or becomes capable of being quantified... before the relevant dates referred to in clause 10.3, " but then, some extension of those dates is somehow allowed).
Contrariwise, Hawthorne identifies the "first proviso" mentioned in clause 10.10 as the limitations language in clause 10.3, i.e., "unless written notice of the Claim... has been given to the Vendor before the expiration of the appropriate period" (because a "proviso" includes a conditional word, such as "unless"). Hawthorne then takes the position that when clause 10.10 refers in its closing parenthetical to extension of a "date, " such an extension could apply to any of the appropriate claims periods enumerated in clause 10.3(a) through (e), depending on the type of indemnity being pursued for contingent claims, and when they mature.
The trial court agreed that the singular term "date" in the closing parenthetical of clause 10.10 was intended by the parties to allow extensions under clause 10.10 to any of the appropriate periods set forth in clause 10.3. Since the SPA as a whole did not exclude contingent claims in the definitions, the concluding parenthetical of clause 10.10 was evidently intended to permit extensions for a claim that is not capable of being quantified at the end of its "appropriate period"; such an "appropriate period" is extended until two months after such claim is quantifiable. (Clause 10.10(a).)
Likewise, the court ruled that the concluding parenthetical of clause 10.10 was evidently intended to grant extensions for substantiated bona fide claims that are contingent, for up to six months after the "appropriate period" otherwise required for the particular type of claim. (Clause 10.10(b).) Thus, "[t]he court finds that to the extent Hawthorne's Claims arising from the radiator issues at [the facility] are quantifiable but contingent, they have been timely made to Defendants, and to the extent such Claims are not yet quantifiable, they have been timely made, as they need not be made until two months after they become quantifiable." (Italics added.)
We can find no fault with the trial court's SPA limitations analysis. Contingent claims were allowed for in the SPA, since the SPA in clause 10.10 anticipated that some claims might arise that were quantifiable but contingent, or pending claims might becomequantifiable at some point. Although contingent claims are not immediately payable under the SPA, the time period for bringing them may be extended, depending on their nature as substantiated, bona fide, or capable of becoming quantified. (Clause 10.10(a), (b).) Clause 10.10 does not modify Clause 10.3 to preclude a request for declaratory relief regarding contingent claims that remain unliquidated past the expiration of the "appropriate period" otherwise applicable.
Here, notice was given to Defendants of the radiator problems, to the extent they became known, in 2005, 2006, and 2008, and the trial court properly found that Hawthorne had made a reasonable interpretation of the claims requirements, by preserving its rights, and it was not precluded from seeking indemnification for related contingent claims, when appropriate, under clause 10.10(a) and (b). Defendants' technical arguments about which "proviso" is which, regarding extensions for claims filing, are too strained and only exalt form over substance.
C. Hawthorne's Liability Exposure under the SPA; Contractual Analysis
The primary issue on appeal is whether the SPA claims periods of clauses 10.3 and 10.10 were satisfied, as to indemnification requests based upon contingent claims, such as environmental liability. In making our analysis, we are mindful that the damages awards with respect to the claims that were no longer contingent are not contested. Defendants have effectively acknowledged that there is a factual and legal basis for application of the indemnities provided in article 9, for the three types at issue here (SPA clause 9.8, breach of environmental representations and warranties; clauses 9.1 and 8.1(q), nondisclosure of material contracts; and clause 9.10, unknown contingent liabilities), all concerning damages arising from delay caused by the radiators at the facility. However, Defendants would draw a sharp distinction between the liquidated claims (payable in damages) and the contingent claims (untimely and supposedly not a proper subject of declaratory relief).
The trial court found that to the extent Defendants were liable under the declaratory judgment for nondisclosure of material contracts, there was a damages threshold of $300,000 provided by the SPA (to include the damages already awarded), before Hawthorne could recover further on that theory. However, under clauses 10.2(d) and (f) of the SPA, the $300,000 limitation does not apply to other kinds of indemnity (environmental liability or contingent liability). Regarding those forms of indemnity, Defendants cannot successfully argue that the supplying of defective equipment that delayed the facility construction had no sufficient connection with contamination of the ocean, since the facility was intended to prevent such environmental contamination.
Under the first part of the concluding parenthetical in clause 10.10, the SPA recognizes that it is possible that a "substantiated, bona fide Claim" may not originally be capable of being quantified, but that this quantification may become possible at some point, at which point a two-month extension is granted for the filing of a claim. (Clause 10.10(a), in the concluding parenthetical.)
Likewise, under the second part of the concluding parenthetical in clause 10.10, the SPA recognizes that it is possible that there may be delay in ascertaining the existence of a "substantiated, bona fide contingent Claim, " and therefore a six-month extension is granted for the filing of such a substantiated, bona fide contingent claim. (Clause 10.10(b), in the concluding parenthetical.)
Interpreting the SPA, the trial court found that such contingent claims existed and that declaratory relief should issue to enforce Defendants' indemnity obligations. First, Hawthorne was subject to exposure to different kinds of future harm or damages, beyond the monetary damages already awarded, that arose from delays at the facility caused by the defective radiators provided. Such exposure to harm or damage prospectively included expenses attributable to the five-year GEA Rainey warranty for the replacement radiators, if GEA Rainey work proved to be defective and led to problems at the facility, for which fines could be imposed.
We reject Defendants' arguments that the ruling on the GEA Rainey five-year warranty was erroneously included in the judgment, or that the trial court could not have intended to impose an indemnity obligation on Defendants, based on that GEA Rainey replacement radiator work, if losses resulted from it. The reporter's transcript of the hearing on formalization of the statement of decision shows that the court allowed clarifying language to be inserted on that subject, to ensure that Hawthorne would not be seeking indemnity for its own substandard work, but rather only indemnification based on any substantiated problems with the GEA Rainey replacement radiators that led to losses.
We agree with Hawthorne that the trial court had the issue before it of whether the work for the replacement radiators, that Hawthorne obtained in a commercially reasonable manner to fix the problems at the facility, should fall under the indemnity clauses of the SPA, if there are costs incurred due to failure of the work, since the replacements were made necessary by the defective work performed by Hawthorne's predecessor. The declaratory relief properly included that finding.
The court also appropriately recognized the possibility that Hawthorne might become subject to claims from the City or other participants in the facility construction, for the delay costs, stemming from imposition of environmental penalties. Those items were deemed by the trial court to qualify as giving rise to authorized indemnity obligations, for purposes of declaratory relief, under either SPA clause 9.10, unknown contingent liabilities, or clause 9.8, environmental liability. Although Hawthorne might become liable to pay governmental fines or penalties related to the delay at the facility construction, it could not recover them from Robison under the terms of its settlement. Such EPA penalties remained to be set in the Sierra Club litigation, and thus the court impliedly found that it was not dispositive that the EPA had apparently not filed a separate enforcement action against Hawthorne.
The statement of decision includes an analysis of when the respective claims matured, within the meaning of the contractual definitions provided, as applied to those facts. The court said that if no circumstances arise requiring indemnification, the declaratory relief issued would amount to a "no harm, no foul" situation. On review, reasonable inferences to be drawn from the facts will be resolved in support of the declaratory judgment based upon the trial court's statement of decision. (In re Marriage of Hoffmeister, supra, 191 Cal.App.3d 351, 358.)
This record shows that when the trial court reached its conclusions about the appropriateness of granting declaratory relief with respect to "indemnity for the future, " it was relying upon evidence about the progress of the remediation at the facility, which included exhibit 25, the federal district court stipulation for stay in the related Hawaii action, apparently extending through August 2009. In the October 2009 judgment, the court expressly retained jurisdiction to hear and decide future issues and to enforce the declaratory relief awarded. Although we do not have before us any information on the current status of the stipulation for stay in the Hawaii action, the record before us required the trial court to evaluate that factor, along with all the other evidence presented in this dispute.
Generally applicable rules of appellate procedure do not allow consideration of postjudgment evidence of changed circumstances, and this court evaluates the trial court's exercise of discretion and legal determinations in terms of the record that was before it at the time. (In re Zeth S. (2003) 31 Cal.4th 396, 413; see Reese v. Wal-Mart Stores, Inc. (1999) 73 Cal.App.4th 1225, 1237.)
Accordingly, the court had support in the record for its conclusion that the clause 9 indemnity language would have no meaning whatsoever, if it were unable to deal with the discovery of or the effects of foreseeable environmental problems, that gave rise to claims that were originally contingent but that would mature in different ways. The court determined that these environmental claims were ripe enough for declaratory relief to be issued regarding Defendants' obligation to indemnify Hawthorne, "[b]ecause we know that in the Sierra Club case there has already been a determination of delay damages under the environmental act or acts pertaining to the time periods when these radiators were causing a problem."
Based on that information and the entire scenario, the court's conclusions are well supported, that there is a likelihood of some imputation of problems from the delay caused by the radiators, and that Hawthorne may face a question of liability flowing from the environmental problems, to the City, through other contractors, down to Hawthorne, such that if it related to the radiator problems, the indemnity would be in place. Declaratory relief is available to set forth obligations of the parties under an agreement, even though some unanswered questions exist as to who is going to seek such liabilities.
For declaratory relief to issue, there must exist an "actual controversy, " or one that is subject to " 'definitive and conclusive relief..., as distinguished from an advisory opinion upon a particular or hypothetical state of facts.' " (Selby Realty, supra, 10 Cal.3d at p. 118.) The record supports the trial court's contract interpretation, and the inferences that it drew about the other involved parties' exposure to liability, which in turn might invoke indemnification rights for Hawthorne, based upon the apparent intent of the contracting parties and the terms of the SPA provisions binding Defendants. (See Rossmoor Sanitation, supra, 13 Cal.3d at p. 633.)
D. Contingent Nature of Claims
We have concluded above that the SPA contemplated that contingent claims could be brought, even before they could become quantified. Defendants nevertheless argue that any potential rights of indemnification for contingent claims, based on the radiator problems at the facility, remain too speculative (or are only "unasserted, potential, future, hypothetical" liabilities), and that such rights should not be cognizable under general statutory standards for declaratory relief. Defendants' briefing fails to acknowledge the potential effects and the status of the related Sierra Club litigation, instead seeking to resolve the indemnity issues in a factual vacuum. Nevertheless, some legal adjudications of liability have already been made regarding other parties involved with the facility's development, and there are real legal consequences at stake.
Defendants cannot properly rely on Selby Realty, supra, 10 Cal.3d at pages 117 to 118, to argue that Hawthorne has failed to allege any "concrete dispute" that would support "definitive and conclusive judicial relief." In that case, the Supreme Court declined to allow declaratory relief to be awarded to a plaintiff who complained that the adoption of a general plan had already affected or taken his land, diminishing its value, based on his application for a building permit, which was denied. Rather, "[t]his plaintiff [has] no greater right to secure a declaration as to the validity of the plan or its effect upon his land than that available to any other citizen whose property is included within the plan. The plan is by its very nature merely tentative and subject to change. Whether eventually any part of plaintiff's land will be taken for a street depends upon unpredictable future events. If the plan is implemented by the county in the future in such manner as actually to affect plaintiff's free use of his property, the validity of the county's action may be challenged at that time." (Ibid., italics added.)
This case does not concern only "unpredictable future events." (Selby Realty, supra, 10 Cal.3d at p. 118.) We reject Defendants' overbroad formulation of its arguments, that Hawthorne failed to present the trial court with any controversy requiring "definitive and conclusive relief" on the subject of Hawthorne's contractual rights, should it become exposed to liability for fines or penalties that were attributable to the radiator problems at the facility. Rather, the record supports a conclusion that Hawthorne showed a basis in the evidence that even though such fines or penalties remained contingent in nature as of the time of judgment, they were reasonably likely to be passed along to it and therefore could realistically become the subject of Hawthorne's contractual rights of indemnification by Defendants.
There is no lack of "concrete" disputes in this case, nor merely any hypothetical issues about indemnity rights. The trial court correctly found that declaratory relief was proper to address the real risks of monetary exposure to Hawthorne, and that not only speculative or contrived issues are involved here. (See BKHN, supra, 3 Cal.App.4th 301, 308-309.)
For those reasons, the indemnity issues qualified under section 1060 as actual controversies relating to the legal rights and duties of the respective parties to the SPA. The trial court correctly ruled this was an actual, present controversy over a proper subject, by reading the contract language and applying it reasonably in the context of all the factual developments presented in the evidence. (See City of Cotati, supra, 29 Cal.4th 69, 79.)
E. Remaining Section 998 Issues
Under City of Long Beach v. Stevedoring Services of America (2007) 157 Cal.App.4th 672, 678, de novo review is proper for statutory cost determinations, where only issues of law are presented on undisputed facts.
Because we have rejected Defendants' substantive claims of error about the nature and scope of the declaratory relief awarded by the trial court, there is likewise no basis to reverse the court's ruling that denied them recovery of costs and fees against Hawthorne under section 998, based on the pretrial settlement offer Defendants made to Hawthorne (which was larger than its current monetary award). Hawthorne remains the prevailing party on all accounts.
DISPOSITION
The judgment is affirmed. Costs are awarded to Respondent.
WE CONCUR: McCONNELL, P. J., AARON, J.