Summary
affirming the trial court's conclusion that "neither Cutler's delay in paying the relatively small sum overdue for June 1998 nor its relatively short delay in paying Korb's earnings for July 1998 constituted a material breach of the oral agreement"
Summary of this case from Irish v. Ghadyan (In re Abulyan)Opinion
A099775.
7-30-2003
KEVIN ROBERT KORB, Plaintiff and Appellant, v. CUTLER TRUCKING, INC., Defendant and Respondent.
I. INTRODUCTION
Plaintiff Kevin Korb (Korb) negotiated an oral contract with Rick Cutler of Cutler Trucking (collectively, Cutler) to provide services as an independent contractor. Korb later brought an action for breach of that contract to recover unpaid earnings from Cutler. The trial court concluded Korb, not Cutler, had breached the oral contract and that Cutler was entitled to retain most of the unpaid earnings pursuant to a provision for liquidated damages. Korb appeals the judgment that awarded damages for only a small portion of the earnings he sought.
We hold that Civil Code section 1671, subdivision (b), does not require that a provision for liquidated damages be written. We also conclude that substantial evidence supports the trial courts determination that the oral provision in this case satisfied the requirements of that section and was enforceable against Korb. Accordingly, we affirm.
II. BACKGROUND
Under the oral contract between Korb and Cutler, Korb began work for Cutler in February 1998. Ordinarily Cutler would issue checks to its independent contractors on the 25th of each month, covering their earnings from the preceding month. On August 25, 1998, Korb did not receive payment for his July earnings. At this time Cutler also had not yet paid Korb for four of the days he had worked in June. Korb complained about the delay in these payments. When Cutler still did not have a check ready for Korb the following day, Korb quit without notice.
Korb filed this action against Cutler on May 30, 2000, alleging, among other things, a cause of action for breach of the oral contract, in which he sought damages for his unpaid earnings for June, July, and August 1998. On the first day of trial by the court, Cutler served and filed trial briefs that argued the oral contract included a term "very similar to a liquidated damages provision," under which Korb had agreed not to quit during Cutlers 1998 "busy season" and not to quit in any event without giving two weeks prior notice. Cutler argued that the parties understood and agreed that Cutler would "screw" Korb in the event of the latters breach of this condition, by which the parties further understood that Cutler would retain any of Korbs earnings not yet paid. The trial court overruled Korbs objection that Cutler had not pleaded or raised this defense previously.
Testimony at trial indicated Cutlers "busy season" was the six- to eight-month dry period each year, during which Cutlers chief clients did most of their construction projects. August through October were the busiest period of this season, when nonconstruction clients also needed trucks to haul fruit and lumber.
The liquidated damages defense was in the nature of an excuse for or an exemption from liability for nonpayment, which Cutler had the burden to prove. As such, it was necessary for Cutler to plead this defense affirmatively in its answer. (See 5 Witkin, Cal. Procedure (4th ed. 1997) Pleading, §§ 1008, 1018, 1022, pp. 462, 469-470, 472.) Cutler had not done so clearly, however. The trial courts ruling impliedly permitted Cutler to amend its answer to state this defense, although this grant was subject to Korbs "revisiting the issue later." Korb did not do so until making an unsuccessful motion for new trial. Although Korb has not challenged this ruling on appeal, we note the record discloses that he was not prejudiced by the delay in raising this defense. He had an opportunity to examine or cross-examine all those who were present when the oral agreement was made. (Cf. Deetz v. Carter (1965) 232 Cal. App. 2d 851, 856-858, 43 Cal. Rptr. 321.) Nor was Korb prejudiced under these circumstances by Cutlers subsequent failure to serve and file a pleading actually reflecting the amendment impliedly granted. (See Myers v. Stephens (1965) 233 Cal. App. 2d 104, 124, 43 Cal. Rptr. 420; see also Godfrey v. Steinpress (1982) 128 Cal. App. 3d 154, 175, 180 Cal. Rptr. 95.)
Following trial, in its statement of decision, the court set out its findings as to the terms of the oral contract. One of the terms was: "if Korb quit in the busy season or without adequate notice, Cutler would screw him ( . . . withhold and keep payments which were earned and due)." The court determined neither Cutlers delay in paying the relatively small sum overdue for June 1998 nor its relatively short delay in paying Korbs earnings for July 1998 constituted a material breach of the oral agreement that entitled Korb to abandon his job. It ruled Korb, on the other hand, did materially breach the oral contract by quitting during the 1998 busy season without notice. The court concluded the above-quoted term was a provision for liquidated damages valid under Civil Code section 1671, and it was to be enforced by permitting Cutler to retain Korbs earnings for July and August 1998. The courts judgment, entered May 20, 2002, thus awarded Korb damages of only $ 1812.20, to compensate Korb for his unpaid June earnings that were past due when he quit. Korbs appeal from that judgment is timely. (Cal. Rules of Court, rule 2(a)(1).)
III. DISCUSSION
Korb first contends the oral contracts provision for liquidated damages is not valid because it is not written. Provisions for liquidated damages are indeed usually in writing. Civil Code section 1671, which governs such provisions generally, does not expressly require them to be in writing, however. Nor is there any decisional authority construing this section to preclude oral provisions.
The oral term in this case is governed specifically by subdivision (b) of Civil Code section 1671, which provides in relevant part: "a provision in a contract liquidating the damages for the breach of the contract is valid unless the party seeking to invalidate the provision establishes that the provision was unreasonable under the circumstances existing at the time the contract was made."
Korb refers to the phrase "provision in a contract" and notes the word "provision" was added when the statute was amended in 1977. He suggests the addition of that word reflects a legislative intent to require the provision to be in writing, given its plain meaning. It is true "provision" is defined as "[a] clause in a statute, contract, or other legal instrument." (Blacks Law Dictionary (7th ed. 1999) p. 1240.) It is also defined, however, as "[a] stipulation beforehand," and "stipulation" is defined in turn as any "material condition or requirement in an agreement." (Blacks Law Dictionary (7th ed. 1999) pp. 1240, 1427.) The term in issue here could thus be regarded as "provision" within the meaning of section 1671, subdivision (b), to the extent it is a material condition in an oral agreement.
Korb argues further that one of the purposes of the 1977 legislation amending section 1671 was to reduce litigation, and that this purpose would not be served by allowing parties to litigate the existence of a provision not reduced to writing. In its comments to the 1977 amendments of the liquidated damages statutes, the Law Revision Commission identified six concerns. One of these, it is true, was the fact that "enforcement of such provisions may improve judicial administration and conserve judicial resources because of fewer contract breaches, fewer lawsuits, and less extended trials." Another, however, was the fact that "[a] party may fear, without such a provision, the other party will lack incentive to perform." (See 1 Witkin, Summary of Cal. Law (9th ed. 1987) Contracts, § 528, p. 470, citing 13 Cal. Law Revision Com. Rep. (1976) pp. 1740, 1741.) Upholding the oral term in this case would thus serve to remedy one of the express concerns underlying the 1977 amendment. Moreover, it would further the overarching purpose of that amendment, which was to encourage the use of liquidated damage terms in all but a few specified consumer agreements. (Ibid.)
The Legislature may expressly require that certain contracts be in writing, and has done so in other statutes. (See, e.g., Civ. Code, § 1624.) It has not done so with respect to contracts including a provision for liquidated damages governed by Civil Code section 1671. Absent any clear indication of legislative intent, we decline to construe section 1671, subdivision (b), to require that a provision for liquidated damages must in writing. (See J.A. Jones Construction Co. v. Superior Court (1994) 27 Cal.App.4th 1568, 1578 [courts should rely on legislative history only when it provides a clear statement of intent].) We therefore hold the provision for liquidated damages in this case is not invalid merely because it is unwritten.
The question remains whether the oral provision for liquidated damages in this case is otherwise valid under subdivision (b) of Civil Code section 1671. Korbs argument on this point is that the evidence is not sufficient to establish a valid provision for liquidated damages, because the statement that Cutler would "screw" Korb is ambiguous and does not specify the amount of liquidated damages.
When the evidence is in conflict, as it was in this case, the existence and terms of an oral contract are factual questions to be determined in the first instance by the trier of fact. (See Treadwell v. Nickel (1924) 194 Cal. 243, 261-262, 228 P. 25; Smyth v. Tennison (1914) 24 Cal.App. 519, 521, 141 P. 1059.) The appellate court reviews a factual determination such as this only to determine whether there is any substantial evidence, contradicted or uncontradicted, that supports the determination. (Western States Petroleum Assn. v. Superior Court (1995) 9 Cal.4th 559, 571, 888 P.2d 1268, citing Crawford v. Southern Pac. Co. (1935) Cal.2d 427, 429.)
Korb argues this court should review the validity of the liquidated damages provision under Civil Code section 1671 independently. First, he suggests the validity of a liquidated damage provision is a question of law, citing Beasley v. Wells Fargo Bank (1991) 235 Cal. App. 3d 1383, 1393-1394. The decision in Beasley concerned the validity of a provision under the stricter standard that applied generally before the 1977 amendments that liberalized the use of liquidated damage provisions. This standard now applies only to certain consumer contracts. (See Civ. Code, § 1671, subds. (c), (d).) Korb misreads Beasley as well. The court in that case said the question of validity was to be decided by the trial court judge rather than the jury, but the question was nevertheless one of fact that a reviewing court could not review independently. (Beasley v. Wells Fargo Bank, supra, 235 Cal. App. 3d at pp. 1393-1394 .) Korb also contends the question is one of law because both parties agreed on Cutlers use of the word "screw." While the parties may have been in agreement on the use of the word "screw," the evidence was in conflict concerning their mutual understanding of that word.
The evidence supporting the trial courts determination may be summarized as follows: Korb had previously quit providing services without notice in 1996, disrupting Cutlers business significantly. When Cutler and Korb met to discuss a contract for Korbs services in 1998, Cutler told Korb that he would have to "hang out the season" and give two-weeks notice before leaving at the end. If he did not, Cutler would "screw" him. Cutler meant by this he would "hold [Korbs] check," and Cutler believed Korb knew this was what he meant. John Hubenet was at the meeting between Korb and Cutler. He, too, understood Cutlers statement to mean Korb "wouldnt be paid." Korb expressed no disagreement with the statement. Cutler paid independent contractors on the 25th of each month for services provided the preceding month, but sometimes it paid contractors as much as three or four days after the 25th. The oral contract did not provide for any different manner of payment in Korbs case.
We conclude that the foregoing is substantial evidence supporting the trial courts findings as to the existence and validity of the oral provision for liquidated damages. While no amount was specified, Korb could easily determine what earnings he had not yet been paid as of the date he quit.
Korb also argues that the provision for liquidated damages is not valid because the evidence is not sufficient to show that the amount of liquidated damages is based on a reasonable estimate of fair compensation. Korb had the burden of proving the provision was not reasonable on this ground. (Civ. Code, § 1671, subd. (b).) His evidence on this issue was limited to an attempt to prove that Cutler suffered no actual damage because another independent contractor soon began using the particular trailer Korb dropped off the day he quit. This evidence has little value because the reasonableness of the provision depends not on actual damages but on "the circumstances existing at the time the contract was made." (Civ. Code, § 1671, subd. (b).)
Korbs authorities on this point are distinguishable. Ridgley v. Topa Thrift & Loan Assn. (1998) 17 Cal.4th 970, 953 P.2d 484 does not discuss the burden of proof under Civil Code section 1671, subdivision (b), but the evidence presented to challenge the provision in issue in that case, unlike this one, clearly showed a provision for a penalty rather than as compensation for reasonably anticipated losses. (See Ridgley v. Topa Thrift & Loan Assn. (1998) 17 Cal.4th at pp. 977-981, 981, fn. 5.) Hitz v. First Interstate Bank (1995) 38 Cal.App.4th 274 was a case in which the stricter standard and reverse burden of proof applied under subdivision (d) of Civil Code section 1671. (See Hitz v. First Interstate Bank, supra, 38 Cal.App.4th at pp. 285-292.) ABI, Inc. v. City of Los Angeles (1984) 153 Cal. App. 3d 669, 200 Cal. Rptr. 563 involved a determination that no provision existed under Civil Code section 1671, subdivision (b). It did not address whether such a provision was or was not reasonable. (ABI, Inc. v. City of Los Angeles, supra, 153 Cal. App. 3d at pp. 684-686.) Other cited cases are similarly inapposite.
In any event, other evidence showed the following: Korb had a previous history of quitting without notice. It is extremely difficult to replace an independent contractor who quits in the middle of the busy season. Cutler received an average amount of $ 125.00 per work day from the earnings of each independent contractor who used one of his trailers. During the busy season there were from five to seven work days per week. Korb estimated his monthly earnings for July 1998 at $ 8,000.00 to $ 9,000.00.
We conclude this evidence substantially supports the finding that the provision for liquidated damages was reasonable under the circumstances existing when the contract was made. There was a risk Korb would quit without notice and the result would be the loss of $ 125.00 per work day for the remainder of the busy season. With an average of six work days per week during this time, Cutlers monthly loss would exceed $ 3,000.00. Thus, Cutler could reasonably anticipate a loss equal to $ 8,000.00 or $ 9,000.00, or a loss even twice that amount if Korb quit early in the six-to-eight-month busy season.
Korb next contends he is entitled to his July 1998 earnings even if the liquidated damages provision is valid, because these were past due when he quit on August 26, 1998. As noted above, however, there was evidence that Cutler usually issued checks on the 25th of each month, but it was not unusual for independent contractors to receive payment as much as three or four days later. The courts finding to this effect supports its determination that Cutler was not in material breach for non-payment of Korbs July earnings when Korb quit.
Because we find substantial evidence to support the trial courts determinations regarding the validity of the provision for liquidated damages and its enforcement, we need not address Korbs remaining contentions regarding forfeiture and the prejudicial effect of the trial courts purported errors.
IV. DISPOSITION
The judgment is affirmed.
We concur: Kline, P.J., Ruvolo, J.