Opinion
Rehearing Denied Jan. 9, 1941
Hearing Granted Feb. 13, 1941
Appeal from Superior Court, Los Angeles County; Thurmond Clarke, Judge.
Action for breach of contract to purchase flour by R.L. Rice against John Schmid and others, wherein Augusta Schmid, as administratrix of the estate of John Schmid, deceased, was substituted as a party defendant. From a judgment for plaintiff in the sum of $712.45 actual damages, notwithstanding plaintiff’s demand for the sum of $13,251.79 as liquidated damages, plaintiff appeals.
Reversed with instructions. COUNSEL
H.M. Lineman, Mab Copeland Lineman, and Benjamin Lewis, all of Los Angeles, for appellant.
Michael Lavelle, of Los Angeles, for respondents Anthony Marik, Felix Marik, John A. Dull and E.A. Osterman.
W.W. Wallace, of Los Angeles, for respondent Augusta Schmid, as Adm’x of Estate of John Schmid, Deceased.
OPINION
MOORE, Presiding Justice.
This is an appeal by plaintiff from a judgment for damages resulting from the alleged breach of the contract on the part of defendants to receive and pay for 2755 barrels of flour, the balance of an order of 6000 barrels. The court awarded judgment to the plaintiff for the sum of $712.45 as actual damages notwithstanding plaintiff’s demand for the sum of $13,251.79 as liquidated damages.
Plaintiff is a wholesale flour merchant. On July 16, 1937, he entered into a written contract with John Schmid, proprietor of the Eagle Bakery, whereby he agreed to sell and deliver to Schmid 6000 barrels of flour of the following brands at the following prices per barrel, to-wit:
Barrels
Priceper barrel
2,000"Ravalli" brand wheat flour at
$7.10
2,750"Gold Cross" brand wheat flour at
7.65
1,250"Isis" brand wheat flour at
7.15
The contract provided that "on directions to be furnished by the buyer, shipment is to be made as follows: ‘within ninety days from date’ ". The contract also provided that shipping instructions should be furnished the seller at least ten days before shipment; that the seller might terminate the contract in the event the buyer should default in the performance of any condition "imposed upon the buyer; that in the event of such termination, the buyer became liable for certain liquidated damages; and that the contract should be automatically extended if, on account of the fault of the buyer, not all of the flour was shipped during the ninety day period".
Contemporaneously with the execution of the contract with John Schmid, plaintiff contracted with the Montana Flour Mills Company, the sole manufacturer of the specified brands of flour for the purchase of flour sufficient to fill the order of 6000 barrels. In his contract with the mill, plaintiff was obligated to pay $6.85 per barrel for "Ravalli" and "Isis" flour and $7.40 per barrel for the "Gold Cross" flour. In turn, after making its contract with plaintiff, the Montana Flour Mills Company purchased sufficient wheat with which to manufacture the flour required to fill plaintiff’s order.
A portion of the flour purchased by John Schmid from plaintiff had been delivered pursuant to the agreement when Schmid sold the Eagle Bakery to defendants Anthony Marik, Felix Marik, John A. Dull and E.A. Osterman who assumed and agreed to carry out the obligations of Schmid’s contract with plaintiff. After the acquisition of the bakery by the last-named defendants, the latter actually gave shipping instructions for 2995 barrels of flour pursuant to the terms of the contract. Between July 16, 1937, and December 2, 1938, plaintiff shipped to the last-named defendants and their predecessor John Schmid a total of 3245 barrels of flour.
After the expiration of ninety days from July 16, 1937, and prior to December 2, 1938, plaintiff on several dates demanded that the new proprietors of the Eagle Bakery supply him with delivery instructions for the balance of the flour, which had not been delivered. This they refused to do.
Seeking to preserve his rights under his contract, plaintiff on December 2, 1938, notified the new proprietors of the Eagle Bakery by writing of his election to terminate the contract and to hold them liable for the liquidated damages provided for by that instrument. According to the provisions of that instrument, and shipments theretofore made, there still remained undelivered 688 barrels of "Ravalli", 1593 barrels of "Gold Cross" and 474 barrels of "Isis" flour. After the commencement of this action, John Schmid departed this life and Augusta Schmid as administratrix of his estate was substituted as a party defendant.
Plaintiff has pleaded his action in five separate counts, to-wit: (1) damages for breach of the express agreement and the liquidated damages provided therefor in the sum of $13,261.79; (2) demanded actual damages in the same sum; (3) a common count in the same sum; (4) an open-book account in the same sum; (5) an account stated in the same sum.
The court denied relief under the first cause of action on the theory that the provision for liquidated damages was a penalty and therefore void but he allowed recovery for actual damages and fixed the amount at $712.45, consisting of his loss of profit at 25 cents per barrel for "Ravalli" and "Gold Cross" and 30 cents per barrel for "Isis".
The question presented for our determination is whether the court erred in holding that the provision for liquidated damages is void. The language of that provision is as follows: "If the buyer fails to give the seller ample clearance (shipping instructions) as herein defined, the seller may without notice (a) cancel the contract, or (b) terminate its contract, the buyer to pay the seller as liquidated damages, on commodities remaining unshipped, first the carrying charges in the amount per day as provided in number 8 hereof from the date of this contract to the date of termination; and second, as to wheat flour, plus 20 cents per barrel as the cost of selling and also plus or minus the difference between the market value per bushel of cash wheat at mill on the date of this contract and on the date of termination multiplied by four and six-tenths (4 6/10ths) times the number of barrels of wheat flour, this later amount to be added if the value of cash wheat is lower and subtracted if the value of cash wheat is higher on the date of termination than on the date of this contract," etc. Paragraph 8 of the contract provides that if the contract is automatically extended, the buyer shall pay to the seller carrying charges of one-sixth cent (1/6¢ ) per day per barrel on flour and one cent (1¢ ) per day per barrel ton on feeds, etc. It is urged that this provision is void under section 1670 of the Civil Code as being in the nature of a penalty while plaintiff contends that it is a proper agreement for liquidated damages under section 1671 of the Civil Code because "from the nature of the case, it would be impracticable or extremely difficult to fix the actual damage".
Evidence tending to prove that it would be impracticable or extremely difficult to fix the actual damage was received. It is thereby made to appear that there is no established market for flour; that it is sold through no exchange but by direct sale only; that it is necessary for salesmen to search for a market; that while there were established markets or exchanges for the sale of wheat, the price of flour fluctuated with great rapidity so that it would be impossible to determine the price of flour at a future date. The price of wheat and the value of the by-products resulting from the manufacture of flour, the quantity of the flour ordered, the manner of delivery, and other elements must be taken into consideration in fixing the price of flour at any given time. On some days, it is impossible to sell any flour; on other days, the same brand of flour might be sold to different purchasers at different prices.
Defendants had the privilege of ordering flour at any time during the life of the contract. Hence of necessity plaintiff was required to maintain a sufficient stock on hand to meet the contractual requirements. It was for the purpose of enabling himself to meet defendants’ requirements under the contract that plaintiff had contracted with the mill for the purchase of sufficient flour to fill the orders of defendant. It may be added moreover that the mill in its turn had found it necessary to purchase sufficient cash wheat for the manufacture of the flour and to store it until used for the manufacture of the flour. The expense of storage incurred by plaintiff was estimated at one-sixth of 1 cent per barrel per day (as provided by the contract).
It having been agreed that the buyer should pay the seller as liquidated damages on the unshipped portion of the order "carrying charges", cost of selling, plus the difference between the market value on the date of the contract and on the date of termination, it was proved that the reasonable value of storage was one-sixth of 1 cent per barrel per day; and that the cost of selling was 20 cents per barrel. With these elements proved, the amount of the liquidated damages recoverable under the contract was established. But respondent questions the validity of the provision for liquidated damages.
Whether a provision for liquidated damages is void as in violation of Civil Code section 1670 or is valid because "from the nature of the case, it would be impracticable or extremely difficult to fix the actual damage" has been the subject of much litigation and of many decisions. But the type of contract in question here has never been adjudicated by the appellate courts of this state. However, many decisions of other jurisdictions afford ample authority for our guidance here. Whether a contract is of such character that it would be impracticable or extremely difficult to fix the actual damage sustained by reason of its breach must be determined from its own particular facts and the circumstances surrounding its execution, as well as from the terms of the instrument. Pacific Factor Co. v. Adler, 90 Cal. 110, 120, 27 P. 36, 25 Am.St.Rep. 102. In seeking to ascertain whether a provision for liquidated damages is really a provision for a penalty or for damages, the fundamental rule is, "that the construction of the stipulations depends, in each case, upon the intent of the parties, as evidenced by the entire agreement construed in the light of the circumstances under which it was made." Nakagawa v. Okamoto, 164 Cal. 718, 130 P. 707, 709. Where the parties to a contract deem it advisable, they may stipulate what the measure of damages shall be in the event of a breach by either. In construing the stipulation, the court will, in the absence of fraud or circumvention, look to all the terms of the contract and the language used to express the intention of the parties. International Milling Co. v. Reierson, 55 S.D. 139, 225 N.W. 218, 222. "There is no sound reason why persons capable of contracting may not agree upon the subject of liquidated damages when fairly entered into with the view to compensation for anticipated loss." Quaile & Co. v. Wm. Kelly Milling Co., 184 Ark. 717, 43 S.W.2d 369, 371, 79 A.L.R. 183. It is generally held that where it is determined that the parties intend to provide for the amount of damages in case of a breach, effect would be given to such provision for liquidated damages, where such damages are uncertain in nature or amount or difficult to ascertain. The parties may contract as to the measure of damages where the liquidation bears a reasonable relation to the probable damages for the breach. 43 S.W.2d page 371.
The foregoing principles are particularly applicable to the contract under consideration, as they were in a number of cases where substantially the identical type of contract was adjudicated. International Milling Co. v. Reierson, supra; Quaile & Co. v. Wm. Kelly Mining Co., supra; Larabee Flour Mills Co. v. Carignano, 10 Cir., 49 F.2d 151; Yerxa, Andrews & Thurston, Inc. v. Randazzo Macaroni Mfg. Co., 315 Mo. 927, 288 S.W. 20; Lettelleir et al. v. Abilene Flour Mills Co., 101 Ind.App. 20, 198 N.E. 111; Calvin Hosmer, Stolte Co. v. Paramount Cone Co., Inc., 285 Mass. 278, 189 N.E. 192. The statute involved in each of the foregoing cases was almost identical with section 1671 of our Civil Code.
In the Larabee case, supra, the buyer argued that the damage was readily ascertainable and that it was the difference between the contract price and the market value of the flour at the time and place of delivery. The court said [49 F.2d 154]: "If the commodity sold was wheat or oil, for which there is a ready market, and if the contract called for delivery at a specified time, the argument would be sound. *** The contract was one to manufacture and deliver flour at the buyer’s option as to time, within a period of ten months. Nor does the record disclose any exchange for flour sales *** on the contrary, it shows that a market for flour must be searched for, and that salesmen are employed for that purpose. *** Furthermore, there is a distinct trend toward a relaxation of the rules as to liquidated damages. *** In the complexities of modern business, breaches of contract involve more incidental but real damage than when business was less complicated; in later years, business men and associations of business men have been more desirous of contracting as to damage, in order that their liability may be a known rather than an unknown quantity. Responding to these changing conditions in the business world, the courts have been much less reluctant than formerly to enforce provisions for liquidated damage." The same views were expressed in the Lettelleir case, supra.
In some of the cited cases, the courts have pointed out the distinction between the contract by a milling company as seller and a contract made by a broker. The distinction between the respective losses suffered by a manufacturer and a broker is readily apparent, the broker being merely the selling agent is entitled to recover only a commission for a sale. In his case, there is no impracticability or extreme difficulty in determining the amount of his damages. The futility of the effort of defendants to apply the rule in the broker’s case to the case at bar is obvious when it is pointed out that the plaintiff is a flour merchant and not a broker. Plaintiff entered into the contract solely on his own behalf and not as an agent for the Montana Flour Mills. Therefore, the same considerations which apply to the manufacturer of flour apply with equal force to the merchant. The provision in his contract with the buyer providing for liquidated damages in the event of a breach is likewise valid. This was clearly held in the case which was in all practical respects identical with that before us (Calvin Hosmer, Stolte Co. v. Paramount Cone Co., supra [285 Mass. 278, 189 N.E. 195]), where the court held that the stipulation for damages was "an agreed reasonable liquidation of possible charges".
In view of the reasoning of the foregoing authorities as applied to such facts as appear in the case at bar, it must be held that the stipulation for liquidated damages is valid. Reading the contract by its four corners, the intent of the parties is clear. The evidence amply demonstrates that it would have been "impracticable or extremely difficult to fix the actual damage". Civ.Code, sec. 1671. That the provision is reasonable appears from the fact that the principal item of damage, i.e., the difference between the contract price and the market price at the time of the breach is to be determined in accordance with the law. San Francisco Milling Co., Ltd., v. Frye & Co., 2 Cal.App.2d 563, 38 P.2d 165; Boyles v. Kingsbaker Bros. Co., 5 Cal.2d 68, 53 P.2d 141; Civ.Code, sec. 1784, subd. 3.
The contention of defendants that the provision under dispute provides for the determination of the damages in accordance with the price of wheat instead of flour is without merit. It was clearly established that there is no market or exchange for the sale of flour while there is such a market for the sale of wheat. Also, it appears without contradiction that 46/10 bushels of wheat are required to manufacture one barrel of flour. These facts demonstrate the wisdom and expediency of the formula used for computing damages as reasonable and free from oppression. The conclusion of the trial court that the sole damage suffered by plaintiff was his loss of profit is untenable. There was no evidence of the price which plaintiff might have received for the undelivered portion of the flour. In the absence of convincing proof that plaintiff sold such undelivered flour for exactly the same price which he paid for it, the court’s conclusion is without support. It was established by uncontradicted evidence that on December 2, 1938, the date of the breach, the market price of "Ravalli" and "Isis" flour was $3 per barrel and the price of "Gold Cross" flour was $3.55 per barrel. Based upon these prices, the total value of the undelivered flour at the date of the breach was $9,141.15 while the contract price for the same flour was $20,460.35. The statutory measure of damages for the buyer’s refusal to accept the flour is the difference between the contract price and the market price on the date of the breach. San Francisco Milling Co. v. Frye & Co., supra; Boyles v. Kingsbaker Bros. Co., supra. Applying this measure of damages to the plaintiff’s case, his actual damage would be $11,319.20 and not $712.45, as found by the court. But since the provision for liquidated damages is valid, plaintiff is not to be limited to his actual damages but is entitled to recover the damages stipulated in the contract. In deriving the amount of liquidated damages, the first item is the difference between the contract price and the price at the date of the breach, namely, $11,319.20; the second item is the selling cost fixed at 20 cents per barrel, making $551. Inasmuch as the mill waived all charges against plaintiff for the storage of cash wheat, the plaintiff is not in a position to add anything as the cost of storage, as a "carrying charge". The total amount of liquidated damages, therefore, to which he is entitled is $11,870.20.
There is no merit in the contention of the administratrix that plaintiff failed to prove his ability to deliver the balance of the flour called for under the contract. The contract provided that the flour should be shipped on instructions furnished by the buyer. The finding of the court is that defendants refused to give shipping instructions for the balance of the flour. Such finding is supported by ample evidence. Therefore, whether plaintiff had in his possession all of the undelivered flour on the date of the breach was immaterial for the reason that defendants were not entitled to receive it until they furnished shipping instructions for it. The evidence is uncontradicted that plaintiff could have secured the necessary flour to fulfill his obligation within the time limited by the contract. Discussion of the numerous authorities cited by defendants (Greenleaf v. Stockton H. & A. Works, 78 Cal. 606, 21 P. 369; Drew v. Pedlar, 87 Cal. 443, 25 P. 749, 22 Am.St.Rep. 257; Pacific Factor Co. v. Adler, 90 Cal. 110, 27 P. 36, 25 Am.St.Rep. 102; Jack v. Sinsheimer, 125 Cal. 563, 58 P. 130; Green v. Frahm, 176 Cal. 259, 168 P. 114; Knight v. Marks, 183 Cal. 354, 191 P. 531; Stark v. Sehmada, 187 Cal. 785, 204 P. 214; Seid Pak Sing v. Barker, 197 Cal. 321, 240 P. 765; Smith v. Carlston, 205 Cal. 541, 271 P. 1091; Robert March & Co., Inc. v. Tremper, 210 Cal. 572, 292 P. 950; Biescar v. Pratt, 4 Cal.App. 288, 87 P. 1101; Thomas v. Anthony, 30 Cal.App. 217, 157 P. 823; Mente & Co., Inc. v. Fresno C. & W. Co., 113 Cal.App. 325, 298 P. 126; and White v. City of San Diego, 126 Cal.App. 501, 14 P.2d 1062) is omitted for the reason that none of them involves the type of contract before us; in many of them there was no agreement for liquidated damages; many of them involved contracts for services or for rentals; and in some recovery was denied for reasons remote from the question of damages.
Contrary to the findings, it is contended that plaintiff breached the contract by failing to ship all the flour within ninety days, and that defendants who purchased the Eagle Bakery did not assume the contract for the purchase of the flour. The obvious answer to this contention is that since defendants have not appealed, errors urged by them will not be reviewed. Lady v. Palen, 12 Cal.App.2d 1, 54 P.2d 1133.
Since the judgment must be reversed, it is unnecessary to consider the remaining contentions raised on this appeal. For the reasons given and upon the authorities cited, judgment is reversed with instructions to the trial court to enter judgment in favor of plaintiff in the sum of $11,870.20.
We concur: WOOD, J.; McCOMB, J.