2013-00150846-CU-BC

Info-Electronics HP Systems Inc vs. All Weather Inc

Nature of Proceeding:    Hearing on Demurrer to First Amended Complaint

Filed By:   Buddingh, Katharine E.

**If any party requests oral argument, then at the time the request is made, the
requesting party must inform the court and opposing counsel of the specific
issue(s) for which oral argument is sought.**

The demurrer of Defendant All-Weather, Inc. d/b/a AWI Corp. (“AWI”) to Plaintiff Info-
Electronics HP Systems, Inc.’s (“Info-Electronics”) first amended complaint (“FAC”) is
SUSTAINED in part with leave to mend and OVERRULED in part as follows:

Overview

This case presents a commercial dispute.  In a written agreement, and then a renewed
written agreement (“Agreement”), AWI appointed Info-Electronics its non-exclusive
representative to promote and obtain orders for AWI’s products in Canada and India.
The agreement required AWI to “act dutifully and in good faith at all times in its
relations with [Info-Electronics].”  (FAC, Exh. A at 3 [¶ 7(1)] [brackets added].)  Info- Electronics received commissions in exchange for its services.  (Id., Exh. A at 3 [¶¶ 8-
9].)  AWI was entitled to terminate the agreement upon 60 days’ notice without or
without cause.  (Id., Exh. A at 5 [¶ 14(2)].)  Upon termination, Info-Electronics became
entitled to “all commission earned…for orders from customers for products in the
[sales] Territory procured by the direct efforts of [Info-Electronics] and accepted by
[AWI] prior to the date of termination.”  (Id., Exh. A at 6 [¶ 15(1)].)  The agreement
contains an integration clause.  (Id., Exh. A at 6 [¶ 16(1)].)  It also contains a one-year
statute of limitations.  (Id., Exh. A at 6 [¶ 15(3)].)

Info-Electronics alleges that, during the parties’ course of dealing, AWI represented
that commissions would be paid post-termination for business that Info-Electronics
brought to AWI.  AWI allegedly terminated the agreement on or about March 1, 2012,
and it allegedly received a large order from the Canadian Department of National
Defence (“DND”) five months later.  Info-Electronics alleges that it negotiated the
contract with DND and that AWI terminated the contract in bad faith in order to
withhold commissions that otherwise would have followed the negotiation.

The FAC contains three causes of action for breach of contract, promissory fraud and
quantum meruit.  AWI demurs on grounds that Info-Electronics’ allegations fail to state
any valid cause of action.

Discussion

The First Cause of Action for Breach of Contract

The demurrer is SUSTAINED with leave to amend.

AWI argues that the demurrer should be sustained because Info-Electronics has not
alleged the element of damages.  In making this argument, AWI notes that it was
contractually entitled to terminate the Agreement with or without cause on 60 days’
notice.  AWI also notes the following provision in the Agreement:

In the event of termination of this Agreement, [AWI] shall pay [Info-
Electronics] all commissions earned by [Info-Electronics] on orders from
customers for Products in the Territory procured by the direct efforts of
[Info-Electronics] and accepted by [AWI] prior to the date of termination .

(FAC, Exh. A at 6 [¶ 15(1)] [emphasis and brackets added]; see also id., Exh. A at 4 [¶
8] [“[Info-Electronics] is entitled to commission for all contracts concluded with
customers for the sale of Products in the Territory during the term of this agreement”]
[brackets and italics added].)

Applying a holding in Martin v. U-Haul Company of Fresno (1988) 204 Cal.App.3d 396
to these provisions, AWI argues that Info-Electronics is barred from alleging damages
that materialized outside the 60-day notice period in the Agreement’s termination
provision.  Thus, AWI contends that Info-Electronics cannot allege that it was damaged
in or after August 2012, when the DND contract was finalized.  Because the only
damages Info-Electronics posits are those associated with the lost DND commission,
AWI argues that Info-Electronics has not alleged cognizable damages.  The court
agrees with AWI.

The Martin case involved a U-Haul dealership agreement under which Mr. Martin, an  independent dealer, drew commissions from his rentals of U-Haul equipment.  After U-
Haul concluded that Mr. Martin had deviated from prescribed rental procedures, it
terminated the dealership contract without notice.  The contract required 30 days’
notice to terminate.

At trial, a jury found that U-Haul’s termination without notice was a breach of the
dealership contract.  On appeal, the issue was whether Mr. Martin was limited to
contract damages attributable to the 30-day termination notice period, as opposed to
damages associated with the remainder of what would have been the term of the
contract.  In holding that Mr. Martin was limited to damages in the 30-day notice
period, the Court of Appeal reasoned:

The specific rule that a termination clause limits recoverable damages to
the notice period is consistent with the general requirement that contract
damages are limited to those foreseeable by the parties at the time of
contracting. Parties who agree that a contract may be terminated for any
reason, or no reason, upon the giving of the specified notice could not
reasonably anticipate that damages could exceed that notice period.

(204 Cal.App.3d at 400 [emphasis added].)

This court reads Martin to announce a substantive rule of contract law, namely that in
an action for the breach of a contract authorizing the breaching party to terminate on
notice, the measure of damages is limited to those attributable to the notice period.
Info-Electronics has not cited any case overruling or limiting Martin, and the court’s
research does not disclose such an authority either.  Accordingly, this court is bound to
follow Martin, (see McClung v. Employment Development Dept. (2004) 34 Cal. 4th
467, 473), and the demurrer must be sustained on grounds that Info-Electronics has
failed to allege cognizable contract damages.

Because the court sustains the demurrer for the reasons above, it does not address
the parties’ additional arguments in support of and in opposition to the demurrer.

Because this is the court’s first opportunity to consider AWI’s pleading challenge, the
court grants Info-Electronics leave to amend.

The Second Cause of Action for Promissory Fraud

The demurrer is OVERRULED.

AWI argues that the parol evidence rule bars the second cause of action.  (See CCP §
1856.)  Where a written agreement was intended to as a final expression of its terms,
the parol evidence rule bars extrinsic evidence of contradictory prior or
contemporaneous agreements.  (See, e.g., Burch v. Premier Homes, LLC (2011) 199
Cal.App.4th 730, 741-742.)  However, the rule does not bar evidence of promises
made subsequent to the written agreement’s execution.  (See Charnay v. Cobert
th
(2006) 145 Cal.App.4   170, 186 [citation omitted].)  The second cause of action can be
construed to include allegations that, after the parties executed the Agreement, AWI
promised to pay commissions for Info-Electronics’ efforts not resulting in completed
products orders prior to termination.  (See FAC, ¶ 7.)  Thus, at least part of the second
cause of action is not subject to the parol evidence bar. If a cause of action states any legal claim, then the court must overrule a demurrer to
it.  (See Charpentier v. L.A. Rams Football Co. (1999) 75 Cal.App.4th 301, 307.)
Because the parol evidence bar does not preclude a claim based on promises
subsequent to execution of the Agreement, the demurrer is overruled.  In reaching this
conclusion, the court does not decide whether the parol evidence rule bars evidence of
other promises alleged in the second cause of action.

Next, AWI argue that the second cause of action is time-barred in light of the
Agreement’s one-year statute of limitations.  In making this argument, AWI appears to
be aware that, for the one-year statue to apply to the second cause of action, that
cause of action must constitute a “claim under th[e] Agreement.”  (FAC, Exh. A at 6 [¶
15(3)].)  AWI’s only effort to explain how the Second Cause of Action for Promissory
Fraud is made “under the Agreement” is its contention that all Info-Electronics’ causes
of action are “based on ZWI’s termination of the contract.”  (Moving memo.at 4:226-
28.)  AWI does not cite any legal authority to support this contention.

Whether the second cause of action, which is based in part on alleged promises made
outside the four corners of the Agreement, is a claim “under the Agreement” requires a
genuine legal analysis that AWI has failed to perform.  The court declines to undertake
the task in the first instance.  As a consequence, AWI has failed to persuade the court
that its statute-of-limitations argument has merit, and the demurrer based on that
argument is overruled.

The court is aware that Info-Electronics did not oppose the demurrer on grounds that
the second cause of action is not a claim “under the Agreement.”  In its Reply, AWI
characterizes this silence as Info-Electronics’ acknowledgement that all its causes of
action are brought under the Agreement.  (See Reply at 7:10-12.)  It is not clear to the
court that Info-Electronics’ silence is such an acknowledgment.  In any event, AWI is
the moving party and is required to persuade the court that it is entitled to the
requested relief.  Because AWI has not met its burden as moving party, the court
overrules the demurrer notwithstanding any silence on Info-Electronics’ part.

The Third Cause of Action for Quantum Meruit

The demurrer is OVERRULED.

First, AWI argues that the third cause of action is defective because it contradicts
terms in the Agreement.  Info-Electronics counters that the first and third causes of
action constitute alternative pleadings and are allowed even if an election of remedies
will be required at some point in the case.  Info-Electronics adds that, if the Agreement
is invalid or unenforceable for any reason, then it should not be barred from seeking
relief outside the contract.

In Reply, AWI takes the position that Info-Electronics cannot rely on the prospective
invalidation of the Agreement to advance the third cause of action.  In AWI’s view, Info-
Electronics must affirmatively seek to rescind the Agreement before it may advance a
cause of action for quantum meruit.  AWI, however, fails to cite any legal authority for
this proposition.  As a result, the court is not persuaded and will not sustain AWI’s
demurrer.

In addition, the court rejects AWI’s second argument based on the contractual statute
of limitations.  AWI has failed to persuade the court that a cause of action for quantum             meruit is one “under the Agreement.”

Judicial Notice

AWI’s request for judicial notice of the FAC is GRANTED.

Conclusion

The demurrer to the first cause of action is SUSTAINED with leave to amend.

The balance of the demurrer is OVERRULED.

No later than July 14, 2014, Info-Electronics may file and serve a second amended
complaint (“SAC”) in an attempt to remedy the defects in the first cause of action.  The
court further GRANTS Info-Electronics’ request for leave to make additional
amendments discussed in Part IV of its Opposition, although the court expresses no
opinion about the merits of the proposed amendments.

AWI shall file its responsive pleading(s) within 14 days after the SAC is served, 19
days if the SAC is served by mail.

Although not required by any statute or rule of court, Info-Electronics is requested to
attach a copy of the instant minute order to the SAC to facilitate the filing of the
pleading.

The minute order is effective immediately.  No formal order pursuant to CRC 3.1312 or
further notice is required.