Notes - McCarthy v. Tally

NOTE

1. Do you take it that, in the century and a quarter that elapsed between Kemble v. Farren and McCarthy v. Tally, judicial attitudes toward liquidated damage clauses had become more receptive? Or more hostile? The provisions of the California Civil Code referred to in the opinion are from the so-called Field Code, originally drafted by David Dudley Field in the 1850s for enactment in New York.

2. Better Food Markets v. American District Telegraph Co., 40 Cal. 2d 179, 253 P.2d 10 (1953), referred to in the McCarthy opinion, is of interest. Shenk, J., in an opinion concurred in by five of the other Judges, stated the case as follows:

This is an action brought on counts alleged in tort and ill contract wherein the plaintiff reeks to recover damages resulting from the alleged failure of the defendants to properly transmit burglar alarm signals to their own guards and to the headquarters of the municipal police department. Such failure is alleged to have permitted a burglar to escape with the sum of $35,930 taken from the plaintiff's food market.

On the first trial the court granted a motion for nonsuit in behalf of all the defendants except the American District Telegraph Company, and ordered judgment for those defendants. As against the defendant American District Telegraph Company the jury on the first trial found for the plaintiff, but a new trial was granted on the ground of insufficiency of the evidence. On the second trial the jury was unable to agree and was dismissed. Thereafter the defendant successfully moved for a directed verdict pursuant to section 630 of the Code of Civil Procedure (ordering judgment where motion for directed verdict should have been, but was not, granted), and the court ordered judgment for the defendant. On this appeal taken from that judgment the plaintiff contends that there is sufficient evidence of the defendant's negligence and breach of contract to sustain a verdict for the plaintiff, and that it was error to grant the motion for a directed verdict.

In June of 1947 the parties entered into a written agreement whereby the defendant was to install and maintain its standard "Central Station Burglar Alarm and Holdup System" in the plaintiff's food market. The contract provided that the defendant

on receipt of a burglar alarm signal from the Subscriber's [plaintiff's] premises, agrees to send to said premises, its representatives to act as agent of and in the interest of the Subscriber. . . . The Subscriber hereby authorizes and directs the Contractor [defendant] to clause the arrest of any person or persons unauthorized to enter his premises and to hold him or them until released by the Subscriber. . . . The Contractor, on receipt of a holdup alarm signal from the Subscriber's premises, agrees to transmit the alarm promptly to headquarters of the public police department.

Viewing the evidence in the light most favorable to the plaintiff on this appeal from a judgment on a directed verdict for the defendant, Anthony v. Hobbie, 25 Cal. 2d 814, 155 P.2d 826, the following facts were established: On November 16, 1947, at approximately 7:30 p. m. the assistant manager of the plaintiff's market set the burglar alarm system and locked the building. As he entered his car in the parking lot he was accosted by an armed robber and at gun point forced to return and open the store, the inner office and the safe. The robber took the contents of the safe, taped the assistant manager, and left. Approximately 14 minutes elapsed between the time when the store was reopened and when the robber left the store with the loot. During this period signals were being received at the defendant's central station indicating the sequence of the opening and closing of the doors. The defendant's operators at the central station did not call a guard or inform the police until 7:51, 9 minutes after the signal indicating that the safe had been opened, was received. The assistant manager had succeeded in knocking a telephone off the hook and calling for help at approximately 7:50. The police arrived at the market at 7:52, within one minute after receiving a call. The defendant's guards arrived shortly thereafter. The assistant manager's watch was broken at the time he was taped and the hands had stopped at 7:50.

Under the circumstances of this case it would have been reasonable to conclude that the defendant had a duty to call the police as well as its own guards to the plaintiff's premises. Promptness being the essence of the defendant's obligation, its delay in acting could reasonably be found to be an omission to render the agreed service and a failure of performance of the contract.

There is evidence upon which it could have been found that the loss was the proximate result of the defendant's delay in responding to the alarms. There was but one individual committing the burglary. He acted deliberately and there is reason to believe that the agreement between the parties was entered into with the intention of providing for the apprehension of such a person before he left the premises. The time and distance factors indicate that this particular burglar may have been caught had the police and guards been called to the premises a few minutes earlier, and that the delay of nine minutes after the safe had been opened permitted the escape. Such probabilities are to be weighed in the light of common experience in such matters and present a triable issue of fact. There was substantial evidence from which a jury could have found that the plaintiff's loss was the proximate result of the defendant's breach of its contract. Therefore it was error for the trial court to order judgment for the defendant on its motion for a directed verdict.

There remains the question of the validity of the following provisions of the contract for liquidated damages:

It is agreed by and between the parties that the Contractor is not an insurer, that the payments hereinbefore named are based solely on the value of the service in the maintenance of the system described, that it is impracticable and extremely difficult to fix the actual damages, if any, which may proximately result from a failure to perform such services and in case of failure to perform such services and a resulting loss its liability hereunder shall be limited to and fixed at the sum of fifty dollars as liquidated damages, and not as a penalty, and this liability shall be exclusive.

Id. at 182-184, 253 P.2d at 12-13.

The majority of the court held that, under the liquidated damage clause, the plaintiff's recovery was limited to $50. Carter, J., dissenting, wrote in part:

This court holds the following provision a valid contract for liquidated damages:

It is agreed by and between the parties that the Contractor [defendant] is not an insurer, that the payments hereinbefore named are based solely on the value of the service in maintenance of the system described, that it is impracticable and extremely difficult to fix the actual damages. if any, which may proximately result from a failure to perform such services and in case of failure to perform such services and a resulting loss its liability hereunder shall be limited to and fixed at the sum of fifty dollars as liquidated damages, and not as a penalty, and this liability shall be exclusive.

(Emphasis added.)

It is conceded that defendant failed to perform its duty; that plaintiff's loss resulted therefrom; that plaintiff's loss was the sum of $35,930 which was taken, by a burglar, from plaintiff's food market.

In order to uphold the so-called $50 liquidated damage provision, it was necessary for the majority to find that damages were "impracticable and extremely difficult" to fix at the time the contract was entered into and further that the $50 provision bore a reasonable relation to any loss which the parties contemplated might be sustained as a result of a breach of the contract.

It is said in the majority opinion that "In determining this question [the losses which might be expected to occur] the court should place itself in the position of the parties at the time the contract was made and should consider the nature of the breaches that might occur and any consequences that were reasonably foreseeable." Placing myself in the 'position of the parties at the time the contract was entered into, I would say that one way of ascertaining the loss which might occur, was to take an average of the amount of cash left in the safe in the store overnight; an inventory of the average merchandise kept in the store. If the losses sustained did not approximate the damages provided for by the parties, the rule set forth in Kothe v. R. C. Taylor Trust, 280 U.S. 224, 50 S. Ct. 142, 74 L. Ed. 382, would be applicable. There the parties provided for excessive liquidated damages, and the Supreme Court held that the damages provided for in the contract bore no reasonable relation to the probable loss to be sustained and held the provision a penalty and therefore unenforceable. It is the rule that the validity of the provision must be proved by the one seeking to enforce it. And as is said in the majority opinion

Where a trial court does find that such a situation did exist (impracticability or extreme difficulty in fixing damages) but it appears to a reviewing court that from the nature of the possible detriment the damages could have been fixed without difficulty, a judgment based on the finding will be reversed, Stark v. Shemada, supra, 187 Cal. 785, 204 P. 214.

It is also said in the majority opinion that "The question becomes one of law where the facts are not in dispute and admit of but a single conclusion." Even if the facts are not in dispute, they seldom admit of but one conclusion. In this case, one jury found for plaintiff and the second jury disagreed. Does this not prove that these facts admit of more than one conclusion? I think it does. It is also said here that whether damages are impracticable, or extremely difficult, to fix is "except on admitted facts . . . generally a question to be resolved by the trier of fact. . . ." In Rice v. Schmid, 18 Cal. 2d 382, 115 P.2d 498 (the latest pronouncement of this court on this subject), it was held that in "each instance" it was a question of fact. Further, even on admitted facts, more than one inference can be, and is often, drawn. See Black v. Black, 91 Cal. App. 2d 328, 204 P.2d 950 (stipulated facts; different inferences possible); Crisman v. Lanterman, 149 Cal. 647, 87 P. 89 (agreed statement of facts; different inferences possible); Anderson v. Thacher, 76 Cal. App. 2d 50, 172 P.2d 533 (evidence not conflicting; conflicting inferences therefrom possible); Rench v. McMullen, 82 Cal. App. 2d 872, 187 P.2d 111 (only documentary evidence offered was subject to conflicting inferences). Again, this court goes to great lengths to uphold the validity of a provision such as this. Note the "possibilities" which it considers might have happened from a failure of the burglar detection system. It is said that

Entrances to the building after working hours might be made by persons having authority as well as by burglars or by persons bent on mischief. They might or might not cause damage. There might be the theft of a ham, or of a truckload of goods, or the contents of a safe. There might be a breaking in for the purpose of theft and no theft. If money was taken it might be a few dollars or many thousands. Books might be tampered with, or papers abstracted. Damage might be caused in many ways that were not foreseeable.

If persons having authority to enter did so, plaintiff would, in all probability, not have sued the defendant, or, if it had done so, that would have been a matter of defense at the trial. If a ham had been stolen, the provision for $50 in all probability, would have been held a penalty as disproportionate to the loss involved. These same arguments apply to the balance of the "reasoning" of the majority.

It is also necessary that the amount agreed upon by the parties "represent the result of a reasonable endeavor by the parties to estimate a fair average compensation for any loss that may be sustained. Dyer Bros. Golden West Iron Wks. v. Central Iron Wks., supra, 182 Cal. 588, 189 P. 445; Rice v. Schmid, supra, 18 Cal. 2d 382, 386,115 P.2d 498, Restatement, Contracts, §339, p. 554." In other words, the amount agreed upon must bear some reasonable relation to the losses which might occur as a result of a breach. In my opinion, the $50 provision bears no reasonable relation to any amount which might have been lost by a failure of the system to operate.

Id. at 189-191, 253 P.2d at 16-17 (Carter, J., dissenting).

3. Fritz, "Underliquidated" Damages as Limitation of Liability, 33 Texas L. Rev. 196, 218-219 (1954) comments, with respect to the Better Food Markets case:

However desirable the result may be under the circumstances, it seems fair to say that it was reached only by dint of a bold disregard for the realities of the situation if the court [i.e., the majority] can be taken to have meant what it said. . . . [T]he clause was intended not to liquidate damages but to limit the defendant's liability.

According to Professor Fritz, counsel for defendant in the Better Food Markets case did not argue the "limitation of liability" point, but counsel in a companion case, Atkinson v. Pacific Fire Extinguisher Co., 40 Cal.2d 192, 253 P.2d 18 (1953), did. Shenk, J., who wrote the majority opinion (Carter, J., dissenting) in Atkinson, commented briefly with respect to the "limitation of liability" argument: "The language employed [in the contract clause] is clear and unambiguous and does not attempt to limit damages but rather to provide a fixed amount in the event of a breach, whether the actual damages should be greater or less than that amount." 40 Cal. 2d at 198. If clauses like those in the Better Food Markets and Atkinson cases are taken as attempts to limit liability rather than to liquidate damages, would the provisions of §§1670, 1671 of the Civil Code, quoted in the opinion in the McCarthy case, be applicable? Do you think the distinction Professor Fritz draws is a tenable one?

4. Priebe & Sons v. United States, 332 U.S. 407, 68 S. Ct. 123 ,92 L. Ed. 32 (1947), involved the following facts (as they are stated in the majority opinion of Mr. Justice Douglas):

Shortly after the enactment of the Lend-Lease Act of March 11, 1941, 55 Stat. 31, 22 U.S.C. (Supp. V, 1946), §411 et seq., the United States acting through agencies of the Department of Agriculture embarked on a program of purchasing dried eggs for shipment to England and Russia. Petitioner [Priebe] agreed to furnish a quantity of dried eggs under that program to the Federal Surplus Commodities Corporation (FSCC). The contract called for "May 18 [1942] delivery" which date, according to the contract, "shall be the first day of a 10-day period within which the FSCC will accept delivery, the particular day within the period being at the FSCC's option." Petitioner was also required to have the eggs inspected, delivery to be accompanied by inspection and weight certificates.

The contract contained two provisions respecting "liquidated damages." One, contained in paragraph 9, was applicable to delays in delivery. It has no application here, for as we shall see, deliveries were timely. The provision for "liquidated damages" with which we are concerned is contained in paragraph 7 and is applicable to a totally different situation. It provides, with exceptions not material here, that "failure to have specified quantities of dried egg products inspected and ready for delivery by the date specified in the offer" will be cause for payment of "liquidated damages."

On May 18, 1942, petitioner had not made delivery nor had the eggs been inspected. Inspection was, however, completed and certificates issued by May 22, which was prior to the time when FSCC asked for delivery. For it was not until May 26 that FSCC gave the first of several written notices for the shipment of eggs involved in this litigation. Petitioner made timely shipments pursuant to those instructions. Subsequently FSCC ascertained that petitioner's inspection certificates had been issued after May 18 and accordingly deducted from the price 10 cents per pound on the theory that the failure to have the eggs inspected and ready for delivery by May 18 was a default which put into operation the "liquidated damages" provision of the contract.

322 U.S. at 408-410.

After noting that "[t]oday the law does not look with disfavor upon 'liquidated damages' provisions in contracts" and approving the "useful function" that such provisions perform "when damages are uncertain in nature or amount or are unmeasurable" (id. at 411), Justice Douglas concluded that the specific liquidated damages provision contained in Paragraph 7 of the Priebe contract was nevertheless unenforceable.

[T]he provision in question] does not cover delays in deliveries. It can apply only where there was prompt performance when delivery was requested but where prompt delivery could not have been made, due to the absence of the certificates, had the request come on the first day when delivery could have been asked. A different situation might be presented had the contract provided for notice to the Government when the certificates were ready. Then we might possibly infer that promptness in obtaining them served an important function in the preparation of timetables for overseas shipments. But the contract contains no such provision; and it is shown that FSCC had no knowledge that the certificates were not ready on May 18 until long after deliveries had been made. So, it is apparent that the certificates were only an essential of proper delivery under this contract.

It likewise is apparent that the only thing which could possibly injure the government would be failure to get prompt performance when delivery was due. We have no doubt of the validity of the provision for "liquidated damages" when applied under those circumstances. . . . But under this procurement program delays of the contractors which did not interfere with prompt deliveries plainly would not occasion damage. That was as certain when the contract was made as it later proved to be. Yet that was the only situation to which the provision in question could ever apply. Under these circumstances this provision for "liquidated damages" could not possibly be a reasonable forecast of just compensation for the damage caused by a breach of contract. It might, as respondent suggests, have an in terrorem effect of encouraging prompt preparation for delivery. But the argument is a tacit admission that the provision was included not to make a fair estimate of damages to be suffered but to serve only as an added spur to performance. It is well-settled contract law that courts do not give their imprimatur to such arrangements. . . .

Id. at 412-413.

Is the Priebe case consistent with McCarthy v. Tally? With Better Food Markets? The report of the Priebe case contains dissenting opinions by Mr. Justice Black and Mr. Justice Frankfurter that are also worth reading.