178 F.2d 541 (9th Cir. 1949), 12054, Pacific Portland Cement Co. v. Food Mach. & Chem. Corp.

Docket Nº:12054.
Citation:178 F.2d 541
Case Date:December 02, 1949
Court:United States Courts of Appeals, Court of Appeals for the Ninth Circuit

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178 F.2d 541 (9th Cir. 1949)




No. 12054.

United States Court of Appeals, Ninth Circuit.

December 2, 1949

Rehearing Denied Jan. 6, 1950.

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Where contract gave buyer right to reject gypsum if it did not meet specified standard of quality but provided no method of testing or sampling, the trial court was free to choose the method which it deemed a fair and proper criterion of the gypsum delivered by the seller under the contract and in doing so it exercised its power of interpretation, and since the result was not unreasonable the Court of Appeals should not reject it. Fed.Rules Civ.Proc. rule 52(a), 28 U.S.C.A.

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Marshall P. Madison, Eugene D. Bennett, Francis R. Kirkham and Wallace L. Kaapcke, San Francisco, Cal. (Pillsbury, Madison & Sutro, San Francisco, Cal., of counsel), for appellant.

Claude N. Rosenberg, Tadini Bacigalupi, Jr., San Francisco, Cal., and Kenneth Ray, New York City (Bacigalupi, Elkus & Salinger, San Francisco, Cal., of counsel), for appellee.

Before DENMAN, Chief Judge, ORR, Circuit Judge, and YANKWICH, District judge.

YANKWICH, District Judge.

Appellant, Pacific Portland Cement Company, the plaintiff below, is a California corporation. Appellee, Food Machinery and Chemical Corporation, is a Delaware corporation. Its immediate predecessor, the defendant below, Westvaco Chlorine Products Corporation, is a Delaware corporation qualified to do business under the laws of the state of California, with a designated agent in the city and county of San Francisco. Westvaco Chlorine Products Corporation, in turn, was preceded in the contractual relationship with the appellant by California Chemical Company. Because they are so designated in the contract around which this litigation turns, we shall refer to the appellant as Pacific, to appellee's first predecessor as Westvaco, to Food Machinery and Chemical Corporation as the appellee.

In 1930, California constructed at Newark, California, a plant, from which bromine was extracted from bittern, as the sole product of the plant. In 1930, a small plant, designated in the testimony as a 'pilot plant, ' was constructed as an experiment in the production of magnesium from bittern. The experiment continued for a period of two years, at which time various tests were made to determine the quality of the bittern. Many informal discussions were had with Pacific about the product. Samples were submitted to them from time to time. After the quality of the product was deemed satisfactory, negotiations were begun for the execution of a contract. They extended from the middle of 1936 to the date on which the contract was executed- January 29, 1937.

By the terms of the contract, Pacific agreed to purchase all the gypsum produced by California at the Newark, California, plant. The term of the contract was twenty-five years, with the right of Pacific to terminate it at any time upon one year's notice. California had no corresponding right. The clause in the contract around which the main controversy centers is clause (6), the 'escalator' clause, which reads:

In the event that California's cost of production of gypsum for any twelve (12) months' period during the term hereof shall increase five per cent(5%) above its average cost of production of gypsum for the preceding (12) months' period, then and in that event California shall have the right, upon giving sixty (60) days' written notice to Pacific, to increase the price payable hereunder for gypsum thereafter delivered hereunder in an amount not to exceed the 'actual advance in California's cost of manufacture'; provided that in no event may more than one such increase be made in any one calendar year.'

The contract fixed an initial price of.$2.80 per ton. Changes in the price were to be governed by the escalator provisions in clause (6). Three price increases were made by California under this clause. The first one, effective October 5, 1941, claimed an increase of 18 cents per ton in the production cost for the period from July 1, 1940, to June 30, 1941. It brought the initial price up from.$2.80 per ton to $2.98. Pacific paid it without objection. The second price increase as to become effective March 15, 1944, but remained inoperative until September 4, 1946, because of wartime control. It was based upon a claimed increase in the cost of production of 78 cents per ton and brought the price per ton to $3.76. The third increase, effective November 13, 1946, claimed an increase in the cost of production of 86 cents per ton for the period of July 1, 1945, to June 30, 1946. This amount,

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later reduced to 60 cents per ton, brought the price to $4.36. The last two increases were paid under protest.

On March 11, 1947, Pacific began an action for declaratory relief under 28 U.S.C.A. §§ 2201-2202. Its complaint grounded jurisdiction on diversity of citizenship. It set forth a controversy between it and Westvaco over the meaning of clause (6) of the contract. It asserted that under its interpretation of the contract, the last two raises in price were unjustified. It sought a declaration of the meaning of the term 'cost of production' in the clause, which would nullify the claimed increases in price, and a declaration as to clause (5)- conformity to specifications. It sought judgment in the sum of $9, 405.93, being the total of the two increase paid under protest. Westvaco's answer admitted the existence of the controversy, and pleaded several defenses which no longer concern us here.

After an extensive trial, the court entered its findings and judgment against Pacific on April 26, 1948. Their content, so far as material to this appeal, will be revealed further on in the discussion. On this appeal, the main portion of the judgment which is under attack is that which interprets the meaning of the phrases 'cost of production' and 'cost of manufacture' in the escalator clause.


Some Preliminary Considerations.

In effect, by its judgment, the court declined to limit the cost of production or manufacture to direct costs. On the contrary, it justified all the increases claimed by Westvaco, which included indirect costs such as overhead and the like. It is the contention of the appellant that this finding (1) is not supported by the evidence, (2) is contrary to the intention of the parties as disclosed by the contract, and (3) finds no support in the practical interpretation of 'cost of production' and 'cost of manufacture' which the parties adopted during the life of the contract and before a controversy arose.

Certain obvious considerations are in order, in view of the nature of these contentions.

As the jurisdiction of the District Court derives from diversity, the meaning of the contract and the rights flowing from it are governed by State law. Angel v. Bullington, 1947, 330 U.S. 183, 67 S.Ct. 657, 91 L.Ed. 832; Cohen v. Beneficial Industrial Loan Corp., 1949, 337 U.S. 541, 69 S.Ct 1221; Woods v. Interstate Realty Co., 1949, 337 U.S. 535, 69 S.Ct. 1235. However, as the relief sought is under the Federal Declaratory Judgment Statute, which antedates the enactment of Federal Rules of Civil Procedure, 28 U.S.C.A., and was in force even when procedure was governed by the Conformity Act, 28 U.S.C.A. § 724, the principles which govern Federal declaratory judgments apply in interpreting the proceedings in the court below and the pleadings and actions of the parties. This is important in the present case because of the insistence of the appellant that, in determining the issues, the trial court adopted a wrong view of the burden of proof. This calls for some observations on the subject. Writers have indulged in much speculation about the meaning of 'burden of proof.' All are in agreement that the only effect of the rule is 'the risk of non-persuasion.' And the concomitant obligation to go forward in the proof when not met may result in failure to convince the trier of facts. 9 Wigmore on Evidence, 3d Ed., 1940.2485, 2489; Borchard, Declaratory Judgments, 2d Ed., 1941, p. 404.

In the last analysis, whether we are dealing with an ordinary action or one for declaratory relief, the question of who has the burden of proof is determined not so much by the position of the parties or by choosing who the actor in the law suit is, as by the nature of the relief asked for and granted. Borchard, Declaratory Judgments, 2d Ed., 1941, pp. 404-409. So far as the Federal declaratory judgment statute is concerned, the matter has been very lucidly stated by the Court of Appeals for the Eight Circuit in Reliance Life Insurance Co. v. Burgess, 8 Cir., 1940, 112 F.2d 234, 237: 'The question as to who must sustain the burden of proof in a declaratory judgment suit is a comparatively new one, which we think does not admit of a categorical answer. It must depend, as in other

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classes of litigation, upon the condition of the pleadings and the character of the issues at the time the question is presented. Plaintiff alleged that the insured committed suicide while sane. It alleged an actual controversy, and the proceeding was instituted by it to determine that controversy. Defendants denied that a justiciable controversy existed and put in issue the allegations of plaintiff's petition, but they asked no affirmative relief but prayed only to be discharged with their costs. The question as to whether the burden of proof in its primary sense rests upon the plaintiff or defendant is ordinarily to be determined by ascertaining from the pleadings which of the parties without evidence would be compelled to submit to an adverse judgment before the introduction...

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