Atkinson v. Pacific Fire Extinguisher Co.

• Decision Date: 06 February 1953
• Citation: 253 P.2d 18,40 Cal.2d 192
• Parties: ATKINSON et al. v. PACIFIC FIRE EXTINGUISHER CO. S. F. 18603.
• Court: California Supreme Court

Page 18

253 P.2d 18

40 Cal.2d 192

ATKINSON et al. v. PACIFIC FIRE EXTINGUISHER CO.

S. F. 18603.

Supreme Court of California, in Bank.

Feb. 6, 1953.

As Modified on Denial of Rehearing March 5, 1953.

Fitzgerald, Abbott & Beardsley and Charles A. Beardsley, Oakland, for appeallant.

Clark & Heafey, Oakland, Thornton & Taylor, San Francisco and Augustin Donovan, Oakland, for respondents.

SHENK, Justice.

This is an appeal from a judgment on a verdict for $97,437 in favor of the plaintiffs in an action for breach of contract. The questions presented are the effect of a prior default by the plaintiffs and the validity of a clause in a written contract fixing liquidated damages for breach of the contract.

On June 5, 1939, plaintiffs entered into a written 'lease' agreement with the defendant company whereby the defendant agreed to install, maintain and operate a fire detection system in the plaintiffs' plaining mill located in Oakland. The system was designed to detect fires originating on the plaintiffs' premises and to automatically transmit signals to the Municipal Fire Alarm System of the City of Oakland. The term of the lease was ten years, at an annual rental of $180 payable in monthly installments of $15 each. Paragraph 6 provides that in the event of default in payments, the defendant had the right to enter and remove the detection system. Paragraph 11 provides, 'It is agreed by and between the parties hereto that the Lessor is not an insurer, and that the payments hereinbefore named are based solely on the value of the services in the operation of the system described, and in case of failure to perform such service and a resulting loss its liability hereunder shall be limited to and fixed at the sum of Twenty-five dollars as liquidated damages, and not as a penalty, and this liability shall be exclusive.'

On July 8, 1948, while the system supposedly remained in operation, a fire was discovered in the plaintiffs' mill. The defendant does not contest the implied finding of the jury that the detection system failed to operate. The first alarm to the fire department was manually transmitted by one of the plaintiffs' employees, and there is evidence that fire fighting equipment arrived on the scene within two minutes after the alarm. Nevertheless the fire was then out of control and the planing mill was destroyed.

At the time of the fire the plaintiffs were in default in the payment of the monthly rental installments for June and July of 1948. During the trial the plaintiffs tendered and the defendant accepted these payments. There was evidence received without objection that throughout the period of the lease the plaintiffs' payments were occasionally in arrears. During most of 1946 payments were made a month or more after becoming due. On these occasions the defendant did not remove the detection system or discontinue the service nor was there any demand for strict compliance. Time had not been made of the essence of the contract. It was customary for the plaintiffs to pay the rental charges upon receipt of an invoice each month, and although controverted there was evidence that invoices were not received for June and July. The record furnishes substantial grounds for the application of the principle that where an obligee condones delay in periodic performance strick compliance thereafter is waived. Boone v. Templeman, 1910, 158 Cal. 290, 110 P. 947; Kern Sunset Oil Co. v. Good Roads Oil Co., 1931, 214 Cal. 435, 6 P.2d 71, 80 A.L.R. 453.

In view of the conclusion on the second phase of the case concerning liquidated damages it is unnecessary to discuss other points made by the defendant as to the form of the pleadings and the evidence with reference to the question of waiver. It is enough to say that the implied findings of the jury to the effect that the defendant's acceptance of overdue payments constituted a waiver of strict performance is supported by substantial evidence.

The principal contention of the defendant is that paragraph 11 of the contract is a valid provision for liquidated damages. This is the second phase of the case and the facts with reference thereto are undisputed. Civil Code § 1670 states that a provision in a contract hich provides for the amount of damages to be paid in the event of a subsequent breach of the contract is void, except as expressly provided in Section 1671 as follows: 'The parties to a contract may agree therein upon an amount which shall be presumed to be the amount of damage sustained by a breach thereof, when, from the nature of the case, it would be impracticable or extremely difficult to fix the actual damage.' In the case of Better Food Markets, Inc. v. American District Telegraph Company, Cal.Sup., 253 P.2d 10, it was held that the question whether it would be impracticable or extremely difficult to fix liquidated damages is generally a question of fact and that the time for the determination of the question is the time of making the contract. It was also held in that case that the question becomes one of law where the facts are not in dispute and admit of but one conclusion.

In the present case the defendant claims that as a matter of law the jury could not properly have found that it was not impracticable or extremely difficult to fix actual damages when viewed from the position of the contracting parties under all the circumstances of the case existing at the time the contract was exectued. The defendant points out that the detection system was intended to provide protection in case of a wide variety of fires. Some of them would be slow burning, as in a bed of sawdust, where a loss resulting from the failure of the detection system might be negligible. Other fires might result only in a pitted floor. Still others would immediately envelop the buildings in flames and result in a very substantial loss. Looking ahead the parties had no way of knowing what type of fire might occur after a particular failure of the detection system. The merit in the defendant's contention lies in the argument that in no event could the parties have predicted what protion of the loss in any particular fire would be the proximate result of the failure of the detection system. It is true that in the event the detection system was functioning properly, there would probably be some damage by fire prior to the alarm; that further damage would have occurred before the fire fighting equipment could have been put into operation; and that the fire may have been of such a nature that the planing mill would have been consumed. The uncertain extent to which losses might occur viewed from the time of entering into the contract would make the task of fixing damages an extremely difficult if not an impossible one. There were additional factors to be considered, such as the weather conditions at the time of the fire, the season of the year, the success of the municipal fire fighting department in moving through traffic to the scene of the fire, and the presence of a full crew of employees or of only a night watchman on the premises. The factors involved were too many and too variable to permit of any certainty in predicting the extent of the losses directly attributable to the failure of the detection system with reference to a particular fire.

The liquidation clause here in question is in effect the same as that appearing in the contract considered in the companion case of Better Foods Markets, Inc. v. American District Telegraph Company above referred to. There the parties contracted for the installation and operation of a burglar alarm system which failed to operate. A substantial loss occurred. It was held, as here, that under the undisputed facts it was competent for the parties, at the time the contract was executed, to agree that it was impracticable or extremely difficult to fix in advance the actual damages that might result from a breach of the contract.

It is true that the validity of a clause for liquidated damages may be questioned on other grounds. One who relies upon a liquidation caluse must show that the parties to the contract 'agree therein upon an amount which shall be presumed to be the amount of damages sustained by a breach thereof * * *.' Civ.Code § 1671. As held in the Better Foods Market, Inc. case the amount agreed upon must result from a reasonable endeavor by the parties to estimate a fair compensation for any loss that may be sustained because of a breach. In the present case the defendant, for a compensation of $15 a month agreed to sound an early warning in case of fire; also to inspect and test the detection system, and to maintain the equipment which was a part thereof. It was agreed that the payments were based 'solely on the value of the services in the operation of the system' and that in the event of a failure of the defendant 'to perform such services and a resulting loss', its liability was to be fixed at $25 as liquidated damages. It is to be noted that the contract does not limit the defendant's liability to losses resulting from fire, but rather to losses resulting from the defendant's failure to perform the contracted-for services, which services included inspecting, testing and maintaining the equipment as well as early warning in the event of a fire. These supplementary services were recognized in the contract to have value in themselves. They also included advantageous fire insurance rates where a detection system was kept in operation. A breach of contract by the defendant, then, might result in losses to the plaintiff other than fire losses, such as the cost to the plaintiff of maintaining the system where the defendant had failed to do so. From the standpoint of the defendant it was important that it should know the extent of its liability. For the small compensation received obviously it could not afford to assume responsibilities such as are assumed in the case of fire insurance coverage. On the other hand, while the...