L. B. Laboratories, Inc. v. Mitchell

• Decision Date: 23 May 1952
• Citation: 244 P.2d 385,39 Cal.2d 56
• Court: California Supreme Court
• Parties: L. B. LABORATORIES, Inc. v. MITCHELL. L. A. 22214.

Page 385

244 P.2d 385

39 Cal.2d 56

L. B. LABORATORIES, Inc. v. MITCHELL.

L. A. 22214.

Supreme Court of California, in Bank.

May 23, 1952.

Rehearing Denied June 19, 1952.

Sheppard, Mullin, Richter & Balthis, Gordon F. Hampton and E. Talbot Callister, all of Los Angeles, for appellant.

Walter G. Danielson, H. Spencer St. Clair, Alva C. Baird and William A. Cruikshank, Jr., all of Los Angeles, Howard W. Campen, County Counsel, Santa Clara, Donald K. Currlin, Asst. County Counsel, and Wade H. Hover, Deputy County Counsel, San Jose, as amicus curiae, for respondent.

CARTER, Justice.

Plaintiff was awarded judgment for $17,428.43 for damages in an action the nature of which will later appear. Defendant appeals.

According to the findings of the court, plaintiff is a corporation. Defendant is a certified public accountant pursuing his vocation in Los Angeles. Prior to December, 1942, defendant represented to plaintiff that he was an expert in all tax matters, both federal and state, and fully capable of handling all plaintiff's tax and accountancy problems, and in reliance thereon plaintiff employed defendant prior to June, 1942, to handle all of such problems. Pursuant to the employment defendant prepared and filed in proper time plaintiff's tax returns for the calendar years 1940-1942. Still in reliance on defendant's representations, on February 7, 1944, plaintiff employed defendant to make an income tax review of its records for 1943 and to prepare and file on or before March 15, 1944, its federal income and excess profits tax returns for 1943 and the state franchise tax returns for the same year. Defendant accepted the employment on February 7, 1944, and reduced his acceptance to writing in the form of a letter to plaintiff, stating: 'This will confirm your request that this office conduct an income tax review of the corporate books and records and as a result prepare the following tax returns for calendar year 1943; California Franchise Tax Return, Federal Income Tax Return, Federal Excess Profits Tax Return. These services will be billed on the basis of $40.00 per diem (eight hours) for all time devoted thereto (travel time included). Progress billing invoices will be rendered as of the close of each Saturday's business.' It was intended by the parties at the time the contract was made that defendant was to prepare and file all of said returns on or before their due date, March 15, 1944. Defendant breached the contract in (1) that he did not make a review of plaintiff's records until the early part of 1946; and (2) did not file and of the returns until March 23, 1946. The breach was due to defendant's negligence and carelessness. As a result of defendant's breach and negligence plaintiff had to pay penalties on the taxes due, as the filing of the returns was late.

In further reliance on defendant's representations, plaintiff entered into a written contract on January 27, 1945, for similar services for the tax returns for 1944. The breach of the contract by defendant was the same and the same type of damages followed.

In January, 1947, the U. S. Treasury Department notified defendant that certain deductions on the federal taxes were disallowed and that a 25% penalty for late filing should be assessed. Defendant notified plaintiff of the former but not the latter, which he concealed from plaintiff. Defendant without plaintiff's knowledge protested the federal officers' action. Proceedings were had and defendant's protests denied on July 18, 1947, and a further hearing was requested, all of which was concealed from plaintiff until March 15, 1948, when defendant told plaintiff that the further hearing would be had and it then learned the facts. Plaintiff thereafter arrived at a settlement with the federal officials in which plaintiff paid 50% of the penalties, all to plaintiff's damage in the amount paid.

Finally, it was found that none of plaintiff's causes of action were barred by section 339 of the Code of Civil Procedure or any other statute of limitation but if they were the statute was tolled by defendant's concealment and representations that he had done all the things required.

Judgment was accordingly entered for the damages suffered.

Defendant contends that plaintiff's action, as stated in its complaint, was one in tort malpractice of an account and not in contract, and later during the trial it shifted its position to a contract theory to defendant's grave prejudice in that he did not make contract action defenses and was not prepared to meet a contract action; that judgment should be ordered entered for him because there was no evidence (expert testimony) of negligence and the action based on tort liability was barred by the statute of limitation, Code of Civil Procedure, section 339(1).

The complaint charges in the first count the representation by defendant of his ability to handle plaintiff's tax problems; it 'specially employed' defendant to prepare and file its 1943 tax returns; defendant negligently failed to file them in time; as a proximate result of the negligence and failure plaintiff was damaged in a named sum. The second count contains the same allegations with regard to the state franchise tax returns, the third and fourth as to the taxes for 1944. In his answer defendant alleges that plaintiff employed him but that it was understood that the returns could not be prepared and filed because of the lack of time. He pleaded section 339(1) of the Code of Civil Procedure, which provides a two year limitation for commencing an action upon contract, obligation or liability not founded upon a written instrument which may well indicate that he was assuming that the 'special employment' was an oral not a written contract as well as that the action was one for negligence, in tort, a liability not founded on a writing where the injury is to other than person or property. He also alleged that the fault for the late filing was plaintiff's not his. Defendant did not demur to the complaint to have it clarified as to whether reliance was had upon negligence or contract or if the latter, whether it was written or oral.

Contrary to defendant's contention, the complaint, for the purpose of determining whether defendant was misled, may be construed to indicate an action in contract as well as in tort. The essential factors of the former are present. A special employment was alleged which points to a contract as an employment relation is a contractual one. It is alleged that defendant was employed to prepare and file specific tax returns which were due at a specified date and that he 'negligently' failed to file them in time, which would be a breach of the contract of employment. The description of the failure as negligent does not prevent the complaint from conveying to defendant the idea that he failed to do what he had promised. These allegations were sufficient to apprize him of what he had to meet, and whether or not he had made an employment contract with plaintiff and if so the terms thereof, were within his knowledge. He made no effort by demurrer to have the complaint clarified.

The indication of a contract action was carried into the trial. On the taking of the deposition before trial by defendant of plaintiff's president, Olson, its counsel said, in the course of discussion, we are proceeding under an action against defendant for alleged negligence in performing his professional services, but at the beginning of the trial defendant's counsel first made an opening statement in which he said contracts were made between plaintiff and defendant to prepare the returns. He also said that the complaint was for negligence and that section 339(1) (above mentioned) barred the action. In reply, plaintiff's counsel referred expressly to the written contracts (referred to in the findings) and said: 'I might just as well dispose of the position of this defendant in this action that this comes under Section 339 of the Code of Civil Procedure, for the reason that it does not, and if counsel believes so, then he has entirely misconceived the whole theory of this action; and if he had demurred to the complaint on the ground that the complaint doesn't allege whether the contract of the employment is in writing or is oral he would then have been advised, because the contract is in writing, and our position is that this action therefore is not barred by Section 339 of the Code of Civil Procedure but comes under the provisions of Section 337, which is an action upon a contract obligation or liability founded upon an instrument in writing, and with respect thereto, the four-year period of limitation becomes applicable. * * * I believe it could be said that his breach of his written employment contract occurred on June 15, 1944.' Defendant made no protest to those statements, nor did he at any time request a continuance to prepare to meet a contract action; he did not ask leave to amend his answer to meet a contract action until later, as will hereafter appear. Thereafter the first witness called was defendant under section 2055 of the Code of Civil Procedure, and the written contracts were introduced without objection. On repeated occasions during the presentation of plaintiff's case his counsel's statement that the action was for breach of contract was not challenged by defendant.

Defendant moved for a nonsuit on the grounds that the action was barred by section 339(1) of the Code of Civil Procedure, asserting that the action was one for negligence and that there was no evidence of negligence because there was no expert testimony as in a malpractice case. Plaintiff opposed the motion on the ground that the action was based upon breach of a written contract. Defendant then asked leave to amend his answer to plead section 337(1) of the Code of Civil Procedure (four year limitation on actions to recover on a written contract) as a defense. The court denied the request on the ground that it was not...