R. J. Cardinal Co. v. Ritchie

• Decision Date: 11 July 1963
• Citation: 218 Cal.App.2d 124,32 Cal.Rptr. 545
• Court: California Court of Appeals Court of Appeals
• Parties: R. J. CARDINAL COMPANY, a corporation, Plaintiff and Respondent, v. Jess M. RITCHIE and Pioneers, Inc., a corporation, Defendants and Appellants. Civ. 20686.

Page 545

32 Cal.Rptr. 545

218 Cal.App.2d 124

R. J. CARDINAL COMPANY, a corporation, Plaintiff and Respondent, v. Jess M. RITCHIE and Pioneers, Inc., a corporation, Defendants and Appellants.

Civ. 20686.

District Court of Appeal, First District, Division 1, California.

July 11, 1963.

Hannon & Hannon, Castro Valley, for appellants.

Broad, Busterud & Khourie, San Francisco, for respondent.

SULLIVAN, Justice.

In this action brought by a third-party creditor beneficiary to recover for goods sold and labor and materials furnished, defendants Jess M. Ritchie (hereafter called Ritchie) and Pioneers, Inc. (hereafter called Pioneers) appeal from a judgment entered on a jury verdict against said defendants and in favor of plaintiff R. J. Cardinal Company (hereafter called Cardinal).

Plaintiff's second amended complaint on which the action proceeded to trial set forth four separately stated causes of action. The first three causes of action were brought against the defendant Battery AD-X2 Sales Corporation (hereafter called Sales) for the recovery $14,612.92 on the bases of a book account and an account stated and in addition for the recovery of certain storage charges. The fourth cause of action was brought against Ritchie and Pioneers. It incorporated by reference the first three causes of action against Sales and sought recovery of the same amounts therein alleged on the basis of an oral promise to pay such indebtedness, allegedly made to Sales by Ritchie and Pioneers for the benefit of Cardinal.

We observe at the outset that the case proceeded to trial only against defendants Ritchie and Pioneers. The pretrial conference order states: 'This is essentially an action by an alleged third party beneficiary. It is conceded that this is 'essentially so' because although the action nominally is against (1) Battery AD-X2 Sales Corporation, Jess M. Ritchie, and Pioneers, Inc., a corporation, actually the defendant, Battery AD-X2 Sales Corporation, has no defense and concedes that it had none at the pre-trial conference. However, plaintiff's real cause, that is, the one in which it is actually interested, is against the other two defendants.' ¹ Hence at the conclusion of the trial, the verdict of the jury and the judgment entered thereon were confined to the two defendants above-mentioned. The instant record does not contain the entry of the default of Sales or the default judgment against Sales. We therefore confine ourselves to the issues as framed by the answer of Ritchie and Pioneers and as delineated by the pretrial conference order, itself confined to such two defendants. ²

Plaintiff's second amended complaint alleged among other things that one Edward N. Hermsen entered into a written franchise agreement with Pioneers; that said agreement was duly assigned to Sales; that said agreement provided that 'in the event of a breach of contract by the franchisees' Sales and Hermsen, defendant Pioneers 'had the right, upon sixty days written notice first given, to cancel and terminate the said franchise agreement'; that on or about February 28, 1959, defendants Pioneers and Ritchie 'each orally agreed and promised' Sales, among other things, 'to pay the above indebtedness to plaintiff in the amount of $14,612.92 within thirty days after February 28, 1959,' in exchange for Sales' and Hermsen's promise and agreement to forego the 60-day cancellation notice and allow Pioneers and Ritchie to immediately take over the said exclusive sales and distribution rights granted by said franchise; that thereupon Sales and Hermsen, in reliance upon said promise and agreement, waived such right to said 60-day cancellation notice and returned to Pioneers and Ritchie the rights given by the written franchise agreement; and that there was no rescission or termination of such oral contract.

Defendants denied the material allegations of all four causes of action. In addition they alleged, among other things, that the oral (third-party beneficiary) agreement, if any, was without consideration and had been terminated and rescinded.

Pioneers was the owner of a secret formula for a battery additive and was engaged in the business of manufacturing and marketing such product under the copyrighted and trade-marked name of 'Battery AD-X2.' Ritchie was the president and director of Pioneers. He and his wife owned 87 percent of its stock. On July 15, 1958, Pioneers entered into a written agreement with Hermsen entitled and hereafter referred to as 'National Sales Agreement' by the terms of which Pioneers appointed Hermsen the exclusive national sales agent for Battery AD-X2 within the continental United States and its territories for a period of ten years. On November 20, 1958, with the consent of Pioneers, Hermsen assigned the above agreement to Sales in consideration, among others, of the issuance to him of the capital stock of Sales. Hermsen became president of the new corporation.

As a result, Sales became the sole customer of Pioneers and in turn distributed the product involved to all of Pioneers' sales outlets throughout the designated territory. As part of this contract, Sales sold franchises for the additive in particular areas. Under these arrangements, the monetary consideration paid by the franchise purchaser included not only the franchise but promotional literature and a specified amount of the additive. Sales employed one Blackiston to handle all of its advertising for the battery additive, including the designing and printing of advertising and promotional material. In discharge of these duties Blackiston acting on behalf of Sales placed various orders for printing with the plaintiff. The orders were separately invoiced over the period November 28, 1958, to February 27, 1959. On the last date plaintiff sent to Sales a statement itemizing the various invoices and showing a total indebtedness due it from Sales in the sum of $14,612.94.

The contract of July 15, 1958, contained, among other things, provisions obligating Sales to purchase all of its requirements of the battery additive from Pioneers and specifying minimum monthly quotas of purchases. In addition it incuded the following so-called cancellation clause: 'Failure by SALES to maintain the above specified monthly quotas shall be considered as just cause for Pioneers to either revise the terms of this agreement or terminate it at their option upon 60 days written notice to SALES. This agreement may also be terminated by the parties by mutual consent or for cause.'

Towards the end of 1958 and at the beginning of 1959, difficulties developed between the parties which, as we shall point out, made the above cancellation clause extremely important. The accounts of these preliminary skirmishes vary. According to Hermsen, he heard from Ritchie constantly about the performance of the sales contract. According to Ritchie, he presented certain complaints to Hermsen and suggested that the latter make certain changes in the personnel of Sales. According to William Klein, attorney for Hermsen, the parties and their respective associates 'had quite a number of talks at different times' about the agreement, especially after Ritchie indicated that he wanted to terminate it. There is evidence that Ritchie objected to the employment of one Ellis as the operating manager of Sales. Finally, at Ritchie's request, the parties held a meeting at Mr. Klein's office. The purpose of the meeting, as Klein put it, was to determine some way of terminating the July 15, 1958 sales agreement immediately without waiting the 60 days allegedly required by the cancellation clause of the contract.

This meeting took place on February 28, 1959, a Saturday. It was attended by Mr. and Mrs. Ritchie, one Hager, the vice-president of Pioneers, Mr. and Mrs. Hermsen, and Mr. Klein, their attorney. The testimony of the above persons as to what transpired at the meeting was in substantial conflict.

Hermsen called by the plaintiff under Code of Civil Procedure section 2055 (since he was president of the defendant Sales) testified as follows: Ritchie handed him a letter dated February 27, 1959, addressed to Hermsen and signed by Ritchie as president of Pioneers. This letter introduced in evidence by plaintiff stated in substance that Sales had failed to perform its agreement with Pioneers, that statements made by its representatives were embarrassing to Pioneers and that '[t]herefore, the National Sales Agreement, dated July 15, 1958, between Pioneers, Inc. and Edward N. Hermsen, at times referred to as 'Sales', is terminated as of midnight, Monday March 2, 1959, on the following grounds: 1. Failure to perform 2. For cause.' Ritchie said that he wanted to cancel the contract and wanted nothing more to do with Sales because he was 'fed up with' Ellis. Hermsen was unwilling to cancel the agreement because Sales had a 60-day cancellation clause in the contract, the business outlook was good and Sales was beginning to make money. In addition Hermsen told Ritchie that Sales had liabilities of approximately $40,000 including $14,000 owned to Cardinal. He had been inactive in Sales because of a stroke suffered in September 1958 but offered to resume management of Sales and demote Ellis. Ritchie would not accept this solution but, according to Hermsen, offered the following proposition: 'that if we would give up the contract and the operation of the company, that he would take over all assets and liabilities of the company'; that if Hermsen agreed to cancel the contract immediately, Ritchie would organize a new corporation in which Hermsen and Ritchie would each own five percent of the capital stock. Hermsen testified that he 'made the decision myself to go ahead and do this * * * and I put that understanding on paper, and sent a copy of it, sent the letter to Mr. Ritchie.' However it is not disputed that the agreement claimed to have been reached by the parties was never reduced to writing.

Mr. Klein, attorney for...