Opinion
NOT TO BE PUBLISHED IN OFFICIAL REPORTS
APPEAL from a judgment of the Superior Court of San Bernardino CountySuper. Ct. No. SCV21882, Craig S. Kamansky and Michael Smith, Judges. Affirmed.
BENKE, Acting P. J.
In the first half of the last century the federal government agreed to finance construction of the All-American Canal, which, in separate branches, brings water from the Colorado River to the Imperial Valley and the Coachella Valley. However, the federal government's financing commitment was in important respects contingent upon the ability of the two parties in this case, appellant Imperial Irrigation District (Imperial) and respondent Coachella Valley Water District (Coachella), to either merge or come to an agreement with respect to operation of the canal and distribution of Colorado River water and electrical power that would be produced by the canal.
In 1934, in order to obtain federal financing of the canal, Imperial and Coachella entered into an Agreement of Compromise (Compromise Agreement). The Compromise Agreement resolved then-pending litigation by which Coachella challenged Imperial's ability to enter into a separate agreement with the federal government. Under the Compromise Agreement, Coachella dismissed its challenge to the agreement Imperial wished to make with the federal government. The Compromise Agreement also established distribution and priority rights in water from the Colorado River.
Pertinent to the instant appeal, Imperial and Coachella also made an agreement with respect to electrical power. Imperial and Coachella agreed Imperial would control the generation and sale of electrical power produced by the canal. Under the Compromise Agreement, Imperial agreed that at some point in the future it would enter into a separate lease of Coachella's right to provide electrical power within Coachella's territory and that in return under the terms of the expected lease Imperial would pay Coachella eight percent of the net proceeds from the canal's power facilities.
To date Imperial and Coachella have not executed the separate lease contemplated by the Compromise Agreement. Instead, when the canal started producing electricity, Imperial provided Coachella with an annual statement of the net proceeds produced by its power facilities and a remittance of eight percent of the proceeds Imperial reported. In making its annual payments, Imperial expressly acknowledged that its payments to Coachella were subject to the provisions of a lease which the parties expected to execute. Each year, Coachella accepted payment from Imperial subject to the terms of the expected lease. Over the course of the years, Coachella regularly submitted Imperial's statements to review by an outside auditor, who would from time to time bring to Coachella's attention issues it believed Coachella needed to resolve at the time it negotiated the terms of the formal lease. Coachella expressly objected to certain accounting methods Imperial employed which significantly reduced the amount of net proceeds attributable to Imperial's power facilities, including Imperial's use of discretionary reserves and interest deductions on prior years net proceeds.
In the 1980's and early 1990's Coachella's general manager contacted Imperial in an effort to finalize a lease. This effort was unsuccessful and in 1994 Imperial sent Coachella a letter in which it took the position that it consistently overpaid Coachella. In response, Coachella filed a complaint against Imperial in which it alleged Imperial consistently underpaid it amounts due under the Compromise Agreement. Imperial in turn filed an answer and cross-complaint against Coachella, alleging, among other matters, that it had overpaid Coachella.
Trial of the districts' competing claims was conducted in three phases. In the first phase the trial court determined Coachella's claims were not barred by the statute of limitations. In the second phase the trial court rejected Coachella's contention that the Compromise Agreement required Imperial calculate net proceeds using an accrual method consistent with Generally Accepted Accounting Procedures (GAAP) promulgated by the Financial Accounting Standards Board (FASB). However, the trial court did find Imperial should not have used the particular accounting procedures to which Coachella objected. In the final phase the trial court calculated the amount due Coachella under the accounting procedures it found were required under the circumstances and entered judgment in Coachella's favor in the amount of $16.96 million.
Imperial appeals from the judgment and Coachella filed a cross-appeal. We reject Imperial's contentions. The record is clear Imperial's payments were provisional and subject to later dispute; hence the statute of limitations did not commence running with respect to the payments and Coachella was not otherwise barred from making a claim for further payments. The record is also clear that under the Compromise Agreement and the parties' course of conduct the parties did not intend to give Imperial the right to use the accounting methods to which Coachella objected.
We also reject Coachella's arguments on appeal. Although by way of a fully executed lease the parties may have agreed to accrual accounting, nothing on the face of the Compromise Agreement required they do so. Indeed, in the nearly 50 years which passed before this litigation was commenced, although Coachella raised a number of objections to Imperial's accounting methods, Coachella never asserted that strict accrual accounting was required by the Compromise Agreement. Thus the trial court properly concluded that by way of its course of conduct Coachella impliedly agreed accrual accounting was not required.
FACTUAL BACKGROUND
1. Section 17 of the Compromise Agreement
The Compromise Agreement which is at the heart of this dispute was entered into by Imperial and Coachella on February 14, 1934. In pertinent part, the Compromise Agreement provided:
"Sec. 17. As a compromise and settlement of the controversy existing between the parties hereto as to all power possibilities, power rights, power resources and power privileges upon the whole of said All-American Canal in both Imperial and Riverside Counties, now or hereafter held, owned, or possessed by said parties, or either of them, including all those at or near Pilot Knob, which said power possibilities, power rights, power resources and power privileges are hereinafter styled 'power rights', and to combine and co-ordinate all of said power rights as a unified project so as to produce the maximum benefits to the parties hereto and to the United States, it is agreed that the parties hereto will, within a reasonable time after the execution of said Coachella Contract, execute a good and sufficient lease agreement, wherein Coachella District shall demise to Imperial District all of said Power rights which the Coachella District may now have or hereafter have or hereafter obtain. Said lease, among other reasonable provisions, shall provide: "[¶] . . . [¶]
"(b) That said lease shall vest in Imperial District the entire and exclusive operation, management, development and control of all said power rights and the use, sale and control of power produced therefrom;
"(c) That subject to the conditions hereinafter contained, Imperial District shall pay, on March first of each year, as rental for said demised power rights, eight per cent of the net proceeds, as defined in sub-section (f) hereof, received by Imperial District during the preceding calendar year from all said power rights held, owned or possessed by both parties hereto and from all power works and power facilities by or in connection with which Imperial District utilizes said power rights; "[¶] . . . [¶]
"(f) That in determining said net proceeds, as between the parties hereto, there shall be taken into consideration all items of cost of production and disposal of power, including, but not necessarily limited to amortization of and interest on capital investment for power purposes, improvements, operation and maintenance, and depreciation, and any other proper factor of cost not herein expressly enumerated;
"(g) That the determination of said net proceeds for the purpose of ascertaining rentals payable under said lease shall be made without reference to the fact that as to Imperial District said rentals will constitute a part of the cost of doing business;
"(h) That on March first of each year Imperial District shall furnish to Coachella District a statement of account showing the computation of said rental;
"(i) That Coachella District shall not be required to contribute in any manner to the cost of construction, operation or maintenance of any power works or facilities on or in connection with the All-American Canal, except indirectly, as said items may be taken into consideration in determining rentals to be paid under said lease; "[¶] . . . [¶]
"(s) That the waiver of a breach of any of the provisions of said lease shall not be deemed to be a waiver of any other provision thereof or of a subsequent breach of such provision."
2. Payments Under Section 17
Following execution of the Compromise Agreement, the federal government commenced construction of the All-American Canal, which in a series of stages was completed in the 1950's. However, the canal began producing hydro-electric power in 1941.
As we have indicated, Imperial and Coachella never entered into the lease contemplated by section 17 of the Compromise Agreement. Nonetheless, beginning in 1946 and each year thereafter Imperial provided Coachella with a net proceeds statement and a check in the amount of eight percent of its determination of net proceeds. Imperial's letters transmitting the annual checks invariably contained a statement in substantially the following form: "In accordance with the terms of the proposed lease of power rights between your District and Imperial Irrigation District provided for in our Agreement of Compromise, we are enclosing our statement of net proceeds from operations of this District's power system . . . ."
In response to the first check it received, in February 1946, Coachella sent Imperial a letter which in part stated: "This check is received subject to adjustment, should an adjustment appear to be necessary upon investigation." Coachella further stated: "This District has in mind to make such investigation of your records as may be necessary to justify a conclusion whether or not the check is in the correct amount. The [accountants] whom we have in mind to do this work will probably not be able to commence it for about thirty days, but will get at and complete the investigation as promptly as possible." Finally, with respect to the lease contemplated in the Compromise Agreement, Coachella stated: "This District has had under active consideration the drafting of the form of power lease required by the agreement of compromise between the two Districts, dated February 14, 1934, and hopes to be able to bring this lease to the point of execution within the near future."
In preparing a financial statement for the period ending December 31, 1946, Imperial's outside auditors included the following statement: "In an agreement of compromise between Imperial Irrigation District and Coachella Valley County Water District dated February 14, 1934, a lease was to be drawn providing for payment of a portion of the net revenues of the Irrigation District from its power operation to the Coachella Valley County Water District for the lease of its share of the power rights on the All-American Canal. A proposed lease which provides for payment of 8 per cent of the net proceeds is in the process of negotiation between the two organizations."
In a separate paragraph of the financial statement, the auditors included the following statement: "The correct amount of the liability to the Coachella Valley County Water District is not definite until such time as the lease agreement is signed, but all amounts tentatively agreed upon have been included in the operating expenses and in the liabilities of the District."
Thereafter, Imperial's financial statements either repeated these descriptions of the prospective lease and the tentative nature of payments Imperial made to Coachella or provided descriptions with substantially the same import.
Beginning in 1947 Coachella's accountants performed an audit of the previous two years of Imperial's rental payments. In their first audit, Coachella's accountants, like Imperial's, noted the parties had not executed the contemplated lease and were operating under terms of section 17 until the lease was "worked out." Coachella's accountants found Imperial's payment was consistent with Imperial's interpretation of section 17, by which it calculated net proceeds on a cash basis and made deductions for "amounts appropriated into special reserve funds either because of bond indenture provisions or because of a policy formulated by the management."
In their initial 1947 report, Coachella's accountants made a number of specific recommendations with respect to the prospective lease, including the need for a more explicit definition of the term "net proceeds." According to Coachella's accountants, the lease needed to provide a definition of net proceeds which dealt with the following issues:
"(1) Nature of items to be included in income and whether such items should be included on a cash or accrual basis.
"(2) Treatment of interdepartment and/or intercompany transactions including sales, other income, joint expenses, and other items. Also rates at which energy is to be sold.
"(3) Nature of items to be deducted as operating and other expenses.
"(4) Treatment of expenditures for additions and betterments to electric plant and other property.
"(5) Basis of deductions, if any, for retirement of bonds or other indebtedness or payments into reserve funds therefor.
"(6) Basis of deductions, if any, for funds set aside for reserves for amortization and interest, replacements and other contingencies, operation and maintenance expenses, and other purposes.
"(7) Deductions for interest on bonds and other indebtedness.
"(8) Treatment of investment in inventories of material and supplies.
"(9) Treatment of accounts receivable, deferred charges and other assets.
"(10) Deductions for depreciation and amortization of investment in electric plant and other properties."
In addition to their concerns with the definition of net proceeds, the accountants advised Coachella that a lease should address the division of proceeds derived from any future expansion of Imperial's power distribution network, the treatment of deficits, Coachella's equity in the assets of the power system, and consistency with Coachella's 1934 contract with the federal government.
Coachella did not raise the foregoing issues with Imperial following receipt of its accountant's first audit. However, over the years, Coachella did raise specific issues with Imperial when they were brought to Coachella's attention by its accountants. For instance, in 1956, based on an audit of the rental payments Imperial made in 1954 and 1955, Coachella objected to Imperial's deduction from net proceeds amounts which Imperial, in its discretion, placed in reserve accounts. Although Imperial had made such deductions for reserves since 1946, Coachella had not previously objected to the practice.
In 1956 Coachella also objected to Imperial's practice, initiated in 1953, of deducting from net proceeds interest Imperial earned on funds generated by its power operations and which it retained after paying rent due Coachella.
In response to Coachella's objections, Imperial suggested their disputes be resolved by way of negotiation of the lease called for in section 17. Imperial stated: "It appears to us now that it might be desirable to hold conferences between the two districts for the purpose of discussing the items raised in your letter, and possibly for the purpose of making a record agreement on the said items by completing the lease contemplated in the Agreement of Compromise." Although no such negotiation occurred, in 1958 Imperial's accountant again noted Coachella's objections.
In 1993 Imperial began deducting what it described as a "falling water" charge from its calculation of the net proceeds produced by its power operations. Imperial reasoned the water-producing portion of its operations, and hence its water customers, should recoup from the power-producing operations the revenue that would be earned if the power the water produced could be sold on the open market to third parties rather than to customers of Imperial and Coachella. For the period from 1993 though 1999, the "falling water" charge was almost twice as large as the cost of operating and maintaining the All-American Canal. Needless to say, Coachella objected to the "falling water" charge.
Although not directly relevant to the issues raised on appeal, as background it is worth noting that both Imperial and Coachella owed the federal Bureau of Reclamation for the construction of the canal and beginning in 1955 Imperial met its obligation to Coachella by paying amounts due under the Compromise Agreement to the Bureau of Reclamation.
3. Lease Negotiations
Imperial's auditors consistently reported that Coachella only accepted payments tentatively and subject to resolution of its specific objections by way of negotiation of a lease. Indeed, in 1973 Imperial's accountant sent Imperial a letter which in pertinent part stated: "You have asked us to outline our thoughts regarding the District's position in respect to the power agreement with the Coachella Valley County Water District. Our discussion presents the facts as we understand them from our audit experience over the years as well as some of our conclusions."
However, no sustained effort to negotiate the terms of a lease were attempted by the parties until 1986, when Coachella employed a new general manager. Coachella's general manager opened negotiations with Imperial's general manager and the negotiations continued until October 1994, when Imperial sent Coachella a letter in which Imperial asserted that it never should have paid Coachella any rent under the Compromise Agreement. According to Imperial, under the terms of its agreement with the federal Bureau of Reclamation, Imperial was required to "place all revenues in excess of expenses in reserve to meet ongoing and future requirements to provide continued service to its customers. . . . [¶]Therefore, our payments that been made from net power proceeds have been incorrectly calculated. The correct use of this formula over the years would not have resulted in any net proceeds. Coachella has been overpaid to the extent of all funds paid to Coachella or to the United States for Coachella's account."
In addition to its argument that all of its excess revenue should have been paid into reserves, Imperial argued that it erroneously paid Coachella eight percent of the revenue from its entire electrical system rather than from the more limited revenue generated by the All-American Canal.
PROCEDURAL HISTORY
In response to Imperial's letter, Coachella filed a complaint alleging causes of action for declaratory relief, an accounting, breach of contract, debt on a book account, and breach of fiduciary duty. Imperial denied the material allegations of the complaint and filed a cross-complaint in which it sought a declaratory judgment requiring that in the future any rent calculation be based solely on power revenue produced by the All-American Canal. By way of an amended answer, Imperial alleged an offset for any amount it overpaid Coachella.
During the course of discovery, Coachella's accountants produced for Imperial, among other documents, two memoranda Coachella's attorneys wrote in 1980. One of the memoranda warned Coachella that "a cause of action [on Imperial's] computation of annual income would appear to accrue annually." When Coachella recognized the memoranda was produced to Imperial, Coachella moved to recover the documents on the grounds they were inadvertently produced and Coachella did not waive the attorney-client privilege. The trial court granted the motion and ordered Imperial to return all copies of the documents to Coachella.
As we have indicated, the trial court tried the parties' claims in three phases. In the first phase, the court tried Imperial's statute of limitations defense; in the second phase, the court tried the merits of the parties' contentions with respect to the accounting required under the provisions of the Compromise Agreement; and in the third phase, the trial court determined the amount of damages owed under the court's accounting findings.
In the first phase, the trial court found that in light of Imperial's own treatment of its rental payments to Coachella, the statute of limitations did not commence running on any of Coachella's claims until at least November 1994, when Imperial sent its letter to Coachella disclaiming any obligation to pay Coachella rent. In the second phase a different trial judge determined Imperial's deductions for reserves, interest on retained revenue, and falling water were not permissible under the Compromise Agreement. The trial court also found Imperial improperly deducted the cost of a settlement with Salton Sea property owners for damage caused solely by negligent operation of Imperial's water facilities. The trial court rejected Coachella's contention that Imperial was required to calculate net proceeds on an accrual basis. In the third phase, the trial court found Imperial owed Coachella $16.96 million and entered judgment in that amount in Coachella's favor. Imperial filed a timely notice of appeal and Coachella filed a cross-appeal.
Following the trial, Coachella moved under Code of Civil Procedure section 2033, subdivision (o), to recover the cost of proving four issues which were the subject of requests for admission Coachella propounded to Imperial and which Imperial denied. The trial court granted the motion with respect to one of the issues, Coachella's contention that it in fact gave up the right to sell electric power within its own territorial boundaries, and awarded Coachella $207,388.48. Imperial filed a notice of appeal from the order awarding the costs. We consolidated the appeals.
I
Imperial's Appeal
A. Statute of Limitations
We turn first to Imperial's contention that in rejecting its statute of limitations defense, the trial court erred.
1. Standard of Review
The parties agree the evidence presented with respect to Imperial's statute of limitations defense was undisputed and suggest that, in light of that circumstance, we review the trial court statute of limitations findings de novo. (See Armstrong Petroleum Corp. v. Tri-Valley Oil & Gas Co. (2004) 116 Cal.App.4th 1375, 1388.) In light of the parties' agreement and because commencement of the statute turns on an interpretation of the Compromise Agreement and Imperial's later financial statements, we will treat the trial court's findings as an interpretation of a contract or other writing. Where, as here, such an interpretation is based on undisputed extrinsic evidence, de novo review is warranted. (See City of El Cajon v. El Cajon Police Officers' Assn. (1996) 49 Cal.App.4th 64, 71.)
2. Trial Court Ruling
In rejecting Imperial's statute of limitations defense, the trial court found that in entering into the Compromise Agreement, Imperial and Coachella established a joint venture and the parties therefore had a fiduciary relationship. The trial court further found Coachella's claims against Imperial did not accrue until October 1994, when Imperial's manager sent Coachella's manager the letter claiming Imperial in fact overpaid Coachella. According to the trial court, Coachella's claims did not accrue until 1994 because "the annual payments of net proceeeds were subject to readjustment until outstanding issues were resolved in a separate lease, which never came about." Importantly, the trial court found Imperial had an affirmative duty to alert Coachella if it did not intend to enter into the contemplated lease. The court found in light of Imperial's audits and annual reports, and its conduct, Coachella did not know until 1994 that Imperial would not enter into a separate lease.
We agree with the reasoning of the trial court. The parties' performance demonstrates they agreed to resolve any disputes which arose over Imperial's payments when they negotiated the lease contemplated in paragraph 17. As we explain more fully below, the trial court's reasoning is supported not only by the record but by well-established principles governing executory contracts and the accrual of the statute of limitations.
3. Executory Contracts and Agreements to Negotiate
For purposes of determining when the statute of limitations commenced running on Coachella's claims, we begin by determining the fundamental nature of the obligations set forth in section 17 of the Compromise Agreement. As we explain, those obligations were, at the time the parties entered into the Compromise Agreement, executory as opposed to executed.
"The distinction between an executed and executory contract is defined in Civil Code section 1661 as follows: 'An executed contract is one, the object of which is fully performed. All others are executory.' 'In an executory contract some act remains to be done, while in an executed contract everything is completed at the time of the agreement without any outstanding promise calling for fulfillment by the further act of either party.' [Citations.]" (Branche v. Hetzel (1966) 241 Cal.App.2d 801, 807; see also In re Alexander (1982) 670 F.2d 885, 887 [an executory contract is one under which the obligations of both parties "'are so far underperformed that the failure of either to complete the performance would constitute a material breach excusing the performance of the other]'".)
Section 17 of the Compromise Agreement was executory. As we have seen, it required that Imperial and Coachella negotiate the precise terms of a lease. Contrary to Imperial's suggestion, this was not an illusory and unenforceable "agreement to agree," but instead was an entirely enforceable promise to negotiate in good faith. (See Copeland v. Baskin Robbins U.S.A. (2002) 96 Cal.App.4th 1251, 1259 (Copeland).)
In Copeland the plaintiff and defendant agreed plaintiff would buy an ice-cream manufacturing plant from defendant for an agreed amount and further that defendant would agree to buy a substantial amount of ice-cream from the plant under the terms of an agreement the parties would negotiate. After lengthy negotiations, the defendant sent the plaintiff a letter stating it no longer wanted to enter into an agreement requiring it purchase ice cream from the plant. The plaintiff then sued the defendant for breach of the promise to negotiate. The court rejected the defendant's argument that the agreement to negotiate was illusory. "Most jurisdictions which have considered the question have concluded a cause of action will lie for breach of a contract to negotiate the terms of an agreement. [Channel Home Centers, Grace Retail v. Grossman (3d Cir. 1986) 795 F.2d 291, 293-294, 299; see also Venture Associates v. Zenith Data Systems (7th Cir. 1993) 987 F.2d 429, 433 [applying Illinois law]; Am. Broadcasting Companies v. Wolf (1981) 52 N.Y.2d 394 [438 N.Y.S.2d 482, 484, 420 N.E.2d 363, 365]; Itek Corporation v. Chicago Aerial Industries, Inc., supra, 248 A.2d at page 629.]
"The Channel Home Centers case is illustrative. There the parties executed a letter of intent to enter into the lease of a store in a shopping center. The letter stated, inter alia, Grossman the lessor '"will withdraw the Store from the rental market, and only negotiate the above described leasing transaction to completion."' After Channel Home Centers expended approximately $25,000 in activities associated with the negotiations, Grossman unilaterally terminated negotiations. The following day Grossman leased the store to one of Channel Home Centers' competitors, Mr. Good Buys. Channel Home Centers sued Grossman for breach of contract based on the letter of intent. After a court trial, the court awarded judgment to Grossman. The Third Circuit Court of Appeals reversed. Distinguishing this case from one alleging merely the breach of an agreement to agree the court pointed out: '[I]t is Channel's position that [the letter of intent] is enforceable as a mutually binding obligation to negotiate in good faith. By unilaterally terminating negotiations with Channel and precipitously entering into a lease agreement with Mr. Good Buys, Channel argues, Grossman acted in bad faith and breached his promise to "withdraw the Store from the rental market and only negotiate the above-described leasing transaction to completion."' The court concluded under Pennsylvania law an agreement to negotiate in good faith is an enforceable contract." (Copeland, supra, 96 Cal.App.4th at p. 1259, fns. omitted.)
For a host of reasons which are plainly applicable here, the Copeland court found that as a practical matter the law was required to recognize and enforce agreements to negotiate. "[W]e believe there are sound public policy reasons for protecting parties to a business negotiation from bad faith practices by their negotiating partners. Gone are the days when our ancestors sat around a fire and bargained for the exchange of stone axes for bear hides. Today the stakes are much higher and negotiations are much more complex. Deals are rarely made in a single negotiating session. Rather, they are the product of a gradual process in which agreements are reached piecemeal on a variety of issues in a series of face-to-face meetings, telephone calls, e-mails and letters involving corporate officers, lawyers, bankers, accountants, architects, engineers and others. As Professor Farnsworth observes, contracts today are not formed by discrete offers, counteroffers and acceptances. Instead they result from a gradual flow of information between the parties followed by a series of compromises and tentative agreements on major points which are finally refined into contract terms. These slow contracts are not only time-consuming but costly. For these reasons, the parties should have some assurance 'their investments in time and money and effort will not be wiped out by the other party's foot dragging or change of heart or taking advantage of a vulnerable position created by the negotiation.'" (Copeland, supra, 96 Cal.App.4th at p. 1262, fns. omitted.)
In sum, then, section 17 of the Compromise Agreement created an enforceable agreement to negotiate, in the future, the terms of a lease of Coachella's right to provide electrical power within its territory. This agreement was enforceable and entirely executory.
4. Accrual of Cause of Action for Breach of Executory Contract
Where parties have entered into an executory contract, and do not abandon or rescind the contract upon a breach or successive breaches, the injured party may "wait until the time arrived for a complete performance by the other party and then bring an action for damages for such breaches. [Citation.]" (Union Sugar Co. v. Hollister Estate Co. (1935) 3 Cal.2d 740, 745-746 (Union Sugar).) The injured party is "not bound to treat the contract as abandoned on the first breach of it, or on any particular breach, but had his election to still rely on it, and the statute of limitations could not begin to run until it had made its election. [Citations.]" (Id. at p. 746.) In Union Sugar a landowner agreed to lease his land for one beet growing season to a farmer. Under the lease the farmer agreed to farm the land in a "'good and husband like manner and in accordance with the standards and customs in the vicinity.'" (Id. at p. 743.) The landowner asserted a claim against the farmer for specified breaches of the farming contract. By virtue of the relation back of cross-claims, the landowner's claim was asserted more than four years after the beet growing season started, but less than four years after the season ended. Because the claims were asserted within four years after the contract was to be completed, the claims were timely even though they may have been asserted more than four years after the first breach. (Id. at p. 745.)
In Aitken v. Hayward (1945) 68 Cal.App.2d 168 (Aitken) this principle−that the statute of limitations does not begin running on an executory contract until the time for performance has arisen−was applied in circumstances which are somewhat similar to the one we face. In Aitken the plaintiff and the defendant were brother and sister and legatees under their mother's will. The will gave specific items of jewelry and a promissory note to the sister and required that the remainder of the estate be divided so that, including the specific bequests, each sibling received property of equal value. The will named the sister as executrix of the estate. In light of the fact that there was no cash in the estate with which to pay the executrix her fees and the equality provision of the will required the specific bequests be valued, the brother and sister agreed in 1938 that the estate could be closed and the sister would pay the brother $1,410 subject "to such deductions for advances made by [sister] to take care of debts of said estate and costs of administration as may be mutually agreed upon . . . the adjustment between the parties hereto of such payments and advances to be made at the convenience of the parties hereto and not as a condition to immediate distribution of said estate . . . ." (Id. at p. 170.)
Because he was a captain in the merchant marine and wounded in the war, the brother made no demand for the adjustment and payment required under the agreement with his sister until 1943. In rejecting the sister's argument that the brother's claim was barred by the statute of limitations, the court stated: "There is no question but that the contract contemplated that a demand be made by one or both of the parties to institute further negotiations and that the time of performance under the contract was uncertain. . . . . [¶]'In cases where a demand is necessary before a cause of action arises, the statute of limitations does not begin to run until the demand is made. The demand, however, must be made within a reasonable time and a time coincident with the period of the statute of limitations will ordinarily be deemed to be reasonable; but "where delay in making the demand is expressly contemplated, even though the obligation is payable on demand, there is no rule of law that requires that demand shall be made within the statutory period for bringing an action." [Citations.] In Vickrey v. Maier [164 Cal. 384, 390, 391], the Supreme Court had under consideration a contract for the repurchase of stock "at any time after six months" and held that a delay of more than four years in making a demand after the lapse of the six months' period was not unreasonable. In our case the delay was somewhat longer, but the question of what was a reasonable time was primarily a question to be decided by the trial court and we cannot hold that the trial court's determination, that the option was exercised within such time as to entitle respondent to recover under the contract, was erroneous.' [Citations.]" (Aitken, supra, 68 Cal.App.2d at pp. 171-172.)
Here, there is no question but that section 17 of the Compromise Agreement contemplated one of the parties would demand negotiation of a lease and if the other party refused to negotiate, a breach would occur. Moreover, there is no question that, as in Aitken, the time for performance of the obligation to negotiate was uncertain.
Admittedly, the almost 40 years which passed between the initial 1946 payment and the initiation of negotiations by Coachella's general manager in 1986 would, considered on its own, be unreasonable. Indeed, had Imperial done nothing other than make payments for 40 years without objection or reservation by Coachella, a very persuasive argument could be made Coachella gave up its right to negotiation of a lease. However, the record shows Coachella did not simply receive payments from Imperial without objection or reservation. Rather, annually Imperial reiterated in its financial statements the fact that its payments to Coachella were tentative and subject to whatever lease terms the parties eventually settled upon. In doing so, Imperial annually reaffirmed its understanding that the passage of time, lengthy as it may have been, did not deprive either party of the right to negotiate a lease. This understanding was of course buttressed by Coachella's objections in 1956 to the reserves and interest Imperial deducted from net proceeds and Imperial's suggestion that Coachella's objections be resolved by way of negotiation of the lease. This understanding was reaffirmed yet again in 1973 by Imperial's own accountant and by the lengthy course of negotiations which occurred between 1986 and 1994. Given Imperial's repeated acknowledgment that the parties were obligated to negotiate a lease and that Coachella had only accepted payments tentatively, there is no basis upon which to find the obligation expired.
Moreover, we note Imperial's response to Coachella's 1956 objections to deductions for reserves and interest on retained funds not only buttressed the conclusion the parties understood the obligation to negotiate a lease was continuing, Imperial's response clearly gave rise to a subsidiary obligation to negotiate the specific matters Coachella raised. Of particular significance is the fact that rather than disputing and rejecting Coachella's specific objections on the merits, Imperial assured Coachella the matter could be resolved by way of further negotiations. Whether we characterize Imperial's obligations to Coachella as those of a joint venturer or as growing out of the covenant of good faith and fair dealing, Coachella could reasonably rely on Imperial's assurance that the obligations were subject to further negotiation. (See Alliance Mortgage Co. v. Rothwell (1995) 10 Cal.4th 1226, 1240; Wolf v. Superior Court (2003) 107 Cal.App.4th 25, 34.)
In sum, negotiation of a lease was an executory obligation of section 17 which was not breached at any time before Imperial sent Coachella its November 1994 letter disclaiming any duty to pay Coachella rent under the Compromise Agreement. More importantly, the same is true of the subsidiary obligation Imperial accepted during the course of its performance of the lease to resolve specific objections to its net proceeds calculation by way of negotiating a lease. Thus, Coachella's breach of contract and declaratory relief complaint, filed shortly after the November 1994 letter, was timely.
B. Remedies Available
Imperial argues Coachella's remedy for breach of the obligation to negotiate a lease is limited to the injury Coachella suffered in relying on Imperial's promise to negotiate a lease. We disagree.
In theory, instead of seeking payments under section 17 of the Compromise Agreement, Coachella could have sought a remedy predicated on the injury it suffered in relying on Imperial's promise to negotiate a lease. (See Copeland, supra, 96 Cal.App.4th at pp. 1262-1263.) "This measure encompasses the plaintiff's out-of-pocket costs in conducting the negotiations and may or may not include lost opportunity costs." (Id. at p. 1263, fns. omitted.) In this case the practical difficulties with this restitutionary approach−both for Coachella and Imperial−are substantial. Coachella's principle injury would be the incontrovertible fact that for more than 50 years it has allowed Imperial to use its power rights. As the trial court noted, Coachella "contributed its anticipated power possibilities to the venture thus removing itself as a potential competitor." Calculating the value of those rights over such a lengthy period of time would be, to say the least, challenging and arguably would expose Imperial to somewhat greater liability than the approach adopted by the trial court.
However, on this record we are not restricted to this restitutionary approach. We have the benefit of the parties' lengthy performance of their obligations. "The law is well settled that the construction of a contract as shown by the acts and conduct of the parties prior to the controversy as to its meaning, is entitled to great weight." (Riverside Water Co. v. Jurupa Ditch Co. (1960) 187 Cal.App.2d 538, 543.) "'. . . Parties to a contract have a right to place such an interpretation upon its terms as they see fit, even when such an interpretation is apparently contrary to the ordinary meaning of its provisions.' [¶]This rule of practical construction is predicated on the common sense concept that 'actions speak louder than words.' Words are frequently but an imperfect medium to convey thought and intention. When the parties to a contract perform under it and demonstrate by their conduct that they knew what they were talking about the courts should enforce that intent." (Crestview Cemetery Assn. v. Dieden (1960) 54 Cal.2d 744, 754; see also Riverside Water Co. v. Jurupa Ditch Co., supra, 187 Cal.App.2d at p. 543; Automobile Salesmen's Union v. Eastbay Motor Car Dealers, Inc. (1970) 10 Cal.App.3d 419, 424.)
Here, the parties' conduct over almost 50 years showed they believed the provisions of section 17 of the Compromise Agreement were, by themselves, definite enough to determine their rights. Indeed, in its brief Imperial accepts that as to the remaining term of the lease paragraph 17 is sufficiently certain to permit enforcement. Repeatedly, Imperial sent Coachella payments which it calculated on the basis of its interpretation of what the lease would provide; repeatedly, Coachella accepted many of those payments without objection. This conduct presents incontrovertible proof that the parties themselves believed the provisions of section 17 created enforceable rights.
Imperial's opening brief states: "Although Imperial contends the superior court erred in material respects, it can live with the resulting interpretation of section 17 as the districts' lease for the next 27 years. After 60 years of performance, little recommends a 'no contract' alternative that portends future protracted discord. Accordingly, Imperial does not argue in this brief that the judgment must be reversed because section 17 is too uncertain to support interpretation or accounting."
Moreover, as we have noted, where Coachella disagreed with Imperial's interpretation, it stated its objection; and in the case on reserves and interest, the parties agreed the objection would be resolved by way of negotiation of a lease. This method of handling the matters upon which the parties could not agree demonstrated repeated confidence on both sides there was an objective means of resolving their differences, to wit: the provisions of section 17.
Our conclusion that by way of their conduct the parties agreed that section 17 was definite enough itself to create enforceable rights and further that any disagreement would be resolved by reference to section 17 is supported by two additional circumstances. First, given the large stakes involved−Imperial's potential liability for millions of dollars in additional rent and Coachella's right to provide power to its customers−it would not have been prudent or likely that either public agency would leave resolution of these rights entirely to acquiescence on the part of the other agency.
Secondly, we note that section 17 does in fact provide a list of 19 fairly specific conditions which the prospective lease was in fact required to contain. Thus in this regard, unlike the agreement to negotiate considered in Copeland, supra, 96 Cal.App.4th at pages 1262-1263, here there is in fact a fairly detailed means of determining what the terms of a lease would provide.
In sum then, the parties' course of conduct convinces us they allowed important issues to go unresolved because both parties believed that if they were unable to reach an agreement, their dispute would be resolved by reference to the Compromise Agreement and in particular section 17. This nuanced understanding between Imperial and Coachella is in reality nothing more than a variation on the agreements reached by virtue of "a gradual flow of information between the parties followed by a series of compromises and tentative agreements on major points" described in Copeland, supra, 96 Cal.App.4th at page 1262. Thus unlike the situation discussed in Copeland, as a remedy for breach of the duty to negotiate, here both parties understood they could seek what was required under the terms of section 17 of the Compromise Agreement.
C. The Trial Court's Determinations on the Merits
In addition to its principal contention Coachella's claims are barred by the statute of limitations, Imperial challenges the trial court's determination Coachella was entitled to a calculation of net proceeds which did not include the deductions for reserves and interest on retained proceeds to which Coachella objected in 1956. Because the trial court's resolution of these issues was based on its interpretation of the contract and undisputed extrinsic evidence, we review the trial court's findings de novo. (See City of El Cajon v. El Cajon Police Officers' Assn., supra, 49 Cal.App.4th at p. 71.) Having done so, we find no error.
1. Timely Objection
Imperial argues Coachella did not properly preserve its right to raise objections to the reserve and interest deductions. Like the trial court, we find Coachella properly preserved its right to contest these deductions from net proceeds.
Code of Civil Procedure section 2076 states: "The person to whom a tender is made must, at the time, specify any objection he may have to the money, instrument, or property, or he must be deemed to have waived it; and if the objection be to the amount of money, the terms of the instrument, or the amount or kind of property, he must specify the amount, terms, or kind which he requires, or be precluded from objecting afterwards." Here, the record shows commencing with the 1954 and 1955 net proceeds calculations and based on the advice of its accountants, Coachella unequivocally objected to the reserve and interest deductions. The record also establishes that rather than expressly disputing Coachella's contention, Imperial suggested further negotiation of the lease. As we have indicated, Coachella could reasonably rely on this assurance from Imperial. (See Alliance Mortgage Co. v. Rothwell, supra, 10 Cal.4th at p. 1240; Wolf v. Superior Court, supra, 107 Cal.App.4th at p. 34 .) Thus having made its objection and received Imperial's response that the matter was subject to further negotiation, Coachella was not required to make any further objection.
2. Interest
Contrary to Imperial's argument, it was not entitled to deduct from its net proceeds the interest it earned on the revenue it derived from its power operations.
As we have previously noted, under section 17(c) of the Compromise Agreement Imperial was required to pay Coachella eight percent of the net proceeds "from all said power rights held, owned or possessed by both parties hereto and from all power works and power facilities by or in connection with which Imperial District utilizes said power rights." Like the trial court, we believe this description of net proceeds includes not only the revenue directly produced by power operations, but also any interest Imperial earned on such revenue. As Coachella points out: "The interest was as much derived from the power business as the principal on which it was based."
We note that our treatment of interest earned is consistent with the manner in which section 17 treated interest which Imperial paid with respect to power operations. Section 17(f) provides that "in determining said net proceeds, as between the parties hereto, there shall be taken into consideration all items of cost of production and disposal of power, including, but not necessarily limited to . . . interest on capital investment for power purposes, improvements, operation and maintenance. . . ." It seems highly unlikely that the parties would enter into an agreement which permitted Imperial to deduct both the interest it paid on its investment in power operations and any interest it earned from those operations.
On appeal Imperial renews its contention it had the unfettered right to deduct reserves before calculating net proceeds. In rejecting this contention, the trial court stated: "Such a construction of the Compromise Agreement is clearly directly contrary to the expressed intention of the parties. Under such a construction Coachella dismissed its appeal to the validation action, thereby permitting Imperial to proceed with its contract with the United States to develop water and power possibilities, and ceded to Imperial its own power rights, possibilities, etc., in exchange for a formula that places the bulk of profits into reserves; resulting in minimal or modest net proceeds to Coachella regardless of Imperial's profits. Such a construction is unreasonable and therefore untenable.
"Revenues set aside as reserves for future use are not 'an item of cost of production and disposal of power;' nor is it 'any other proper factor of cost.' As such, it cannot properly be deducted from revenues in determining net proceeds due Coachella.
"Section 17(g), as expounded upon by Mr. Dowd [Coachella's accounting expert] compels the same conclusion. Section 17(g) provides the 8 percent net proceeds to Coachella 'will constitute a part of the cost of doing business' for Imperial. Mr. Dowd explained this means the 8 percent net proceeds due Coachella 'would be considered the same as operation and maintenance . . .' costs to Imperial.
"It is axiomatic that a business entity must first pay all of its 'costs of doing business,' i.e. its 'operation and maintenance costs, before determining if it has any surpluses to set aside for reserves, savings, investment, etc.
"It is therefore clear Imperial's practice of deducting amounts it sets aside as reserves from revenues, in determining net proceeds due Coachella, violates the express provisions of Section 17 of the Compromise Agreement and is directly contrary to the express intent of the parties."
We find the trial court's reasoning persuasive. Imperial's interpretation would give it the right to pay Coachella nothing. Neither the Compromise Agreement itself, the circumstances surrounding its negotiation, nor the parties' conduct, support such an illusory promise. Thus, like the trial court, we find that from 1954 onward Coachella had the right to a calculation of net proceeds before any deduction for reserves.
D. Attorney Memorandum
Imperial argues the trial court erred in ordering that it return to Coachella the memorandum of counsel which Coachella's accountants produced in discovery. Imperial notes that in making the motion one of Coachella's counsel conceded he reviewed the memoranda before they were produced and erroneously believed the memoranda were not privileged. We find no error.
"'[W]aiver' does not include accidental, inadvertent disclosure of privileged information by the attorney." (See State Comp. Ins. Fund v. WPS, Inc. (1999) 70 Cal.App.4th 644, 654.) Contrary to Imperial's contention, an attorney error in permitting privileged material to be released is not binding on the client, where as here there is no evidence the client was cognizant that, with respect to the particular documents produced, the privilege was being waived.
E. Cost of Establishing Fact
By way of a request for admission, Coachella asked Imperial to concede that under the Compromise Agreement Coachella gave up its right to sell power within its geographic boundaries. Imperial denied the request. When, following trial, Coachella moved to recover the cost of establishing that it gave up the right to sell power, Imperial argued Coachella's request implied that in 1934 Coachella already had the right to sell power and that its denial was therefore reasonable. The trial court rejected Imperial's explanation and awarded Coachella $207,388.48. On appeal Imperial renews its contention that it acted reasonably in denying the request for admission.
We review the trial court's order for abuse of discretion. (Wimberly v. Derby Cycle Corp. (1997) 56 Cal.App.4th 618, 637, fn. 10.) We find no abuse of discretion. Section 17 of the Compromise Agreement itself states Coachella "shall demise to Imperial District all of said Power rights which the Coachella District may now have or hereafter have or hereafter obtain." (Italics added.) In light of the fact the request for admission was made with specific reference to the Compromise Agreement, it was not reasonable for Imperial to interpret the request as implying the existence of any more rights than those set forth in the agreement.
II
Coachella's Cross-Appeal
By way of its cross-appeal, Coachella argues the trial court erred in refusing to require any recalculation of net proceeds based on matters to which Coachella did not specifically object or of which Coachella was unaware. In particular, Coachella argues section 17 required that Imperial calculate net proceeds by way of accrual accounting rather than the modified cash basis Imperial employed. Coachella also argues the trial court erred in limiting its recovery for reserve and interest deductions to the period from 1954 onward, and in refusing to permit it to recover based on Imperial's practice of financing capital improvements from internal loans.
Again, because the trial court's resolution of these issues was based on its interpretation of the contract and undisputed extrinsic evidence, we review the trial court's findings de novo. (See City of El Cajon v. El Cajon Police Officers' Assn., supra, 49 Cal.App.4th at p. 71.) Again, we find no error.
A. Accrual Accounting
Accrual accounting would have had a dramatic impact on the net proceeds calculations because, among other matters, it would have prevented Imperial from eliminating large portions of its net proceeds in any given year by deducting the entire cost of a capital improvement in that year. Like the trial court, we agree that under GAAP Imperial would have been required to use an accrual accounting method in calculating net proceeds from its power operations. Like the trial court, we also accept that, although section 17 does not expressly require accrual accounting, the reference in section 17(f) to depreciation could be interpreted as requiring accrual accounting.
However, like the trial court, we do not believe that as performed by the parties, the Compromise Agreement required accrual accounting. First, like the trial court, we note that at the time the Compromise Agreement was executed accrual accounting was a fairly new method of accounting and at that time the parties might not have necessarily expected Imperial to use it. Secondly, and more importantly, in their very first audit of Imperial's net proceeds calculation, Coachella's accountants notified Coachella that Imperial was using a modified cash basis accounting method and that one issue Coachella should raise in negotiating a lease was whether Imperial should use cash or accrual accounting. Thereafter, through the entire following 48 years, Coachella never objected to the modified cash basis accounting Imperial employed. We note, however, that in 1956 Coachella did object to the reserve and interest deductions. Like the trial court, we find it difficult to interpret this course of conduct as anything other than agreement to Imperial's modified cash basis accounting. Coachella's position might in some sense be stronger if it had not made the specific objection in 1956 to the reserve and interest deductions. That it did object as to other matters lends a great deal of support to the notion Coachella understood that in order to preserve its objections it needed to make them.
Apart from the specifics of Coachella's course of conduct, however, the larger problem with Coachella's contention is that it is not plausible. Under Coachella's theory, the 48 years of payments were in all respects open to recalculation for an infinite period of time. We do not believe Coachella was willing to indefinitely delay receipt of substantial payments otherwise due or that Imperial was willing to expose itself to such a large contingent liability for so long a period of time. The practical necessity of operating on some roughly predictable basis would prevent either public agency from entering into such an agreement. Rather, as the trial court found, we believe the two agencies agreed to delay resolution only of those issues Coachella specifically raised. Thus, like the trial court, we find that Coachella agreed to a modified cash basis accounting of net proceeds. (See Crestview Cemetery Assn. v. Dieden, supra, 54 Cal.2d at p. 754.)
B. Pre-1954 Reserves and Interest
As we have noted, Coachella made no objection as to the reserve and interest deductions until it raised those issues in response to the 1954 and 1955 payments. It argues that it should nonetheless recover for earlier periods when these deductions were made. We disagree.
As we have interpreted the parties' agreement, only those matters to which Coachella objected were reserved for later resolution by negotiation. The parties' modus vivendi did not afford Coachella the right to raise objections to payments at any time during the course of their relationship.
C. Internal Loans
Coachella contends it did in fact object to Imperial's practice of financing capital projects by way of internal loans and the net proceeds calculations were distorted by this practice. Like the trial court, we find no evidence of an effective objection.
When the internal loans were first disclosed to Coachella in 1957 as the means by which Imperial financed a third unit at its El Centro Steam Station, Coachella in fact expressed to Imperial its concerns the loans would diminish its rental payments and asked its accountants for their opinion. Importantly, in response to Coachella's concerns, Imperial conceded the cost of the internal financing would reduce the rent paid to Coachella, but argued the loans, including the repayment schedule and interest, were proper deductions from net proceeds. Coachella did not, thereafter, contest the issue or expressly reserve the issue for further negotiation. Thus, there is nothing in the record which would support the conclusion that, unlike the interest and reserve issues, Imperial agreed to resolve the issue by way of negotiation of a lease. Indeed, a 1973 letter from Imperial's accountants, which Coachella relies upon, undermines rather than supports the conclusion that the issue was preserved by Coachella. The accountant's letter, rather than suggesting the loan issue was still in dispute, appears to use Imperial's treatment of the loans as a means of assuring Imperial that it has treated Coachella fairly.
In sum then, Coachella did not have the right to recalculation of the cost of Imperial's internal financing.
CONCLUSION
The record here demonstrates the parties' agreement was in fact formed not only by way of their written agreement, but in important respects by their performance over the years. That performance reveals both parties took a practical approach to resolution of disputes. Where those disputes could be resolved, the parties resolved them. With respect to matters they could not resolve, the parties agreed to resolve them by way of later negotiation and by reference to the rights set forth in their initial written agreement.
Judgment affirmed.
I CONCUR: McINTYRE, J.
CONCURRING OPINION
HUFFMAN, J.
I concur in the holdings and the reasoning in the majority opinion except for the discussion of Imperial's challenge to the trial court's statute of limitations ruling. As to that portion of the opinion I concur only in the result.
I agree there is sufficient in the record to affirm the trial court's decision on the defense of statute of limitations. Although I am instinctively repelled by the notion that a dispute can simmer between sophisticated entities for nearly six decades without triggering any applicable statute of limitations, I believe the trial court's statement of decision on this issue provides an adequate basis for upholding its decision. Therefore, notwithstanding my personal reluctance, I believe I am compelled to conclude the record supports the conclusion that Imperial did not carry its burden of proof at trial to prevail on the defense of statute of limitation. Accordingly I concur with the majority's conclusion on that issue.