Opinion
NOT TO BE PUBLISHED
APPEAL from a judgment of the Superior Court of Los Angeles County Ct. No. BC328811 Elizabeth A. Grimes, Judge.
Burkhalter Kessler Goodman & George, Daniel J. Kessler, and Michael Oberbeck for Defendant and Appellant.
Khang & Khang, Joon M. Khang, and Judy L. Khang for Plaintiff and Respondent.
SUZUKAWA, J.
Defendant Lollicup USA, Inc. (Lollicup) appeals the judgment in favor of plaintiff William K.K. Ng, doing business as Global Foods (Ng). We conclude that the damages awarded by the trial court were excessive, and thus we direct the trial court to modify the judgment by reducing the damages from $383,624.53 to $44,000. As so modified, we affirm.
FACTUAL AND PROCEDURAL BACKGROUND
I. The Parties
Lollicup is a California corporation that operates specialty coffee and tea stores throughout the United States and abroad. Ng is a former Lollicup distributor in California and Indonesia. The present dispute arises out of the parties’ distributorship agreement and resulting business relationship.
II. The Distributorship Agreement
In 2001, Lollicup and Ng entered into a written distributorship agreement (the distributorship agreement) that granted Ng the exclusive right to distribute Lollicup products in Indonesia. As relevant to the present dispute, the distributorship agreement provided as follows:
Earlier, Ng and Lollicup had entered a distributorship agreement that gave Ng the right to open a Lollicup store in San Diego. The trial court resolved a dispute over Lollicup’s alleged breach of that agreement in Lollicup’s favor, and it is not part of the present appeal.
The grammar, spelling, and punctuation errors reflected in the following paragraphs appear in the original distributorship agreement.
(1) “Lollicup will provide all necessary advertisement such as phone book, radio, Television network, and etc.”
(2) “Lollicup will provide all necessary raw ingredients needed for daily operation of business at competitive rate. To ensure the quality of our products, the distributor must purchase all raw ingredients through Lollicup or company designated by Lollicup. Any raw ingredient pertaining to the making of drink product not purchase from Lollicup would constitute a default of this agreement and that Lollicup may seek damages for any loses and termination of this agreement. Raw ingredients is define as cups, lids, powders, concentrated juices, syrups, sugars, tea, bags, promotion posters and etc.”
(3) “Distributor agrees to pay $10000 for the license fee upon signing of this contract, and $10000 every three years thereafter.”
(4) “Distributor will be responsible for the shipping and custom clearance for any supply shipped from Taiwan.”
(5) “Exclusion[:] [¶] Lollicup will not be responsible for any [loss] or damage suffered by distributor or any third parties as a result of the use of Lollicup’s product. This includes lose of revenues resulting from delays, non-deliveries, misdeliveries or service interruptions.”
(6) “Liability[:] [¶] The liability of Lollicup Inc to distributor shall not exceed the amount actually paid by distributor to Lollicup Inc for the specific product order form that is in dispute.”
(7) “Notwithstanding anything else to the contrary stated or implied herein, Lollicup shall not be liable to distributor or any third parties for any indirect incidental consequential, punitive or special damages. Including without limitation, loss of profits or loss of business suffered by distributor or any third parties even if Lollicup has been informed in advance of the possibility of such damages.”
III. The Dispute
Pursuant to the distributorship agreement’s terms, Ng paid Lollicup $10,000 upon signing the agreement. He then leased and built out three Lollicup stores in Indonesia at a cost of $339,624.53. He also ordered and paid for approximately $34,000 of product (frying powers, boba, syrups, and seasoning) from Lollicup. He had difficulty bringing the product into Indonesia, however, because despite Ng’s repeated requests, neither Lollicup nor its Taiwanese supplier ever provided Ng with the import documents required by Indonesian customs. As a result, Indonesian customs officials held the product at the port for almost four months. Customs ultimately released the product only after Ng signed a guarantee.
By the time Indonesian customs finally released the Lollicup product to Ng, it had been damaged by its lengthy exposure on the docks. Further, Lollicup never provided any form of advertising in Indonesia, as the distributorship agreement required. As a result, Ng was not able successfully to operate the Indonesian stores, and he closed all three within approximately three months. Ng’s operating losses during that period were $140,362.
IV. The First Trial
Ng filed a five-count complaint, alleging breach of contract, fraud, breach of the implied covenant of good faith and fair dealing, indemnification, and tortious interference with contractual and business relations against Lollicup, Alan Yu, and Marvin Cheng on February 15, 2005. The operative second amended complaint, filed September 30, 2005, added a sixth cause of action for unfair business practices. It alleged that the defendants entered into franchise agreements with Ng in January 2000 and thereafter, but that defendants breached the franchise agreements, made false and misleading representations to induce plaintiff to enter the franchise agreements, interfered with plaintiff’s intended sale of the franchise to a third party, and improperly terminated the franchise agreements. (Ng v. Lollicup USA, Inc. (Nov. 26, 2007, B196076) [nonpub. opn.].) Defendants denied the allegations of the complaint and filed a cross-complaint for breach of contract, fraudulent misrepresentation, unfair business practices, contractual indemnity, and professional negligence.
The case was tried to a jury, which returned a special verdict for Lollicup. Ng made a timely motion for new trial, urging that as a result of a serious flaw in the special verdict form, the jury never decided Ng’s breach of contract claim. The court agreed and granted a new trial limited to breach of contract. (Ng v. Lollicup USA, Inc., supra, B196076 [at pp. 2-3].) Lollicup appealed the grant of a new trial, and we affirmed. (Id. [at pp. 1-6].)
V. The Second Trial
Ng retried his breach of contract claim to the court on June 26, 2008. At the conclusion of trial, the court entered judgment for Ng in the amount of $383,624.53. In relevant part, the court found as follows: “Plaintiff alleged that defendant Lollicup USA, Inc. breached... a distributorship agreement for three [boba tea stores] in Indonesia.... [¶] The court finds plaintiff proved defendant breached the Indonesia contract by failing to provide the necessary advertising and by failing to provide for delivery of products. It was undisputed that defendant provided no advertising at all in Indonesia, where there was no consumer awareness of boba or the Lollicup brand of tapioca milk tea beverages. Defendant offered no evidence that any of its ‘worldwide’ advertising reached Indonesia. The contract term ‘necessary advertising’ required defendant to provide some advertising. Having provided no advertising or marketing support at all, defendant materially breached the contract. Plaintiff also proved that defendant failed to do its part to ensure that the products were delivered from Taiwan with all the necessary certificates to permit their passage through Indonesian customs, such that they were left on the docks for at least two months, during which time plaintiff was unable to operate. Defendant offered no assistance or assurances that future deliveries would be able to pass through customs or that it would support plaintiff’s marketing efforts. Accordingly, plaintiff acted reasonably in ceasing operations when it did and is entitled to recover the franchise fee and all amounts paid to purchase equipment and remodel the three stores according to Lollicup standards. Plaintiff did not offer substantial evidence to support the operating losses claimed in its closing trial brief, and the court does not find such losses to be recoverable damages.”
Judgment was entered on August 6, 2008, and notice of entry of judgment was served on August 8, 2008. Lollicup timely filed a motion for new trial, which the trial court denied on September 18, 2008. This timely appeal followed.
DISCUSSION
I. Standard of Review
The parties concede that our review of the trial court’s factual determinations is for substantial evidence. Pursuant to this standard of review, “our role is not to reweigh this evidence, even when there is a conflict in the record; rather, we are required to view the record in the light most favorable to plaintiffs and resolve all evidentiary conflicts and indulge all reasonable inferences in support of the judgment. [Citation.]” (Donovan v. Poway Unified School Dist. (2008) 167 Cal.App.4th 567, 618, fn. 26.)
The parties dispute, however, the standard applicable to our review of the trial court’s interpretation of the distributorship agreement. Lollicup contends that the distributorship agreement is unambiguous, and hence our review is de novo. Ng disagrees, urging that the agreement is ambiguous and the parties offered disputed extrinsic evidence. Accordingly, he contends we must defer to the trial court’s reasonable interpretation of the agreement.
“When the meaning of the contract language may be determined without the aid of extrinsic evidence, we generally apply a de novo standard of review to the construction of the instrument. ‘“‘Under statutory rules of contract interpretation, the mutual intention of the parties at the time the contract is formed governs interpretation. [§ 1636.] Such intent is to be inferred, if possible, solely from the written provisions of the contract. [§ 1639.]’”’ (ASP Properties Group, L.P. v. Fard, Inc. (2005) 133 Cal.App.4th 1257, 1269, citing the Civil Code.) ‘It is therefore solely a judicial function to interpret a written instrument unless the interpretation turns upon the credibility of extrinsic evidence. Accordingly, “An appellate court is not bound by a construction of the contract based solely upon the terms of the written instrument without the aid of evidence [citations], where there is no conflict in the evidence [citations], or a determination has been made upon incompetent evidence [citation].”’ (Parsons v. Bristol Development Co. (1965) 62 Cal.2d 861, 865; see also City of Hope National Medical Center v. Genentech, Inc. (2008) 43 Cal.4th 375, 395 [contract interpretation is solely a judicial function when ‘based on the words of the instrument alone, when there is no conflict in the extrinsic evidence, or a determination was made based on incompetent evidence’].) To the extent that the testimony adduced by the parties revealed a meaning of which the contract was reasonably susceptible, we defer to the court’s determination of those witnesses’ credibility and apply the substantial evidence rule to that determination.” (Tin Tin Corp. v. Pacific Rim Park, LLC (2009) 170 Cal.App.4th 1220, 1225.)
In the present case, although much of the extrinsic evidence relevant to the alleged contract breach is disputed, there is no extrinsic evidence, disputed or otherwise, relevant to contract formation. Such evidence would include “‘extrinsic evidence of such objective matters as the surrounding circumstances under which the parties negotiated or entered into the contract; the object, nature and subject matter of the contract; and the subsequent conduct of the parties. [Citations.]’” (Manufactured Home Communities, Inc. v. County of San Luis Obispo (2008) 167 Cal.App.4th 705, 714.) In the absence of such evidence, our determination of the meaning of the distributorship agreement necessarily is based solely on the language of the agreement, and hence our review is de novo.
II. Liability
A. Lollicup’s Breach of Its Obligation to Provide Import Documents
Lollicup contends that the trial court erred in finding that it had a contractual obligation to provide Ng with documentation necessary to allow product imported from Taiwan to pass through Indonesian customs. Specifically, Lollicup urges that the distributorship agreement “clearly and unambiguously obligated Ng to ‘be responsible for the shipping and custom clearance for any supply shipped from Taiwan’” and “bestowed no obligation of any kind upon Lollicup regarding the shipment and custom clearance of supplies that Ng ordered.” Thus, although Lollicup concedes that it never provided Ng with import documents, it contends that it had no obligation to do so.
We do not agree. As we have said, the distributorship agreement expressly anticipated that Ng would operate Lollicup stores in Indonesia. Further, it required Lollicup to “provide”—i.e., to “make available” or “furnish” (Random House Webster’s College Dict. (1992) p. 1087, col. 1.)—Ng with “all necessary raw ingredients needed for daily operation of business.” And, it provided that if Ng failed to purchase from Lollicup any raw ingredient required to make a Lollicup boba tea product, Ng would be in default of the agreement and subject to termination.
If we interpret the distributorship agreement as Lollicup urges us to do, Ng would be obligated to purchase raw ingredients from Lollicup, but Lollicup would not have a corresponding obligation to provide Ng with the documents necessary to bring the raw ingredients into Indonesia. As a result, Ng would be responsible to pay for product that he could not import to the intended point of sale. Further, since procuring necessary raw ingredients from any source other than Lollicup was explicitly a breach of the distributorship agreement, Lollicup’s proposed interpretation would render it impossible for Ng successfully to operate Lollicup stores in Indonesia—i.e., to realize the essential purpose of the agreement. Such an interpretation is absurd on its face. As such, it violates the established principle that “‘[W]here a contract is susceptible of two interpretations, the courts shall give it such a construction as will make it lawful, operative, definite, reasonable and capable of being carried into effect if it can be done without violating the intention of the parties. [Citations.]... [T]he court shall avoid an interpretation which will make a contract extraordinary, harsh, unjust, inequitable or which would result in absurdity [citations].’” (County of Humboldt v. McKee (2008) 165 Cal.App.4th 1476, 1498; see also Bill Signs Trucking, LLC v. Signs Family Limited Partnership (2007) 157 Cal.App.4th 1515, 1521 [“‘Interpretation of a contract “must be fair and reasonable, not leading to absurd conclusions.”’”].)
Our conclusion is not inconsistent with the contractual provision cited by Lollicup that provides that Ng “will be responsible for shipping and custom clearance for any supplies shipped from Taiwan.” As the trial court noted, Ng’s ultimate (and undisputed) responsibility to clear products through Indonesian customs did not relieve Lollicup of a duty to provide Ng with documentation that only it could provide—i.e., certification, such as that at issue here, that Indonesian customs authorities required to be supplied by the exporter.
Our conclusion does not rest, as Lollicup suggests, on the allegedly unsupported assertion that the Taiwanese supplier was affiliated with Lollicup. According to Lollicup, it could not have had any obligation to deliver import documents to Ng because the Taiwanese supplier “was not and is not Lollicup, but an unnamed third party that is unrelated to and unaffiliated with Lollicup.” We disagree. As we have noted, Lollicup, not its Taiwanese supplier, had the express contractual obligation to “provide [Ng] all necessary raw ingredients needed for daily operation of business.” Hence, the obligation to provide Ng with the documents necessary to permit the raw ingredients to be imported into Indonesia was also Lollicup’s. Although Lollicup certainly had the right to contract with a Taiwanese third party to ship the raw ingredients directly to Ng, that arrangement did not alter Lollicup’s contractual obligations to “provide” Ng with both the necessary raw ingredients and the documents necessary to allow their import into Indonesia.
For all of these reasons, we conclude that the trial court correctly found that Lollicup had a contractual obligation to provide Ng with certification necessary to allow product imported from Taiwan to pass through Indonesian customs. Because it is undisputed that neither Lollicup nor its Indonesian supplier ever provided Ng that certification, there was substantial evidence to support the judgment as to the breach of contract claim.
B. Lollicup’s Breach of Its Obligation to Provide Advertising
The distributorship agreement indisputably required Lollicup to “provide all necessary advertisement such as phone book, radio, Television network, and etc.” Since it was undisputed at trial that Lollicup provided no advertising in Indonesia, there is substantial evidence that Lollicup breached this obligation.
In its brief, Lollicup attempts to excuse its failure to advertise by claiming it did not know Ng had opened the stores. No such evidence was presented at trial.
III. Damages
Lollicup contends that the distributorship agreement contained a clause limiting its liability in the event of a breach of contract. Thus, it contends that the trial court erred in awarding Ng $339,624.53 to compensate him for his out-of-pocket costs to lease and build-out the three Lollicup stores in Indonesia. Ng disagrees, contending that the relevant contractual language is ambiguous and, if interpreted as Lollicup suggests, would constitute a general waiver prohibited by Civil Code section 1542. For the reasons that follow, we agree with Lollicup and conclude that the trial court erred in awarding Ng $339,624.53 in out-of-pocket costs.
Lollicup concedes that if it breached a contractual obligation to provide import documents to Ng, then Ng is entitled to recover the value of the raw materials that he was unable to import. Because we have concluded that Lollicup did breach such an obligation, Ng was entitled to recover as damages the approximately $34,000 it paid Lollicup for raw materials. Lollicup has not challenged the award of $10,000 as compensation for the license fee Ng paid Lollicup.
The contractual language on which Lollicup relies is as follows: “Notwithstanding anything else to the contrary stated or implied herein, Lollicup shall not be liable to distributor or any third parties for any indirect incidental consequential, punitive or special damages. Including without limitation, loss of profits or loss of business suffered by distributor or any third parties even if Lollicup has been informed in advance of the possibility of such damages.”
Notwithstanding its grammatical imprecision, we conclude that this paragraph unambiguously excludes, among other things, consequential and special damages. Indeed, Ng does not contend to the contrary. While he urges that this paragraph is “vague and ambiguous,” he does not suggest a way in which the paragraph can be read to permit him to recover consequential or special damages.
Ng’s suggestion that the paragraph is limited to disputes arising from “specific product order forms” is belied by the clear language stating that the limitation of damages clause applies “Notwithstanding anything else to the contrary stated or implied herein.”
“Consequential” or “special” damages “are those losses that do not arise directly and inevitably from any similar breach of any similar agreement. Instead, they are secondary or derivative losses arising from circumstances that are particular to the contract or to the parties.” (Lewis Jorge Construction Management, Inc. v. Pomona Unified School Dist. (2004) 34 Cal.4th 960, 968.)
Consequential damages resulting from a seller’s breach include “[a]ny loss resulting from general or particular requirements and needs of which the seller at the time of contracting had reason to know and which could not reasonably be prevented by cover or otherwise” and “[i]njury to person or property proximately resulting from any breach of warranty.” (Cal. U. Com. Code, § 2715, subd. (2)(a) & (b).) Ng’s out-of-pocket costs to lease and build-out the three Indonesian stores are plainly of this character, and thus they are not recoverable unless their contractual exclusion is unenforceable under California law.
Ng cites no authority suggesting that consequential damages may not be contractually excluded under California law. Moreover, the California Uniform Commercial Code expressly allows the limitation or exclusion of consequential damages for commercial loss unless the limitation or exclusion is unconscionable. (Cal. U. Com. Code, § 2719, subd. (3); Nunes Turfgrass, Inc. v. Vaughan-Jacklin Seed Co. (1988) 200 Cal.App.3d 1518, 1539.) Ng has made no showing that the limitation of damages is unconscionable in the present context, and thus we conclude that it is enforceable here.
Ng contends that if we interpret the liability clause as Lollicup suggests, it constitutes a general waiver of all known and unknown claims prohibited by Civil Code section 1542. We do not agree. On its face, Civil Code section 1542 applies to releases made in connection with a “settlement,” and thus it has no application to the present case. Moreover, we do not interpret the liability limitation to exclude Ng from recovering what he paid for the undeliverable product and as a license fee, and thus it does not exclude “all” damages claims.
DISPOSITION
We direct the trial court to modify the judgment by reducing the damages by $339,624.53, from $383,624.53 to $44,000. As so modified, we affirm. Each party shall bear its own costs on appeal.
We concur: EPSTEIN, P.J. MANELLA, J.