Opinion
As Modified on Denial of Rehearing May 27, 1970.
Opinion on pages 231 to 242 omitted
HEARING GRANTED
See 3 Cal.3d 389 for subsequent opinion.
See 3 Cal.3d 389 for subsequent opinion.
For Opinion on Hearing see, 90 Cal.Rptr. 580, 475 P.2d 852.
[86 Cal.Rptr. 681]Gibson, Dunn & Crutcher and John L. Endicott, Los Angeles, for plaintiffs and appellants.
Robert M. Fisk, Pasadena, for defendant and respondent.
KINGSLEY, Acting Presiding Justice.
Plaintiffs and defendant were partners in a firm engaged in the business of accounting. The original partnership agreement was executed in 1958; it was revised on October 1, 1960. The partnership carried on its business from offices located in the City of Pasadena and in the City of Azusa.
Difficulties arose among the partners. At a partnership meeting held on October 1, 1961, defendant was offered the choice of withdrawing 'voluntarily' under subparagraph (B) of paragraph 17 of the partnership agreement or of suffering an 'involuntary' withdrawal under subparagraph (C) of that paragraph. He elected to withdraw 'voluntarily.' The agreement required a 90-day notice of intent to withdraw voluntarily unless that notice was waived. Defendant asked for and received such a waiver, so that his withdrawal became effective immediately. The withdrawal was not accompanied by any new instrument, other than some papers relating to the amount of defendant's then accrued compensation and expense account.
'(17) Membership in partnership may be terminated as follows:
Defendant seems to make some point of the fact that his departure was made under subparagraph (B), which speaks of a 'withdrawal' and not under subparagraph (D) of paragraph 17, which speaks of a 'retirement.' We fail to see that that fact is material on this appeal:
(1) All of the provisions of the partnership agreement and its appendix use the terms 'withdrawal' and 'retirement' interchangeably and as though they were synonyms. For example, paragraph 18 of the partnership agreement, which is the paragraph primarily involved herein, opens as follows: 'In the event of the withdrawal of a partner * * * the retiring partner * * *.'
[86 Cal.Rptr. 682](2) The case was tried below on the theory that it involved the effect, interpretation and application of subparagraph (J) of paragraph 18 of the partnership agreement, which subparagraph speaks in terms of a 'retiring' partner. Having twice tried the case, and once appealed it, on that theory defendant cannot now adopt a different theory.
(3) In his brief in this court, defendant contends that plaintiffs are barred from recovery because (inter alia) they have never tendered or paid the 'deferred compensation,' which subparagraph (D) of paragraph 18 and paragraph 14 of the appendix, provide shall be paid to a 'retired' partner. At oral argument, defendant's counsel pointed out that defendant's cross-complaint had sought recovery only for his unpaid share of the capital account (due him under subparagraph (E) of paragraph 18), and had not sought to recover under subparagraph (D). But defendant was free, for whatever reason may have influenced him, to waive part of his potential rights; his election does not affect the meaning of the contract involved.
Respondent's brief states:
After his withdrawal, defendant opened offices in the cities of San Gabriel and Arcadia--both in the County of Los Angeles--and practiced accounting from those offices, servicing, among other clients, some persons and firms who had theretofore been clients of the old partnership within the three years prior to his withdrawal. Some of those so serviced had 'addresses' in the City of Pasadena.
The partnership agreement, as revised on October 1, 1960, provides as follows with reference to competition by a withdrawing (or 'retiring') partner:
'(J) In consideration of the payments to be made to a retiring partner under the terms of this AGREEMENT * * * a retiring partner agress that for a period of five years from the date of his retirement he will enter into the practice of public accountancy only subject to the following restrictions:
'(1) The retired partner will not render service to a client which is or has been a client of the partnership within the last three years prior to the retirement of the retired partner.
'(2) The retired partner will not render service to a client which has its principal office within a radius of twenty miles from any partnership office which existed on the date of his retirement. * * *'
'(4) In the event of a breach of this Subsection (J) of this Section (18) the offending partner shall be liable to the partnership for the full amount of the fees collected or collectible from such prohibited clients.'
Plaintiffs sued, originally seeking both an injunction and damages. A demurrer to their complaint was sustained, they declined to amend and the action was dismissed. On appeal, that judgment was reversed. On remittitur, defendant answered and also cross-complained for monies allegedly due to him as a withdrawing partner. The trial court entered judgment in his favor, both on the complaint and on the cross-complaint. Plaintiffs have appealed. We reverse the judgment in part.
2d Civ. No. 28952, decided October 25, 1965.
I
Passage of time and stipulations removed from the complaint all claims for injunction and for any relief other than for damages for breach of the non-competition clause above quoted. Although the notice of appeal refers to the entire judgment, the appellants' briefs are silent as to [86 Cal.Rptr. 683]the judgment against them on the cross-complaint; we deem that portion of the appeal to be abandoned and affirm that part of the judgment.
The pleading problems and the appeal had consumed so much time that the action did not come on for trial until May, 1968--long after the five-year period of the non-competition paragraph had expired.
II
The trial court held that the first subparagraph of the non-competition agreement--imposing a non-geographical prohibition on servicing former clients--was void as violative of section 16600 of the Business and Professions Code and not excepted therefrom by any other section of that code. Again, the briefs make no argument that that provision may be resorted to and we deem that any claim thereunder has, also, been abandoned.
Section 16600 of the Business and Professions Code reads as follows:
III
The issues remaining, and argued to us, are as follows:
The briefs state the issues in somewhat different form.
(1) Should subparagraph (2) of the quoted paragraph be construed in the light of the language in section 16602 of the Business and Professions Code as that section read in 1960, when the partnership agreement was last revised, or as that section read in October, 1961, when the withdrawal took place?
(2) Assuming that a violation of the non-competition agreement has occurred, is the damage provision contained in subparagraph (3) valid as a provision for liquidated damages or invalid as a penalty?
IV
We turn, first, to the issue of which version of section 16602 should be applied. As of October 1, 1960, that section read as follows:
'Partner[s] may, upon or in anticipation of a dissolution of the partnership, agree that none of them will carry on a similar business within the same city or town or a specified part thereof, where the partnership business has been transacted.'
After its amendment by chapter 1091, Laws of 1961, effective September 15, 1961, prior to defendant's withdrawal, it read:
'Any partner may, upon or in anticipation of a dissolution of the partnership, agree that he will not carry on a similar business within a specified county or counties, city or cities, or a part thereof, where the partnership business has been transacted, so long as any other member of the partnership, or any person deriving title to the business or its goodwill from any such other member of the partnership, carries on a like business therein.'
As far as is here pertinent, the amendment broadened the permissible geographic scope of a noncompetition agreement from 'the same city or town or a specified part thereof,' to 'a specified county or counties, city or cities, or a part thereof.'
The trial court held that the statutory language as it stood in 1960 controlled and that, under that language, no breach of an enforceable agreement had been shown. For the reasons set forth below, we conclude that the trial court erred in so holding and that the agreement should be construed in the light of the 1961 amendment and that, as so construed, a breach was proved.
The ruling that no breach had been proved was based on the theory that defendant's business had been 'carried on,' within the meaning of section 16602, only in the cities in which he maintained offices and that it was, thus, immaterial where his clients had their 'principal office.' Since we hold that the amended language (which allows a restriction applicable to an entire county or counties) applies, the issue thus before the trial court becomes factually immaterial and we do not determine it.
V
[86 Cal.Rptr. 684]We note, at the outset, that the language of the partnership agreement is both narrower and wider than the statute permits. The agreement limits defendant only to not servicing a client whose principal office is within the 20-mile radius therein set forth; the statute imposes no limitation on the residence or place of business of the client, but only on the place where the restrained partner 'carries on' his business. The agreement imposes a 20-mile radius on the geographic limitation; the statute imposes a limit set, not by distance, but by political boundaries.
Since no law requires parties to a partnership agreement to impose a limitation going to the full extent allowed by law, we must construe the agreement before us as allowing defendant to service any client whose principal place of business is outside the 20-mile radius based on the office locations of the partnership on October 5, 1961, even though defendant carried on his business within whichever political entity the statute provided for.
Because of the theories on which the judgment below was based, the findings do not deal with that issue; on remand the court should take testimony and make findings as to the location of the 'principal office' of clients serviced by defendant within the applicable five-year period and should impose liability only for service to clients whose 'principal offices' were within the 20-mile radius described in the agreement.
VI
Defendant's first argument for the application of the 1960 language is that the opinion rendered on the former appeal had determined, as the law of the case, that it was that language which should be resorted to unless plaintiffs amended their complaint to show reliance on the amended version, and that plaintiffs had not so amended.
We think that that is not a correct reading of the opinion. That opinion held that the cause of action now relied on did state a cause of action, good as against general demurrer, at least for conduct falling within the 20-mile radius and the political boundary limitations of the 1960 statute. The only reference to the matter now involved was in the concluding paragraph of the opinion, the significant language being as follows:
'It is not certain from the allegations of the second amended complaint whether the parties intended that the statutory law which might be in effect upon the withdrawal of a partner should be regarded as a part of their contract. Since there might be an application to amend the complaint with respect thereto, it is not necessary to determine herein the applicability of the amended section.'
We do not read this as meaning more than that defendant might, if he so desired, interpose a special demurrer designed to smoke out plaintiff's theory. No such special demurrer was interposed after remand. The case was tried and decided on the theory that the possible application of the amended section was in issue. Not having sought a more explicit statement in the trial court, defendant cannot claim injury here.
We do not intend to imply that an amendment was necessary. The rule of pleading is that a party set forth the facts on which he relies; he need not normally allege any 'theory' of action.
VII
Neither party cites us to any case directly in point. Defendant relies on the general proposition that the substantive law in force at the time of execution of a contract is to be read into it and refers us to the language in the Restatement of the Law, Contracts, section 609, which reads as follows:
'A bargain that is illegal when formed does not become legal
[86 Cal.Rptr. 685]'(a) by reason of a change of fact, except where both parties when the bargain was made neither knew nor had reason to know the facts making it illegal, or
'(b) by reason of a change of law, except where the Legislature manifests an intention to validate the bargain.'
As defendant points out, the California annotations state that '[t]he California law is in accord,' except as to usury statutes, which are a recognized exception.
Plaintiffs rely on usury cases, and on a California case which, although it contains language to the effect that non-competition agreements should be construed liberally, dealt with a situation different from the one now under consideration.
The case relied on is Edwards v. Mullin (1934) 220 Cal. 379, 30 P.2d 997, but that case stands only for the proposition that a non-competition clause, broader in scope than section 16602 permits, may be enforced up to the statutory limits--a proposition already settled for the case at bench by the opinion on the former appeal.
We think, however, that defendant misconstrues the rule on which he relies. In the case at bench, the parties agreed, in 1961 and after the amendment had come into force, to terminate their partnership. Although that termination was oral, it brought into operation several provisions of the partnership agreement which are express considerations for the non-competition clause--including, as we have above pointed out, provisions on which defendant relied in his cross-complaint and provisions on which he relies in this court. Thus, plaintiffs do not seek to enforce a clause which purportedly had been operative in 1960, but a clause which came into force and effect only when the termination occurred. To give effect to that clause as far as the 1961 statute allowed is to do no more than the parties could legally have done had they, in October of 1961, elected to spell out anew their respective rights and duties. Clearly, they did not intend that the partnership simply end, with no rights or duties between them thereafter. As we have said, defendant invoked, and has succeeded in enforcing, some of the post-termination paragraphs; he cannot take the benefit of part of that package and reject the rest.
It follows that, as we said above, he is liable for damages for any competition which is not permitted by the 1961 statute and which violates the 20-mile radius provision of the agreement.
VIII
Defendant claims that, even assuming a breach by him of the non-competition paragraph, no damages were proved. We disagree.
Plaintiffs offered evidence as to the clients serviced by defendant during the five-year period, but they did not attempt to prove that any of those clients would have become clients of plaintiffs' new firm had defendant not competed. Instead, plaintiff relied on the third paragraph of the non-competition clause, above quoted, which provides for damages measured by 'the full amount of fees collected or collectible from such prohibited clients.'
See Finding of Fact No. 11, and Conclusions of Law No. 13, which read as follows:
Defendant here contends, and the trial court held, that that provision was void as a forfeiture and that it was not valid as a provision for liquidated damages.
[86 Cal.Rptr. 686]The applicable rule in California is stated as follows in McCarthy v. Tally (1956) 46 Cal.2d 577, 586-587, 297 P.2d 981.
'We hold that in order to recover on a contract provision for liquidated damages the plaintiff must plead and prove that at the time the contract was entered into damages in the event of a breach would be impracticable or extremely difficult of ascertainment; that the sum agreed upon represented a reasonable endeavor to ascertain what such damages would be; and that a breach of the contract had occurred. In other words, no actual damage is necessary in order to recover under a liquidated damages provision provided that the case is, in other respects, a proper one under the conditions set forth in section 1671 of the Civil Code. As we have heretofore pointed out, there is, in the case under consideration, no finding that the sum of $10,000 represented a reasonable endeavor by the parties to ascertain what the damages would be in the event of a breach, and the findings as to whether, at the time the contract was entered into, the damages would be extremely difficult or impracticable of ascertainment in the event of a breach were fatally inconsistent.
'The liquidated damages provision here involved related to the goodwill of a summer resort business. As we have heretofore pointed out, it has been held that a breach affecting the goodwill of a business may cause damages which, at the time the contract was entered into, may be impracticable or extremely difficult of ascertainment.'
In part, defendant, and the trial court, rely on the first sentence of the above quotation and on the fact that plaintiffs did not plead or prove the facts therein specified. But that omission was apparent from the face of the second amended complaint, which was before the appellate court on the first appeal and on which, as we have said, the case ultimately went to trial. We take judicial notice of the record on that appeal. Defendant's demurrer makes no reference to that obvious omission; the appellate court held that the complaint stated a cause of action and remanded the case for trial. The defect is one which could easily have been cured had defendant raised it at the outset. We do not think that he can now rely on the pleading issue.
However, since the prior appeal involved only a demurrer, the fact that the pleading defect is not now available to defendant does not necessarily mean that he cannot raise the issue of proof. The requirement of McCarthy, above quoted, is that the plaintiff must both plead and prove 'that at the time the contract was entered into damages in the event of a breach of the contract would be impracticable or extremely difficult of ascertainment; that the sum agreed upon represented a reasonable attempt to ascertain what such damages would be; * * *.' Admittedly, no effort to make such a proof occurred in the trial herein under review. However, we do not think that defendant can rely on that omission on this appeal. The trial court had ruled that no breach had occurred; it also required plaintiffs to attempt proof of actual damage. Neither defendant nor the court ever intimated that proof (as distinguished from pleading) of the requirements set down in McCarthy was either necessary or even appropriate. Defendant may not raise here, for the first time, an omission of proof which could have been rectified in the trial court had it been raised there.
Defendant argues that the measure adopted is not one that represents, or could represent, 'a reasonable endeavor' to ascertain the probable damages, citing General Paint Corp. v. Seymour (1932) 124 Cal. App. 611, 615-616, 12 P.2d 990. But that case did not involve a liquidated damage clause at all. In it the plaintiff, lacking such a clause, was compelled to attempt proof of actual loss--the very situation [86 Cal.Rptr. 687]which clauses for liquidated damages are designed to prevent and which McCarthy v. Tally expressly says is their proper function. As plaintiffs point out, their business went on, its overhead continued, their loss was just what the language covered--the loss of additional income to offset their fixed costs.
Nothing we have said herein is intended to foreclose the trial court, on remand, from permitting or requiring plaintiffs to amend their complaint so as to raise specifically the factual issues required by the language we have quoted from McCarthy v. Tally; and nothing herein is intended to relieve plaintiffs, if either the trial court or the defendant shall specifically so require, from making the factual proof required by that language.
IX
As a final contention, defendant argues that plaintiffs are barred from recovery because they had not paid nor tendered the amounts due to him as a retiring partner. The amount thus due was in dispute, as the pleadings show; defendant ultimately recovered only a small part of what he claimed; the trial court struck from the findings and conclusions prepared by defendant those portions which would have given him the larger sum and those provisions which adopted the defense now urged. On this record, we cannot say that any estoppel or other bar to recovery has been shown.
The judgment in favor of defendant and against plaintiffs on the cross-complaint is affirmed; the judgment in favor of defendant and against plaintiffs on the second amended complaint is reversed and the case is remanded for further proceedings consistent with this opinion. Neither party shall recover costs on this appeal.
DUNN, J., and IRWIN, J. pro tem., concur.
Retired Judge of the superior court sitting under assignment by the Acting Chairman of the Judicial Council.
'(A) Upon the death or legally adjudicated incompentency of a partner.
'(B) Upon voluntary withdrawal of a partner by his giving at least ninety (90) days' written notice of his desire to withdraw to the Managing Partner, unless a shorter time of notice is agreed upon by a majority-in-interest vote of the partners.
'(C) By involuntary withdrawal upon the vote of more than seventy-five percent (75%) of a majority-in-interest of the partners at a special meeting called specifically for this purpose, at which the partner subject to involuntary withdrawal shall have full opportunity to present his case, and at which meeting he shall be entitled to vote.
'(D) By retirement under additional terms and conditions to be determined and agreed upon subsequently, which terms and agreement shall be contained in Appendix A to this AGREEMENT.'
'In any event, defendant was excused from performance by reason of plaintiffs' failure to tender or pay to defendant any portion of the deferred compensation which, by the ageement, was made the consideration for the covenants contained in section 18(j).' (Emphasis supplied.)
'Except as provided in this chapter, every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.'
'11. Commencing in January, 1962, and thereafter, to October 5, 1966, Defendant rendered accounting services to 15 clients having addresses either within the City of Pasadena or which were served by the Pasadena Post Office.'
'13. Even if a breach of a valid provision of the Partnership Agreement were found to have occurred, Plaintiffs could not recover from Defendant unless they establish that they suffered some actual damage flowing from breach. Plaintiffs failed to establish that they had suffered any actual damage as a result of any breach by Defendant of a valid provision of the Partnership Agreement.'