Court Opinion

ID: 1037301
Source: CourtListenerOpinion
Date Created: 2013-08-12 16:06:04.952362+00
Date Added: 2024-06-11T11:51:00.391574
License: Public Domain

Filed 7/25/13
                           CERTIFIED FOR PUBLICATION

                COURT OF APPEAL, FOURTH APPELLATE DISTRICT

                                     DIVISION ONE

                                STATE OF CALIFORNIA

HEBBERD-KULOW ENTERPRISES, INC.,                  D060438

        Plaintiff and Respondent,

        v.                                        (Super. Ct. No. ECU03823)

KELOMAR, INC.,

        Defendant and Appellant.

        APPEAL from a judgment of the Superior Court of Imperial County, Donal B.

Donnelly, Judge. Reversed.

        Sutherland & Gerber and Lowell F. Sutherland for Defendant and Appellant.

        Horton, Knox, Carter & Foote, Orlando B. Foote and Margarita McKee Haugaard

for Plaintiff and Respondent.

        Hebberd-Kulow Enterprises, Inc. (HKE) sold agricultural supplies to Kelomar,

Inc. (Kelomar) for 20 years. HKE brought suit against Kelomar when Kelomar refused

to pay for certain goods shipped under 33 separate invoices. Kelomar filed a cross-

complaint alleging damages arising from HKE's delivery of nonconforming labels

provided under a contract that did not involve the 33 invoices.
       The matter proceeded to trial where the jury awarded HKE damages in the amount

of $439,792.99, consisting of $259,120.50 of principal and $180,672.49 of interest. The

jury also awarded Kelomar $27,769.94 on its cross-complaint.

       Kelomar appeals, contending the court erred as a matter of law in interpreting the

various contracts between the parties to include interest charges on late payments. In the

alternative, Kelomar argues that even if the parties agreed that Kelomar would pay

interest on any late payment, the amount of interest was improperly calculated because

the principal awarded HKE was subject to a set off. We conclude the trial court erred in

ruling that the parties' contracts included an interest charge for late payments (the interest

provision). As we discuss below, the court made this ruling as part of its consideration of

HKE's motions in limine, but did not appear to have a basis to do so on the record, and

thus, we reverse the judgment. We do not reach Kelomar's set off argument.

                      FACTUAL AND PROCEDURAL HISTORY

                                            Facts

       HKE has sold agricultural supplies to Kelomar for 20 years. During these 20

years, Kelomar would routinely order products over the phone. HKE would agree to

supply the items requested. In the phone call, the parties' representatives would discuss

and agree to the type of item, its quantity, and its price. Kelomar would provide HKE

with a purchase order number for the requested items. After delivery of the items to

Kelomar, HKE would send Kelomar an invoice that corresponded to the applicable

purchase order number. Kelomar often paid late, but HKE never charged Kelomar

interest on the late payments.

                                              2
       The dispute between the parties arose after HKE delivered about $250,000 worth

of goods in the spring of 2007. These goods were shipped separately with corresponding

invoices. In all, there were a total of 33 invoices for the subject goods. At the bottom of

most invoices was printed: "Unpaid invoices beyond terms will be assessed a monthly

service charge of 1-1/2%."

       Kelomar did not pay any of these 33 invoices because it claimed to have incurred

damages due to certain nonconforming labels supplied by HKE. These nonconforming

labels were not part of the 33 unpaid invoices, but instead were shipped under a separate

contract between the parties.

                                        The Lawsuit

       HKE filed suit against Kelomar for its failure to pay the 33 invoices. In response,

Kelomar filed a cross-complaint for damages arising out of the defective labels.

                                HKE's Motion In Limine No. 4

       Prior to trial, HKE filed several motions in limine. Motion in limine No. 4 sought

to preclude evidence that would vary the express terms of the 33 invoices, specifically the

charging of interest or a service charge if payment was made late. In support of this

motion, HKE submitted the declaration of one of its trial attorneys, ostensibly

authenticating copies of the 33 invoices that were attached to the attorney's declaration as

Exhibit A.

       Kelomar opposed motion in limine No. 4, arguing that the parties never intended

any interest payment or service charge to be part of their contract and a prior course of

conduct would show HKE never demanded payment of interest. Kelomar also argued

                                             3
that the issue of whether the interest provision contained in the invoices was a term of the

contracts between the parties was governed by California Uniform Commercial Code

section 2207.1 In support of its opposition, Kelomar submitted a declaration from one of

its trial counsel describing the facts he believed would be adduced at trial.

       The trial court denied motion in limine No. 4, but in doing so, ruled that the 33

invoices, under section 2202, were writings intended by the parties as the final expression

of their agreement. The court then stated that it found, under section 2202, that the

"agreement between [the] parties may be explained or supplemented by either the course

of dealing, course of performance, or usage of trade." However, the court made clear that

it "found an express agreement between the parties, requir[ing] interest to be paid." The

court, nevertheless, stated it would allow evidence at trial to show the interest provision

had never been enforced or may have been waived. When HKE's counsel asked the court

if it determined that the invoices were part of the parties' contracts under section 2207,

the court responded: "And the reason that I stated that this morning is, I believe that's an

issue of law that must be determined by the court. And I'd like to assist the parties by

removing that issue from the table."

       Kelomar's counsel then argued that additional evidence to be proffered at trial

would bear on the issue of whether the parties intended to include the payment of interest

as part of their contracts. During Kelomar's counsel's argument, the court and counsel

engaged in the following exchange:

1     Statutory references are to the California Uniform Commercial Code unless
otherwise specified.
                                              4
"[Kelomar's counsel]: I think the evidence is going to be undisputed
that the parties understood that they were never going to pay interest.
And I think there is additional testimony from Mike [Kulow], who, I
think, at that time was the president of HKE, that the reason he did
that was because he considered Kelomar to be a good customer, and
he wanted to continue to get their business. [¶] And knew -- I don't
know if he will actually testify to this. But I think he knew that the
produce business was such that the cash flow was not always there
when the bills came out. [¶] I think that the central thing that you
have to decide is, what evidence do you have that any of those
invoices represent Kelomar's understanding of the final expression.

"The Court: Because that was the contractual document between the
parties. It would have been far preferable if they had entered into a
specific agreement, but they didn't. And if you have evidence that
will show that, for years, that document was the key contractual
document and we've provided stuff to you, there's the bill, and you
pay it. Absent any evidence, affirmative evidence, that that was
rejected, then I have to find that it's integrated. [¶] Now, I'm
prepared to find that Mr. [Kulow's] comments would be a waiver of
enforcement, but how can I not find -- it's the only expression of
express intent between the parties that exists.

"[Kelomar's counsel]: I think you're confusing the fact that it's
written -- because it's written, you're assuming that it's the contract.
The contract is the actual meeting of the minds between the parties.
This may be evidence of the contract, but there is other evidence,
parole evidence, of the contract from both parties that they never
charged interest and that they never paid interest. [¶] And if you
look at [section] 2207, which allows evidence in the course of
dealings, that evidence comes in, unless the court finds [the] writing
to have been intended that they complete an exclusive statement of
the terms of the agreement. And there is no evidence that either
party considered that to be an exclusive statement, any of those
invoices intended to be an exclusive statement of the agreement
between them. Because --

"The Court: There's no evidence that it wasn't, though.

"[Kelomar's Counsel]: Yes, there is evidence that there wasn't. The
testimony of both Kelomar and Mr. [Kulow], that they never
enforced the --

                                   5
             "The Court: There's a difference between the enforcement and
             existence of the term . . . . I thought I made that clear. It exists. It's
             a term that exists. Whether enforcement was waived is a separate
             issue. That's where we quarrel."

       At the end of the hearing, the court made clear that it was ruling that the interest

provision was part of the parties' contracts. The court also stated that it denied motion in

limine No. 4 without prejudice.

                              The Trial and Postjudgment Briefing

       The dispute proceeded to trial. The jury awarded HKE a total of $439,792.99,

consisting of $259,120.50 in principal and $180,672.49 in interest. The jury also

awarded Kelomar $27,769.94 on its cross-complaint.

       After the jury's verdicts were entered and the jury was discharged, there was a

postjudgment hearing on matters briefed by the parties. One of those issues involved

Kelomar's argument that the determination whether interest was part of the parties'

contracts was a question of law for the court to decide. Kelomar contended there was

never meeting of the minds regarding interest being charged, and as such, no interest

should have been awarded to HKE.

       The court declined to rule as a matter of law that HKE could not recover interest.

It stated:

             "Again, I know the way in which this jury was instructed -- I'll note
             according to the court's ruling there was a specific instruction given
             on waiver. Nevertheless, this jury did hear conflicting testimony
             from the parties as to what the intent of the parties were, as well as
             what their agreement may or may not have been. So this court will
             respectfully decline to make any contrary legal interpretation on that
             issue. It does appear it would require the court to improperly
             interfere with a finding of fact, either explicitly or implicitly, by the

                                                 6
           jury of its special verdict. [¶] I think it is important to note from this
           court's perspective, having heard the evidence, one of the most
           significant disputed issues of fact is whether there ever was any
           agreement between the parties not to charge interest. A stronger
           argument could be made that interest may not be recovered if there
           was affirmative evidence -- I should say undisputed evidence that
           the parties agreed not to charge interest. And I know that is an
           argument made [b]y Kelomar by virtue of their conduct and
           relationship and history of their practices that in fact was the
           agreement. That remains in dispute. It's clear from the testimony
           . . . that that remains in dispute."

       Kelomar timely appealed the judgment.

                                        DISCUSSION

       Kelomar argues that the trial court erred in deciding as a matter of law that the

interest provision was a term of the parties' contracts. We agree.

       It is undisputed that the parties here are merchants (§ 2104, subd. (1)) and thus that

their transactions are governed by the California Uniform Commercial Code. In finding

the interest provision part of the parties' contracts, the court stated "the invoices under

section 2202 do qualify as writings intended by the parties as final expression of their

agreement with respect to such terms." The court also responded affirmatively that it was

relying on section 2207 as well. Thus, we begin our analysis by reviewing these

Commercial Code sections and evaluating the trial court's ruling under them.

       Section 2202 states:

           "Terms with respect to which the confirmatory memoranda of the
           parties agree or which are otherwise set forth in a writing intended
           by the parties as a final expression of their agreement with respect to
           such terms as are included therein may not be contradicted by
           evidence of any prior agreement or of a contemporaneous oral
           agreement but may be explained or supplemented:

                                               7
          "(a) By course of dealing, course of performance, or usage of trade
          (Section 1303); and

          "(b) By evidence of consistent additional terms unless the court finds
          the writing to have been intended also as a complete and exclusive
          statement of the terms of the agreement."

Section 2202 removes written agreements for the sale of goods from the operation of

Code of Civil Procedure section 1856, the general parol evidence statute. (See 4 Witkin,

Summary of Cal. Law (10th ed. 2005) Sales, § 33, p. 46.) Thus, section 2202 is not a

statute that provides particular guidance to a court to determine if a writing is intended to

be a final expression of the parties' agreement. Instead, it directs the court regarding what

evidence it should admit to explain or supplement the terms of the agreement. (§ 2202;

4 Witkin, supra, at p. 46.)

       In its motion in limine No. 4, HKE did not mention section 2202. In fact, HKE

essentially asked the court to ignore section 2202 and prohibit the admission of any

parole evidence. In opposition to the motion, Kelomar argued that section 2207 allowed

extrinsic evidence to determine if the parties intended to have the interest provision be

part of their final agreement.

       The trial court correctly ruled that section 2202 would allow certain parole

evidence at trial. However, the court erred when it found the invoices were writings

intended by the parties to be the final expression of their agreement, and as such, the

parties agreed to the interest provision. There simply was not enough evidence before the

court to make this determination.

                                              8
       HKE offered no evidence that the parties intended the invoices to be the final

expression of their agreement. Kelomar certainly did not offer any evidence to support

this finding and vigorously argued against this finding at the hearing, representing to the

court that, at trial, evidence would be offered that would prove that the parties never

intended the invoices to be the final expression of their agreement and the interest

provision was not part of their contracts. Based on the limited evidence in front of the

court when it considered motion in limine No. 4, there was no basis on which the court

could conclude the parties intended the invoices to be the final expression of their

agreement. Therefore, the court could not base its ruling that the interest provision was

part of the parties' agreement under section 2202 on the invoices themselves.

       Although we conclude section 2202 was not the appropriate provision for the trial

court to conclude the parties agreed to the interest provision, the court also made

reference to section 2207 in discussing its ruling. HKE asked the court if it was finding

that the interest provision was an agreed to term under the parties' agreement pursuant to

section 2207. The court implied that it was. Further, Kelomar argued in its opposition

that section 2207 was the proper statute to apply to the invoices and the analysis of

whether the parties intended the interest provision to be part of the parties' agreement.

       Section 2207 provides as follows:

          "(1) A definite and seasonable expression of acceptance or a written
          confirmation which is sent within a reasonable time operates as an
          acceptance even though it states terms additional to or different from
          those offered or agreed upon, unless acceptance is expressly made
          conditional on assent to the additional or different terms.

                                              9
           "(2) The additional terms are to be construed as proposals for
           addition to the contract. Between merchants such terms become part
           of the contract unless:

           "(a) The offer expressly limits acceptance to the terms of the offer;

           "(b) They materially alter it; or

           "(c) Notification of objection to them has already been given or is
           given within a reasonable time after notice of them is received.

           "(3) Conduct by both parties which recognizes the existence of a
           contract is sufficient to establish a contract for sale although the
           writings of the parties do not otherwise establish a contract. In such
           case the terms of the particular contract consist of those terms on
           which the writings of the parties agree, together with any
           supplementary terms incorporated under any other provisions of this
           code."

       Section 2207 was intended to address a " 'battle of the forms' [situation] in which

contracting parties exchange pre-printed forms that attempt to cast liability for certain

categories of damage on the other party to the transaction." (Frank M. Booth, Inc. v.

Reynolds Metals Co. (E.D.Cal. 1991) 754 F.Supp. 1441, 1445.) It does so "by providing

'rules of contract formation in cases . . . in which the parties exchange forms but do not

agree on all the terms of their contract.' " (Ibid., quoting Diamond Fruit Growers, Inc. v.

Krack Corp. (9th Cir. 1986) 794 F.2d 1440, 1443.) The statute "establishes a legal rule

that proceeding with a contract after receiving a writing that purports to define the terms

of the parties' contract is not sufficient to establish the party's consent to the terms of the

writing to the extent that the terms of the writing either add to, or differ from, the terms

detailed in the parties' earlier writings or discussions. In the absence of a party's express

assent to the additional or different terms of the writing, [Uniform Commercial Code]

                                               10
section 2-207 provides a default rule that the parties intended, as the terms of their

agreement, those terms to which both parties have agreed, along with any terms implied

by the provisions of the UCC." (Step-Saver Data Systems, Inc. v. Wyse Technology (3d

Cir. 1991) 939 F.2d 91, 99, fns. omitted [discussing § 2-207 of the Uniform Commercial

Code].)

       Our Supreme Court explained contract formation under the Commercial Code as

follows: "Under traditional common law, no contract was reached if the terms of the

offer and the acceptance varied. 'In order to make a bargain it is necessary that the

acceptor shall give in return for the offeror's promise exactly the consideration which the

offeror requests.' [Citation.] This 'mirror image' rule of offer and acceptance was plainly

both unfair and unrealistic in the commercial context. 'The fact that the parties did intend

a contract to be formed and both had a reasonable commercial understanding that the deal

was closed, is ignored.' [Citations.]" (Steiner v. Mobil Oil Corp. (1977) 20 Cal.3d 90, 99

(Steiner).)

       "Section 2207 rejects the 'mirror image' rule. [Citation.] 'This section of the Code

recognizes that in current commercial transactions, the terms of the offer and those of the

acceptance will seldom be identical.' [Citation.]" (Steiner, supra, 20 Cal.3d at p. 99.)

       "Under section 2207, for example, the parties may conclude a contract despite the

fact that, after reaching accord, they exchanged forms which purport to memorialize the

agreement, but which differ because each party has drafted his form 'to give him

advantage.' [Citations.] Similarly, the parties may form a contract even if the terms of

offer and acceptance differ because one or the other party, in stating its initial position,

                                              11
relies upon 'forms drafted to cover the majority of [its] transactions in a uniform, standard

manner' [citation], and subsequently fails to amend its form to reflect the deal which the

other party claims was actually negotiated. [Citation.]" (Steiner, supra, 20 Cal.3d at

p. 99.)

          "In place of the 'mirror image' rule, section 2207 inquires as to whether the parties

intended to complete an agreement: 'Under this Article a proposed deal which in

commercial understanding has in fact been closed is recognized as a contract.' [Citation.]

If the parties intend to contract, but the terms of their offer and acceptance differ, section

2207 authorizes a court to determine which terms are part of the contract, either by

reference to the parties' own dealings (see § 2207, subds. (1), (2)), or by reference to

other provisions of the code. (See § 2207, subd. (3).)" (Steiner, supra, 20 Cal.3d at

pp. 99-100.)

          "Section 2207 is thus of a piece with other recent developments in contract law.

Instead of fastening upon abstract doctrinal concepts like offer and acceptance, section

2207 looks to the actual dealings of the parties and gives legal effect to that conduct.

Much as adhesion contract analysis teaches us not to enforce contracts until we look

behind the facade of the formalistic standardized agreement in order to determine

whether any inequality of bargaining power between the parties renders contractual terms

unconscionable, or causes the contract to be interpreted against the more powerful party,

section 2207 instructs us not to refuse to enforce contracts until we look below the

surface of the parties' disagreement as to contract terms and determine whether the parties

undertook to close their deal. Section 2207 requires courts to put aside the formal and

                                                12
academic stereotypes of traditional doctrine of offer and acceptance and to analyze

instead what really happens." (Steiner, supra, 20 Cal.3d at p. 100; italics omitted.)

       Here, there is no dispute that the parties' entered into multiple contracts. Kelomar

agrees that it ordered goods from HKE and the invoices correctly list the agreed upon

price of the goods. The issue at the heart of this appeal is whether the parties agreed to

the interest provision. Section 2207 is the appropriate mechanism to determine this issue.

       The evidence adduced at trial supports the application of section 2207. The parties

enjoyed a 20-year business relationship where Kelomar often placed orders over the

telephone and the parties would agree on a price. After the goods were delivered, HKE

would provide Kelomar with an invoice. The invoice typically stated that a 1 1/2 percent

service charge would be applied to late payments. There is no evidence that the parties

agreed to an interest charge when Kelomar placed its orders with HKE, but there also is

no evidence that Kelomar voiced any objection to the interest provision in the invoice.

       While the evidence produced at trial lends itself to application of section 2207, the

court, when it ruled on motion in limine No. 4, did not have this evidence before it.

Indeed, as we discuss above, there was very little evidence offered in support of or in

opposition to motion in limine No. 4. In support of its motion, HKE provided copies of

the 33 invoices and a declaration from trial counsel attempting to authenticate the

invoices. It provided no declaration from any percipient witness explaining how the

parties conducted business, how the invoices were used, or any other pertinent evidence

that would allow the court to properly apply section 2207. Instead, HKE primarily

                                             13
offered argument in support of its motion. An attorney's argument in pleadings is not

evidence.

       In opposing motion in limine No. 4, Kelomar offered no evidence. It merely

submitted the declaration of trial counsel who stated what evidence he anticipated would

be offered at trial. Thus, the only evidence in front of the court in determining the parties

intended the interest provision to be a part of their agreement was the 33 invoices. These

invoices, absent additional evidence, did not by itself establish that the interest provision

was an agreed upon term. (Cf. India Paint & Lacquer Co. v. United Steel Products Corp.

(1954) 123 Cal.App.2d 597, 607 ["The prevailing rule is that an invoice, standing alone,

is not a contract, [citations]; and a buyer is ordinarily not bound by statements thereon

which are not a part of the original agreement."] Thus, to find the interest provision an

agreed upon term under section 2207, the court had to rely on more evidence than the

invoices. And there was no indication in the record that there was any additional

evidence before the court at that time.

       In addition, during argument on the motion in limine No. 4, the court was made

aware that, at trial, there would be evidence offered weighing on the issue of the

inclusion of the interest provision. Kelomar's counsel represented that he was aware of

witnesses who would testify that the parties never intended for the interest provision to be

part of their agreement. As such, based on the evidence before the court at the hearing on

the motion in limine No. 4, the court, under section 2207, did not have a basis to find that

the interest provision was part of the agreement between the parties. There simply was

not enough evidence for the court to make that determination as a matter of law.

                                             14
       Further, there was the indication that conflicting evidence on this issue would be

presented at trial. Whether parties have reached a contractual agreement and on what

terms are questions for the fact finder when conflicting versions of the parties'

negotiations require a determination of credibility. (Kawasho Internat., U.S.A., Inc. v.

Lakewood Pipe Service, Inc. (1983) 152 Cal.App.3d 785, 791 (Kawasho); Southern

Christian Leadership Conference v. Al Malaikah Auditorium Co. (1991) 230 Cal.App.3d

207, 220.)

       The court's comments after trial remove any doubt that it should not have ruled the

interest provision was an agreed upon term as a matter of law at the motion in limine

hearing. After the verdict was rendered but prior to entry of judgment, Kelomar asked

the court to rule as a matter of law that the interest provision was not a term of the parties'

contracts. The court declined to do so, noting, "one of the most significant disputed

issues of fact is whether there ever was any agreement between the parties not to charge

interest." The court then implied the jury made a finding of fact on this issue and it did

not want to "interfere with a finding of fact" by making a ruling as a matter of law. Thus,

prior to hearing any evidence, the court made a ruling, as a matter of law, that the parties

agreed to the interest provision. However, after hearing all the evidence at trial, the court

stated that whether the parties agreed to the interest provision was a "significant"

disputed fact. We cannot reconcile the court's posttrial comments with its comments

during the hearing on motion in limine No. 4. At the very least, the court's posttrial

comments underscore the court's error in ruling on motion in limine No. 4.

                                              15
       HKE, nevertheless, asserts the trial court properly found that the interest term was

part of the parties' agreement, but relies on the evidence presented at trial. Further, to

support its position, HKE cites Southwest Concrete Products v. Gosh Construction Corp.

(1990) 51 Cal.3d 701 (Southwest Concrete); Boyd v. Oscar Fisher Co., Inc. (1989) 210

Cal.App.3d 368; and Kawasho, supra, 152 Cal.App.3d 785. These cases all address a

situation where the trier of fact, after trial, found that an additional term contained in an

invoice was part of the parties' contract.2 Boyd and Kawasho both involve a substantial

evidence review. While we do not quibble with the holdings of these cases, they are not

applicable here where the court determined, as a matter of law during a motion in limine

hearing, that the parties agreed that a certain term was part of their contracts.

       Moreover, we find nothing in the record that leads us to believe the jury, per

section 2207, found that the interest provision was part of the parties' contracts or was

even prepared to do so. There was no jury instruction under section 2207 nor would we

expect there to be one when the court had already decided this issue as a matter of law.

Without such an instruction, the jury lacked the framework under which to apply the

evidence to make a factual finding as to the interest provision. Moreover, the parties

appeared to focus more on waiver of the right to collect interest, not whether the interest

2       In Southwest Concrete, supra, 51 Cal.3d 701, our high court expressly stated that
it was only considering the issue of whether interest payments on overdue commercial
accounts were not subject to the usury law. (Id. at p. 704.) However, the court stated in
dicta that it agreed with the "Court of Appeal's analysis of the California Uniform
Commercial Code" and that "[t]he late charges became part of the contract under section
2207[.]" (Southwest Concrete, supra, at p. 709.) Except for one sentence explaining
what the jury found, the court provided no analysis of the section 2207 issue.
                                              16
provision was actually part of the parties' contracts. The jury was instructed on waiver,

the parties submitted evidence regarding waiver, and closing arguments concerned

waiver. Simply put, the issue of whether the interest provision was an agreed upon term

was not presented to the jury. However, based upon the court's comments that this was a

"significant" disputed fact, it should have been. (See Kawasho, supra, 152 Cal.App.3d at

p. 791.)

       In conclusion, we determine that the court erroneously determined at the motion in

limine hearing that the interest provision was part of the parties' contracts as a matter of

law. There was not sufficient evidence in front of the court at that time to make this

determination. Further, after hearing the trial evidence, the court's comments indicate

that the issue was one of disputed fact that should have been determined by the jury. (See

Kawasho, supra, 152 Cal.App.3d at p. 791.) Accordingly, the award of $180,672.49 in

interest to HKE was in error, and we must reverse.

                                       DISPOSITION

       The judgment is reversed. Kelomar is awarded its costs on appeal.

                                                                    HUFFMAN, Acting P. J.

WE CONCUR:

                        NARES, J.

                        AARON, J.

                                              17