Court Opinion

ID: 6963124
Source: CourtListenerOpinion
Date Created: 2022-07-24 01:49:03.318403+00
Date Added: 2024-06-11T16:08:21.007712
License: Public Domain

TASHIMA, Circuit Judge,
dissenting:
I respectfully dissent.
I do not agree that Wyler Summit has stated a claim for breach of contract based on a waiver theory. Notwithstanding the parties’ clear expression of their contractual intent, the majority allows Wyler Summit unilaterally to rewrite a material term of an unambiguous agreement nearly 40 years after its formation by misapplying the California law on waiver.
Preliminarily, I take issue with the majority’s conclusion that “the district court committed two distinct errors,” first, in misapplying the applicable standard under Rule 12(b)(6) and, second, in “eonduet[ing] the wrong inquiry,” on the “for-whose-benefit” issue. The district court, in fact, did not commit error in either respect and its judgment should be affirmed.
The district court concluded that “[tjhere is nothing in the contract to suggest that the percentage compensation provision was included solely for the benefit of Wyler. In fact, the opposite is true: the provision also benefits defendants by allowing them to limit Wyler’s annual payment.” (Initial emphasis added, remaining emphases in the original.)
The interpretation of a contract is a question of law. HS Servs., Inc. v. Nationwide *665Mut. Ins. Co., 109 F.3d 642, 644 (9th Cir. 1997). Under the objective theory of contracts, whether a provision is intended solely to benefit one side should be determined from an objective review of the contract as a whole; not from extrinsic evidence offered 40 years later. As the majority recognizes, on a 12(b)(6) motion, only the well pleaded facts of a complaint should be accepted as true. “We do not, however, necessarily assume the truth of legal conclusions merely because they are cast in the form of factual allegations.” Western Mining Council v. Watt, 643 F.2d 618, 624 (9th Cir.1981). Moreover, in this ease, the Ben Hur contract was attached to the complaint and incorporated in haec verba. Thus, neither we nor the district court are required to accept as true concluso-ry allegations in the complaint which are contradicted by the clear import of the contract itself. See Durning v. First Boston Corp., 815 F.2d 1265, 1267 (9th Cir.1987).1
For a contractual provision to be waivable, as the cases cited by the majority recognize, the provision must have been included in the contract solely for that party’s benefit. E.g. Sabo v. Fasano, 154 Cal.App.3d 502, 505, 201 Cal.Rptr. 270, 271 (1984). Wyler Summit does not even allege that the installment payment provision was included solely for Wyler’s benefit, a pleading deficiency which the majority overlooks. Even assuming, however, that paragraph 7 of the complaint could fairly be read as alleging that the installment payment provision was included in the Ben Hur contract solely to benefit Wyler, that allegation is not entitled to be accepted as true because, as the district court recognized, it is contradicted by a plain reading of the contract.
It is evident from the face of the installment payment provision and as a matter of plain common sense that, from the contract’s inception, the provision benefitted MGM just as much, if not more so, than it benefitted Wyler. The forbearance of the payment of any debt, without interest, primarily benefits the debtor. If any party receives only an “incidental” benefit from such an arrangement, it is the creditor, whose only benefit is a tax benefit.2
This is not a factual issue. This is a contract interpretation issue. As a matter of law, the district court’s interpretation of the contract was the only sensible conclusion to reach. The issue was properly reached and correctly disposed of on a 12(b)(6) motion to dismiss, where the contract was appended to and incorporated in the complaint.
On the primary legal issue of waiver, the majority relies on a line of cases beginning with Knarston v. Manhattan Life Ins. Co., 140 Cal. 57, 73 P. 740 (1903). This reliance is greatly misplaced. The majority acknowledges that these cases involve waiver of only minor or procedural conditions precedent to performance. Yet, it goes on blithely to announce, without analysis or citation to any authority, that there is “no impediment” to waiver of the installment payment provision in the case at bench. In fact, there are several impediments, each one of which takes this case beyond the bounds of established waiver doctrine.
First, the majority conveniently overlooks the black letter rule that waiver may not *666operate materially to alter the parties’ agreed upon exchange. Restatement of Contracts (Second) § 84(1), & cmts. c, d. (1979) (“Restatement ”); John D. Calamari & Joseph M. Perillo, The Law of Contracts § 11— 31, at 493 (3rd ed. 1987) (“The most important rule is that waiver of a material part of the agreed exchange is ineffective.”); John E. Murray, Jr., Murray on Contracts § 111, at 629-30 (3rd ed.1990).
As the district court understood, fundamental changes in the parties’ contractual duties may not be accomplished unilaterally through waiver, but instead require a modification of the contract by mutual consent or through estoppel. See e.g., Howard v. County of Amador, 220 Cal.App.3d 962, 977, 269 Cal.Rptr. 807, 817 (1990) (“The parties to an existing contract may, through mutual consent, modify or rescind their agreement.”) (citing Cal.Civ.Code §§ 1689(a), 1697, 1698). The installment payment provision cuts to the core of the consideration on which the contact rests; it, therefore, should be held to be not subject to unilateral waiver. According to the Restatement, “where a promise to disregard the non-occurrence of the condition materially affects the value received by the promisor or the burden or risk assumed by him, the promise is not binding_” Restatement § 84, cmt. c. Here, the admitted purpose and undeniable effect of Wyler Summit’s waiver is to change the monetary value of the performance it will receive from Turner.
Further, even if Turner’s failure to comply with the installment payment provision would not by itself have constituted a material breach, the provision is clearly more crucial to the contractual agreement than the provisions waived in the cases on which the majority relies. See, e.g., Sabo v. Fasano, 154 Cal.App.3d 502, 201 Cal.Rptr. 270 (five-day time limit on offer); Reeder v. Longo, 131 Cal.App.3d 291, 296-97, 182 Cal.Rptr. 287, 290-91 (1982) (illegal subordination clause in real estate contract).
In this respect, the present ease is not analogous to Knarston, where an insurance company waived the requirement that the insured pay its premiums by a specific date, 140 Cal. at 62-63, 73 P. at 741, but to Conner v. Union Auto. Ins. Co., 122 Cal.App. 105, 9 P.2d 863 (1932). There, the court held that the insurance company could not waive an express exemption from its duty to insure even though the provision was clearly inserted in the contract solely for the insurance company’s benefit. Id. at 110, 9 P.2d 863 (“By means of the doctrine of waiver a contract may not be reformed so as to create a liability for conditions which are specifically excluded by the very terms of the instrument.”). See also Intel Corp. v. Hartford Accident Indem. Co., 952 F.2d 1551, 1559-61 (9th Cir.1991) (under California law, no waiver of policy exclusion absent estoppel or misconduct). Just as the insurer’s duty to pay in Conner was expressly limited by an exclusion held to be unwaivable, Turner’s duty to pay in the present case is limited by the installment payment provision which I would similarly hold unwaivable.
Second, in valid waiver cases, like Knarston and its progeny, waiver of the condition makes the waiving party’s duty of performance independent of the condition. See 1 B.E. Witkin, Summary of California Law, Contracts §§ 767-68 (9th ed.1987) (collecting cases). This alteration of the contract lacks consideration and other validating devices. Restatement § 84, cmt. d.; 2 E. Allan Farnsworth, Farnsworth on Contracts § 8.5, at 376-77 (2d ed. 1990) (“Farnsworth ”). However, this absence is tolerated because waiver spares one of the parties (usually the non-waiving party) the loss that would occur if the waiving party’s performance were excused by failure of the condition. See Restatement § 227, cmt. b. That rationale does not apply to the instant ease because the waiving party, Wyler Summit, has already fully performed all of its duties under the contract, so there is no performance to preserve.
In fact, the only effect of waiving the installment payment provision is to add to the performance obligations of Turner, the non-waiving party, by requiring it to pay more, earlier, than was originally required under the contract. Such offensive use of waiver to impose additional duties on other parties is expressly prohibited by our caselaw interpreting California law. Groves v. Prickett, *667420 F.2d 1119, 1125 (9th Cir.1970); Rennie & Laughlin, Inc. v. Chrysler Corp., 242 F.2d 208, 210 (9th Cir.1957) (“[I]t is settled that waiver can be employed only for defensive purposes. It can preclude the assertion of legal rights but it cannot be used to impose legal duties. The shield cannot serve as a sword.”).
An even more radical departure is the majority’s conclusion that Turner’s continued compliance with the provision constitutes a breach of the contract. Tellingly, the majority cites no ease (nor has my research uncovered one) where a court has held, as the majority does, that a non-waiving party’s continued compliance with the terms of a waived provision provides grounds for breach.3 What the majority has done is to rewrite the Ben Hur contract. Whereas the parties had originally agreed that Turner was required to pay no more than $50,000 per year, by virtue of the majority’s ipse dixit, Turner is now prohibited from doing so under the rewritten contract.
The majority’s new formula for waiver will no doubt have a corrosive effect on the stability of contractual relations, particularly long-term agreements. Its overly-expansive reading of Knarston removes all limits on the kinds of provision that can be waived by parties eager to engage in a line-item redrafting of their agreements.
I would affirm the district court’s order that Wyler Summit’s complaint fails to state a claim for breach of contract based on a waiver theory.4 I therefore respectfully dissent.

. On this issue, the majority relies on both state and federal precedent. Assuming its reliance on state cases on how a contract should be construed on a 12(b)(6) motion is correct, as the majority notes, those cases are in conflict. See Maj. op. at 663 & n. 8. Unlike the majority, I believe that the better rule is stated in WYDA Assoc, v. Merner, 42 Cal.App.4th 1702, 50 Cal. Rptr.2d 323 (1996). "When a contract is reduced to writing, the intention of the parties is to be ascertained from the writing alone, if possible. ...” Id. at 1709, 50 Cal.Rptr.2d 323 (quoting Cal. Civ.Code. § 1639). "The trial court's resolution of an ambiguity is also a question of law if no parol evidence is admitted....” Id. at 1710, 50 Cal.Rptr.2d 323.

. If, as the majority hypothesizes (probably correctly), Wyler’s motive in agreeing to or insisting on the installment payment provision was to avoid or defer the payment of confiscatory income taxes, then he surely had no subjective intent that the provision could be waived by him. Otherwise, he would have run afoul of the constructive receipt of income doctrine, making all of his percentage compensation immediately taxable to him upon its receipt by MGM. See generally 2 Mertens Law of Federal Income Taxation §§ 10:01-10:03 (discussing the history and substance of the constructive receipt doctrine).

. The majority’s approach will lead to some bizarre results when applied to more typical waiver situations. Once an insurance company waived the requirement of notice of a claim, the insured presumably could be held liable for breach of the notice provision, if it gave notice anyway. Cf. Restatement § 230 ill. 1 & cmt. b (discussing waiver under identical facts). Similarly, if a seller of goods waived its right to limit the buyer's period for objections to the goods to a five-day period, the buyer could be held in breach if it complied with the five-day limit. Cf. Fairbanks, Morse & Co. v. Nelson, 217 F. 218 (9th Cir. 1914) (same fact pattern).

. I therefore would not reach the statute of limitations issue and express no opinion on it.