Court Opinion

ID: 2818922
Source: CourtListenerOpinion
Date Created: 2015-07-21 22:33:43.359926+00
Date Added: 2024-06-11T12:25:14.775749
License: Public Domain

F L. ED
                                                                                                          COURT OF ADPEALS
                                                                                                              DI! VIISIO" ii

                                                                                                        2015 JUS. 21   AM 9> 26
    IN THE COURT OF APPEALS OF THE STATE OF
                                                                                                WASIq.P
                                                      DIVISION II                                        3Y

CH2O, INC., a Washington Corporation,                                                      No. 45728 -8 -II

                                Appellant,

         V. -

MERAS ENGINEERING, INC.,                                                           UNPUBLISHED OPINION

                                Respondent,

         E

JAMES SHAW, individually and the marital
community comprised of JAMES SHAW and
JENNIFER SHAW,

                                Third Party Defendants.

         SUTTON, J. —      CH2O, Inc. appeals the superior court' s summary judgment order that CH2O

cannot recover economic damages against Meras Engineering, Inc. under Section 9 of the parties'

2007 Distributor Agreement ( Agreement).                   CH2O argues that the trial court erred in interpreting

Section 9 of the Agreement to prohibit both parties from recovering economic damages against

one another,    but    not as   to   claims   brought    by   third   parties.   We hold that, under Section 9 of the

Agreement, the parties expressly waived the right to seek economic damages from one another for

breach   of   the Agreement.         Accordingly, we hold that CH2O cannot recover economic damages

against Meras for breach of the Agreement, but CH2O may pursue other forms of noneconomic

recovery     against   Meras. We       affirm   the   superior court' s    final   order   granting summary judgment in
No. 45728 -8 -II

favor   of   Meras   and   denying   partial    summary judgment to CH2O.           We also award Meras, as the

prevailing party, its reasonable attorney fees and costs on appeal.

                                                         FACTS

         C142O, a Washington corporation, and Meras, a California corporation, entered into an

Agreement in 2007.          Both companies provide chemical water treatment products and services to

commercial customers          in the United States       and abroad.      The parties negotiated and drafted the

Agreement together.

         At the time that the parties entered into the Agreement, CH2O had an existing customer

base in California where it sold its products. Under the Agreement, CH2O appointed Meras as a

nonexclusive     distributor for the      sale of particular products      to specific   customers.   The customers

and products were identified in Addendums A and B to the Agreement, respectively.

         Section 6( a) of the Agreement provided that Meras was to " use its best efforts to develop

and maintain     the   market   for the Products in [ California]."       Clerk' s Papers ( CP) at 10. To this end,

CH2O     sold products     to Meras   for   resale   to its existing   customers.   The Agreement also contained

noncompete provisions prohibiting Meras from selling or distributing any products of CH2O' s

potential competitors       that   were   the   same or similar   to CH2O'    s products.   The Agreement was to

continue for an initial period of three years and then automatically renew annually unless the

parties expressly terminated it;,

         On August 10, 2011, two of Meras' s principals learned for the first time of the existence

of the 2007 Agreement when Meras' s former attorney forwarded to them a letter from CH2O' s

attorney, attaching the Agreement. Meras promptly exercised its termination rights under Section

 14 of the Agreement by giving written notice to CH2O of its intent to terminate the Agreement

                                                             2
No. 45728 -8 -II

within   90 days.       On September 30, 2011,. CH2O received written notice from Meras' s attorney

terminating        the Agreement.           Consequently, the Agreement was terminated on December 31.

CH2O subsequently learned that, during the term of the Agreement, Meras sold products similar

to   CH2O'    s    products     to   CH2O'    s   customers.    CH2O contends that this conduct violated the

noncompete provisions of Section 15 of the Agreement, as well as the " best efforts" provision of

Section 6( a) of the Agreement. CP at 10. CH2O also alleged that Meras failed to comply with the

portion of        Section 6( a)      of   the Agreement that    requires     Meras to " refer to CH2O inquiries and

requests   for [ CH2O'     s]   Products from       potential customers outside     the [ California   area]."   CP at 10.

         In January 2012, CH2O filed a lawsuit seeking economic damages for Meras' s alleged

breach   of   the Agreement.              With its answer to the lawsuit, Meras filed a third party complaint

against its former principal, James Shaw, alleging claims arising from his negotiation and

execution of the Agreement and his failure to disclose the Agreement to Meras' s executive team

upon his separation from the company. Following mandatory alternative dispute resolution, Meras

dismissed its claims against Mr. Shaw with prejudice.

         In October and November 2012, CH2O and Meras filed cross- motions for partial summary

judgment regarding the interpretation                 of   Section 9   of   the 2007 Agreement.   The superior court

granted Meras' s motion for partial summary judgment and denied CH2O' s motion. The superior

court held that CH2O " may not seek economic damages against [ Meras] for breach of the subject

Distributor Agreement."               CP at 186. On January 31, 2014, the superior court entered a final order

and judgment dismissing all claims in favor of Meras and against CH2O, because its summary

judgment ruling disposed of all triable issues in this matter. CH2O appealed.

                                                                 3
No. 45728 -8 -II

                                                               ANALYSIS

                                                        1.   STANDARD OF REVIEW

            We review a summary judgment order de novo, engaging in the same inquiry as the trial

court.      Donatelli     v.   D.R.   Strong Consulting Eng' rs,             Inc., 179 Wash. 2d 84, 90, 312 P.3d 620 ( 2013).

Summary judgment is appropriate only if, viewing the facts and reasonable inferences in the light

most favorable to the nonmoving party, no genuine issues of material fact exist and the moving

party is    entitled    to judgment         as a matter of     law. Donatelli, 179 Wash. 2d          at   90; CR 56( c).   "   A genuine

issue of material fact exists when reasonable minds could differ on the facts controlling the

outcome       of    the litigation."         Dowler v. Clover Park Sch. Dist. No. 400, 172 Wash. 2d 471, 484,

258 P.3d 676 ( 2011).

             When reviewing             a   decision     on a motion    for summary judgment, `[ a]          question of contract

interpretation may be determined as a matter of law if it does not turn on the credibility of extrinsic

evidence       or ...      a choice among reasonable inferences to be drawn from extrinsic evidence."'

Donatelli, 179 Wash. 2d at 107 ( quoting Kofinehl v. Baseline Lake, LLC, 177 Wash. 2d 584, 594,

305 P.3d 230 ( 2013)) (              alteration   in    original).   Contract interpretation is a question of law when

      1) the interpretation does not depend on the use of extrinsic evidence, or (2) only one reasonable

inference      can   be drawn from the             extrinsic evidence."'        United Fin. Cas. Co. v. Coleman, 173 Wash.
463, 472, 295 P.3d 763 ( 2012) ( quoting Tanner Elec.                    Coop.   v.   Puget Sound Power & Light,
App.

 128 Wash. 2d 656, 674, 911 P.2d 1301 ( 1996)).

             When- interpreting a contract, we give ordinary meaning to the words in the contract and

try   to   effect   the   parties'     mutual     intent.     City of Tacoma v. City of Bonney Lake, 173 Wash. 2d 584,

590, 269 P.3d 1017 ( 2012);                see   Realm, Inc.    v.   City   of Olympia, 168 Wn.         App.   1, 4, 277 P.3d 679
No. 45728 -8 -II

 2012). "    Washington courts follow the objective manifestation theory of contracts, imputing an

intention corresponding to the                reasonable        meaning      of   the    words used."         Realm, 168 Wash. App.

at 5.

            To interpret a contract, we must determine the parties' intent, for which we apply the

 context rule.""     Fedway Marketplace West, LLC v. State, 183 Wash. App. 860, 871, 336 P.3d 615

 2014) ( quoting Roats         v.    Blakely       Island Maint. Comm'            n,   Inc.,   169 Wash. App. 263, 274, 279 P.3d
943 ( 2012)).      The   purpose of          the   context rule    is to determine the           parties' "   meeting of the minds,

as opposed     to [ their] insufficient            written expression of ...              intent."   Tjart v. Smith Barney, Inc.,

107 Wn.     App.   885, 895, 28 P.3d 823 ( 2001).                 The     context rule allows a court, when "`             viewing the

contract ' as a whole, to consider extrinsic evidence, such as the circumstances leading to the

execution of the contract, the subsequent conduct of the parties and the reasonableness of the

parties'    respective    interpretations."'              Fedway    Marketplace West, 183 Wn.                  App.   at   871 ( quoting

Roats,     169 Wn.       App.       at     274). "       This   rule   applies `       even when the disputed provision is

unambiguous."' 183 Wash. App. at 871 ( quoting Roats, 169 Wash. App. at 274).

            But our consideration of `surrounding circumstances and other extrinsic evidence' is

limited ` to determin[ ing] the meaning of specific words and terms used' and not to ` show an

I
    The Washington Supreme Court first                      adopted    in Berg v. Hudesman:
                                                                       the "`   context rule"'

            The   Berg         recognized that intent of the contracting parties cannot be
                           Court]
           interpreted without examining the context surrounding an instrument' s execution.
           If relevant for determining mutual intent, extrinsic evidence may include ( 1) the
           subject matter and objective of                  the contract, ( 2)     all the circumstances surrounding
           the making     of   the    contract, ( 3)       the subsequent acts and conduct of the parties, and
            4) the reasonableness of respective interpretations urged by the parties.
Fedway Marketplace West, LLC v. State, 183 Wash. App. 860, 871 n. 14, 336 P.3d 615 ( 2014)
    quoting Hearst Commc'            ns,   Inc.    v.   Seattle Times Co., 154 Wash. 2d 493, 502, 115 P.3d 262 ( 2005)).

                                                                       5
No. 45728- 841

intention independent of the instrument' or to ` vary, contradict or modify the written word."'

Fedway Marketplace West, 183 Wash. App. at 871 ( quoting Hearst Commc' ns, Inc. v. Seattle Times

Co., 154 Wash. 2d 493, 503, 115 P.3d 262 ( 2005) ( emphasis in original)).

                                                 II. SECTION 9

         The disputed provision, Section 9 of the Agreement, provides as follows:

                 9.     Limitation   Liability. ' Neither party shall be liable to the other for
                                     of

         incidental, special, consequential or punitive damages, including but not limited to
         loss of profits, use of capital, or business opportunity, downtime costs or claims of
         customers of said party arising out of the performance, non-performance or
         termination of this Agreement, whether based upon strict liability, active or passive
         negligence, contract, breach of warranty or any other legal theory.

CP. at 11.

         CH20 argues that reading Section 9 to prohibit recovery of economic damages for breach

of the Agreement is not a reasonable interpretation, and renders the contract obligations illusory,

because it would prohibit either party from recovering any sort of economic damages against the

other   for any type    of claim.    CH20 argues that this court should interpret Section 9 to limit the

parties' liability to one another only for third party indemnification claims, such as those brought

by " customers"   as referenced      in Section 9.     CP at 11.

         Meras argues that Section 9 is an express and unambiguous waiver of the parties' liability

to one another for economic damages, precluding economic recovery. Meras also claims that the

tern "claims. of customers" is only one type of claim listed in Section 9, and thus the section is not

limited to only third party claims. CP at 11.

         We agree with Meras; read as a whole, Section 9 applies not just to damages for " claims

of customers,"    but   also   to damages for " loss   of profits, use of capital, or   business opportunity, [ or]

                                                           0
No. 45728 -8 -II

downtime       costs."    CP   at   11.   The    plain   language     of    Section 9    says, "   Neither party shall be liable

to the   other   for incidental,      special, consequential, or punitive                damages."      CP   at   11.   Accordingly,

neither party may recover economic damages against the other for breach of the Agreement.

          CH2O argues that, under City ofTacoma v. Bonney Lake, we should not interpret the broad

limitation of liability in Section 9 to preclude recovery of economic damages, because limiting

liability in this manner would prevent CH2O from obtaining a viable remedy for breach. But we

reject this argument because Section 9 still permits CH2O to pursue other recovery in the form of

noneconomic damages.

          City of Tacoma involved Tacoma' s water service agreements with municipalities and a

broad    indemnity       provision    that   stated, "[   Tacoma] hereby releases, covenants not to bring suit and

agrees    to   indemnify,      defend      and    hold harmless the           City ...     from any and all claims, costs,

judgments,       awards or     liability     to any   person."      City of Tacoma, 173 Wash. 2d at 593 ( alteration in

original).     The municipalities argued that, because any enforcement action to compel performance

would be a " claim" arising under the contract, the indemnity provision completely precluded the

City of Tacoma from filing an action under the contract. City of Tacoma, 173 Wash. 2d at 593. The

Supreme Court rejected this argument, holding that interpreting such a blanket limitation of

liability into the contract would create an absurd result by allowing the indemnified party to

 completely avoid its contractual obligations by claiming any enforcement action to compel

performance       is   a ` claim'   arising   under      the   contract." 173 Wash. 2d     at   593.                             r

          But here the language in Section 9 is narrower than the broad indemnity provision in City

of Tacoma; here, Section 9 allows either party to sue the other party for breach, but it precludes
economic       recovery.       This is not the absurd result that CH2O claims; long-term business partners

                                                                     7
No. 45728 -8 - II

may choose to preclude recovery of economic damages because they depend on each other' s

financial stability to      execute a successful           business strategy.        The Agreement still permits either

party to dispute its obligations under the contract, to bring a suit against the other party, or to obtain

noneconomic recovery, such as specific performance or a declaratory judgment.

                                                           A. Section 18

          CH2O then argues that Section 18 of the Agreement would be meaningless if the court were

to interpret Section 9 to           waive      liability   for    economic    damages.        Section 18 provides for the

recovery of costs and attorney fees by the prevailing party in a dispute regarding the Agreement.2

CH2O argues that Section 18' s provision permitting recovery of costs and attorney fees would be

illusory if Section 9 is interpreted as a waiver of economic damages. .

          We agree with Meras that Section 9 of the Agreement, read as a whole, applies not just to

damages for "     claims of customers,"              but   also   to   damages for " loss of profits, use of capital, or

business opportunity, downtime                 costs or claims. of customers."        CP     at   11.   But " a reasonable, fair,

just,   and effective    meaning to       all manifestations of         intention," expressed in Section 18 compels us

to hold that this provision carves out a guarantee of attorney fees and costs for claims not waived

by   Section 9.        Spokane Sch. Dist. No. 81 v. Spokane Educ. 4ss' n, 182 Wash. App. 291, 305,

331 P.3d 60 ( 2014).       Moreover, Section 9 does not bar other recovery in the form of noneconomic

damages. And Section 18, accordingly, allows recovery of fees and costs to a prevailing party in

2
    Section 18    of   the Agreement between the                 parties provides,   in   relevant part, "    In the event of a
dispute    over   any   part of     this Agreement, the           parties agree   that ...    the prevailing party shall be
entitled to recover from the losing party any costs, disbursements and reasonable attorney fees
incurred in    such     dispute."    CP   at   13.
No. 45728 -8 -II

an action seeking declaratory judgment or other equitable relief. This interpretation harmonizes

Sections 9 and 18.

                                                   B. Section 13

         CH2O next argues that Section 13, the Force Majeure provision, would be " superfluous" if

we   interpret Section 9 to   waive economic       damages. Br.    of   Appellant   at   12.   Section 13 disclaims

the parties' liability to one another in situations beyond the parties' control. But just as the parties

agreed to waive liability to one another for economic damages resulting from performance .of the

Agreement, it is reasonable for them to also specifically agree to waive liability in the event that

forces beyond the parties' control make performance impossible.

         Although the broad limitation of liability may significantly limit CH2O' s remaining

recovery since the parties already terminated the Agreement, this does not render this interpretation

of Section 9 absurd,.as CH2O argues. Both parties drafted and negotiated the Agreement and both

parties are sophisticated; we conclude that the parties understood their contracting terms, and

implicitly accepted the potential consequence that recovery may be limited or even effectively

foreclosed if a party did not timely purse its right to enforce the contract.

                                         Ill. EXTRINSIC EVIDENCE

         The   superior court considered extrinsic evidence        in its summary judgment ruling. CH2O

submitted      declarations   from    Tony    McNamara,      President     of   CH2O,          and   James   Shaw,   a

representative     of   Meras, both   of whom were       involved in the Agreement negotiations.                Their

declarations stated that the parties worked together in creating the Agreement and that they

understood     the Agreement to      permit economic     damages for breach. CH2O argues that, although

the superior court properly     admitted     the   extrinsic evidence as an aid      in ascertaining the      parties'
No. 45728 -8 - II

intent, the court erred in failing to find that this evidence supported CH2O' s interpretation of

Section 9 of the Agreement.3 CH2O contends that these declarations demonstrated that the parties

never intended Section 9 to preclude economic damages.. We disagree.

          We do "      not   consider [ extrinsic]       evidence    to ` show an intention independent of the

instrument'      or   to ` vary,   contradict    or   modify the    written word."'     Hulbert v. Port of Everett,

159 Wash. App. 389, 402, 245 P.3d 779 ( 2011) (                 quoting Hearst Commc' ns, 154 Wash. 2d at 503).

Because these declarations would contradict the clear terms of Section 9,. which precludes the

parties from recovering economic damages for breach, we do not consider these declarations.

                                                      IV. AMBIGUITY

          CH2O argues that it was not the sole drafter of the Agreement and Meras is not entitled to

have the    contract read         in the light   most   favorable to it.   CH2O further argues that the contract

should not be construed against it unless the parties' intent cannot otherwise be determined.

           If a contract provision' s meaning is uncertain or is subject to two or more reasonable

interpretations after analyzing the language and considering extrinsic evidence ( if appropriate), the

provision   is   ambiguous."          Viking Bank v. Firgrove Commons 3, LLC, 183 Wash. App. 706, 713,

334 P.3d 116 ( 2014). '          We generally    construe ambiguities against        the   contract' s   drafter."   Viking

Bank, 183 Wn.         App.   at    713.   But " if the .parties drafted the contract together, we will adopt the

interpretation that is the         most reasonable and     just." 183 Wash. App. at 713.

3 Meras challenged the admission of extrinsic evidence at trial, but it did not appeal the trial court' s
ruling.    The trial court considered Mr. McNamara' s declaration in its order granting Meras' s
summary judgment motion, and expressly ruled that it did not consider Meras' s motion to strike
portions of the declaration.

                                                              10
No. 45728 -8 - II

          Declarations submitted by both CH2O and Meras showed that both parties engaged in

drafting and negotiating the Agreement. Unlike an adhesion contract, the Agreement was freely

negotiated   between the      parties.    Because we find that the terms of Section 9 clearly express the

parties' intent at the time of drafting, we decline to consider extrinsic evidence.

                                          V. ATTORNEY FEES AND COSTS

          Meras requests reasonable attorney fees and costs on appeal. RAP 18. 1( a) and ( b) permit

a requesting party the right to recover reasonable attorney fees or expenses on appeal if applicable

law grants the party that right. Under RCW 4. 84.330, the prevailing party in an action to enforce

or defend a contract is entitled to attorney fees and costs on appeal where the contract so provides.4
Section 18    of   the Agreement between the parties provides,            in   relevant part: "   In the event of a

dispute   over   any    part of   this Agreement, the    parties agree   that ...   the prevailing party shall be

entitled to recover from the losing party any costs, disbursements and reasonable attorney fees

incurred in      such   dispute."    CP   at   13.   Because under RCW 4. 84. 330 and Section 18 of the

Agreement, the prevailing party is entitled to an award of reasonable attorney fees and costs on

appeal in a contract dispute action, we award Meras, as the prevailing party, reasonable attorney

fees and costs on appeal.

4 RCW 4. 84. 330 provides,
                In any action on a contract or lease entered into after September 21, 1977,
          where such contract or lease specifically provides that attorneys' fees and costs,
          which are incurred to enforce the provisions of such contract or lease, shall be
          awarded to one of the parties, the prevailing party, whether he or she is the party
          specified in the contract or lease or not, shall be entitled to reasonable attorneys'
          fees in addition to costs and necessary disbursements.
                                                          11
No. 45728 -8 -II

                                                CONCLUSION

        We hold that, under Section 9 of the Agreement, the parties expressly waived the right to

seek economic damages from one another arising for breach of the Agreement. Thus CH2O cannot

seek economic damages against Meras for breach of the Agreement, but CH2O may pursue other

recovery in the form of noneconomic damages. We affirm the superior court' s final order granting

summary judgment in favor       of   Meras    and   denying   partial   summary judgment to CH2O.   We also

award Meras, as the prevailing party, reasonable attorney fees and costs on appeal.

        A majority of the panel having determined that this opinion will not be printed in the

Washington       Appellate   Reports,       but will be filed for public record in accordance with

RCW 2. 06. 040, it is so ordered.

                                                              SUTTON, J.
 We concur:

                                        i

 JC. HANSON, C.J.

 B    RGT , .,
                 A.C. l-- -•

                                                        12