Quaile & Co. v. William Kelly Milling Co. , 184 Ark. 717 ( 1931 )

STATEMENT OF FACTS.

This was an action at law by appellee against appellants to recover $667.67, as liquidated damages, for breach of a contract for the purchase by appellants from appellee of 300 barrels of flour at $7.30 per barrel. The suit was defended on the ground that the contract was never confirmed by appellee as contemplated by the parties, and that the agreement in the contract for liquidated damages amounted to a penalty and was not therefore enforceable. By consent of the parties, the case was transferred to the chancery court and tried there.

The contract was in writing and was dated July 10, 1928. It provided that appellee, a manufacturer of flour at Hutchinson, Kansas, sold to appellants, merchants at Paris, Arkansas, 300 barrels of flour, branded "Kelly-Famous," at $7.30 per barrel.

The damages are claimed and computed on the basis of a provision of the contract which reads as follows:

"Rights of Seller: The seller may cancel this contract if there is any unpaid past-due bill, or if the property and assets of the buyer are in liquidation. If the buyer shall fail to furnish shipping instructions and/or packages as herein provided, the seller may cancel the contract; or (2) terminate the contract, the buyer to pay to the seller as liquidated damages on wheat flour remaining unshipped by reason of buyer's breach or default, the sum of (a) one-third of one cent (1/3c) per day per barrel on flour, and one cent (1c) per day per ton on feeds from the date of sale to the date of the termination as the expense of carrying; plus (b) twenty cents (20c) per barrel as the cost of selling and (c) plus or minus the difference between the market value of a bushel of cash wheat at mill on the date of the termination, multiplied by 4.6 times the lumber of barrels of flour. This amount is to be added if the price of cash wheat is lower and subtracted if the price of cash wheat is higher, upon the date of termination."

Then follows other clauses as to the right of the seller to extend the provisions of the contract for shipping directions, and also as to the rights of the buyer, which we do not deem it necessary to abstract.

T. E. Higley, district sales-manager of appellee, attached the sales contract as an exhibit to his deposition, and stated that B. M. McCurry, a salesman for appellee, obtained the contract. Higley was first notified by telephone of the contract. After he received the telephone call from McCurry, Higley wired confirmation to appellants, the buyers, at Paris, Arkansas. On the 12th day of July, 1928, Higley wrote appellants a letter in which the contract was confirmed. Appellants never gave any shipping instructions for the flour as provided for in the contract. On October 9, 1928, appellee wrote to appellants a letter asking for shipping directions to April 1, 1929, for the flour. Appellee reminded appellants that that date was some time away and that shipping instructions were requested in order to help keep the mill of appellee in operation. From time to time until the latter part of April, 1929, appellee continued to write appellants asking for shipping instructions. On April 2, 1929, appellee notified appellants that it was extending the time of shipment to May with carrying charge, and that, if the flour was not ordered within the next thirty days, it would send appellants a statement of loss. Appellants refused to semi shipping instructions, and, on May 1, 1929, appellee wrote appellants a letter terminating the contract and inclosing a statement of loss.

According to the testimony of the witness, in terminating the contract, appellee sustained a loss of $667.67, which was arrived at in accordance with the provisions of the contract under "Rights of Seller." Appellee multiplied 300 barrels by one-third of a cent, making a dollar a day for carrying charge. The contract was carried for 294 days, making $294. For selling cost, appellee multiplied 300 barrels by twenty cents. making a cost of selling $60. Appellee had purchased 1,380 bushels of wheat to cover the contract on the date of its execution, July 10, 1928. He arrived at this amount by using 4.6 bushels of wheat, which is required to make a barrel of flour. The wheat was purchased at the prevailing market price on July 10, 1928, which was $1,216. On the day the contract was terminated, wheat was selling at $0.996, making a loss of twenty-two cents a bushel, due to the decline in the price of wheat. Appellee then multiplied 300 barrels by 4.6, the amount of wheat required to make one barrel, making 1,380 bushel's. It then found that 1,380 bushels at twenty-two cents amounted to $303.60.

P. N. Baum, secretary and treasurer of appellee, was also a witness for it. According to his testimony, immediately after the receipt of the contract, sufficient wheat was purchased to mill the quantity of flour sold. It was necessary to buy 1,380 bushels of wheat to mill 300 barrels of flour. This is the ordinary and to procedure of milling companies after the selling of a quantity of flour. The immediate purchase of a quantity of wheat to cover the flour sale is necessary after the sale of flour in, bulk. This is so because the market fluctuates very rapidly. On the day the contract was terminated, appellee sold 1,380 bushels of wheat which it had bought on July 10, 1929, to make the 300 barrels of flour which it had sold to appellants. Baum corroborated the testimony of Higley as to the loss sustained and the manner of computing it.

Guy L. O'Kelley, a member of the firm of appellants, admitted signing the contract, but denied that it had ever been confirmed by appellee is contemplated by the parties, when the order was taken by the salesman of appellee and signed by appellants. Witness said that the contract was intended to be signed in confirmation both by appellants and appellee, and that his firm never signed it.

B. M. McCurry, the salesman of appellee, testified that he did not receive any commission under a contract of that sort unless the flour was delivered, and that he never got any commission under the contract sued on.

The chancellor found that appellants had breached the contract, and was of the opinion that the clause for liquidated damages was valid and binding on the parties. The court found that appellee was entitled under clause (a) to liquidated damages in the sum of $290.17, as carrying charges. The court found that the appellee was not entitled to recover twenty cent's per barrel as the cost of selling under clause (b) for the reason that appellee's salesman testified that he did not receive any commission for the sale where it was not consummated. The court further found that the appellee should recover under clause (c) $303.60, as liquidated damages for the difference between the price of wheat upon the date the contract was signed and upon the date of the termination of the contract. A decree was entered in accordance with the findings of the chancellor, and to reverse that decree appellants have prosecuted this appeal. Appellee was granted a cross-appeal. (after stating the facts). At the outset it may be stated that the contract was reduced to writing and signed by the parties. It was contemplated that the written contract should be confirmed at the home office of appellee, and this was done both by telegram and by letter when the contract was received by appellee at its home office. It is true that a member of the firm of appellants testified that it was also intended that appellant should sign the confirmation of the contract, and that this was never done. This evidence was not admissible because it tended to contradict and vary the terms of a valid and unambiguous written contract which had been signed by the parties and was complete in itself. Colonial United States Mortgage Co. v. Jeter, 71 Ark. 185,71 S.W. 945; Ogletree v. Smith, 176 Ark. 597, 3 S.W.2d 683; and Wright v. Marshall, 182 Ark. 890, 33 S.W.2d 43.

It is earnestly insisted by counsel for appellants, however, that the damage clause of the contract, which forms the basis of this lawsuit, should be construed as a penalty and not as liquidated damages. The general rule is that contracts for liquidated damages, when reasonable in their character are not to be regarded as penalties and may be enforced between the parties. But agreements to pay fixed sums, plainly without relation to any probable damage which may follow a breach, will not be enforced. Kothe v. Taylor, 280 U.S. 224, 50 S. Ct. 142; and Robbins v. Plant, 174 Ark. 639, 297 S.W. 1027, 59 A.L.R. 1128.

There is no sound reason why persons capable of contracting may not agree upon the subject of liquidated damages when fairly entered into with the view to compensation for anticipated loss. So it is generally held that, where the intention of the parties on this point is clearly ascertained from the written contract, effect will be given to the provision for liquidated damages where such damages are uncertain in nature or amount, or difficult to ascertain, or where the amount stipulated for is not so greatly disproportionate to the damage which might result from the failure of the seller to deliver the property as to show that the parties must have intended a penalty, and could not have meant liquidated damages. There must be an element of uncertainty and the apparent absence of any reasonable connection between the method of computation of the loss and the actual performance of the contract. In other words the parties under the law may contract as to the measure of damages where the liquidation bears a reasonable relation to the probable damages for the breach.

The evidence in the present case is uncontradicted that the parties contemplated that the seller should manufacture a particular brand of flour and deliver it to the buyer. The price of wheat fluctuates greatly, and it was necessary for the seller to buy an amount of wheat necessary to cover the contract and carry it until the time came for manufacturing the flour in order that it might not suffer great loss. Orders were taken to the end that the mill would be kept busy during the year, filling the contracts as they came due. The contract was not for the sale and delivery of flour by the seller, which was purchased in the open market and delivered to the buyer, but it was a contract for the manufacture of a certain brand of flour from wheat. Therefore, wheat was the basic raw material; and, inasmuch as the price of it fluctuated greatly, what damages might be suffered from the failure on the part of the buyer to carry out his part of the contract varied greatly and were uncertain.

It was said in Sheffield-King Milling Co. v. Domestic Science Baking Co., 95 Ohio St. 180, 115 N.E. 1014, by the Supreme Court of Ohio:

"The parties agreed that wheat, the thing from which the flour was to be made, should be the basis upon which to calculate the damages. They could, of course, we agreed that the flour should be such basis, but they did not do so. That was a matter for them to agree about. They did not fix an arbitrary lump sum which might turn out to be wholly inequitable, but fixed a method, the chief element of which was the price of wheat from which the flour was to be made, a matter not within the control of either. In this situation, when the plaintiff proved it had performed the terms of the contract on its part, had purchased the necessary wheat, and showed the damages that had accrued on the basis agreed on, it was entitled to recover."

In view of the situation of the parties and the surrounding circumstances, it cannot be said that the stipulated damages appear to be greatly in excess of the damages sustained or to have no relation thereto. The surrounding circumstances indicate that it would be necessary to purchase wheat and store it until the time to manufacture it into flour, and also to consider the cost of manufacturing the wheat into flour. It is a matter of common knowledge that the price of wheat fluctuates greatly, and that the cost of running a mill or manufacturing plant would be greatly increased where it was necessary for it to be idle at uncertain intervals. Similar provisions for liquidated damages in contracts for the manufacture and sale of flour have usually been sustained. International Milling Co. v. Reierson, (S.D.)225 N.W. 218, and cases cited; Yera, Andrews Thurston, Inc., v. Randozzo Macaroni Mfg. Co., 315 Mo. 927,288 S.W. 20, and cases cited; Sheffield-King Milling Co. v. Jacobs, 170 Wis. 389, 175 N.W. 796; Larabee Flour Mills Co. v. Carignano, 49 F.2d 796; and Rock v. Gaede, 111 Kan. 214, 207 P. 323, 27 A.L.R. 1152.

In this connection we call attention to the case of Kirchman v. Tuffli Brothers Pig Iron Coke Co.,92 Ark. 111, 122 S.W. 239, where it was held that, upon a breach by the vendee in a contract for the sale of goods, the general rule is that the measure of the vendor's damages is the difference between the price fixed by the contract and the market value of the goods at the time and place of delivery, provided the contract price exceeds such market value.

That principle of law would apply here, if there had been no valid contract for stipulated damages, and it might be said to apply in any event, where no steps had been taken in the performance of the contract, and no expense had been incurred. If there had been a breach of the contract in the present case before the seller had gone to the expense of purchasing wheat to be used in the fulfillment of its contract, then the principle of law just referred to would govern. But, as already pointed out, the seller, as soon as the contract was executed, purchased sufficient wheat to cover the terms of its contract with the buyer, and kept it on hand until the contract was terminated because the buyer refused to send shipping instructions to the seller. The undisputed evidence shows that the wheat was not sold by the seller, until the contract was terminated.

On the cross-appeal, but little need be said. It appears from the testimony that the salesman of appellee never received any commission for the sale made to appellants, and contemplated none until the flour was delivered. Therefore, the court properly held that the seller was not entitled to recover under clause (b), twenty cents per barrel as the cost of selling.

Therefore the decree will be affirmed, both on the appeal and the cross-appeal.