Ch20, Inc. v. Meras Engineering, Inc. ( 2015 )

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MERAS ENGINEERING, INC., UNPUBLISHED OPINION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
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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.
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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)).
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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]
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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
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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.
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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.
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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-- -•
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