Runyan v. Pacific Air Industries, Inc.

Opinion

In this action for relief based upon the rescission of a franchise contract, defendant appeals from a judgment determining that the contract had been rescinded and ordering restitution and consequential damages in favor of plaintiff.

Defendant Pacific Air Industries, Inc. (Pacific) is a corporation engaged in the business of aerial surveying and photogrammetric services with headquarters in Long Beach. In 1965 plaintiff was, and for several years prior thereto had been, a geologist and engineer employed by Tidewater Oil Company (Tidewater). In October of that year he responded to an advertisement, placed by Pacific in the Wall Street Journal announcing the availability of Pacific franchise territories in various areas of California. A number of conferences with Pacific followed. Eventually on March 9, 1966, plaintiff and Pacific entered into a written area service contract whereby, in consideration of the payment by plaintiff of $25,000, he was awarded an exclusive photogrammetric franchise for the Counties of Inyo, Kern, Kings and Tulare. 1 In the meantime, on February 18, 1966 he had *307 resigned his position with Tidewater Oil Company. 2 At trial, plaintiff claimed that since he was entering a technical field in which he had no experience, he relied in part upon a schedule of projected income prepared by Pacific.

Under the agreement Pacific was obligated to train plaintiff in the rudiments of photogrammetry, provide 24-hour sales and technical assistance for the initial period, obtain premises in Bakersfield and supply that office with various essential devices for carrying on “second order instrument” services. The more sophisticated “first order instrument” work was to be done at the Long Beach plant.

There was evidence that during the training period (see fn. 2, ante) defendant provided little in the way of formal education in the theoretical aspects of topography and photogrammetry. Plaintiff was permitted to observe various aspects of plant techniques and was given instruction in some of the simpler aspects of the operation. He was also employed by Pacific at night to perform certain routine operations which to some extent supplemented his limited knowledge of the business. Much of the time, however, plaintiff had nothing to do.

In early April 1966, plaintiff completed his training and returned to his Bakersfield office to begin his franchise operation. Pacific’s performance in supplying and maintaining the local office did not comply with its obligations under the contract. A promised sign did not appear for months and few of the necessary instruments and equipment were available until late in the summer. Instead of full-time assistance during the initial period plaintiff received infrequent visits from various officers of Pacific. Such visits, however, provided plaintiff with some opportunity to go into the “field” and observe sales techniques first hand.

Despite Pacific’s failure to fully perform its promises plaintiff initially made no complaint. In late summer, however, he became concerned that his franchise was being treated by Pacific merely as a commission arrangement. He complained that Pacific was making charges for “first order instrument” work at arbitrary rates. Finally, on October 7, 1966, plaintiff gave Pacific written notice of rescission of the contract of March 9, 1966, based upon failure of consideration and fraud.

Shortly thereafter plaintiff brought the instant action for restitution and consequential damages. His complaint set forth four counts: the first based on rescission for failure of consideration; the second and third based on *308 rescission for fraud; and the fourth a common count for money lent apparently grounded on a theory of rescission. Plaintiff sought recovery not only of the consideration paid by him but also of consequential damages consisting of office expenses, training expenses and loss of salary for the period during which he had attempted to operate under the franchise.

The trial court found in favor of plaintiff on the first count 3 but against plaintiff on the remaining three counts. The court concluded that plaintiff had rescinded the area service contract on October 7, 1966, and was entitled to recover the $25,000 franchise fee and his “net consequential damages” in the sum of $5,273.25. 4 Judgment was entered accordingly. This appeal followed.

Pacific does not challenge the trial court’s determination that plaintiff had effectuated a rescission of the contract and was entitled to a recovery of the consideration paid. However it contends: (1) that the court should have required plaintiff to return or to give credit for the consideration received by plaintiff from Pacific; and (2) that the court erred in awarding certain items of consequential damages.

Pacific’s first contention is essentially this: uncontradicted evidence showed continuing substantial performance of the contract by it; the trial court ignored its duty to make a finding as to the reasonable value of such performance; and the court compounded this error by its anomalous conclusion of law that “Plaintiff shall restore to defendant any consideration received by him which he still possesses.”

It is true that the trial court made no finding as to the value of any benefit conferred upon plaintiff by Pacific’s performance of certain of its contractual obligations. However, in awarding plaintiff consequential damages, the trial court allowed an offset of $3,065, representing plaintiff’s “earned gross income” from the Bakersfield operation. (See fn. 4, ante.) The record indicates *309 that plaintiff earned a portion of this sum by providing customers with services which required “first order instrument” work at Pacific’s plant. In such cases Pacific received a portion of the customer’s payment; the balance went to plaintiff. The trial court expressly found that Pacific’s charges for such supplementary services were not made according to a definite rate schedule. The trial court also found that such charges by Pacific contributed to the failure of consideration upon which plaintiff’s rescission was based. *

From the express finding that Pacific made arbitrary charges, the court could have reasonably concluded that through such arbitrary charges, Pacific was attempting to recoup the very expenditures and rental value which it now claims as an offset against plaintiff’s judgment. In our view, from the above express findings, it can reasonably be implied that the court found that any benefits conferred upon plaintiff by Pacific had been compensated for by its above-mentioned arbitrary charges. 5 This implied finding is confirmed by the court’s remarks on hearing Pacific’s motion for a new trial. 6 As stated in Richter v. Walker (1951) 36 Cal.2d 634, 640 [226 P.2d 593]: “[W]hile full findings are required upon all material issues a judgment will not be set aside on appeal because of a failure to make an *310 express finding upon an issue if a finding thereon, consistent with the judgment, results by necessary implication from the express findings which are made.” 7

What we have said disposes of the contention that the trial court erred in failing to find the value of any benefit conferred upon plaintiff and to allow that value as an offset against his recovery. The second aspect of Pacific’s argument is that the trial court reached an “anomalous conclusion” that plaintiff should restore “any consideration received by him which he still possesses.” At oral argument, however, Pacific conceded that everything which Pacific had originally made available to plaintiff had been returned.

We now take up Pacific’s principal contention that the court erred in awarding consequential damages. Actually Pacific does not challenge the entire award of consequential damages. It raises no issue as to the item of $1,082 for training and office expense. It objects only to the item of “loss of income” in the sum of $7,256.25 (see fn. 4, ante) upon the ground that there is no evidence that it had guaranteed to plaintiff a profit from the franchise equal to or greater than his former salary with Tidewater. In essence Pacific argues that plaintiff “assumed the risk” of loss which is inherent in any entrepreneurial activity. We are thus called upon to inquire into plaintiff’s entitlement not only to the restitution of the $25,000 franchise fee but also to consequential damages because of the loss of his salary income.

The positions of the parties may be briefly summarized thusly: Pacific argues that damages cannot be recovered in the event of rescission since the two remedies are mutually inconsistent, a claim for damages being based upon an affirmance of the contract while rescission is predicated upon its disaffirmance. Plaintiff in response maintains that although prior to 1961 an award of damages in cases of rescission “might have been subject to serious question,” nevertheless Civil Code section 1692 8 enacted in that year not only authorizes but probably requires an award of consequential damages where relief is sought based upon a rescission.

Section 1692 which provides for relief based upon rescission was added to the Civil Code in 1961 upon the recommendation of the California Law Revision Commission. (See said Commission’s Recommendations and Study relating to Rescission of Contracts (1960) in 3 Cal. Law Revision Com. *311 Rep. (1961) D-5-D-35 (hereafter Law Revision Report). 9 We set forth section 1692 in full in the footnote. 10

At the start it would appear that the statute compels the rejection of Pacific’s argument that damages cannot be recovered in an action for relief based on a rescission since the section expressly and unequivocally states that a “claim for damages is not inconsistent with a claim for relief based upon rescission” and that the aggrieved party “shall be awarded compílete relief, including restitution of benefits, if any, . . . and any consequential damages to which he is entitled; . . . but . . . not . . . duplicate or inconsistent items of recovery.” (See fn. 10, ante.) Our more proper inquiry then is whether the relief awarded in the instant case is that intended by the Legislature. Since the enactment of section 1692 was not an isolated event (see fn. 9, ante) we must examine the section in the light of the historical background of rescission procedures and the purpose of the statutory changes enacted in 1961.

In California prior to 1961 there were two methods provided for in the Civil Code by which a party entitled to rescind could obtain rescissionary relief. The first, found in sections 1688-1691, specified certain instances in which a party to a contract might rescind it and provided that' such rescission could be accomplished by the rescinding party by giving notice of the rescission and offering to restore everything of value which he had received. This method contemplated a rescission “by the individual act of one of the parties to the contract” and has been referred to as a unilateral *312 rescission. (McCall v. Superior Court (1934) 1 Cal.2d 527, 536 [36 P.2d 642, 95 A.L.R. 1019].) Having rescinded the contract by his own act, the rescinding party then brought an action to enforce the out-of-court rescission. (Philpott v. Superior Court (1934) 1 Cal.2d 512, 524 [36 P.2d 635, 95 A.L.R. 990].) Such action was considered to be one at law brought on the implied promise on the part of the nonrescinding party to repay or return the consideration received. (McCall v. Superior Court, supra, at p. 535.) “In reality, it is an action in which the law, in order to prevent the unjust enrichment of defendants from the property of plaintiff, itself implies a promise to repay the sum demanded. In other words, it is an action in assumpsit upon a promise implied by law.” (Philpott v. Superior Court, supra, at p. 518.)

The second method by which a party could obtain rescissionary relief was the action for a judicial rescission. (Philpott v. Superior Court, supra, at pp. 523-524.) Former sections 3406-3408 provided that a rescission could be adjudged on any of the grounds specified in section 1689 together with two additional grounds. 11 Unlike the method of unilateral rescission, however, this method was viewed as an action for specific judicial relief for the wrong giving rise to the right of rescission, and was deemed equitable in nature. (Id.; McCall v. Superior Court, supra, at p. 535.)

In short, the two procedures which we have described contemplated “two types of action for rescissionary relief”—the first an “action to enforce a rescission” and the second an “action to obtain a rescission.” (See Law Revision Report, supra, at p. D-15.) Significant substantive and procedural differences existed between these two methods for obtaining rescissionary relief. The right to a jury trial, the applicable statute of limitations, the availability of the provisional remedy of attachment and the possibility of joinder of other claims all depended upon which of these two methods the plaintiff elected to use in seeking rescissionary relief. The result was a body of law which was “unnecessarily complex and confusing to both courts and attorneys, to say nothing of laymen.” (Law Revision Report, supra, at p. D-6.)

As previously mentioned (see fn. 9, ante, and accompanying text) the Legislature made several changes in these procedures in 1961. Prominent among these was the addition of section 1692 (see fn. 10, ante) and the *313 repeal of sections 3406-3408. “This legislation, in effect, abolished the action to obtain court rescission and left only an action to obtain relief based upon a party effected rescission.” (Paularena v. Superior Court (1965) 231 Cal.App.2d 906, 913 [42 Cal.Rptr. 366].) (See Law Revision Report, supra, at pp. D-6 - D-7.) As the Law Revision Report indicates, the purpose of the statutory changes was to eliminate the confusing and complex duality of rescission procedures by “providing a single, simple procedure to be followed in all situations where rescissionary relief is sought.” (Law Revision Report, supra, at p. D-6.)

We perceive in this fusing of the two former rescission procedures no intention on the part of the Legislature to disturb, much less eradicate, substantive differences theretofore underlying such procedures. Indeed the Law Revision Report which was the genesis of these statutory changes included among its specific recommendations the following: “The rescission statutes should make plain that, after rescinding a contract, a party may seek any form of relief warranted under the circumstances, whether legal or equitable. As all such actions will be to enforce a rescission, the right of the parties to a jury and the court in which the action must be brought will be determined by the nature of the substantive relief requested and not by the form of the complaint. For example, if a bare money judgment is sought, a justice court will have jurisdiction in appropriate cases, and the plaintiff may not convert the action into an equity action and thus deprive the justice court of jurisdiction merely by a prayer for rescission. The statute should also make plain that the court may grant any other relief that is appropriate under the circumstances if it develops at the trial that the plaintiff has mistaken his remedy and the purported rescission was not effective.” (Law Revision Report, supra, at p. D-7.) (Original italics.) It is manifest that section 1692 (see fn. 10, ante) was intended by the Legislature to effectuate the recommendations of the Law Revision Commission, including the recommendation just quoted, since the section is identical in language with the measure suggested by the Commission. (See and compare the Commission’s proposed section 1692 found in its report at page D-10 with the statute as enacted.)

Under the new statutory scheme, when a contract has been rescinded in accordance with the statutory procedure (§ 1691) 12 “any party to the *314 contract may seek relief based upon such rescission . . . .” This is accomplished by bringing an action “to recover any money or thing owing to him” and “for any other relief” to which he may be entitled. Whatever may have been the rule under former decisional law dealing with “legal” rescission, the statute now expressly provides that a “claim for damages is not inconsistent with a claim for relief based upon rescission” and that the aggrieved party “shall be awarded complete relief” including restitution and consequential damages, if any. (All quotations are from section 1692.)

,Under pre-1961 law, however, an action at law to enforce an out-of-court rescission was, by its very nature, invariably restricted to the recovery of the consideration given by the rescinding party. As we have explained, it was an actipn in assumpsit upon a promise implied by law. (Philpott v. Superior Court, supra, 1 Cal.2d 512, 518.) The scope of relief was therefore limited by the promise raised by implication of law on which the action was based—namely to return the consideration (id.); 13 there was no implied “promise” to pay damages. The decisions were replete with statements that the remedies of rescission and damages were inconsistent. 14 Indeed our attention has not been directed to nor has our independent research revealed, any reported California case upholding an award of damages in an action at law brought under pre-1961 law to enforce an out-of-court rescission.

However, under pre-1961. law in actions in equity to obtain a judicial rescission, monetary awards including those of consequential damages, *315 given in conjunction with restitution, have been sustained in a variety of contexts. Thus, it was settled that a vendee of real property who rescinded a land sale contract because of the vendor’s fraud could recover the purchase money paid by him and the reasonable value of improvements less the reasonable rental value of the land while in the vendee’s possession. (See, e.g., Kent V. Clark (1942) 20 Cal.2d 779, 785-786 [128 P.2d 868, 142 A.L.R. 576]; Mosher v. Lack (1919) 41 Cal.App. 23, 27 [181 P. 813]; see also McDonald v. Mission View Homestead Assn. (1876) 51 Cal. 210, 211; Shermaster v. California Home Bldg. Loan Co. (1919) 40 Cal.App. 661, 667-668 [181 P. 409].) An award for the value of improvements was also available in some cases where the vendee rescinded because of a failure of consideration. (See, e.g., Barrows v. Harter (1913) 165 Cal. 45, 46-47 [130 P. 1050]; Garvey v. Lashells (1907) 151 Cal. 526, 531 [91 P. 498]; Fountain v. Semi-Tropic Land & Water Co. (1893) 99 Cal. 677, 680-681 [34 P. 497]; Worley v. Nethercott (1891) 91 Cal. 512, 517 [27 P. 767]; Gates v. McLean (1886) 70 Cal. 42, 50-51 [11 P. 489]; Haynes v. White (1880) 55 Cal. 38, 41-42. See also Owen v. Pomona Land & Water Co. (1901) 131 Cal. 530, 541-542 [63 P. 850, 64 P. 253].) Similarly, the rescinding vendee was entitled to monetary compensation for any payments by him to reduce the amount of a mortgage imposed upon the property by the vendor. (Arthur v. Graham (1923) 64 Cal.App. 608, 612 [222 P. 371].) Where the vendor rescinded, the vendee was liable for the rental value of the land while he had possession. (Austin v. Burns (1934) 139 Cal.App. 747, 753 [35 P.2d 142].) When a contract for the sale of personal property was rescinded, a rescinding vendor was also entitled to an award for the reasonable value of the use of the property by the vendee (Vice V. Thacker (1947) 30 Cal.2d 84, 92 [180 P.2d 4]), or for its cost of replacement where the specific property could not be returned. (Swan v. Talbot (1907) 152 Cal. 142,146-147 [94 P. 238]; United Motor etc. Co. v. Callander (1916) 30 Cal.App. 41, 45-46 [157 P. 561].) Finally, a monetary award was proper where the court conditioned the decree of rescission upon a payment by the rescinding party to a third party whose rights were affected by the contract. (Stewart v. Crowley (1931) 213 Cal. 694, 700-701 [3 P.2d 562].)

Some of these cases refer to such monetary awards given in an action for rescission as “damages” or “consequential damages.” (See also 9 Cal. Jur.2d, Cancellation of Instruments, §§ 48, 50.) For example, we said in Hines v. Brode (1914) 168 Cal. 507, 511-512 [143 P. 729], that “[T]he vendee may rescind, and, in addition to the recovery of the consideration with which he has parted, obtain recoupment for any other special damage to which he has been subjected by the vendor’s fraud.” (Italics added.) (See, *316 e.g., United Motor etc. Co. v. Callander, supra, 30 Cal.App. 41, 46 (“make good in damages”); Bank of America v. Greenback (1950) 98 Cal.App.2d 220, 238 [219 P.2d 814] (“money damages”); Carter v. Carr (1934) 139 Cal.App. 15, 27 [33 P.2d 852] (“consequential damages,” citing Hines v. Brode, supra)-, Lobdell v. Miller (1952) 114 Cal.App.2d 328, 343 [250 P.2d 357] (“consequential damages,” citing Carter v. Carr, supra); 15 cf. Utemark v. Samuel (1953) 118 Cal.App.2d 313, 317 [257 P.2d 656] (“defendants . . . elected to take the consequences, . . .”).

The fundamental principle underlying these decisions and the awards which they upheld is that “in such actions the court should do complete equity between the parties” and to that end “may grant any monetary relief necessary” to do so. (Stewart v. Crowley, supra, 213 Cal. 694, 701.) It is the purpose of rescission “to restore both parties to their former position as far -¿s possible” (Bank of America v. Greenback, supra, 98 Cal.App.2d 220, 238, citing 3 Pomeroy, Equity Jurisdiction (5th ed.) 578) and “to bring about substantial justice by adjusting the equities between the parties” despite the fact that “the status quo cannot be exactly reproduced.” (Lobdell v. Miller, supra, 114 Cal.App.2d.328, 344; see also Utemark v. Samuel, supra, 118 Cal.App.2d 313, 317.) As the court said in Greenback “concurrent with the award of rescission, the trial court may award money damages or order such other relief as justice may require.” (98 Cal.App.2d at p. 238.)

As the cases already cited by us illustrate, California courts applying *317 general principles of equity have recognized that the restoration to the rescinding party of the consideration with which he originally parted does not necessarily in all instances restore him to his former position and bring about substantial justice. The rescinding vendee of land who in reliance upon the contract has placed improvements on the property must invariably be compensated for them if he is to be afforded “complete relief.” In instances such an adjustment may be compelled so as to forestall unjust enrichment of the nonrescinding party through whose fault the grounds of rescission have arisen.

This prompts us to point out that restitutionary damages have not been awarded the rescinding party in every case of rescission. Such damages may be awarded in conjunction with restitution where rescission has been sought for the nonrescinding party’s fraud (see, e.g., Kent v. Clark, supra, 20 Cal.2d 779, 785-786; Hines v. Brode, supra, 168 Cal. 507, 511-512), misrepresentations (see, e.g., McDonald v. Mission View Homestead Assn., supra, 51 Cal. 210, 211; Shermaster v. California Home Bldg. Loan Co., supra, 40 Cal.App. 661, 667-668), and, in some cases, failure of consideration (see, e.g., Garvey v. Lashells, supra, 151 Cal. 526, 531; Fountain v. Semi-Tropic Land & Water Co., supra, 99 Cal. 677, 680-681). We have not found nor has our attention been directed to any reported California decisions in which the courts have awarded consequential damages when rescission has been sought merely upon the grounds of illegality or mistake (but see Owen v. Pomona Land & Water Co., supra, 131 Cal. 530). It appears, therefore, that California decisions, in determining when restitutionary damages should be awarded, have differentiated between actions for rescission based upon a ground involving some fault on the part of the nonrescinding party, and actions based upon a ground not involving such fault. Only in the former category have courts of equity required the nonrescinding party to pay to the other restitutionary damages, for the obvious reason that otherwise he would be unjustly enriched. 16 (See Paoliniv. Sulprizio (1927) 201 Cal. 683, 685 [258 P. 380].)

*318 These traditional and deep-rooted principles of courts of equity can now be invoked through the simple procedure furnished by section 1692 which provides, among other things, that the “aggrieved party shall be awarded complete relief’ (italics added) and that the court “may otherwise in its judgment adjust the equities between the parties.”

Mindful of these principles and of the purpose of the statutory changes enacted in 1961, we turn to the case before us. Essentially the question we confront is whether the trial court, presumably responsive to the mandate that the aggrieved party be awarded complete relief, acted reasonably and equitably in making an award of consequential damages for plaintiffs “loss of income.”

The trial court gave plaintiff relief on the first count 17 of his complaint which sought rescissionary relief based upon failure of consideration. Pacific’s answer, although admitting the execution of the area service contract and the payment of the $25,000 fee, denied all remaining allegations, including that stating plaintiff’s rescission of the contract on October 5, 1966. In his complaint plaintiff prayed for “A determination by the Court that said contract had been rescinded,” restoration of the consideration paid and consequential damages. The trial court found that plaintiff had in good faith substantially performed his part of the contract, that there had been a material failure of consideration because of specified acts of Pacific (see fn. 3, ante), that plaintiff gave Pacific notice of rescission based on such failure of consideration, that “In reliance upon said contract plaintiff necessarily incurred” (italics added) certain expenses including the “loss of income” here in question, and that while the franchise was in effect plaintiff had certain gross income from his franchise activities.

As we have pointed out, the trial court awarded plaintiff the sum of $7,256.25 to compensate him for his loss of income for the period from the execution of the area service contract to the giving of the notice of rescission, this loss being measured by the salary he would have received had he remained at Tidewater. We cannot find this award unreasonable or inequitable particularly since, as the court expressly found, plaintiff relied upon the contract in severing his relationship with Tidewater. Not only did plaintiff suffer a loss but Pacific, enjoying the use of plaintiff’s time and energies, received some benefit thereby. (See fn. 5, ante.) As in the situa *319 tion of land contracts already alluded to, where the vendor whose fault caused the rescission would otherwise enjoy the improvements made by the rescinding vendee, so in the instant case the court could properly reason that Pacific would otherwise enjoy the benefit of plaintiff’s time and energies without cost and would thereby be unjustly enriched.

However, we note that the trial court deducted from the total amount of consequential damages the gross income received by plaintiff during the same period from his activities relating to the franchise. (See fn. 4, ante.) By so doing it avoided any duplication in computing the value of plaintiff’s full-time services and at the same time complied with the express statutory condition governing any award of consequential damages that “such relief shall not include duplicate or inconsistent items of recovery.” (§ 1692.)

Thus the court’s rescissionary relief may be summarized in this way: Plaintiff surrendered the exclusive franchise to Pacific and the latter was ordered to restore to plaintiff the $25,000 franchise fee and to pay plaintiff his net consequential damages. Plaintiff received damages for his loss of income for the seven-month period during which he attempted to carry out the contract but was not permitted to retain the gross income received under the franchise during that period. In sum, plaintiff recovered his original consideration and the damages he sustained in reliance on the contract. Pacific retrieved the exclusive franchise and was given credit for what it in effect had produced. We are satisfied that the trial court thus “adjusted the equities” between the parties and restored them to their former positions so far as it was possible to do so.

The judgment is affirmed.

Tobriner, Acting C. J., McComb, J., Peters, J., Mosk, J., and Burke, J., concurred.