United States: No Economic Recovery Available For Breach Of A Non-Compete Set Forth In A Distributorship Agreement Which Bars Damages Awards

Where a freely negotiated contract between two sophisticated companies included a provision barring an award of monetary relief for breach of contract, the court will enforce the provision as written and award no economic damages.  CH2O, Inc. v. Meras Engineering, Inc., No. 45728-8-II (Wash. App. Court, July 21, 2015) (unpublished opinion).

Status of the Case

A non-exclusive distributorship agreement between CH2O, a California water treatment company, and Meras, a Washington State competitor, provided for CH2O's sales of specified products to Meras for resale to certain of its existing customers.  The agreement's non-compete clause prohibited sales by Meras of products similar to those made by CH2O but manufactured by its competitors.  Further, Meras was required to refer to CH2O inquiries regarding, and requests for, CH2O's products from potential customers.  Section 9 of the agreement stated that neither of the parties would be liable to the other for economic damages arising out of a breach of the agreement.  CH2O sued Meras in a Washington state court, seeking economic damages for breach of contract, for allegedly selling products similar to CH2O's products to CH2O's customers.  The lower court granted summary judgment to Meras.  CH2O appealed.  A few days ago, the state's appellate court affirmed.

CH2O's Contentions

CH2O maintained that the lower court's interpretation of Section 9 rendered other contractual obligations illusory.  For example, Section 6(a) obligated Meras to use its best efforts to sell the identified CH2O products to designated California customers.  Section 13 contained a force majeure provision, disclaiming liability of one contracting party to the other for events beyond the parties' control.  Further, CH2O contended that the court's interpretation of Section 9 was inconsistent with Section 18 which provided for an award of costs and attorneys' fees for a prevailing party in a dispute concerning the agreement.  CH2O insisted that Section 9 only excluded one party's liability to the other with respect to third party claims brought against one of them by, for example, customers.

The Ruling on Appeal

The appellate court agreed with Meras that Section 9 contained an express, unambiguous and universal waiver of the parties' liability to each other for economic damages resulting from a breach of the agreement, regardless of what caused the damages.  But a lawsuit for breach of contract was not precluded so long as only noneconomic recovery — for example, asking for specific performance or a declaratory judgment — was sought.  Consistent with the court's effort to reconcile Sections 9 and 18, it said that by means of Section 18 the parties carved out from the damages exclusion recovery of attorneys' fees and costs for prevailing in a contract action seeking only equitable relief.

CH2O maintained that the court misconstrued the parties' intent as to the meaning of Section 9.  Finding Section 9 to be unambiguous, the court declined to interpret it based on evidence outside the four corners of that section.  (Interestingly, however, the court went on to surmise that perhaps the reason for Section 9's exclusion of monetary damages was that, as business partners, the companies "depend on each other's financial stability to execute a successful business strategy." )

Takeaways

Although Section 9 might appear to be strange, it left little room for interpretation.  The appeals court found that both companies engaged in drafting and negotiating their contract.  Therefore, the court concluded that Section 9 should be enforced precisely as written.  The lesson is that a party acts at its peril by assuming that a contract provision will be interpreted by a court to incorporate terms not actually included.

These two companies have litigated against each other before.  Meras' employment of several CH2O's employees, who allegedly were subject to non-compete agreements with CH2O, was the subject of Northern District of California court rulings in August 2012 and January 2013.  In that litigation, Meras and the employees sued in California, seeking a determination that the non-competes were void (separately, CH2O sued the employees in Washington to enforce the agreements).  The California federal court held that because the employees' non-compete clauses required litigation in a Washington court construing the clauses under Washington (not California) law, the California lawsuit must be dismissed.  That holding was the subject of a Seyfarth Shaw blog in February 2013.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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