Paramount Petroleum Corp. v. Superior Court , 227 Cal. App. 4th 226 ( 2014 )

Filed 6/20/14
CERTIFIED FOR PUBLICATION
IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
SECOND APPELLATE DISTRICT
DIVISION THREE
PARAMOUNT PETROLEUM B253290
CORPORATION, a Delaware corporation,
(Los Angeles County
Petitioner and Defendant, Super. Ct. No. BC481673)
v.
SUPERIOR COURT OF THE
STATE OF CALIFORNIA, COUNTY OF
LOS ANGELES,
Respondent;
BUILDING MATERIALS
CORPORATION OF AMERICA,
a Delaware corporation,
Real Party in Interest and Plaintiff.
ORIGINAL PROCEEDINGS in mandate. Malcolm H. Mackey, Judge. Petition
granted in part and denied in part with directions.
McCool Smith Hennigan, J. Michael Hennigan, Peter J. Most, Michael Swartz
and David M. Ross; Greines, Martin, Stein & Richland, Irving H. Greines and
Marc J. Poster for Petitioner and Defendant.
No appearance for Respondent.
Bird, Marella, Boxer, Wolpert, Nessim, Drooks & Lincenberg,
Thomas R. Freeman, Mark T. Drooks and Jessica S. Chen for Real Party in Interest and
Plaintiff.
_______________________________________
2
Plaintiff and real party in interest Building Materials Corporation of America dba
GAF Materials Corporation (GAF) brought the instant breach of contract action against
defendant and petitioner Paramount Petroleum Corporation (Paramount). GAF had
entered into a long-term contract with Paramount by which Paramount would supply
GAF with its requirements for asphalt coating for GAF’s manufacture of roofing
shingles. The asphalt coating was to be made from Oriente crude oil, from Ecuador.
Rather than linking the price of the asphalt coating to the price of Oriente, the parties
agreed to link the contract price to that of another type of oil, West Texas Intermediate
(WTI), as the prices of the two oils had, historically, moved up and down together, and
WTI was readily quoted. Several years into the contract, changed circumstances led to
the decoupling of the market price for Oriente and the market price for WTI.
Specifically, there was an excess of oil competing with WTI and its price dropped
dramatically, while Oriente’s price remained relatively high. As a result, from
Paramount’s point of view, it became economically infeasible for it to continue to
supply GAF with asphalt coating (made from Oriente) at the contract price. When
negotiations failed to result in a higher contract price, Paramount terminated
performance. GAF brought the instant action for breach of contract. GAF then moved
for summary adjudication of the issue of Paramount’s liability for breach of contract,
but not on the issue of damages. GAF also moved for summary adjudication on several
of Paramount’s affirmative defenses, including mutual mistake. GAF’s motion was
granted in its entirety.
3
Paramount sought writ relief and we issued an order to show cause. We now
conclude that: (1) the trial court erred in granting summary adjudication in GAF’s favor
on liability, because summary adjudication cannot be granted in favor of a plaintiff on
liability alone; but (2) the trial court did not err in granting GAF summary adjudication
on Paramount’s defense of mutual mistake. We therefore will grant the petition in part
and deny it in part.
FACTUAL AND PROCEDURAL BACKGROUND
1. Facts Leading to the Contract
GAF is in the business of manufacturing and selling roofing shingles. It is the
largest manufacturer of residential roofing systems in the United States, and it
manufactures roofing shingles at four different facilities in California. One of the
materials used to manufacture shingles is asphalt coating.1 While it is not necessary for
the purposes of our discussion to understand the process by which asphalt coating is
produced from crude oil, two facts are very relevant: first, not all types of crude oil are
acceptable for this process; GAF uses a battery of proprietary tests to determine whether
any particular crude will be sufficient for its asphalt coating; second, asphalt coating
has a very limited shelf life and must therefore be produced near the shingle
manufacturing factory.
1
Another necessary product is asphalt saturant. The agreement at issue in this
case involved both asphalt coating and asphalt saturant. The pricing issue that arose
related only to the price of asphalt coating. We therefore limit our discussion to asphalt
coating.
4
Prior to December 2007, pursuant to a prior agreement, Paramount supplied
GAF’s requirements for asphalt coating with coating produced out of Alaskan North
Slope crude. When the price of that oil increased, Paramount sought to use a different
type of oil and proposed Oriente crude. GAF tested Oriente and approved it.
By this time, Paramount had (through acquisitions) become the largest supplier
of asphalt products on the west coast and was the only supplier with sufficient volume
to meet GAF’s requirements. GAF therefore sought a long-term agreement with
Paramount that would assure that it would be supplied with necessary asphalt coating.
The parties negotiated the agreement at issue in this case.
2. The Contract
The parties entered into the contract effective December 1, 2007. The contract
had a term running to June 30, 2013. Additionally, it would be extended for five
additional one-year terms, unless GAF, in its sole discretion, chose to terminate it.
Pursuant to its terms, Paramount would supply GAF with all of its requirements for
asphalt coating for three of its California facilities, and 75% of its requirements for its
fourth facility. Parmount was to produce the coating only from Alaskan North Slope or
Oriente crude, unless the parties agreed in writing to another type of crude. GAF was
required to provide regular forecasts of its anticipated purchase requirements.
As to pricing, the contract gave GAF discretion to choose between two different
methods of pricing asphalt coating.2 The first method was called “Index Pricing” by the
2
Under the contract, GAF was permitted to switch between the two pricing
methods on sufficient notice. The amount of necessary notice is somewhat ambiguous.
5
parties; the second was “Formula Pricing.” In order to avoid confusion, we refer to the
first method as “Asphalt Index Pricing” and the second as “WTI Formula Pricing.”
Under Asphalt Index Pricing, the monthly price for asphalt coating would be based on
the prior month’s average quoted price for asphalt cement or roofing flux, as quoted in
identified indices. Under WTI Formula Pricing, the monthly price for asphalt coating
would be based on the prior month’s average daily closing price for WTI crude.3 The
contract further provided, with respect to WTI Formula Pricing, that “[i]f WTI crude is
no longer quoted or becomes illiquid, an alternative formula basis as mutually agreed by
the parties and manifesting a commercially reasonable substitute for the WTI crude
quote will be used.” It further provided that if the parties agreed that Paramount could
use a different type of crude for the asphalt coating, “the price basis of the [coating] will
be subject to mutual agreement . . . . ”
The contract contained several pricing protections for GAF, but not for
Paramount. Specifically, if GAF received a better price offer from another supplier,
Paramount must either meet that price, or GAF would be free to purchase its
requirements from the other supplier. Moreover, if Paramount sold asphalt coating to
It appears that GAF could initially switch pricing methods on 30 days’ notice, but must
give 90 days’ notice for future changes.
3
Specifically, the asphalt coating price would be calculated as follows:
(1) calculate the average of the daily closing price for WTI crude in the prior month;
(2) add $3.96 per barrel; (3) multiply by 5.66 to establish price per ton; and (4) subtract
$6.00 per ton. This calculation adjusted the WTI price downward to account for the
historically lower price of Oriente. According to Paramount, the difference per barrel
built into this formula was $7.07.
6
another buyer for a price lower than the contract price, GAF would be entitled to receive
that lower price.
The contract also included a severability clause. It provided, “Any provision
hereof which is (at any time) legally unenforceable shall be ineffective only to the
extent of such unenforceability without thereby invalidating the remaining provisions
hereof (including the remaining enforceable portion of any affected paragraph) or
affecting the validity or enforceability of this Agreement as a whole. Such invalidated
provision shall be replaced by the Parties hereto with a valid provision that most closely
reflects the intent of the Parties in the invalidated provision.”
3. Performance Under the Contract
Pursuant to the terms of the agreement, pricing under the agreement was
originally calculated using Asphalt Index Pricing. In October 2008, GAF gave notice to
switch to WTI Formula Pricing effective November 8, 2008. Performance under the
agreement continued without issue,4 using that pricing alternative, until early 2011.
WTI was regularly quoted at Cushing, Oklahoma. In early 2011, there was an
unanticipated glut of oil at Cushing. The reasons for this glut are described by
Paramount, somewhat generally, as follows: (1) an “astonishing amount” of crude was
obtained in North America by means of hydraulic fracturing or “fracking,” which oil
4
This may not be entirely accurate. Paramount contends that GAF did not
properly perform under the contract, specifically arguing that GAF was padding its
forecasts for its asphalt coating needs. As we shall discuss, whether GAF properly
performed under the contract is an issue to be determined at trial; we express no opinion
on the issue.
7
ended up at Cushing; and (2) the lack of existing infrastructure at Cushing to transport
this additional crude oil to refineries for processing.5 While there may be some dispute
as to the precise causes, Paramount and GAF agree that the Cushing glut caused the
price of WTI to decrease dramatically relative to world oil prices, including Oriente.
In the summer of 2011, Paramount asked to discuss with GAF “the hardship to
Paramount created by the decline in the market price of WTI crude relative to Oriente
crude.” Discussions were held, but were fruitless. At one point, Paramount suggested
the selection and approval of a third type of crude.6 GAF tested Paramount’s samples of
three different types of crude. Although GAF approved one of those samples as
meeting its requirements, Paramount then reported that it could not, in fact, obtain that
crude.
5
A more nuanced explanation was provided in the lengthy and detailed
declaration of Paramount’s expert economist, George R. Schink. He stated that, in
addition to the unanticipated increase in production caused by fracking, it was expected
that Western Canadian crude oil production would further increase the supply of crude
oil production to the “Midcontinent area.” However, it was expected that new pipeline
projects would be constructed to transport a substantial portion of this increased
production to the U.S. Gulf Coast. The Western Canadian crude production did
increase as expected, but the anticipated pipeline projects were not constructed. This
resulted in more Western Canadian crude ending up in the Midcontinent area than the
Gulf Coast, which contributed to the glut at Cushing. Moreover, although the evidence
is not as clear as it could be, it does not appear that the increase in oil at Cushing was an
increase in WTI crude itself. Instead, the additional oil (obtained by fracking and/or
Western Canadian production) caused an excess of oil at Cushing, which, presumably,
negatively affected the price of WTI. Thereafter, “market participants began to sharply
increase their inventory holdings of crude oil at Cushing and elsewhere in the
Midcontinent area in anticipation of the WTI eventual return to full value.”
6
This was presumably because the approval of another type of crude would trigger
the provision of the agreement setting the new price by mutual agreement.
8
4. Paramount Terminates Performance
By a letter dated March 16, 2012, Paramount informed GAF that it was
terminating performance under the contract. Its letter stated that Paramount was taking
such action because GAF had “refused to honor the spirit of the Agreement by
acknowledging that WTI is no long[er] a reasonable proxy for Oriente prices.” Having
incurred millions of dollars in losses, Paramount stated that it was unreasonable and
impracticable for it to continue. It stated, “Until such time as GAF acts reasonably by
agreeing to reform the Agreement in a manner that reflects the original intent of the
parties, Paramount is not in a position to continue [p]roduct deliveries.”
GAF still needed asphalt coating in quantities that only Paramount could supply.
It therefore continued to purchase coating from Paramount but at prices unilaterally set
by Paramount. In March 2013, while this action was pending, Paramount stopped
selling asphalt coating to GAF entirely.
5. Allegations of the Complaint
GAF brought the instant action shortly after Paramount terminated the contract.7
The operative complaint is the first amended complaint; it states a single cause of action
for breach of contract. The complaint alleges that “[a]t the time the [a]greement was
entered into on December 1, 2007, the pricing mechanism set forth in the Agreement
was just, fair and reasonable as to Paramount, and the consideration for asphalt coating
7
The record does not reflect the date that this action was initiated. The first
amended complaint, however, was filed on April 27, 2012, less than six weeks after
Paramount terminated the contract.
9
and asphalt saturant under the Agreement therefore is adequate.” GAF alleged
Paramount’s breach, and sought damages, specific performance, injunctive relief,8 and
attorney fees (pursuant to a clause in the agreement).
Paramount filed an answer consisting of a general denial and numerous
affirmative defenses. Among others, Paramount raised the affirmative defense of
mistake of fact.9
6. GAF’s Motion for Summary Adjudication
On August 14, 2013, GAF moved for summary judgment or, in the alternative,
summary adjudication. Although GAF purported to seek summary judgment on its
complaint, it specifically indicated that it was “not seeking summary judgment on the
amount of . . . damages through this motion. If this motion is granted, then barring
settlement, the amount of damages would be established at trial.” In other words, GAF
8
In its motion for summary adjudication, GAF did not address its claims for
specific performance and injunctive relief.
9
While this action was pending, GAF obtained two attachment orders against
Paramount. GAF relied on the attachment orders in its motion for summary
adjudication, noting that the trial court had already determined the probable validity of
its claim and rejected Paramount’s mistake of fact defense. Such reliance is puzzling;
the court’s attachment order specifically states, “The court does not determine whether
[GAF’s] claim is actually valid; that determination will be made at trial and is not
affected by the decision on the application for the order.” Indeed, the attachment statute
provides as much. (Code of Civ. Proc., § 484.050, subd. (b).) The trial court’s order
granting summary adjudication states, as a section heading, “Judge Chalfant Found that
GAF’s Claim Had Probable Validity and Granted GAF’s Two Applications for
Prejudgment Attachment Against Paramount,” although it includes no discussion under
that heading. To the extent the trial court stated this as a simple procedural fact, it was
correct; if the court relied on the prior holding in its summary adjudication analysis,
such reliance was improper.
10
sought summary adjudication on the issue of Paramount’s liability for breach of
contract, but not on the element of damages.10 It also sought summary adjudication of
several of Paramount’s affirmative defenses, including, as relevant here, the defense of
mistake of fact.
As to that defense, GAF argued that any mistake in using WTI as a proxy for the
price of Oriente was a simple error in judgment by Paramount, as opposed to a mistake
as to an existing fact. Further, GAF noted that Paramount was the party which had
proposed the use of WTI, and Paramount had assumed the risk that WTI’s price would
not track Oriente’s price. In this respect, it relied on the deposition testimony of Alan
Moret, Paramount’s person most qualified, who testified that he knew that WTI had the
potential to deviate up or down with respect to the cost of Oriente.11
10
GAF argued that it would establish on summary adjudication that Paramount
owed it some damages, but not the specific amount.
11
The question arises as to why the parties did not simply contract for a pricing
formula based on Oriente’s cost. According to Paramount, there was no market that
published a daily price for Oriente. It further argued, “Paramount and GAF did not
want a mechanism that would routinely require Paramount to provide GAF with crude
purchase invoices to establish the price that Paramount had paid for the crude it used.”
Why Paramount would not want GAF to know its actual costs is easy to infer; why GAF
would not want that mechanism is less clear. It could certainly be argued that it was
Paramount’s interest in keeping its costs (and therefore, profits) secret from GAF that
prompted Paramount to decide to base its pricing formula on the price of another type of
crude – even though there were risks inherent in using anything other than its actual
costs in the formula. In other words, if Paramount priced its coating on a cost-plus
basis, any savings it achieved by negotiating a cheaper price for Oriente would be
passed on to GAF. However, by using a formula which assumed Oriente is $7.07 less
per barrel than WTI, Paramount could retain the savings any time it obtained Oriente at
a price more than $7.07 lower than WTI.
11
GAF also relied on an e-mail from Paramount during the negotiations of the
agreement, in which Paramount first proposed using WTI Formula Pricing. The e-mail
stated the following, “The pricing ‘formula’ has worked well when crude oil was less
than $40 per barrel, however, when crude is over $60 per barrel, the formula does not
work. With crude oil above $95 per barrel, the resulting ‘formula’ pricing absolutely
does not and will not work.[12] For the fifteen years prior to 2005, the formula seemed
to work as intended. Since 2005, we have not used the ‘formula’ price and it is likely
not to come into play again for the foreseeable future. Therefore, the analysis and
discussion is almost moot. That being said, it is our desire to come up with a fair
‘formula’ price, that could be used, if and when crude returns to a more ‘normal’ level.
Because of the enormous difficulty and number of variables present, a fair, transparent
and easily verifiable formula will be difficult.” Paramount’s e-mail went on to propose
using WTI in the formula, stating, “WTI is quoted each and every day, is readily
transparent, cannot be manipulated or influenced, is widely traded and is regularly used
to hedge prices or positions, by hundreds of compan[ies]. This opens the possibility for
GAF to hedge its costs in the future.” The implication from this e-mail is that
Paramount understood that risks were involved in adopting a formula pricing method,
12
Interestingly, the record indicates that, from the start of the contract period until
October 2008, when GAF requested to change from Asphalt Index Pricing to WTI
Formula Pricing, the amount Paramount paid for Oriente exceeded $86.50 per barrel.
The price dropped somewhat in October 2008, and in November 2008, it had dropped to
$55.88 per barrel. In other words, GAF’s behavior seemed in accord with the
observations in this e-mail: formula pricing was desirable when the price per barrel was
low, not when it was high.
12
and that it could have protected itself by writing into the contract a provision that WTI
Formula Pricing would only be used under certain circumstances.
7. Paramount’s Opposition
As to the motion for summary adjudication on liability for breach of contract,
Paramount argued this was procedurally improper, as summary adjudication could not
be sought on a portion of a cause of action. Paramount also argued that triable issues of
fact existed as to the elements of breach of contract.13 For example, Paramount noted
that the contract provided for renegotiation of “an alternative formula basis” if WTI
13
GAF had sought summary adjudication on any affirmative defense Paramount
raised which might be based on GAF’s alleged antecedent breach of the contract, on the
basis that Paramount never gave GAF notice of such breach and an opportunity to cure.
Paramount argued that issues of GAF’s performance were related not to its affirmative
defenses but, instead, to the elements of GAF’s breach of contract cause of action itself.
In other words, Paramount argued that GAF had to prove its own performance in order
to obtain damages for Paramount’s breach; not that Paramount had to prove GAF’s
failure of performance as part of its affirmative defenses. The trial court apparently
agreed, considering the issue with respect to GAF’s cause of action, not Paramount’s
affirmative defenses. However, the court ruled that Paramount could not assert any
non-performance of GAF, as it had failed to comply with the notice and opportunity to
cure provisions. We are not certain of the correctness of this ruling. The notice and
opportunity to cure provisions in the contract appear to refer only to whether a party can
terminate the contract after an allegedly breaching party has been given an opportunity
to cure such breach and has failed to do so. Paramount never sought to terminate the
contract for GAF’s breach; it is simply arguing that, as a factual matter, GAF cannot
establish that it performed the contract. It is not at all clear that the notice and
opportunity to cure provisions can even be relied upon to defeat a defense of a failure to
perform. As we will ultimately conclude that the trial court committed procedural error
in granting summary adjudication of the partial cause of action, GAF will be required to
establish at trial all elements of its breach of contract cause of action, including its own
performance. The issue of whether Paramount’s failure to give notice of any alleged
lack of GAF’s performance constitutes a waiver of a defensive use of such lack remains
an open one.
13
became “illiquid.” Paramount argued that the Cushing glut caused WTI to become
“illiquid,” under certain financial definitions of liquidity.
As to the mistake of fact defense, Paramount argued that triable issues of fact
existed as to whether the mistake in using WTI in the pricing formula had been
a mistake of fact or an error in judgment. Specifically, Paramount argued that two
mutual mistakes of then-existing fact had been made when the contract was negotiated
in 2007: first, the parties did not know that then-existing technologies (including
fracking) were then capable of accessing vast quantities of crude in the market area that
depended on Cushing;14 and second, that the parties did not know that the infrastructure
at Cushing was unable to handle the extra oil.15 Both of these facts made the eventual
Cushing glut, and WTI’s subsequent price drop relative to other oils, inevitable.
14
Although Paramount submitted its expert’s declaration regarding the cause and
unanticipated nature of the Cushing glut, the expert at no point testified to this particular
mistake of fact. He stated that the WTI pricing disruption “arose largely as
a consequence of the unanticipated dramatic increase in crude oil production in the
Midcontinent area . . . . ” He added, “[i]n 2007 it was not anticipated that such an
excess supply situation would arise.” In other words, Paramount’s expert did not testify
either that: (1) those people who were aware of the then-existing capabilities of
fracking did, in fact, anticipate the Cushing glut; or (2) nobody, in 2007, was aware of
the then-existing capabilities of fracking. In short, Paramount’s expert testified to
a market disruption that “could not [have] been” anticipated. Although Paramount
argues that, if it had known of the then-existing facts, it would not have entered into the
contract with WTI Formula Pricing, it does not clearly explain how its purported
mistake regarding then-existing facts would have led it to anticipate something its own
expert claims could not have been anticipated. Putting it another way, an allegation that
future behavior of a price index was unforeseeable “completely negates the notion of
a mistake as to a material ‘existing’ fact.” (Wabash, Inc. v. Avnet, Inc. (N.D. Ill. 1981)
516 F. Supp. 995, 999.)
15
In its opposition to the summary adjudication motion, Paramount did not argue
that the parties did not know of the limits of the infrastructure at Cushing. Instead, it
14
Paramount emphasized that, at the time of contracting, both parties had wanted
a formula that tracked the price of Oriente. This was not a case of Paramount gambling
on the price of WTI; it was, instead, both parties attempting to find a reasonable proxy
for Oriente. Before entering into the agreement, Paramount had conducted research
concerning the historical price movements of WTI and Oriente and had satisfied itself
that WTI was a reasonable proxy for Oriente. Paramount argued that, although it had
understood, at the time of contracting, that WTI’s price would not always move in
lock-step with Oriente’s price, Paramount (and GAF) had never anticipated that WTI’s
price would actually become lower than Oriente’s price.
8. GAF’s Reply
In reply, GAF argued that it could, in fact, obtain summary adjudication on the
issue of liability only. It further argued that, if it was incorrect on this point, it could
obtain summary adjudication of two issues of duty – specifically, whether Paramount
had a duty under the contract and whether it had breached that duty.
9. The First Summary Adjudication Ruling
After a hearing, the trial court denied GAF’s motion in all respects. It
specifically found triable issues of fact existed as to, among other things: (1) the
interpretation of some ambiguous or implied contractual terms; (2) whether the contract
argued that the parties did not consider the Cushing infrastructure. Paramount stated,
“Neither party realized that production gains were nearly certain to flood Cushing, so
there was no concern about its outbound pipelines.” In the instant writ proceeding,
Paramount argues that the mistake was, in fact, in not knowing about the inadequacies
of the infrastructure at Cushing, not that it did not consider the issue.
15
terms were performed or breached; and (3) which issues interrelate with Paramount’s
affirmative defenses.
10. The Second Summary Adjudication Ruling
More than two weeks later, the trial court issued an order vacating its initial
ruling and stating that the matter stood submitted. Thereafter, it issued a new ruling
granting GAF’s motion for summary adjudication. The parties were not given an
opportunity to provide further oral or written argument before such new ruling was
issued.
As to GAF’s cause of action for breach of contract, the court stated, “Paramount
has breached the agreement by refusing to supply GAF with asphalt[] coating . . . at the
contract price. Plaintiff has suffered damages when it was forced to purchase cover
from Paramount and third parties in the amounts in excess of the parties’ contract price.
Therefore, Plaintiff’s Motion for Summary Adjudication is granted for breach of
contract . . . . ” The court did not address Paramount’s procedural argument that
summary adjudication could not be granted on issues of liability alone, without
calculating damages.
The trial court also granted summary adjudication in GAF’s favor on several of
Paramount’s affirmative defenses. As to mutual mistake, the only affirmative defense at
issue in the instant writ proceeding, the court concluded that Paramount’s mistake of
fact defense was, in fact, based on an error in judgment. In this regard, the court relied
on the testimony of Moret that Paramount had been aware of the risk that WTI’s price
would not track the price of Oriente.
16
11. The Instant Petition
Paramount filed a timely petition for writ of mandate, seeking review of the trial
court’s order. As already indicated, we issued an order to show cause and set the matter
for hearing.
CONTENTIONS OF THE PARTIES
Paramount’s petition focuses on three issues. First, Paramount contends the trial
court improperly reconsidered its summary adjudication ruling without granting the
parties notice and an additional opportunity to be heard. GAF responds that
reconsideration was properly granted and, in any event, any error in granting
reconsideration was necessarily harmless as the trial court’s ultimate ruling was correct.
Second, Paramount argues that the trial court procedurally erred in granting summary
adjudication on a portion of a cause of action (i.e., liability for breach of contract). GAF
responds that partial summary adjudication on liability only is proper and, in any event,
the same result follows if the motion was characterized as seeking summary
adjudication of issues of duty. Third, Paramount argues that triable issues of fact
existed as to whether its mistake of fact defense was based on a mistake of existing fact
or an error in judgment.
DISCUSSION
1. The Trial Court Erred in Granting Reconsideration
Without Notice and a Hearing
Our Supreme Court has clearly stated that a trial court has the inherent power to
reconsider orders on its own motion “as long as it gives the parties notice that it may do
17
so and a reasonable opportunity to litigate the question.” (Le Francois v. Goel (2005)
35 Cal. 4th 1094, 1097.) “To be fair to the parties, if the court is seriously concerned
that one of its prior interim rulings might have been erroneous, and thus that it might
want to reconsider that ruling on its own motion—something we think will happen
rather rarely—it should inform the parties of this concern, solicit briefing, and hold
a hearing.” (Id. at p. 1108.) As the trial court in the instant case failed to do so,16 the
court erred.
GAF argues, however, that the error is not reversible if the trial court’s ultimate
ruling on the summary adjudication motion was substantively correct. We agree.
“[T]he California Constitution requires that in any case in which a trial judge
reconsiders an erroneous order, and enters a new order that is substantively correct, the
resulting ruling must be affirmed regardless of any procedural error committed along
the way.” (In re Marriage of Barthold (2008) 158 Cal. App. 4th 1301, 1313.) We
therefore turn to the merits of the trial court’s ultimate order granting summary
adjudication.17
16
GAF impliedly suggests that the court met this burden by giving notice that it
would be reconsidering its initial ruling, “thereby giving Paramount sufficient time to
request additional briefing or argument had it believed it was necessary.” We disagree.
The court’s order had simply stated the prior order was “vacated and set aside” and that
the motion “stands submitted.” Stating that the prior order was “vacated and set aside”
did not inform the parties of the court’s concern that the prior ruling may have been
erroneous; stating that the matter “stands submitted” did not constitute a solicitation of
further briefing. Indeed, such an order compels the opposite conclusion.
17
See footnote 23, post.
18
2. Summary Adjudication of a Partial Cause of Action is Improper
GAF sought, and obtained, summary adjudication of Paramount’s liability for
breach of contract, with the specific understanding that damages would be determined at
trial. This result is not permitted by the language of the summary adjudication statute,
the legislative history of the statute, and the case authority interpreting it.
“The objective of statutory interpretation is to ascertain and effectuate legislative
intent. [Citation.] We look first to the words of the statute, giving to the language its
usual, ordinary import and according significance, if possible, to every word, phrase and
sentence in pursuance of the legislative purpose. [Citation.] Significance should be
attributed to every word and phrase of a statute, and a construction making some words
surplusage should be avoided. [Citation.] Both the legislative history of a statute and
the wider historical circumstances of its enactment may be considered in ascertaining
legislative intent. [Citation.] Various extrinsic aids, including the history of the statute,
committee reports and staff bill reports may be used to determine the intent of the
Legislature, and such aids are especially helpful where the wording of the statute is
unclear. [Citation.]” (DeCastro West Chodorow & Burns, Inc. v. Superior Court
(1996) 47 Cal. App. 4th 410, 418.)
Our initial investigation of the words of the statute is somewhat complicated by
an unfortunate amendment intended to clarify the statute’s language. We are concerned
with Code of Civil Procedure, section 437c, subdivision (f)(1), which provides for
motions for summary adjudication. It states, “A party may move for summary
adjudication as to one or more causes of action within an action, one or more
19
affirmative defenses, one or more claims for damages, or one or more issues of duty, if
that party contends that the cause of action has no merit or that there is no affirmative
defense thereto, or that there is no merit to an affirmative defense as to any cause of
action, or both, or that there is no merit to a claim for damages, as specified in
Section 3294 of the Civil Code, or that one or more defendants either owed or did not
owe a duty to the plaintiff or plaintiffs. A motion for summary adjudication shall be
granted only if it completely disposes of a cause of action, an affirmative defense,
a claim for damages, or an issue of duty.”
The preliminary problem arises because, technically speaking, the first sentence
of the statute does not appear to allow a plaintiff to move for summary adjudication of
a cause of action on the basis that the cause of action is indisputably meritorious. To
see the problem, compare subdivision (a) of the same statute. This permits a party to
move for summary judgment “in any action or proceeding if it is contended that the
action has no merit or that there is no defense to the action or proceeding.” (Code Civ.
Proc., § 437c, subd. (a).) Thus, a plaintiff may move for summary judgment if it
contends that “there is no defense to the action.” A later subdivision explains that
“[a] plaintiff . . . has met his or her burden of showing that there is no defense to a cause
of action if that party has proved each element of the cause of action entitling the party
to judgment on that cause of action.” (Code Civ. Proc., § 437c, subd. (p)(1).) Thus,
a plaintiff can seek summary judgment by contending there is “no defense” to the
action, and it proves there is “no defense” by establishing every element of its causes of
action.
20
There is, however, no provision for a plaintiff to move for summary adjudication
of a cause of action if it proves there is “no defense” to the cause of action.
Subdivision (f)(1) provides that a party may move for summary adjudication “if that
party contends . . . that there is no affirmative defense” to a cause of action.18 (Italics
added.) But establishing that there is no affirmative defense to a cause of action does
not establish the merits of that cause of action.19 For the summary adjudication
provision of the summary judgment statute to permit a plaintiff to seek summary
adjudication of a cause of action, the statute should permit the plaintiff to seek summary
adjudication if it contends that there is “no defense” to a cause of action.
This was, in fact, what was intended. Prior to a 1993 amendment, the summary
adjudication provision provided, in language paralleling that of the summary judgment
provision, that a party could move for summary adjudication “[i]f it is contended that
one or more causes of action within an action has no merit or that there is no defense
thereto . . . . ” (Stats. 1992, ch. 1348, § 1.) In 1993, the subdivision was amended to
read as it currently does, purportedly allowing a plaintiff to seek summary adjudication
18
If the party contends there is no affirmative defense to a cause of action, the
statute is not entirely clear as to what the party should seek summary adjudication. If
a party contends the affirmative defense has no merit, it can and should seek summary
adjudication of the affirmative defense itself. The phrasing of the sentence seems to
imply that a party can seek summary adjudication of the cause of action if it contends
there is no affirmative defense to it, but, as we discuss, this is logically erroneous.
19
Indeed, consider the hypothetical of a cause of action against which a defendant
interposes a general denial, but pleads no affirmative defenses. The plaintiff is not
entitled to summary adjudication of the cause of action in its favor on the basis of
defendant’s answer alone. The lack of affirmative defenses says nothing about the
merits of the cause of action, on which the plaintiff bears the burden of proof.
21
if it contends there is “no affirmative defense” to a cause of action, not if there is “no
defense” to it. (Stats. 1993, ch. 276, § 1.) The legislative history confirms that this
amendment was not intended, in any way, to change the bases on which a party could
seek summary adjudication; instead, it was intended only to “[c]larify existing language
relating to summary adjudication motions . . . . ” (Sen. Rules Com., Off. of Sen. Floor
Analyses, Analysis of Assem. Bill No. 498 (1993-1994 Reg. Sess.), as amended July 1,
1993, p. 2.) Indeed, another division of this appellate district has already concluded that
“despite the more awkward sentence structure of the 1993 amendment, we can only
conclude that the first sentence of section 437c, subdivision (f)(1) was amended only to
provide clarity and not to alter the meaning of the prior version of the sentence.”
(DeCastro West Chodorow & Burns, Inc. v. Superior Court, supra, 47 Cal.App.4th at
p. 421 [rejecting the argument that the 1993 rephrase allowed parties to seek summary
adjudication on a claim for damages other than punitive damages].)
Moreover, subdivision (p) of the summary judgment statute, which sets forth the
standards of proof, begins with: “For purposes of motions for summary judgment and
summary adjudication,” (emphasis added), before proceeding to subdivision (p)(1),
which describes the burden of establishing that “there is no defense to a cause of
action.” The inclusion of “summary adjudication” in this subdivision would make no
sense if a plaintiff could not, in fact, move for summary adjudication on the basis that
there is no defense to a cause of action.
We therefore conclude that a plaintiff may, despite the confusing language of the
statute, move for summary adjudication of a cause of action, if the plaintiff asserts there
22
is “no defense” to that cause of action. Further, the plaintiff’s burden of proof on such
a motion is defined by subdivision (p)(1) of Code of Civil Procedure, section 437c; the
plaintiff must “prove[] each element of the cause of action entitling the party to
judgment on that cause of action.”20
With that established, we now proceed to the issue raised by the parties: may
a plaintiff seek summary adjudication of liability only, leaving the resolution of
damages to a later trial? The statutory language mandates the question be answered in
the negative. A plaintiff can obtain summary adjudication of a cause of action only by
proving “each element of the cause of action entitling the party to judgment on that
cause of action.” As damages are an element of a breach of contract cause of action
(Rutherford Holdings, LLC v. Plaza Del Rey (2014) 223 Cal. App. 4th 221, 229),
a plaintiff cannot obtain judgment on a breach of contract cause of action in an amount
of damages to be determined later.
Legislative history is in accord. Prior to the 1990 amendment to the summary
adjudication statute, parties could seek summary adjudication on any issues raised in
a case. The 1990 amendment limited summary adjudication motions to: a cause of
20
Paramount never contended that GAF could not seek summary adjudication of
the entirety of its breach of contract cause of action. It was necessary, however, for us
to make the digression into this issue in order to demonstrate that the burden of proof in
subdivision (p)(1) of Code of Civil Procedure section 437c applied to GAF’s motion.
GAF argues that the use of the phrase “cause of action” in subdivision (f)(1) is
ambiguous as to what it means for a plaintiff to move for summary adjudication of
a cause of action. But, when considered together with the burden of proof in
subdivision (p)(1), there is no ambiguity.
23
action, an affirmative defense, a claim for punitive damages, or an issue of duty.21
(Stats. 1990, ch. 1561, § 2.) The amendment was proposed by the California Judges
Association, which took the position that “it is a waste of court time to attempt to
resolve issues if the resolution of those issues will not result in summary adjudication of
a cause of action or affirmative defense. Since the cause of action must still be tried,
much of the same evidence will be reconsidered by the court at the time of trial.”22
(Senate Com. on Judiciary, Analysis of Sen. Bill No. 2594 (1989-1990 Reg. Sess.), as
amended May 7, 1990, pp. 2-3.) The clear purpose of the amendment was to “ ‘stop the
21
The 1993 amendment subsequently reinforced this, by adding the sentence
stating, “A motion for summary adjudication shall be granted only if it completely
disposes of a cause of action, an affirmative defense, a claim for damages, or an issue of
duty.” (Stats. 1993, ch. 276, § 1.)
22
GAF argues that this purpose would be satisfied by allowing a plaintiff to move
for summary adjudication on liability only, with damages left to be tried. GAF’s own
motion refutes this. GAF argued in its motion that, even if Paramount was correct on its
mutual mistake defense, it would still be entitled to summary adjudication. GAF took
the position that if there was a mistake as to WTI Formula Pricing, the severability
clause would be triggered, and Paramount would therefore have been required to
perform the contract under Asphalt Index Pricing. Thus, GAF argued that even if
Paramount raised a triable issue of fact as to mutual mistake, GAF should still be
granted summary adjudication on liability. GAF pursues this argument in this writ
proceeding. But if GAF’s argument is correct, it would obtain a summary adjudication
order providing that Paramount was liable for breach of contract either by not
performing under WTI Formula Pricing or by not performing under Asphalt Index
Pricing. The subsequent trial would not simply involve a calculation of GAF’s losses,
as the trier of fact would be required to determine whether the WTI Formula Pricing
term should, in fact, be considered severed as a result of mutual mistake of fact. Thus,
all of the evidence considered by the trial court on whether there was a triable issue of
fact on mutual mistake would have to be presented again at trial in order to determine
the proper measure of GAF’s damages. This is precisely the waste of time and judicial
resources intended to be prohibited by the 1990 limitations on summary adjudication
motions.
24
practice of adjudication of facts or adjudication of issues that do not completely dispose
of a cause of action or a defense.’ ” (Lilienthal & Fowler v. Superior Court (1993)
12 Cal. App. 4th 1848, 1853.) A determination of liability alone does not completely
dispose of the cause of action.
Case authority confirms this conclusion. In Department of Industrial Relations
v. UI Video Stores, Inc. (1997) 55 Cal. App. 4th 1084, the parties had filed cross motions
for summary judgment; the plaintiff’s was denied and the defendant’s was granted. On
appeal, the court reversed, concluding that the plaintiff’s legal position was meritorious.
However, the plaintiff had not established its damages. On appeal, the plaintiff
requested the court of appeal to order the trial court to enter summary judgment in its
favor. The court rejected the request, as follows: “The trial court had apparently
ordered [plaintiff] to move for summary judgment on the issue of [defendant]’s liability,
with damages to be determined in a later accounting proceeding. Although we have
determined that [defendant] is liable to [plaintiff], Code of Civil Procedure section 437c
makes no provision for a partial summary judgment as to liability. Even summary
adjudication may be granted only in limited instances. (Code Civ. Proc., § 437c,
subd. (f)(1).) Because issues of the calculation of damages apparently remain to be
determined, it is not appropriate to grant summary judgment for appellant at this time.
(Weil & Brown, Cal. Practice Guide: Civil Procedure Before Trial (The Rutter Group
1996) ¶ 10:40.1, p. 10-17 [summary judgment or adjudication improper where amount
of damages raises factual issue].) The correct procedure below would have been
a motion to bifurcate the issue of liability, which the parties could have tried upon the
25
undisputed facts. [Citation.] A decision on the issue of liability against the party on
whom liability is sought to be imposed does not result in a judgment until the issue of
damages is resolved.” (Department of Industrial Relations v. UI Video Stores, Inc.,
supra, 55 Cal.App.4th at p. 1097.)
GAF takes the position that this case authority is not controlling. GAF argues
that the court was discussing summary judgment, and that its language regarding
summary adjudication was only a vague implication, bereft of analysis, in dicta. The
confusion may have arisen because the court spoke of “partial summary judgment” and
“summary adjudication” as two separate things. In truth, there is no such creature as
“partial summary judgment” in California; the proper term is “summary adjudication.”
(Weil & Brown, Cal. Practice Guide: Civil Procedure Before Trial (The Rutter Group
(rev. #1, 2013), ¶ 10:35, p. 10-7.) With this clarification, it is apparent that the court’s
language is a well-reasoned holding. The court was specifically requested to enter
partial summary judgment—summary adjudication—on the issue of liability, leaving
damages to be tried. The court rejected the request, because there was no statutory basis
for such an order. As we have explained, the governing statute provides that a plaintiff
can only obtain summary adjudication of a cause of action if the plaintiff establishes
each element of the cause of action entitling it to judgment on that cause of action. The
court specifically held that “[a] decision on the issue of liability against the party on
whom liability is sought to be imposed does not result in a judgment until the issue of
damages is resolved.” (Department of Industrial Relations v. UI Video Stores, Inc.,
26
supra, 55 Cal.App.4th at p. 1097.) Therefore, such a summary adjudication would be
improper. We fully agree with the court’s reasoning.
GAF attempts to defend the trial court’s ruling in its favor by recharacterizing it
as a summary adjudication on issues of duty – specifically, that Paramount owed it
a duty under the contract, and that it breached that duty. There are two reasons why this
is incorrect. First, there is no statutory basis for summary adjudication on the issue of
breach. We return to the language of Code of Civil Procedure, section 437c,
subdivision (f)(1). “A party may move for summary adjudication as to . . . or one or
more issues of duty, if that party contends . . . that one or more defendants either owed
or did not owe a duty to the plaintiff or plaintiffs.” A plaintiff may seek summary
adjudication on the existence or nonexistence of a contractual duty (Linden Partners v.
Wilshire Linden Associates (1998) 62 Cal. App. 4th 508, 519), but there is simply no
statutory basis for an order summarily adjudicating that a party breached a duty.
Second, to the extent GAF argues the trial court’s summary adjudication order should
be interpreted as a determination that Paramount owed it a contractual duty, we decline
to do so on the basis that GAF did not move for such an order, but raised this issue for
the first time in its reply memorandum. “[I]t is improper to grant summary adjudication
absent a motion therefor. [Citations.] Therefore, because [defendant] did not move in
the alternative for summary adjudication of specified issues, we will not address
whether [defendant] may have prevailed on some issues in this case. [Citation.]”
(Hawkins v. Wilton (2006) 144 Cal. App. 4th 936, 949.)
27
In sum, there is no legal basis for a plaintiff’s motion for summary adjudication
on liability only, and the trial court erred in granting GAF’s motion in this case.23 We
will therefore grant Paramount’s writ petition to the extent it challenges the trial court’s
order granting GAF partial summary adjudication on its breach of contract cause of
action.
3. Summary Adjudication of Paramount’s Mistake of Fact
Defense Was Proper
We now turn to GAF’s motion for summary adjudication of Paramount’s mutual
mistake defense. We review the grant of summary adjudication de novo. (King v. Wu
(2013) 218 Cal. App. 4th 1211, 1213.)
“A contract may . . . be rescinded if the consent of the rescinding party was given
by mistake. [Citation.] The party attempting to void the contract as a result of mistake
must also show that it would suffer material harm if the agreement were enforced,
though that need not be a pecuniary loss. [Citation.]” (Habitat Trust for Wildlife, Inc.
v. City of Rancho Cucamonga (2009) 175 Cal. App. 4th 1306, 1332-1333 (Habitat).)
“Mistake of fact is a mistake, not caused by the neglect of a legal duty on the part of the
person making the mistake, and consisting in: [¶] 1. An unconscious ignorance or
forgetfulness of a fact past or present, material to the contract; or, [¶] 2. Belief in the
present existence of a thing material to the contract, which does not exist, or in the past
existence of such a thing, which has not existed.” (Civ. Code, § 1577.)
23
For this reason, the trial court’s error in reconsidering its summary adjudication
ruling without giving the parties notice and an opportunity to be heard was not
harmless.
28
Civil Code section 1577 speaks in terms of mistakes as to present or past facts;
there is no authority for rescission based on a mistake regarding future events. (Mosher
v. Mayacamas Corp. (1989) 215 Cal. App. 3d 1, 5 (Mosher).) In determining whether
a mistake is a mistake of fact or an error in judgment, “[i]t is the facts surrounding the
mistake, not the label, i.e., ‘mistake of fact’ or ‘mistake of judgment,’ which should
control.” (White v. Berrenda Mesa Water Dist. (1970) 7 Cal. App. 3d 894, 907.)
According to Paramount, at the time of contracting, the parties were mutually
mistaken24 as to two then-existing facts: the capacity of existing fracking technology;
and the lack of capacity at Cushing. These facts made the use of WTI in the pricing
formula a bad choice, as they would, in the end, result in WTI’s price eventually
decoupling from that of Oriente, with disastrous results for Paramount.
Two California cases provide guidance in characterizing the mistake in the
instant matter. The first is Mosher, in which the two parties had together owned
properties in Lake Tahoe, and one party agreed to buy out the other. (Mosher, supra,
215 Cal.App.3d at p. 3.) The buyer stopped paying the agreed purchase price, and
sought to rescind, when a change in federal tax law (eliminating tax benefits for
secondary residences) drastically reduced the property values below the purchase price.
24
GAF argues that any mistake was unilateral, on Paramount’s part. Yet
Paramount’s witnesses testified that both parties had wanted stability in the pricing
formula, and both parties agreed that WTI would provide the necessary level of
stability. GAF questions the basis by which Paramount’s witnesses knew what GAF’s
representatives were allegedly thinking. However, the record before this court does not
indicate that GAF pursued any objections to Paramount’s evidence on this basis. Thus,
for the purposes of our consideration of the ruling on the summary adjudication motion,
we assume Paramount is correct and both parties shared in the mistake.
29
(Id. at pp. 3-4.) The seller obtained summary judgment and the appellate court
affirmed, over the buyer’s contention of mutual mistake. The court explained that the
buyer “asserts that the valuation of the Lake Tahoe properties which formed the basis of
the 1982 contract was grossly overstated, an assertion which might raise a triable issue
of fact were it supported by evidence that the valuation was overstated at the time of the
sale. However, the entire thrust of [the buyer’s] claim appears to be that the valuation
was rendered mistaken by subsequent events, i.e., the adverse tax legislation which
began affecting Lake Tahoe real estate in 1985 and was ultimately enacted in 1986,
nearly four years after the parties’ transaction.” (Id. at p. 5.) The court continued,
“Absent evidence that the existence of a future contingency (e.g., continuation of tax
benefits) is an assumption of the contract (about which more in a moment), the defense
of mistake of fact must be premised on past or present facts about which the parties are
ignorant or mistaken. There was no evidence presented to the trial court that the
valuation of the properties proposed by appellant itself in 1982 was erroneous in light of
facts then or previously in existence.” (Ibid.) As to the issue of whether the existence
of future tax benefits was an assumption of the contract, the court concluded that there
was no evidence that it was. The court explained that the buyer “chose to enter into the
subject contract knowing that tax benefits were a major aspect of the value of the
properties and presumably knowing that the availability of such benefits could be
affected by future legislation, yet it made no provision with respect to tax matters in the
contract which its own chief executive officer prepared.” (Id. at p. 6.) In short, the
30
buyer’s mistake was, as a matter of law, an error in judgment, not a mistake of fact.
(Ibid.)
Just as the buyer in Mosher was not mistaken about the value of the properties at
the time of the contract, Paramount was not mistaken regarding the value of WTI at the
time it entered into the contract at issue in this case. The Mosher buyer was mistaken as
to whether the then-existing tax benefits would continue; Paramount was mistaken as to
whether the then-existing correlation in price between WTI and Oriente would continue.
The Mosher buyer could have protected itself by providing in the contract that the price
depended on the continuation of tax benefits, but failed to do so; Paramount could have
protected itself by providing that the continued use of WTI Formula Pricing depended
on the continuation of the price relationship between WTI and Oriente, but failed to do
so. As the facts are similar, the Mosher result should govern; Paramount’s mistake was
an error in judgment.
There is one sentence in Mosher on which Paramount can attempt to distinguish
its situation. Mosher states that the buyer entered into the contract “presumably
knowing that the availability of [tax] benefits could be affected by future legislation.”
(Mosher, supra, 215 Cal.App.3d at p. 6.) Paramount argues that, in contrast, it did not
know that the price correlation between WTI and Oriente could be affected by
then-existing fracking technology and therefore could not have contracted to protect
itself. But Paramount did know that there was always a risk that WTI and Oriente
31
would not continue to track;25 indeed, it conducted a great deal of research to assure
itself that the past behavior of the two prices had stayed within a reasonable range, from
which it made the assumption that it was likely that the two would remain relatively in
sync. But there were no guarantees that past pricing relationships would continue (for
whatever reason) and Paramount did nothing to protect itself from such a contingency.
The second case from which we obtain guidance is Habitat, a case in which
a developer sought to develop a residential subdivision. The draft environmental impact
report (EIR) proposed that, in order to mitigate the potential loss of a habitat for plants
and animals, the developer should convey some off-site land to a County Special
District. A non-profit environmental advocacy group found this mitigation provision to
be insufficient, and intended to oppose the development. (Id. at p. 1312.) The
developer and the non-profit then reached an agreement that the non-profit would not
oppose the development if, rather than conveying the mitigation land to the County, the
developer conveyed the mitigation land to the non-profit itself. (Id. at pp. 1312-1313.)
The final, approved, EIR provided that the developer must convey the mitigation land to
the County or “ ‘other qualified conservation entity approved by the City.’ ” (Id. at
p. 1313.) The developer contracted to give the mitigation land to the non-profit, and the
parties sought City approval of the non-profit as a “qualified conservation entity.” (Id.
25
Indeed, Paramount knew the risks enough to include a contract term that the
price would be renegotiated if WTI was no longer quoted or became illiquid. Surely if
Paramount realized the possibility that WTI could become illiquid, while Oriente would
still be available, it recognized that WTI would not necessarily always track Oriente’s
price.
32
at p. 1314.) The non-profit failed to obtain City approval, but nonetheless sued the
developer for failing to transfer the land. (Id. at p. 1315.) The developer sought to
rescind the contract with the non-profit, on the basis of mutual mistake. (Id. at p. 1317.)
The developer successfully obtained summary judgment, and the judgment was
affirmed on the non-profit’s appeal. It was clear from the facts that the contract
between the developer and the non-profit was based on the assumption that the
non-profit would be approved by the City as a “qualified conservation entity,” although
the contract did not specify this. The issue arose as to whether the parties’ mistake was
a mistake in judgment that the City would approve the non-profit, or a mistake in fact
that the non-profit met the necessary qualifications. (Id. at p. 1343.) The court
concluded that, despite the non-profit’s characterization of the mistake as one regarding
future approval, the facts showed that both parties were mistaken “as to the present fact
that [the non-profit] would qualify.” (Ibid.)
The Habitat opinion illustrates the ease with which a mistake can be
characterized as either a mistake of fact or an error in judgment. But, further, it
demonstrates what it is to be mistaken about a present fact, even though it was a future
occurrence of an unexpected event that derailed the contract. That is, in Habitat, the
contract depended upon the City ultimately approving the non-profit to take the
mitigation land; it was the future event of the City’s disapproval of the non-profit that
undermined the developer’s reason for entering into the contract with the non-profit.
However, the parties had entered into the contract with the present understanding that
the non-profit met the requirements of a qualified conservation entity, and would
33
therefore be approved as a matter of course. The mistake was not a failure to predict the
City’s exercise of its discretion, but a mistake in understanding the qualities of the
non-profit itself. Mosher provided an illustration of the distinction. When two parties
agree to the sale of a violin believed to be a Stradivarius, they can rescind the contract
when the violin is discovered to be a fake. This is because the violin never was what
the parties believed it to be. (Mosher, supra, 235 Cal.App.3d at p. 5.) Similarly, in
Habitat, the non-profit never was the qualified conservation entity it was believed to be.
In this case, there was no such factual mistake. WTI oil, on which the parties
relied for the formula pricing alternative, was, in fact, exactly what the parties believed
it to be. The then-existing capacity at Cushing was also what the parties believed it to
be. There is no suggestion, for example, that at the time of contracting, the Cushing
glut existed and the parties were mistaken about it. Instead, the parties were mistaken in
their assumption that WTI would continue to serve as a reasonable proxy for Oriente.
This is, as a matter of law, an error in judgment. While Paramount, with the benefit of
hindsight, attempts to find facts existing at the time of contracting which could be
blamed for eventually causing WTI’s price to decouple from Oriente’s,26 this does not
26
We note that any failure to predict events based on human behavior can, with
enough creativity, be attributed to a failure to know then-existing facts. The buyer in
Mosher presumably did not anticipate the change in tax law because he failed to know
the then-existing tax philosophy of President Reagan. There is, of course, a causal
problem with such arguments – as they focus on facts more and more distant from the
actual event which frustrated the contract. Even though the President might be
favorably disposed toward a tax change, the change will not go into effect unless
Congress passes the necessary legislation. Thus, the mistake truly was in not predicting
the future occurrence. Paramount’s argument suffers from a similar causal problem.
Paramount argues that it was not aware that then-existing fracking technologies were
34
change the fact that it was Paramount’s failure to predict the future results of these facts,
not its failure to know them,27 which was the true nature of the mistake in this case. The
trial court did not err in granting GAF’s motion for summary adjudication of
Paramount’s mistake of fact defense.
capable of extracting large amounts of oil. But even though technologies are capable of
extracting large amounts of oil, that oil will not be extracted unless the oil companies
obtain the rights to extract the oil, the existing regulatory environment allows the
extraction, and the companies believe that it will be profitable to actually choose to
extract the oil at that time. Thus, the mistake truly was in not predicting that oil
companies would extract vast amounts of oil via fracking.
27
Tellingly, at one point in its briefing, Paramount argues, “the parties simply
made a mistake with respect to how existing facts would inevitably prevent
a WTI-based pricing formula from tracking the price of Oriente crude that Paramount
was using.” This is a failure to predict the future, not a failure to know the facts. Were
Paramount correct, no futures or long-term performance contract would be safe.
Suppose Paramount and GAF had contracted not for asphalt coating made from Oriente,
but for WTI futures at a fixed price. When the price of WTI substantially and
unexpectedly dropped due to the Cushing glut, the buyer (who would then have to pay
a much higher price for WTI than its market price) would not be heard to complain that
there had been a mutual mistake in that the parties failed to predict that conditions
would result in the Cushing glut and the drop in price of WTI. The result must be the
same when the parties did not contract for WTI futures, but based their pricing structure
on the future price of WTI. Paramount argues that this is unfair, in that the parties had
not intended to gamble on the price of WTI and had, instead, chosen to use WTI
Formula Pricing because of the presumed stability of the price of WTI with respect to
the price of Oriente. Unfortunately, however, Paramount built no protections into the
contract to protect it from such WTI price fluctuations (as GAF did), but, instead,
agreed that WTI Formula Pricing would be used regardless of future contingencies.
35
DISPOSITION
The petition for writ of mandate is granted in part and denied in part. Let
a peremptory writ of mandate issue directing the trial court to vacate its order granting
GAF’s motion for summary adjudication in its entirety and to issue a new and different
order: (1) denying GAF’s motion for summary adjudication of the liability portion of
its cause of action for breach of contract; and (2) granting GAF’s motion for summary
adjudication of the identified affirmative defenses,28 including mutual mistake. The
parties shall bear their own costs in connection with this petition.
CERTIFIED FOR PUBLICATION
CROSKEY, J.
WE CONCUR:
KLEIN, P. J. KITCHING, J.
28
These affirmative defenses are mistake of fact, commercial frustration,
impossibility, and impracticability. To the extent that the trial court may have granted
summary adjudication of Paramount’s “affirmative defenses” based on GAF’s
purported failure of performance, this was error. There were no affirmative defenses
pleaded based on GAF’s purported failure of performance. Instead, Paramount’s
arguments that GAF failed to perform were arguments that GAF could not establish the
performance element of its own breach of contract cause of action. (See footnote 13,
ante.) As these arguments went to a general, not an affirmative, defense, they were an
inappropriate basis on which to grant summary adjudication.
36