Opinion
No. C6-01-1720.
Filed June 18, 2002.
Appeal from the District Court, Hennepin County, File No. 9914896.
Andrew S. Birrell, R. Travis Snider, (for respondent)
David L. Mitchell, John P. Morgan, (for appellant)
This opinion will be unpublished and may not be cited except as provided by Minn. Stat. § 480A.08, subd. 3 (2000).
UNPUBLISHED OPINION
Robert Murphy appeals the partial denial of his posttrial motions challenging the district court's computation of damages in a breach-of-contract action. The district court found that Murphy breached a consulting contract with Business Machine Sales and Services, Inc. The court construed the contract to be a guarantee by Murphy to produce $6,000 in monthly sales. We agree with Murphy that his consulting contract, when read as a whole, does not support the district court's determination that he guaranteed to produce a fixed amount of monthly net gross profits. Accordingly, we reverse the findings on damages and remand to the district court for a new trial on the issues of damages only.
FACTS
In 1984, Robert Murphy obtained stock of Business Machines Sales and Services, Inc. (BMS), a corporation that leases and sells computers and other business equipment and supplies. Approximately five years later, Murphy and one of his partners, Gerard Thompson, purchased the stock of the other two owners, each taking a 50% stake in the company. Under this management structure, Murphy was the sales manager, and Thompson worked with the service and rental side of the business.
In January of 1997, after BMS experienced some stagnancy in sales, Thompson agreed to purchase Murphy's interest in the company to allow Murphy to assume a consulting position that would focus solely on sales. In May of 1997, the two men formed a contract consisting of a consulting agreement, a non-compete agreement, and a stock-redemption agreement. The consulting agreement extended for 48 months during which Murphy " commit[ted] to achieve a minimum "Net Gross Profit" of $6,000.00 per month on sales of BMS products." (Emphasis added.) The contract defines "Net Gross Profit" as "equal to sales revenue minus the cost of goods sold by Murphy."
The consulting contract required Murphy to use his best efforts to sell BMS products. BMS agreed to pay Murphy "a commission of 40% of the Net Gross Profit on all product sales, provided the monthly minimum net gross profit of $6,000.00 per month [was] achieved." Murphy received sole access to 21 BMS accounts, and was required to sell only BMS products to these accounts so long as the products were available and competitively priced. If Murphy failed to meet the $6,000 monthly commitment, he forfeited his commission, unless his four-month total equaled or exceeded $24,000. Added to this, Murphy also received a commission of 20% of the face value of any service contracts or extended warranties he either created or renewed.
For the first 17 months, Murphy's sales usually exceeded $6,000 in net gross profits each month. In late 1998, Murphy's sales experienced a significant downturn, dipping permanently below the $6,000 monthly commitment. For the remainder of the contract term, Murphy's monthly net gross profits only reached as high as $2,673.89 and more often were approximately $300. Murphy claims the downturn was both a consequence of BMS's inability to compete in the computer-sales market and a decrease in the protected accounts' purchasing needs. Thompson disagreed, claiming that the downturn was caused by Murphy's acting on a threat to "dry up" the business after Thompson refused to renegotiate the terms of Murphy's contract. According to Thompson, in late 1998 Murphy had requested that he be released from the $6,000 monthly commitment in exchange for bringing in a new account with a major purchaser in Arizona. Murphy denied making any threat and testified that he wanted to restructure the contract because the business was drying up as a result of market forces beyond his control.
When Thompson refused to restructure the terms of the contract, Murphy ceased working for BMS. BMS paid Murphy his last commission in January 1999. In September 1999, BMS sued Murphy for breach of the consulting contract.
At the bench trial, Murphy admitted that he had occasionally violated some of the contract terms by selling non-BMS products to the 21 protected accounts. Murphy also admitted that he formed his own company called ConCom, through which he sold products similar to BMS products. Murphy testified that he used a four-step plan to make sales and admitted that with many of the protected accounts he failed to follow this plan. Murphy claims that his reasons for not following his sales plan were legitimate, experienced sales decisions.
The district court generally discredited Murphy's testimony, and found that he did threaten to dry up the business when Thompson refused to renegotiate their contract. The district court also found that Murphy breached the contract by failing to produce at least $6,000 per month in net gross profits, by not adequately servicing and maintaining the 21 protected accounts, by selling products to these accounts from companies other than BMS, and by not putting forth his best efforts to make sales for BMS.
To calculate damages for the breach, the district court initially concluded that Murphy would have produced $8,300 each month in net gross profits for the last 31 months of the contract, resulting in damages of $154,380 after subtraction of Murphy's 40% commission. Following posttrial motions, the district court reduced the damages to $111,600, computed by multiplying the $6,000 monthly commitment by 31 months and subtracting Murphy's commission.
On appeal, Murphy argues that the court erred by construing the $6,000 commitment as a guarantee. Murphy also argues that BMS failed to mitigate its damages and failed to prove the extent of its damages with any degree of certainty. Furthermore, Murphy argues that any damages must be offset by the money he earned in the first 17 months of the contract that exceeded the $6,000 monthly quota, as well as the money his protected accounts generated over the final 31 months of the contract.
DECISION
Findings of fact, whether based on oral or documentary evidence, will be set aside only if clearly erroneous, and a reviewing court defers to the district court's evaluation of witness credibility. Minn.R.Civ.P. 52.01. A district court's decision on a purely legal issue is independently reviewed. Frost-Benco Elec. Ass'n v. Minn. Pub. Utils. Comm'n, 358 N.W.2d 639, 642 (Minn. 1984). Findings of fact that result from an error of law must also be set aside. Reserve Mining Co. v. State, 310 N.W.2d 487, 490 (Minn. 1981).
I
Murphy first challenges the district court's determination that he guaranteed $6,000 in net gross profits to BMS under the terms of the consulting contract.
When construing a contract, we give effect to the intention of the parties as expressed in the language contained in the whole contract. Art Goebel, Inc., v. North Suburban Agencies, Inc., 567 N.W.2d 511, 515 (Minn. 1997). Absent any ambiguities, we are bound to attribute the usual and accepted meaning to contractual language. Trondson v. Janikula, 458 N.W.2d 679, 681 (Minn. 1990). Ambiguity exists if the language of the contract is reasonably susceptible to more than one meaning. Id. If an ambiguity is found, courts may resort to extrinsic evidence of intent to construe the contract. Blattner v. Forster, 322 N.W.2d 319, 321 (Minn. 1982).
The primary question in this appeal is whether the term "commit," as used in the consulting contract, has a plain and ordinary meaning that is synonymous with guarantee. Murphy argues that to define "commit" as synonymous with "guarantee" would nullify two other provisions in the contract. Those provisions include a sentence stating that "BMS realizes that not all sales calls will result in sales" and language explaining that Murphy forfeits his monthly commission whenever the $6,000 monthly goal is not met.
We are mindful that a contract should be read in a manner that enforces the entire agreement. Telex Corp. v. Data Products Corp., 271 Minn. 288, 293, 135 N.W.2d 681, 685 (1965); see also Cement, Sand Gravel Co. v. Agricultural Ins. Co., 225 Minn. 211, 216, 30 N.W.2d 341, 345 (1947) (intent of contracting parties is ascertained by synthesis of words in accordance with obvious contractual purpose, not by isolating words from their context). The provisions identified by Murphy together with other aspects of the contract militate against defining "commit" to mean "guarantee."
Significantly, if "commit" were a guarantee, then it would be understood that a failure to meet the $6,000 monthly commitment would mean that Murphy was accountable to BMS to cover the difference between what was earned and what was promised. No language in the contract provides for coverage of that deficit. Instead, the language provides for a forfeiture of Murphy's commission if he fails to meet the $6,000 commitment.
It is equally significant that before the contract sets out the monthly profits language, it states that Murphy "shall use his best efforts to maintain [his] Consulting Accounts as BMS customers." This volitional language would be unnecessary if Murphy had guaranteed net gross profits of $6,000, because his best efforts would not be relevant.
Furthermore, reading "commit" to mean that Murphy guaranteed monthly net gross profits of a specified amount is contrary to the commonly understood legal relationship between an agent and a principal. In ordinary agency relationships, the agent is only expected to make reasonable efforts to accomplish the result. See Restatement (Second) of Agency § 377 cmt. b (1958) (an agent is not liable unless he fails to make reasonable efforts to perform services). The language of Murphy's consulting contract, as a whole, appears to create the more commonly accepted agent-principal relationship between the parties rather than a guarantee. This reading is also consistent with the allegations in BMS's complaint — that Murphy failed to use his best efforts to make sales. Murphy did not guarantee $6,000 per month in net gross profits to BMS, but instead agreed to give his best effort to achieve this goal.
II
Murphy's remaining arguments focus on the measure of damages used by the district court when it found that he had breached a guarantee to BMS to generate $6,000 each month in net gross profits. Murphy claims that (a) because the contract did not contain a guarantee, the damages were incorrectly calculated and BMS has failed to show non-guarantee damages, (b) BMS failed to mitigate its damages, and (c) he is entitled to credit for excess profits from the first months of the contract and uncredited commissions for the last months against the claimed damages.
A
The appropriate measure of damages for breach of contract is the amount that will place the plaintiff in the same situation as if the contract had been performed. Logan v. Norwest Bank Minnesota, N.A., 603 N.W.2d 659, 663 (Minn.App. 1999); see also 4 Minnesota Practice, CIVJIG 20.60 (1999) (stating that damages for breach of contract should put the nonbreaching party in the same position he or she would have been had the contract not been breached). A party seeking lost profits from a breach of contract must prove that the profits were reasonably certain and that the breach caused the loss. See Polaris Indus. v. Plastics, Inc., 299 N.W.2d 414, 419 (Minn. 1980) (holding that plaintiff failed to prove it lost profits as a result of a defective tank). In the absence of a guarantee, BMS must prove its damages by showing the amount of net gross profits that Murphy would have generated had he used his best efforts to perform for the duration of the contract, minus any compensation or expenses BMS would have incurred to retain Murphy.
The district court initially found that Murphy would have produced $8,300 in monthly net gross profits for the last 31 months of the contract. In amended findings, the district court concluded Murphy committed to produce $6,000 in monthly net gross profits for the final 31 months. Both the first and the second computation are apparently predicated on the court's finding that Murphy's commitment equated to a guarantee. Because we have concluded that the contract terms did not constitute a guarantee, we remand for a new trial on damages. Consistent with the law and our finding of no guarantee, the district court shall make findings on the reasonably certain amount of net gross profits that Murphy would have generated in light of market circumstances, had he used his best efforts to perform in the remaining months of the contract.
B
Murphy also challenges the district court's refusal to reduce the damages for BMS's failure to mitigate damages. "Under the theory of avoidable consequences, a plaintiff with an otherwise valid claim is denied recovery [if] he failed to mitigate the consequences of a known wrong." First Nat'l Bank of LeCenter v. Farmers Union Mktg. and Processing Ass'n, 371 N.W.2d 22, 26 (Minn.App. 1985), review denied (Minn. Sept. 26, 1985). But the breaching party has the burden of showing that damages could have been mitigated with reasonable diligence. Lanesboro Produce Hatchery Co. v. Forthun, 218 Minn. 377, 381, 16 N.W.2d 326, 328 (1944). If the district court decides that the plaintiff has made reasonable efforts to minimize the breaching party's damages, the amount will not be limited by the doctrine of avoidable consequences. See Anderson v. Hunter, Keith, Marshall Co. 417 N.W.2d 619, 628 (Minn. 1988) (framing the mitigation of damages as fact issue).
The transcript and findings indicate that the mitigation issue was affected by the conclusion that Murphy's commitment constituted a guarantee. On retrial, Murphy should be afforded the opportunity to raise and demonstrate the failure to mitigate. We thus remand the mitigation issue as part of the new trial on damages.
C
Finally, Murphy argues that he is entitled, as a matter of law, to an offset for the amount of money he earned in the first 17 months of the contract that exceeded $6,000 in monthly profits and the amount of money earned from his accounts in the last 31 months of the contract. Murphy's argument on the first 17 months is tied to the court's determination on the guarantee. Because we conclude that the language of the consulting contract did not create a guarantee we do not address Murphy's argument on excess profits. Murphy's argument on the offset for the money earned from his accounts in the last 31 months of the contract is part of the measure and computation of damages to be litigated in the new trial.