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holding as to reasonableness regarding time of performance that "[t]he course of conduct of the parties is strong evidence of the parties' original intent."
Summary of this case from TA Operating LLC v. Comdata, Inc.Opinion
No. M2002-00790-COA-R3-CV.
April 9, 2003 Session.
Filed February 9, 2004.
Appeal from the Circuit Court for Putnam County, No. 99 N 0330, John J. Maddux, Jr., Judge.
Judgment of the Circuit Court Affirmed in part, Reversed in part and Remanded.
Jay S. Bowen, Timothy L. Warnock, Taylor A. Cates, Nashville, Tennessee, for the appellants, Reed Welch, Olive Welch, Quality Metal Treating, Inc., and S S Screw Machine Co., Inc.
S. Roger York, Crossville, Tennessee; William S. Walton, Nashville, Tennessee, for the appellees Jay Johnson and QMT Quality Metal Treating, Inc.
Patricia J. Cottrell, J., delivered the opinion of the court, in which Ben H. Cantrell, P.J., M.S., and Russ Heldman, SP. J., joined.
OPINION
This appeal involves a business dispute with multiple claims for breach of three separate contracts. The trial court found Reed Welch and his company, S S Screw Machine Company, Inc., in breach in various ways and awarded a total of $1,032,133.15 in damages to Jay and Gail Johnson, both personally and as the owners of Quality Metal Treating, Inc. We affirm in part and reverse in part the judgment of the trial court.
This is a breach of contract action arising from three separate agreements. The first involves an employment agreement between S S Screw Machine Co., Inc. ("S S"), and Jay Johnson. The second contract involves the purchase of a heat treating business known as Quality Metal Treating, Inc. ("QMT"), by Jay Johnson and his wife, Gail Johnson, from Reed Welch and his wife, Olive Welch. The final agreement involves the Johnsons' lease and subsequent purchase of commercial property from the Welchs.
S S is a subchapter S corporation, and 100% of its stock is owned by Reed Welch. During the time period of the transactions at issue, Olive Welch also owned stock in S S. When Mr. and Mrs. Welch divorced, she conveyed her stock in S S to Mr. Welch, and he indemnified her from any liability resulting from this litigation.
I. THE TRANSACTIONS
In April, 1993, Reed Welch hired Mr. Johnson to become the general manager of his business, S S. The company manufactures screw machine parts for industrial tractor trailers and dump trucks. Mr. Johnson's new position required him to relocate to Tennessee from Washington state with his family. The employment agreement provided that S S would pay part of the Johnsons' relocation expenses, and Reed Welch personally guaranteed S S's commitment. The agreement had two provisions entitled "Relocation Expenses" which specifically provided:
Mr. Johnson testified that he had wanted to relocate to Tennessee from Washington and had submitted his resume to Mr. Welch. They spoke over the telephone and eventually reduced their agreement to writing. Mr. Johnson felt that Mr. Welch's offer presented a good business opportunity with an annual base salary of $65,000. In addition, he anticipated that his income would increase approximately 20 to 30 thousand dollars through the profit sharing and bonus program. However, after moving his family to Tennessee, Mr. Johnson never received a bonus or participated in profit sharing while employed by S S.
Relocation Expenses: Temporary living expenses and transportation will be provided by S S Screw Machine Company.
Relocation Expenses: Expenses associated with the sell [sic] and purchase of a home, moving of household goods and relocating my family will be shared by both me and S S Screw Machine Company.
Contemporaneously with the signing of the employment agreement, Mr. Johnson presented Mr. Welch a list entitled "Anticipated Re-location Expenses" which estimated the expenses to be approximately $35,000. Following the move, on July 30, 1993, Mr. Johnson provided Mr. Welch with a letter setting forth a total of $29,986.77 in relocation expenses and requested that S S pay its portion. S S delayed payment for almost nine months and then reimbursed the Johnsons for only $5,000 of the expenses.
Despite S S's failure to promptly reimburse the Johnsons for relocation expenses, in October, 1993, the Johnsons purchased the on-going business, QMT, from the Welchs for $186,000. QMT heat treats specialized auto and truck parts such as those produced by S S. In fact, S S was QMT's largest customer, and the QMT furnaces were uniquely suited to heat treat S S parts. Approximately 50 to 60 percent of QMT's revenue was generated by heat treating S S parts. The parties executed a sales contract which included the following language:
The heat treating business does not require manufacturing or machining of parts. Instead, the heat treating process involves carburizing, neutral hardening, stress relieving, carbonitriding, annealing and induction heat treating. Essentially, heat treating is a process by which tools and parts are heated and then cooled to increase their hardness.
Buyers [Johnsons]. . . . will have the exclusive rights to heat treat all of the metal treating process required of all goods manufactured by S S Screw Machine Co., Inc. coming under Quality Metal Treatment, Inc.'s capabilities as long as Quality Metal Treatment, Inc. is competitive in price, quality and delivery. The price specified in paragraph 6 below is agreed to be `competitive' price. S S Screw Machine Co., Inc. agrees it will not decrease its production requiring heat treatment to be supplied by Buyers except in the ordinary course of business, i.e. loss of business due to competitiveness in price, quality and delivery.
The provision of the agreement giving QMT the exclusive right to all of S S's requirements for heat treating (also referred to herein as the exclusivity or requirements provision) was crucial to the Johnsons obtaining financing for the purchase of QMT. Indeed, the pro forma submitted to the lending institutions specifically identified various parts that were produced by S S and anticipated to be heat treated by QMT. Prior to the transaction, Mr. Johnson had requested and Mr. Welch had provided a list of parts produced by S S that could be expected to be heat treated by QMT.
Also important to the Johnsons obtaining financing to purchase QMT was Mr. Welch's signing an unconditional guaranty of $98,000 for the loan.
Shortly after the deal closed, S S lost its contract to make three Paccar parts that had been included in the pro forma and on the list provided by Mr. Welch. The three lost Paccar parts had accounted for almost 40 % of the revenues QMT had generated from S S work. Mr. Welch had met with Paccar's engineers in Seattle earlier in the year concerning the re-design of the parts S S made for Paccar. S S did not have the capability at the time to make the re-designed parts. Mr. Welch never disclosed this information to the Johnsons prior to the sale of QMT. As a result, QMT and its new owners, the Johnsons, lost a substantial portion of its expected revenue from heat treating the Paccar parts.
When the Johnsons purchased the assets of QMT, they agreed to continue to operate it at its then current location in Hendersonville until the lease in effect at that location expired in February of 1997. The Johnsons also agreed to move the business to property owned by the Welchs in Cookville after the expiration of the Hendersonville lease so that QMT would be closer to the S S plant in Sparta. In furtherance of that mutual plan, on the same day the Johnsons purchased QMT from the Welches, they entered into a separate five year Lease and Purchase Option Agreement with the Welches for their building and land in Cookeville.
The two agreements stated that the Johnsons would have no liability under the existing lease for the Hendersonville property, but that QMT would pay the Welchs $1600 per month on the lease for the Cookeville property during the term of the Hendersonville lease. In other words, Mr. Welch remained personally liable to the Hendersonville landlord until February, 1997, but the Johnsons paid the amount of the Hendersonville lease to Mr. Welch as rent on the Cookeville property QMT would not occupy until February of 1997.
The two documents, the agreement for the purchase of QMT's assets and the lease with option to purchase, contained provisions regarding the parties' responsibilities for the relocation of QMT. The sales contract provided:
Reed Welch agrees to prepare the real property to be leased to Buyer for occupancy of the heat treating process. This will include but will not be limited to, the following work:
* * * *
(c) Assist in relocation . . ., installation and start-up of all the office and industrial assets being purchased hereunder when the previously mentioned February 17, 1992 lease on the premises [in Hendersonville] is terminated, or at such time as Quality Metal Treatment, Inc. ceases its rental payment under that lease. The relocation, installation and start-up project to be no more than a period of three (3) months.
Buyers will have the responsibility of making a physical layout as to where all office and industrial assets being purchased hereunder, are to be placed in the industrial facility in Cookeville, TN (described herein) and Lessors will have the responsibility to relocate, install and start-up all the office and industrial assets being purchased, utilizing S S Screw machines, maintenance personnel and equipment.
The lease contained the same provision, with small variation in the language.
Following the QMT sale in October of 1993, Mr. Johnson continued as the general manager at S S during the day and worked weekends and some evenings at QMT. In late 1996, shortly before the expiration of QMT's Hendersonville lease, the Johnsons exercised their option to purchase the Welchs' Cookeville building and land for an additional $275,000.
QMT moved to the property in Cookville. Subsequently, a dispute arose over whether S S had honored its obligations associated with the moving and installation and start-up of QMT's equipment. According to the Johnsons, S S failed to properly set up the equipment and actually damaged some of the equipment. Edward Newman, a long time S S employee, admitted that several of the furnaces and other pieces of QMT equipment were damaged by S S during the move from Hendersonville. Mr. Newman further testified that he had never installed such equipment before. S S never repaired the damage allegedly done by its employees, and the machinery was not set up and ready to function on time. As a result of this situation and Mr. Welch's threats to terminate the contract if QMT missed any deliveries, Mr. Johnson was forced for nearly six months to out-source parts for heat treatment to another heat treater until he could complete repairs, installation and start-up. He claimed he incurred expenses of over $65,000 due to S S's failure to abide by the terms of the relocation assistance provision in both contracts.
In the same month the Cookeville deal closed and Mr. Welch's obligation on the Hendersonville lease expired, Mr. Johnson's employment with S S was terminated without notice. Mr. Johnson testified that Mr. Welch fired him. Mr. Welch testified at trial that Mr. Johnson had "terminated himself" as general manager of S S due to a conflict of interest, i.e., being manager of S S and owner of QMT, although that situation had existed with Mr. Welch's full knowledge and encouragement since the Johnsons bought QMT in 1993. After Mr. Johnson's employment at S S was terminated, Mr. Welch stated to the Department of Employment Security that Mr. Johnson had quit. As to these claims by Mr. Welch, the trial court found "[b]asically, none of that was accurate and none of that was true." The court found that Mr. Johnson was fired by Mr. Welch in February of 1997.
Mr. Welch replaced Mr. Johnson as general manager of S S with his son, Jerald Welch. When Mr. Johnson was fired, it placed his family in a financial bind due to the outstanding payments due the Welches for QMT, and the real property and plant purchase in Cookeville. The Johnsons managed by selling their home and other assets, and lived in the plant.
Mr. Welch's son, Jerald Welch, had worked for his father most of his adult life. Prior to becoming the general manager of S S in 1997, Jerald ran his father's golf course.
After the relocation of QMT to Cookville, QMT continued to provide heat treating services to S S until that arrangement was terminated by S S sending all its heat treating business elsewhere in August of 1999. During the time between the relocation, which coincided more or less with the termination of Mr. Johnson's employment with S S, and the cessation of all business between the two companies, several events occurred which were discussed at trial.
During this time, the Johnsons became increasingly concerned that Mr. Welch wanted to take the heat treating process back into his business. Although Mr. Welch denied this, his actions confirmed the Johnsons' suspicions. In 1998, Mr. Welch attended an auction in Ohio of heat treating equipment where he bought some furnaces. According to Kenneth Robertson, a heat treater who attended the auction, Mr. Welch told him that he was "getting into the heat treating business." Mr. Welch explained he was unhappy with his current heat treater. "He was very derogatory with a lot of profanity referring to his present heat treater." Mr. Roberston did not recall Mr. Welch complaining about the quality of the heat treating. James Cooper attended the auction with Mr. Robertson and testified to the same effect regarding Mr. Welch attending the auction. In addition, Mr. Welch sent his son, Jerald Welch, to seminars and conventions for heat treaters during late 1998 and the spring of 1999 to investigate the expense to S S of purchasing new heat treating equipment and taking the heat treating business in-house.
To compound the Johnsons' financial strain, S S began to "slow pay" QMT after the move to Cookeville in 1997. Because QMT was a small business and was dependent upon S S for a substantial portion of its revenues, the timely payment of invoices was particularly important. The sales contract had recognized this fact by requiring invoices to be paid within 7 days for the first three years and within 30 days thereafter. Tensions between Mr. Johnson and S S mounted.
In April of 1999, Jerald Welch began secretly outsourcing S S parts for heat treating to another heat treater. When Mr. Johnson learned of the outsourcing, he brought the exclusivity language to the attention of Jerald Welch, who said he was unaware of the contract.
In the summer of 1999, a problem arose concerning S S Part #K233-509, which is a shock absorber and is considered a "Category II" part which is a safety designation. S S Quality Assurance Director Lawrence Biss noticed a crack in one of the lots and, consequently, recalled seven lots for further inspection of each part. A small number of these parts were determined to have cracks, but the majority were shipped to customers without incident.
In July of 1999, Mr. Biss sent a corrective action request to QMT asking for a determination as to the cause of the cracks. QMT responded promptly that it has inspected the part and also sent the part to a metallurgist at Metallurgical Technologies to investigate the cause of the crack. The parties agreed to send the parts to a third party for further testing. A metallurgical engineer at Sherry Laboratories reached no conclusion regarding the cause of the crack. Sherry found nothing to indicate QMT's process did not meet industry standards. Meanwhile, Metallurgical Technologies concluded that the cracks were most likely caused by poor alloy in the steel that was used to manufacture the parts. Although Mr. Johnson shared this report with S S, the Welches never contacted the firm to discuss their findings.
During cross-examination, Jerald Welch acknowledged that S S had changed steel suppliers three times during the summer of 1999 when the cracks appeared.
Jerald Welch admitted to becoming angry with Mr. Johnson for not accepting responsibility for the quench cracks. As a result, on August 26, 1999, he sent Mr. Johnson a strongly worded letter directing QMT to remove the terms of its limited warranty and limitation of remedies from all its invoices. Jerald Welch further advised Mr. Johnson in the letter that S S would no longer accept or pay over such terms. The terms now objected to were the same terms that had appeared on QMT invoices for years. At trial, Jerald Welch testified that he had subsequently learned the QMT language was standard practice within the heat treating industry and that his current heat treater, Carolina Commercial Heat Treating, uses the same or similar terms.
In response to Jerald Welch's demand that the limitation terms appearing on the invoices would no longer be accepted by S S, Mr. Johnson advised Jerald Welch by letter that S S had breached the contract between S S and QMT with his demand, but QMT would continue to process S S purchase orders under the terms stated in the invoices. The trial court found that, "In response to S S's decision to seek other heat treaters and refusal to accept AMT's invoices, Mr. Johnson told S S that AMT expected to be paid C.O.D. for its heat treating work as it was performed."
On August 31, 1999, Jerald Welch ordered a QMT truck to unload S S parts headed to QMT for heat treating, and directed that no other parts be sent to QMT for heat treating. Since that day, S S has not sent any heat treating work to QMT and instead has sent all heat treating business to Carolina Commercial Heat Treating. In addition, S S refused to pay QMT for heat treating work already performed.
In September, 1999, QMT and the Johnsons filed the instant lawsuit against S S and the Welchs alleging various instances of breach of contract: (1) failure to pay the Johnsons' personal relocation expenses; (2) failure to pay QMT expenses incurred in relocating the business to Cookeville; (3) refusal to pay incurred invoices for heat treating work already performed for S S by QMT; (4) concealment of pertinent information prior to the sale of QMT; and (5) termination of the business relationship resulting in substantial loss of revenue for QMT.
Following a three day bench trial, the trial court ruled in favor of the Johnsons and QMT on all claims. The court awarded the Johnsons damages, including prejudgment interest, as follows:
The Johnsons had also alleged S S wrongfully refused to pay Mr. Johnson a discretionary bonus or allow him to participate in profit-sharing programs. The trial court ruled against Mr. Johnson on this claim, and that ruling has not been appealed.
— $30,689.86 for the personal relocation expenses;
— $96,317.43 for expenses related to the QMT relocation;
— $9,036.86 for the unpaid invoices for work performed;
— $821,689.00 for four years of lost profits due to termination of the agreement for QMT to do all of S S's heat treating;
— $74,400.00 as partial rebate of the purchase price the Johnsons paid for QMT based upon Mr. Welch's failure to disclose S S's need for heat treating would likely decrease because of the impending loss the Paccar business.
The trial court made extensive (twenty-two pages) findings of fact as well as thorough conclusions of law. In addition, the trial court awarded attorneys fees to QMT pursuant to the QMT purchase agreement, and at a subsequent hearing set the attorneys fees at $63,612 and awarded discretionary costs in the amount of $16,619.35.
II. STANDARD OF REVIEW
The standard of review on appeal is well-settled. We review the trial court's findings de novo, with a presumption of the correctness of the factual findings of the trial court, unless the evidence preponderates otherwise. Tenn. R. App. P. 13(d); Bogan v. Bogan, 60 S.W.3d 721, 727 (Tenn. 2001). No such presumption of correctness attaches to the trial court's conclusions of law. S. Constructors, Inc. v. Loudon County Bd. of Educ., 58 S.W.3d 706, 710 (Tenn. 2001).
Here, seventeen witnesses testified and various relevant documents were entered into evidence. As to a number of instances of disputed facts where the testimony of Mr. Welch differed from that of other witnesses, the trial court made specific findings that Mr. Welch's statements were not true and not accurate. In addition to these specific findings on credibility, the court also made general statements that it was favorably impressed with the credibility of Mr. Johnson and several witnesses on his behalf. In addition, the court stated, "the Court was not persuaded by the testimony of Reed Welch, and Jerald Welch, and Lawrence Biss."
Because trial courts are in a far better position than this court to observe the demeanor of the witnesses, the weight, faith, and credit to be given witnesses' testimony lies in the first instance with the trial court. McCaleb v. Saturn Corp., 910 S.W.2d 412, 415 (Tenn. 1995); Whitaker v. Whitaker, 957 S.W.2d 834, 837 (Tenn.Ct.App. 1997). Consequently, where issues of credibility and weight of testimony are involved, appellate courts will accord considerable deference to the trial court's factual findings. Seals v. England/Corsair Upholstery Mfg. Co., 984 S.W.2d 912, 915 (Tenn. 1999) (quoting Collins v. Howmet Corp., 970 S.W.2d 941, 943 (Tenn. 1998). Stated another way, "The credibility accorded by the trier of fact will be given great weight by the appellate court." Weaver v. Nelms, 750 S.W.2d 158,160 (Tenn.Ct.App. 1987); see also In re Estate of Walton, 950 S.W.2d 956, 959 (Tenn. 1997); Whitaker, 957 S.W.2d at 837; Doe v. Coffee County Bd. of Educ., 925 S.W.2d 534, 537 (Tenn.Ct.App. 1996).
To the extent the issues raised herein involve interpretation of written agreements, the question of interpretation of a contract is a question of law. Guiliano v. CLEO, Inc., 995 S.W.2d 88, 95 (Tenn. 1999). Therefore, the trial court's interpretation of a contractual document is not entitled to a presumption of correctness on appeal. Id.; Angus v. Western Heritage Ins. Co., 48 S.W.3d 728, 730 (Tenn.Ct.App. 2000). This court must review the document ourselves and make our own determination regarding its meaning and legal import. Hillsboro Plaza Enters. v. Moon, 860 S.W.2d 45, 47 (Tenn.Ct.App. 1993). Our review is governed by well-settled principles.
"The central tenet of contract construction is that the intent of the contracting parties at the time of executing the agreement should govern." Planters Gin Co. v. Fed. Compress Warehouse Co., Inc., 78 S.W.3d 885, 890 (Tenn. 2002). The purpose of interpreting a written contract is to ascertain and give effect to the contracting parties' intentions, and where the parties have reduced their agreement to writing, their intentions are reflected in the contract itself. Id.; Frizzell Constr. Co. v. Gatlinburg, L.L.C., 9 S.W.3d 79, 85 (Tenn. 1999). "The intent of the parties is presumed to be that specifically expressed in the body of the contract. . . ." Planters Gin Co., 78 S.W.3d at 890. Therefore, the court's role in resolving disputes regarding the interpretation of a contract is to ascertain the intention of the parties based upon the usual, natural, and ordinary meaning of the language used. Guiliano, 995 S.W.2d at 95; Bob Pearsall Motors, Inc. v. Regal Chrysler-Plymouth Inc., 521 S.W.2d 578, 580 (Tenn. 1975).
Where the language of the contract is clear and unambiguous, its literal meaning controls the outcome of contract disputes; but, where a contractual provision is ambiguous, i.e., susceptible to more than one reasonable interpretation, the parties' intent cannot be determined by a literal interpretation of the language. Planters Gin Co., 78 S.W.3d at 890. In that situation, courts must resort to other rules of construction, and only if ambiguity remains after application of the pertinent rules does the legal meaning of the contract become a question of fact. Id. However, a strained construction may not be placed on the language used by the parties to find or create ambiguity where none exists. Id. at 891.
Thus, courts defer to the contracting process by enforcing written contracts, which establish the rights and obligations of the parties, according to their plain terms without favoring either contracting party. Cocke County Bd. of Highway Comm'rs v. Newport Utils. Bd., 690 S.W.2d 231, 237 (Tenn. 1985); Hardeman County Bank v. Stallings, 917 S.W.2d 695, 699 (Tenn.Ct.App. 1995). Courts must avoid rewriting an agreement under the guise of interpreting it. Marshall v. Jackson Jones Oil, Inc., 20 S.W.3d 678, 682 (Tenn.Ct.App. 1998). The courts will not make a new contract for parties who have spoken for themselves, Petty v. Sloan, 197 Tenn. 630, 640, 277 S.W.2d 355, 359 (1955), and will not relieve parties of their contractual obligations simply because these obligations later prove to be burdensome or unwise. Boyd v. Comdata Network, Inc., 88 S.W.3d 203, 223 (Tenn.Ct.App. 2002).
However, courts may and will incorporate a reasonableness requirement into any contract. Moore v. Moore, 603 S.W.2d 736, 739 (Tenn.Ct.App. 1980) (holding that "a qualifying word which may be read into every contract is the word `reasonable,' or its equivalent `reasonably.'"); see also Hurley v. Tenn. Farmers Mut. Ins. Co., 922 S.W.2d 887, 892 (Tenn.Ct.App. 1995) (holding that insurance company's demand for production of financial records and assertion that insured's failure to produce was a breach of the cooperation clause of the insurance contract could be considered unreasonable). In fact, this court has stated that the qualifying word "reasonable" must be read into every contract. Minor v. Minor, 863 S.W.2d 51, 54 (Tenn.Ct.App. 1993); see also Hathaway v. Hathaway, 98 S.W.3d 675, 679 (Tenn.Ct.App. 2002) (reasonableness must be read into agreement). In Minor, because the contract did not include a time for performance, a reasonable time was implied, based upon Moore and upon the well-settled rule that missing contract terms may be implied. Id. In McClain v. Kimbrough Constr. Co., 806 S.W.2d 194, 198 (Tenn.Ct.App. 1991), this court held that "the extent of contractual obligations should be tempered by a `reasonableness' standard," citing Moore.
Further, in construing contracts, courts must look at the language and the parties' intent and impose a construction that is fair and reasonable. ACG, Inc. v. Southeast Elevator, Inc. 912 S.W.2d 163 (Tenn.Ct.App. 1995). Reasonableness must be viewed in light of the parties' situation at the time of the making of the agreement as well as at the time performance becomes due. Hathaway, 98 S.W.3d at 680-81. The language of a contract should be construed with reference to the situation of the parties, the business to which the contract relates, the subject matter of the agreement, the circumstances surrounding the transaction, and the construction placed on the contract by the parties in carrying out its terms. Penske Truck Leasing Co., L.P. v. Huddleston, 795 S.W.2d 669, 671 (Tenn. 1990); International Flight Center v. City of Murfreesboro, 45 S.W.3d 565, 570 (Tenn.Ct.App. 2001). Similarly, when a court is called upon to supply a missing term with a reasonable one, it must consider the subject matter of the contract, the situation of the parties, their intention in what they contemplated at the time the contract was made, and the circumstances attending the performance. Minor, 863 S.W.2d at 54. The course of conduct of the parties is strong evidence of the parties' original intent. Pinson Associates v. Kreal, 800 S.W.2d 486, 487 (Tenn.Ct.App. 1990).
It is well settled that under Tennessee law there is in every contract an implied duty of good faith and fair dealing. Wallace v. National Bank of Commerce, 938 S.W.2d 684 (Tenn. 1996); Spectra Plastics, Inc. v. Nashoba Bank, 15 S.W.3d 832, 843 (Tenn.Ct.App. 1999). In Wallace, the Tennessee Supreme Court addressed the nature of the duty of good faith in the performance of contracts:
In Tennessee, the common law imposes a duty of good faith in the performance of contracts. This rule has been considered in several recent decisions of the Court of Appeals. The law regarding the good faith performance of contracts was well stated by the Court of Appeals in TSC Industries, Inc. v. Tomlin, 743 S.W.2d 169, 173 (Tenn.App. 1987):
It is true that there is implied in every contract a duty of good faith and fair dealing in its performance and enforcement, and a person is presumed to know the law. See Restatement 2d Contracts, § 205 (1979). What this duty consists of, however, depends upon the individual contract in each case. In construing contracts, courts look to the language of the instrument and to the intention of the parties, and impose a construction which is fair and reasonable.
Wallace, 938 S.W.2d at 686. The Wallace court also cited with approval other opinions of this court that held that good faith in performance is measured against the intent of the parties as evidenced by a fair and reasonable interpretation of the terms of the contract. Id.
Finally, with respect to damages, the proper measure of damages is a question of law and therefore subject to de novo review with no presumption of correctness. The proper amount of damages is a question of fact. This court has consistently reviewed the actual amount of damages awarded by a trial court with a presumption that the damages are correct and that it will only alter the amount when the evidence preponderates against the amount awarded. Beaty v. McGraw, 15 S.W.3d 819, 829 (Tenn.Ct.App. 1998).
III. TERMINATION OF THE BUSINESS ARRANGEMENT
S S effectively terminated its agreement to use QMT for all its heat treating business without actual notice by sending all its business elsewhere after August of 1999. Simonton v. Huff, 60 S.W.3d 820, 827 (Tenn.Ct.App. 2000) (holding that under Tennessee law a cause of action for breach of contract arises when on of the parties demonstrates a total and unqualified refusal to perform under the contract). The QMT purchase/sale agreement stated that the Johnsons `will have exclusive rights to heat treat all of the metal treating process required of all goods manufactured by S S Screw Machine Co., Inc. coming under Quality Metal Treatment, Inc.'s capabilities as long as Quality Metal Treatment, Inc. is competitive in price, quality, and delivery." (emphasis added).
The trial court found that when this agreement was executed, "all the parties agreed that this was to be a long-term contract for QMT to exclusively heat treat S S's parts." The court noted a memorandum Mr. Welch sent to an S S employee confirming QMT's exclusive right to all of S S's heat treating business. The court also relied on the testimony of Mr. Welch himself to the effect that the contract would not end as long as the conditions were satisfied.
There was no question regarding QMT's competitiveness as to price and delivery. At trial, S S and Mr. Welch took the position that S S was permitted to terminate the contract because QMT was no longer competitive in quality because of the cracks discovered in some parts. The trial court stated,
The trial court found that QMT did not raise its prices from those set out in the contract, and agreed therein to be competitive, and that S S was paying its new heat treater more. The court also found that QMT always met delivery and turnaround deadlines.
Reed Welch claimed that S S would still be using QMT's services except for the fact that QMT had a quality problem and QMT did not certify its work. Neither of these assertions are accurate.
The court also found that the Welchs' assertions that QMT was not competitive in quality as to the K233-509 part was simply not the case and that S S had not been acting in good faith because it had sent some of its heat treating business elsewhere prior to the discovery of any cracks in that part and because Mr. Welch had been looking for a way to get back into the heat treating business. Thus, the court stated, S S's motivation for terminating the contract was "suspect at the very minimum."
The Welchs also took the position that S S was the sole arbiter of competitiveness of quality. The court found this interpretation of the contract unsupported by the evidence or the language of the document, and held that the Welchs' interpretation was "self-serving, revisionist, and totally incorrect."
On appeal S S again argues that it had more than sufficient cause to terminate the agreement and that the trial court's findings to the contrary are in error. In addition, S S asserts that the contract was, as a matter of law, terminable at will because it included no specific termination date or duration provision, relying primarily on First Flight v. Professional Golf Co, 527 F.2d 931 (6th Cir. 1975).
In First Flight, the court interpreted a contract for sales representation on specific products for a specified territory that provided that the right of representation "was not an irrevocable right but would remain in effect" only so long as the representative did satisfactory business as one for an indefinite duration. The court then held that contracts silent on the time of duration are generally terminable at will by either party with reasonable notice. Id. at 935. The court did not state that it was applying Tennessee law, but instead cited a treatise as authority for that holding. That treatise now states, in pertinent part:
A contract is not invalid for indefiniteness for the mere reason that it does not specify how long performance should continue. If the surrounding circumstances do not indicate the parties' intentions, the court may hold that the contract will remain in effect for a reasonable time, or that the contract is terminable at will be either or both parties, or terminable on the occurrence of a specific event, or terminable by one of the parties only on condition of some act or forbearance by that party.
Margaret N. Kniffin, 5 Corbin on Contracts § 24.29 (rev.).
Which of these results is adopted by the courts depends to a large extent on the language of the agreement itself. Where the contract itself does not state its duration, courts have generally held that it should be effective for a reasonable time or terminable at will with reasonable notice. Id.
In at least one case, the court held the contract terminable "only after a reasonable duration and reasonable notice." Italian French Wine Co. of Buffalo, Inc. v. Negociants U.S.A., Inc., 842 F. Supp. 693, ___ (W.D.N.Y. 1993) (emphasis added). Important to that decision were the efforts and expense already undertaken by the distributor.
Where, however, the parties have indicated an intent that their contractual obligations last indefinitely until the occurrence of a particular event, many courts have concluded that the contracts are terminable only upon the occurrence of that event. Corbin, § 24.29. Thus, where a contract does not include a termination date but does include the right to terminate upon the happening of specified circumstances, courts will generally interpret the contract as remaining in force until terminated for cause.
The leading case in this area is Warner-Lambert Pharmaceutical Company, Inc. v. John J. Reynolds, Inc., 178 F. Supp. 655, (S.D.N.Y. 1959), aff'd. per curiam on opinion below, 280 F.2d 197 (2d Cir. 1960), wherein the manufacturer of Listerine had agreed to pay royalties for use of the secret formula for that product based upon the amount sold, and, many years later, sought to be relieved of that obligation when the secret formula was no secret any more. One of the arguments made by the manufacturer was that the contract did not have a termination date and, therefore, was a forbidden `perpetuity' that the law would not enforce. The court found, first, that "[t]he mere fact that an obligation under a contract may continue for a very long time is no reason in itself for declaring the contract to exist in perpetuity or for giving it a construction which would do violence to the expressed intent of the parties." Id. at 663.
The court acknowledged the general rule that where the contract includes no termination date and it appears the parties did not contemplate a termination date or their intention cannot be ascertained, the contract will be held to be terminable within a reasonable time or revocable at will, dependent upon the circumstances. Because courts are loathe to infer a perpetual obligation, generally the date or condition of termination will be determined from the actual intention of the parties. Id. However, the court distinguished the contract before it from those falling within this rule:
Contracts which provide no fixed date for the termination of the promisor's obligation but condition the obligation upon an event which would necessarily terminate the contract are in quite a different category and it is in this category that [the contracts at issue] fall. On the face of the agreements the obligation of [the original manufacturer] and its successors to pay is conditioned upon the continued manufacture or sale of Listerine. When they cease manufacturing or selling Listerine the condition for continued payment comes to an end and the obligation to pay terminates. This is the plain meaning of the language which the parties used.
Id. at 661-62. The court also held that because the condition under which the obligation was to continue was set out in the contract, there was no need to construe the agreement so as to import or imply a condition or date of termination other than that expressed by the parties themselves in the contract. See also Payroll Express Corp. v. Aetna Casualty and Surety Company, 659 F.2d 285, 291-92 (2d Cir. 1981) (applying Warner-Lambert and holding that an agreement that the policy would terminate upon the insured's failure to pay premiums, without establishing a set duration of the policy, made the policy cancelable only upon that circumstance and not terminable at will or after a reasonable time).
The court emphasized that the event that would relieve the manufacturer of its obligation was directly related to the subject matter of the contract, not an extraneous event outside the control of the parties. See also Ehrenworth v. George F. Stuhhmer Co., 128 N.E. 108 () (holding that an agreement to provide goods at a fixed low price was not terminable at will in the absence of an expressed termination date and remained in effect while both parties remained in business, in part because such a termination point bore a rational relationship to the subject matter of the contract).
Similarly, in Foster-Porter Enterprises, Inc. v. DeMare, 81 A.2d 325 (Md.Ct.App. 1951), the court held that the applicability of the contention that the contract at issue (an exclusive distributorship agreement) was terminable at will because it contained no provision for a definite term depended upon the construction of the contract. Interpreting the general rule regarding the absence of a duration provision as having exceptions, including where the contract is terminable for cause, the court noted that the contract at issue included a provision for termination upon the happening of any one of three specified events. Consequently, the court concluded,
The only reasonable interpretation of [that provision] is that the contract continues in force until terminated for cause — or at least continues for a reasonable time. Construction of the contract as terminable at will would defeat its purpose and would make [the termination provision] meaningless.
Id., 81 A.2d at 333. See also Pumphrey v. Pelton, 245 A.2d 301, 303 (Md.Ct.App. 1968) (interpreting a contract for the exclusive use of Dairy Queen equipment and name that did not contain an explicit termination date but stated it would be for the time covered by the involved patents and copyrights so long as the restaurant operator performed its covenants under the contract was terminable only for cause, i.e., one of the causes expressed in the contract.)
It is generally held that parties may contract for an indefinite term whose duration is defined by the conduct of the parties as set out in the conditions agreed to for continuation or termination. See Zee Medical Distributor Association, Inc. v. Zee Medical, Inc., 94 Cal.Rptr.2d 829, 833 (Cal.Ct.App. 2000). Accordingly, contracts stating that the obligations would continue "as long as" or "so long as" a party fulfilled specified obligations have been found valid and enforceable. Id. (and cases cited therein). In that situation, the contract is not terminable at will but, instead, is terminable for the causes set out therein.
As Warner-Lambert indicates and Zee Medical Distributor Association makes clear, a contract without a specific durational term may fall within one of several categories, or, stated another way, courts may apply a three-step analysis to questions of the duration of a contract:
The court first seeks an express term. If one is absent, the court determines whether one can be implied from the nature and circumstances of the contract. If neither an express nor an implied term can be found, the court will generally construe the contract as terminable at will.
Zee Medical Distributor Association, 94 Cal.Rptr.2d at 835, citing Consolidated Theatres, Inc. v. Theatrical Stage Employees Union, 447 P.2d 325 (Cal. 1968).
If the parties have not set a termination date or condition, the law may imply an agreement that the contract is to last for a reasonable time or is terminable only upon reasonable notice. Thus, in the absence of a controlling provision fixing the duration of a contract, courts will deem the contract to be terminable with a reasonable period of time. United States Surgical Corporation v. Oregon Medical Surgical Specialties, Inc., 497 F. Supp. 68, (S.D.N.Y. 1980), citing Warner-Lambert, supra. What is reasonable is determined by the intent of the parties and all the circumstances of the case, including the course of conduct of the parties and their reasonable contemplation and expectation. Id.; San Francisco Brewing Corp. v. Bowman, 343 P.2d 1 (Cal. 1959) (considering an exclusive beer distributorship arrangement).
We agree that these are the applicable principles and are consistent with Tennessee law. In McReynolds v. Cherokee Insurance Co., 896 S.W.2d 777,779 (Tenn.Ct.App. 1994), this court acknowledged and applied First Flight and other authority holding that contracts for an indefinite duration are generally terminable at will by either party with reasonable notice. (emphasis in original). However, the Cherokee court specifically noted that the contract at issue in that case "did not include a statement of duration and did not incorporate any stipulations regarding termination." Id. at 778.
Contracts without definite durational provisions have been considered by Tennessee courts, but often in the context of an argument that such a contract is unenforceable because it lacks sufficient definiteness as to a material term. In the context of that argument, and recognizing that "the law leans against the destruction of contracts for uncertainty, especially where one of the parties has performed his part of the contract," this court has held that the duration of a contract need not be specified to make the contract enforceable. Book-Mart of Florida, Inc. v. National Book Warehouse, Inc., 917 S.W.2d 691, 694 (Tenn.Ct.App. 1996); APCO Amusement Company, Inc., v. Wilkins Family Restaurants of America, Inc., 673 S.W.2d 523, 528 (Tenn.Ct.App. 1984). These cases establish that a contract that is silent as to duration is enforceable. See also Parks v. Morris, 914 S.W.2d 545, 549 (Tenn.Ct.App. 1995).
In some cases, our courts have held that a contract that is indefinite as to duration, it is
In Tennessee, the duration of contracts need not always be specified in an agreement, and an agreement that contains no express provision as to its duration may be construed as being perpetual, indefinite, or terminable at will.
The contract at issue provided that QMT had the exclusive right to heat treat S S parts as long as their services were competitive in "price, delivery, and quality." Even Mr. Welch conceded at trial that the parties intended the agreement to continue indefinitely as along as the conditions were satisfied.
The long term nature of the arrangement was evidenced in several provisions. The contract provided in Paragraph 6 a specific pricing formula for the first year of the contract. Thereafter the contract provided that "[d]uring the month of January of each succeeding year the guaranteed minimum price will be increased and/or remain the same for each succeeding year. In addition, the contract provided in Paragraph 7 that "invoicing submitted by [QMT] will be a net 7 days for the next three (3) year period ending October 25, 1996. Terms will be net 30 days thereafter." Regarding the lease/option to purchase the Cookeville properties, the lease term was for five (5) years beginning October 25, 1993 through October 25, 1998.
Courts are required to ascertain and give effect to the intention of the parties when they construe a contract. If the terms of a contract are clear and unambiguous, the courts need look no further than the language of the contract itself. Bokor v. Holder, 722 S.W.2d 676, 679 (Tenn.Ct.App. 1986). If, however, a contract is ambiguous, the courts may look beyond the document to ascertain the intention of the parties. Judicial construction of contracts must be guided by fairness and reasonableness in light of the subject matter of the contract, the conduct of the parties, and the circumstances surrounding the making of the contract. Even the motivation that induced the parties to make a contract may have a bearing on their intention. A contract is ambiguous when its meaning is uncertain or when it may be fairly understood in more ways than one.
Ambiguities may be resolved by recognizing that when the contracting parties have not agreed on a term that is essential to a determination of their rights and duties, courts may supply a term that is reasonable under all the circumstances. See RESTATEMENT (SECOND) OF CONTRACTS § 204 COMMENT (D) (1979). Thus, with specific regard to the time of performance, the courts will supply a reasonable time where the contract does not contain one.
Contracts silent on time of termination are generally terminable at will by either party with reasonable notice. First Flight v. Professional Golf Co, 527 F.2d 931,935 (6th Cir. 1975). Even contracts terminable at will can only be terminated upon reasonable notice. McReynolds v. Cherokee Insurance Co., 896 S.W.2d 777,779 (Tenn.Ct.App. 1994); RESTATEMENT (SECOND) OF CONTRACTS § 205 (1979). Reasonable notice of termination flows from and must be determined in accordance with the standards of good faith and fair dealing implied in every contract. Misco, Inc. v. United States Steel Corp., 784 F.2d 198, 203 (6th Cir. 1986); P.S. E. Inc. v. Selastomer Detroit, Inc., 470 F.2d 125 (7th Cir. 1972). The determination concerning what constitutes reasonable notice, however, is a fact specific inquiry dependent upon the length of the contractual relationship between the parties, the reliance which either party placed upon the continuing vitality of the contractual relationship, the particular business involved. Id.
The determination that an agreement is sufficiently definite is favored under Tennessee law and the courts will, if possible, construe the agreement to effectuate the reasonable intention of the parties if that intention can be ascertained. APCO Amusement Company, Inc., v. Wilkins Family Restaurants of America, Inc., 673 S.W.2d 523, 528 (Tenn.Ct.App. 1984). The duration of contracts need not always be specified in an agreement, and an agreement which contains no express provision as to its duration may be construed as being perpetual, indefinite, or terminable at will. Id. (quoting 17 Am.Jur.2d Contracts § 80 (1964)). "The intention of the parties is, of course, the ultimate question to be decided on the construction of an agreement." Cherokee Ins. Co., 896 S.W.2d at 780.
The absence of a duration or termination provision in a contract necessitates an inquiry into the intention of the parties and the surrounding circumstances. The absence of a duration provision of a contract does not necessarily render the contract terminable at will, but instead, requires the court to look to the intention of the parties to determine what the parties' intention was concerning duration and to provide a reasonable interpretation and conclusion concerning the parties' intent. See Hamblen County v. City of Morristown, 584 S.W.2d 673, 677 (Tenn.Ct.App. 1979); Mid-Southern Toyota, Ltd. v. Bug's Imports, Inc., 453 S.W.2d 544 (Ky.Ct.App. 1970).
In Hamblen County, the Hamblen County Board of Education and the City of Morristown's Board of Education entered into a written agreement calling for the construction of a new public high school and the renovation of an existing high school in order to alleviate school overcrowding. The County agreed to acquire the necessary land for the new high school and thereafter lease the land to the City for "[s]uch time and so long as the same is used for educational purposes for city and county students." Id. at 677. This arrangement worked for eleven years, until the County filed suit to set aside the contract with the City and regain the right to operate the new school.
The court noted that although the contract stated that the arrangement was "binding and irrevocable," it was not a perpetual contract.
The intentions of the parties in entering into this contract are manifested within the language of the agreement. The agreement calls for extensive expenditures and long term commitments. Both parties needed protection from arbitrary rescission. This Court interprets irrevocable to mean that the contract could not be revoked at will by one of the parties over the objection of the other. (citations omitted). The contract is and was clearly revocable for material breach by either party or by mutual agreement.
Id.
The New Jersey Supreme Court addressed this issue in In re Miller, 447 A.2d 549 (N.J. 1982), which involved the estate of Glenn Miller, the famous band leader of the 30s' and 40s' who was killed near the end of World War II. Following the death of Mr. Miller, his widow entered into a contract with RCA regarding certain of Mr. Miller's recordings. Mrs. Miller then entered into a separate agreement with Glenn Miller's former attorney, Mr. Mackey. Mr. Mackey performed extensive services and businesses, including cataloging the recordings and placing them in a format which made the recordings attractive to RCA. Under the terms of the agreement between Mrs. Miller and Mr. Mackey, which was drafted by Mr. Mackey, Mr. Mackey was to have one-third of any royalties received from RCA. The agreement contained no duration regarding how long Mr. Mackey was to have this interest. Id. at 552.
The court considered the issue to be one of whether there was an intent that Mr. Mackey would receive a one third interest in perpetuity or for a limited time period. The court construed the agreement against the drafter, Mr. Mackey, who sought to invoke a perpetual term. Id. at 554. The court did not consider the agreement to be terminable at will but, instead, looked to the intention of the parties and concluded that it was the parties' intention that Mr. Mackey would receive his royalties for the duration of the RCA agreement.
We think Hamblen County and In re Miller teach us that it is the duty of the court to consider what the intention of the contracting parties was at the time the agreement was entered into to determine the length of the parties' obligation.
Here, clearly, nothing in the parties dealings here indicates the exclusivity agreement was just an "at will" business relationship. Such an interpretation would be unreasonable and contrary to the intentions of the parties. Over the course of the contract, the Johnsons have paid the Welchs more than $461,000. As part of the initial transaction to purchase QMT, the Johnsons paid the Welchs more than $186,000 for the assets of their heat treating business which largely were unique to servicing the parts of S S. Similarly, Mr. Welch encouraged the Johnsons to move QMT from Hendersonville to Cookeville in order to be closer to S S. Not only did the Johnsons move to Cookeville, they purchased additional properties from the Welches for $280,000.
Mr. Welch was well aware that when he sold QMT to the Johnsons that virtually all of the heat treating work for QMT was provided by S S. Before Mr. Welch sold QMT to the Johnsons, QMT had performed all of the heat treating work for S S. Moreover, because of the nature of Mr. Welch's product line, substantial portions of the QMT heat treating equipment were uniquely tied to S S's product line.
The trial court found that the parties treated the exclusivity agreement as a long term arrangement, that was to continue as long as QMT's heat treating of S S's parts was competitive in "price, delivery and quality."
It has long been held in this jurisdiction that contract terms may be implied in appropriate cases. Minor v. Minor, 863 S.W.2d 51, 54 (Tenn.Ct.App. 1993). A contract must be construed with reference to the situation of the parties, the business to which it relates and its subject matter. Id. at 54. Where the duration of the contract is indefinite, the courts will imply that they intended performance to continue for a reasonable time:
What constitutes a reasonable time within which an act is to be performed where a contract is silent upon the subject depends on the subject matter of the contract, the situation of the parties, their intention in what they contemplated at the time the contract was made, and the circumstances attending the performance.
Minor at 54 (quoting 17A AM.JUR.2D Contracts § 479 (1991).
The trial court noted that:
The terms of a contract should be construed with reference to this situation of the parties, the business to which the contract relates, . . . a qualifying word which may be read into every contract is the word `reasonable'. . . . In every contract there is an implied covenant that neither party should do anything which will have the effect of destroying or injuring the right of the other party to receive the fruits of the contract, which means that in every contract there exists an implied covenant of good faith and fair dealing.
S S maintained that its terminated the contract because QMT had damaged S S parts during the heat treating process and therefore was in material breach of the contract since it was no longer providing quality. Having heard all the testimony on this issue the trial court rejected Mr. Reed Welch's testimony that S S would have still used QMT's services except for quality problems with their heat treating: Indeed, the trial court specifically dismissed S S's interpretation of the various metallurgical reports about the part racks as "self-serving, revisionist, and totally incorrect."
The trial court specifically found that Mr. Welch did not enjoy a good reputation for treating people honestly in business transactions.
Until the contract was terminated in August 1999, S S never complained to QMT that its heat treating was not competitive in price, delivery, or quality. Nor did S S customers refuse to accept products heat treated by QMT, and that was before there was any alleged controversy which arose concerning the K233-509 parts. Also, well before any controversy arose, Reed Welch was attending auctions to purchase heat treating equipment in order to take back the heat treating process. The Defendants claim that they terminated the contract because QMT was not competitive in quality with respect to the K233-509 parts. That's simply not the case. S S was not acting in good faith, and Jerald Welch had not read the contract until Mr. Johnson questioned the out-sourcing of the parts to Paulo Products. Reed Welch was looking for a way to get back into the heat treating business.
We affirm the trial court's conclusion that S S breached the exclusivity agreement. The proof at trial clearly supports the trial court's finding that S S had no basis in which to terminate the long standing agreement with QMT.
IV. LOST PROFITS
Having found S S breached the exclusivity agreement, we turn to the Johnsons's claim for lost profits. S S insists that the trial court erred in awarding the Johnsons $821,689 in lost profits. Since August 31, 1999, QMT has struggled to replace the lost revenues from the exclusive contract it enjoyed with S S. In awarding the Johnsons four years of lost profits, the trial court found that:
The Johnsons had requested loss profits for fifteen years to parallel the financing terms the Johnsons had entered into to purchase the Cookeville property. During cross-examination, S S's expert accountant, Steven Riley, explained that according to accounting litigation support guidelines, three years from the breach is the preferred period of time.
The amount of heat treating work that was generated by S S that otherwise would have been sent to QMT is know have been sent to Carolina Commercial Heat Treating. The actual amounts of revenue and probable net profit lost by QMT is reasonably certain, and the purchase orders of Carolina Commercial Heat Treating for the first twenty-five (25) months after the contract was terminated were used to calculate the loss of revenue and loss of net profit to QMT.
A CPA, Mr. Clouse testified he's familiar with the books of QMT from 1995 to the present, and he testified that the net profit lost to QMT as a result of the loss of this contract for the first twenty-five (25) months was $427,963.
* * * * *
The Court determines that this period of time is a reasonable time under the facts and circumstances of this contract and it is the time that would be appropriate, and that would be four years from the date of the breach of the contract. . . . If you look at the entire forty-eight (48) months including those first twenty-five (25) months, the amount would be $821,689.00.
The purpose of damages in a breach of contract case is to place the injured party, as nearly as possible, in the same position it would have been in had the contract been performed. Hennessee v. Wood Group Enters., Inc., 816 S.W.2d 35, 37 (Tenn.Ct.App. 1991); Wilhite v. Brownsville Concrete Co., 798 S.W.2d 772, 775 (Tenn.Ct.App. 1990). Damages ordinarily protect the injured party's expectation interests by awarding the party the benefit of its bargain. Restatement (Second) of Contracts § 344(a) cmt. a (1979); Dan B. Dobbs, Handbook on the Law of Remedies § 12.1, at 786 (1973); E. Allan Farnsworth, Legal Remedies for Breach of Contract, 70 Colum. L.Rev. 1145, 1148-49 (1970). The most common method for awarding expectation damages is to award the injured party the profits it would have made had the contract been completed. Inland Equip. Co. v. Tennessee Foundry Mach. Co., 192 Tenn. 548, 556, 241 S.W.2d 564, 567 (1951); Morristown Lincoln-Mercury, Inc. v. Roy N. Lotspeich Publishing Co., 42 Tenn. App. 92, 103, 298 S.W.2d 788, 793 (1956).
The courts will not award uncertain or speculative damages. Nashland Assocs. v. Shumate, 730 S.W.2d 332, 334 (Tenn.Ct.App. 1987); Maple Manor Hotel, Inc. v. Metropolitan Gov't, 543 S.W.2d 593, 598 (Tenn.Ct.App. 1975). Thus, damages based on lost or expected profits must be proved with reasonable certainty. American Bldgs. Co. v. DBH Attachments, Inc., 676 S.W.2d 558, 562 (Tenn.Ct.App. 1984); Black v. Love Amos Coal Co., 30 Tenn. App. 377, 384, 206 S.W.2d 432, 435 (1947). The reasonable certainty requirement does not require mathematical precision, Airline Constr., Inc. v. Barr, 807 S.W.2d 247, 274 (Tenn.Ct.App. 1990), but rather sufficient proof to enable the trier of fact to make a fair and reasonable assessment of the damages. Pinson Assocs. Ins. Agency, Inc. v. Kreal, 800 S.W.2d 486, 488 (Tenn.Ct.App. 1990).
Therefore, the proper measure of damages in this situation is the net profits QMT would have made had S S not breached the contract and outsourced heat treating parts. McClain v. Kimbrough Const. Co., 806 S.W.2d 194, 200 (Tenn.Ct.App. 1990). When lost profits are the proper measure of damages, they need only be proved with reasonable certainty, not with mathematical precision. Id. at 200.
Here, the 1993 Exclusivity Agreement provided QMT the exclusive right to heat treat S S parts. C.P.A. Ronald Clouse testified that he had been QMT's independent accountant since 1995. He explained that he was involved in preparing their financial statements, doing tax returns, and consulting. Mr. Clouse described QMT as a service provider, bringing people's product in, performing a service on it and shipping it back to the company. When asked about the effect of S S terminating its agreement with QMT, Mr. Clouse stated that the impact was "devastating. . . . . [t]hey went basically from the first eight (8) months of 1999 with a profit of an average of $8,000 per month to the last four (4) months to a loss of some $13,000.00 per month."
Mr. Clouse stated that he was asked to determine the means of placing QMT back into the same position it was in prior to the S S contract was terminated. Regarding the methodology used to calculate this, Mr. Clouse explained that he determined the net profits that would have been realized had the contracts been continued. To reach a conclusion, Mr. Clouse explained that he considered the financial statements, the outsourced heat treating statements of Caroline Heat Treating from September 1999 through trial. He calculated the profits lost were $427.963 for twenty-five months, which was an average of $17,118 per month. He utilized the actual revenues and net profit lost to QMT as the basis for his calculation. The trial court's decision to treat the business conducted by Carolina Commercial Heat Treating as revenues that would have been accrued by QMT was appropriate. See Tennessee Jurisprudence, Damages § 8.
Mr. Clouse opined that "basically QMT had no marketability after the contract was lost, so using a methodology to determine the value of the business before and after would not work.
While the evidence could arguably support a smaller or larger damage award than that given by the trial court, the evidence does not preponderate against the finding of the lower court, and therefore we affirm the trial court's award of lost profits to the Johnsons.
V. THE RELOCATION OF QMT
As set out earlier, both the QMT sales agreement and the contemporaneous lease with option to purchase the Welchs' Cookville property envisioned the move of QMT from Hendersonville to Cookville upon the expiration of the Hendersonville lease in February of 1997. Those agreements required that Mr. Welch (or Mr. and Mrs. Welch) assist in the relocation, installation and start up of QMT equipment. This obligation was described in several more specific provisions, including "the responsibility to relocate, install and start-up all the office and industrial assets being purchased, utilizing S S Screw Machines, maintenance personnel and equipment."
The trial court found that while S S used its employees to help move the equipment, they delivered the equipment but did little else to install or start up the heat treating furnaces and other equipment. The court also found S S employees damaged the furnaces in transit making them inoperable and S S and Mr. Welch never repaired the equipment. The court found that it was May of 1997 before Mr. Johnson was able to use any of the equipment; that he had to hire third parties to repair, install and start up the equipment; and that he incurred additional expenses due to the problems in the relocation. The court held that S S and the Welchs did not fulfill their obligations under the agreements and awarded the Johnsons damages resulting from that breach.
On appeal, the Welchs make several arguments. First, they claim they were only required to assist in the relocation and that they did assist. They argue that the provisions of the agreements regarding the relocation of QMT are inconsistent and, therefore, the first provision (with the general obligation to assist) must prevail over the second (spelling out the work to be done by the Welchs). They also argue the ambiguity created by the inconsistency should be construed against the drafter, the Johnsons through their attorney.
We disagree that there is any inconsistency or ambiguity in the agreement. The Welchs' agreement to "prepare the real property" in Cookeville is specifically defined to include the "responsibility to relocate, install and start up" the equipment. The obligations of the agreement are clear.
Second, the Welchs argue that no liability should attach to them because the Johnsons failed to perform the precondition of preparing a layout of the placement of the equipment. While they state that Mr. Johnson was unable to produce a layout at trial, it is significant they do not assert that no layout was ever made. Mr. Johnson testified he provided a layout to S S. Mr. Newman, S S's employee, testified Mr. Johnson laid out where the machines were to be located. Further, the Welchs showed no connection between the absence of a layout and the failure to install and startup the equipment. They do not address the failure to repair the equipment their employees damaged in the move.
We find the Welchs' arguments regarding interpretation of the contract lacking in merit. The trial court correctly identified the obligations under the agreement, and the evidence supports the trial court's finding the Welchs breached the agreement.
The Welchs also challenge the trial court's award of damages as excessive. The trial court adopted the Johnsons' claim for damages, and that claim included expenses for repair of the damaged equipment and installation of the equipment. In addition, Mr. Johnson testified that he was forced to outsource heat treating for customers, primarily S S, while the QMT equipment remained inoperable. The court awarded $65,312.68, plus prejudgment interest, as damages for the Welchs' failure to fulfill their responsibilities under the agreement and as a result of the damage to the equipment caused by S S employees.
The Welchs argue that the contract required that the relocation and installation be completed within three months and that, therefore, the court erred in awarding damages for expenses incurred after February 1997. This argument disregards their obligations in the relocation. They were responsible for installation, and it was S S employees who damaged the equipment rendering it inoperable.
The trial court found that the Johnsons were unable to use any of QMT's equipment until May of 1997. Mr. Johnson testified as to the expenses incurred and introduced invoices documenting those expenses. No contrary evidence was introduced and no real challenge was made at trial to the validity of those expenses or their connection to the relocation. The evidence supports the damages awarded by the trial court.
VI. QMT'S UNPAID INVOICES
S S next argues that the trial court erred in awarding QMT damages for unpaid invoices in the amount of $7,248.80, plus prejudgment interest of $1,788.06, for a total of $9,036.86, because S S claimed a setoff.
At the time S S pulled work from QMT, S S owed QMT $7,248 for heat treating work previously performed. When payment was requested by QMT, S S presented a document reflecting expenses allegedly incurred by S S related to rust and cracking problems during the spring and summer of 1999 which S S calculated as totaling $7,248, the exact amount owed QMT.
The trial court found that S S's claim for a deduction was not appropriate and not supported by the facts of the case. With regard to the rust problem, the court found:
About mid-June to mid-July of 1999, there was a controversy that arose between QMT and S S that involved a part known as K233-509. This part is a shock absorber that is considered a Category 2 part, which is the safety designation applied to that part. QMT had been heat treating these parts for S S almost six years and had never had any problem with the part. There was an issue of some type of rusty color with the product, but that issue seemed to go away. Mr. Biss concluded that the heat treating process did not cause the rust, and rather that it was a material problem with the part.
The evidence supports these findings. Even Mr. Biss, who came up with the list of expenses claimed as setoff, did not attribute the rust to the heat treating process.
With regard to the cracking problem, which S S also relied upon to justify termination of the contract with QMT, the court found that the evidence did not support a conclusion that QMT's heat treating process caused the cracks. The court found persuasive the independent metallurgical engineer's failure to conclude that heat treating was the cause of the cracks or that QMT's process did not meet industry standards. Another company found the cracks were likely caused by the material used in manufacturing. The court found:
The Defendants indicate that since the crack in some of the parts appeared during the quenching that QMT was not competitive in quality. The Court finds that the crack was not caused by a defective heat treating process. QMT had treated these same parts for almost six years without incident. QMT had treated thousands of these parts. Sam Pendergrass is a credible and qualified metallurgical expert. He indicated and verified that the most likely cause of the problem with this part arose from the material alloy used in making the part, not from any defect in the heat treating process.
The laboratory which the Defendants selected to test these parts, Sherry Laboratories, never told them that the heat treating process by QMT was defective. To the contrary, they indicated that the examination of the part did not indicate that QMT had varied from the accepted heat treating industry standards in any way during its heat treating of these products.
The evidence supports these findings.
S S had agreed that all invoices submitted by QMT would be paid within thirty days. This was agreed to in part because "QMT was a small business and was dependent upon S S for a substantial majority of its revenues and the timely payment of invoices was very important. S S increasingly slow paid QMT after QMT moved to Cookeville in 1997." The trial court found S S owed the monies to QMT and properly awarded QMT damages for the unpaid invoices, plus prejudgment interest. We affirm.
For the first three years of the contract, the invoices were to be paid within seven (7) days.
VII. PARTIAL REBATE OF PURCHASE PRICE OF QMT
S S argues that the trial court erred in awarding the Johnsons a partial rebate of the purchase price of QMT in the amount of $74,400. First, S S argues that this claim was time barred. S S argued below and before this court that the three year statute of limitations for tort claims applied as opposed to the six year statute of limitations for contract actions. The trial court rejected this argument, finding the rebate claim was a contract remedy.
A party induced by fraud to enter into a contract may elect to pursue various remedies. For example, a party may sue for contract damages, refund of purchase price, or seek other contract damages such as rescission. On the other hand, a party may sue for damages premised solely on a theory of deceit. The former is a contract action, while the latter is grounded in tort. See Vance v. Schulder, 547 S.W.2d 927, 931 (Tenn. 1977). Here, the Johnsons sought to recover a portion of the contract price paid for QMT.
Shortly after the Johnsons purchased QMT in October, 1993, S S stopped manufacturing Paccar Parts # 5296, 6262 and K179-378. The trial court found that Mr. Welch was aware of the likely loss of this business prior to the sale, but that he failed to disclose this to the Johnsons. It was clear to the trial court that:
[Mr. Welch] indicated and claimed that he had discussed this subject with Mr. Johnson before Mr. Johnson purchased QMT. This is simply not accurate and not the truth. Mr. Johnson would not have paid the same amount of money for this business if he had known that it was going to lose 40 percent of the revenue stream almost instantly after he had purchased the business from Mr. Welch. The revenue generated by these three parts identified by Reed Welch as probable sources of future revenue for QMT were also identified by Mr. Johnson on his Pro Forma Statements that were presented to lending institutions when Mr. Johnson sought financing to buy QMT from Mr. Welch.
As a consequence, the Johnsons requested a 40 % rebate in the amount of $74,400. The 40% figure was based upon the fact the "lost" three Paccar parts represented 40% of S S heat treating products QMT had planned to heat treat.
S S Screw Machine Company, Incorporated agrees that it will not decrease its production requiring heat treatment to be supplied to buyers except in the ordinary course of business, i.e., the loss of business due to competitiveness in price, quality, and delivery.
In Tennessee, the applicable statute of limitations is determined according to the gravamen of the complaint rather than a plaintiff's designation of a claim as an action in tort or contract. Pera v. Kroger, 924 S.W.2d 357, 359 (Tenn. 1984). This court has stated:
[R]egardless of whether a complaint sounds in contract, if the suit seeks to recover damages for injuries to the plaintiff's property, the applicable limitations period is three years as found in Tenn. Code Ann. § 28-3-105.
Keller v. Colgems-EMI Music, Inc., 924 S.W.2d 357, 359 (Tenn.Ct.App. 1996).
Tenn. Code Ann. § 28-3-105 provides a three-year statute of limitations for "actions for injuries to personal or real property." Our Supreme Court has held that an economic loss sustained by a plaintiff from fraud or misrepresentation is an "injury to personal property" requiring the application of the three-year statute of limitations. Vance v. Schulder, 547 S.W.2d 927, 932 (Tenn. 1977). This court held in American Fidelity Fire Insurance Co. v. Tucker, 671 S.W.2d 837, 841 (Tenn.Ct.App. 1983) that fraud in the inducement of a contract sounds in tort and is therefore subject to § 28-3-105's three year limitation period.
The Johnsons filed this lawsuit on September 23, 1999. S S lost the three Paccar parts in March of 1994. No claim for misrepresentation was raised within the three-year statute of limitations and is therefore time-barred. Accordingly, we reverse the trial court's award of a 40% rebate of the purchase price to the Johnsons.
VIII. THE JOHNSONS' PERSONAL RELOCATION EXPENSES
The trial court awarded Mr. Johnson $17,290.67 plus prejudgment interest as damages for S S's failure to pay its share of relocation and temporary living expenses as provided in the employment agreement between S S and Mr. Johnson. The court found that the failure to pay such expenses was a breach of the employment agreement. The agreement required S S to pay all temporary living expenses and to share in moving and related expenses. The trial court found that sharing meant sharing equally. Mr. Welch does not dispute the interpretation.
Instead, on appeal, Mr. Welch asserts that Mr. Johnson's final request for reimbursement of expenses totaled only $6,464.00 and that S S paid Mr. Johnson $5,000, so the maximum liability could only be $1,464.00. That argument overlooks the fact that two types of relocation expenses were included in the agreement. While Mr. Johnson claimed only $6,464.60 in temporary living expenses, he also claimed $31,652.14 in moving-related expenses. He requested half of the moving expenses ($15,826.07) and all of the temporary living expenses ($6,464.60), with credit for the $5,000 he had been reimbursed. The trial court accepted the claims and awarded Mr. Johnson $17,290.67.
The trial court found that the $5,000 paid by Mr. Welch was "completely arbitrary," without any basis, and did not comply with the parties' agreement. The court recounted that Mr. Welch indicated $5,000 was plenty because he had moved from California to Tennessee in 1971 for less than $5,000.
On appeal, Mr. Welch does not dispute any of the specific items claimed by Mr. Johnson. His only argument is that the trial court erred by awarding Mr. Johnson expenses greater than those he had requested form S S and Mr. Welch. The trial court found that Mr. Johnson had protested the payment of only $5,000, "but he was not in a position to do much else other than to protest" since his family had relocated to Tennessee, he was employed by S S, and, by the time the $5,000 payment was made, he and his wife had bought QMT and borrowed money to finance that purchase.
The evidence does not preponderate against the trial court's determination of damages. We affirm the judgment for breach of the employment agreement.
IX. CONCLUSION
We affirm the trial court's judgments on all claims but the partial rebate claim which we reverse, and remand the case for any further proceedings which may be necessary. Costs of the appeal are taxed to the appellants. (Attorneys fees for the appeal?)