Panuelo v Pepsi Cola Bottling Co of Guam [1991] FMSC 36; 5 FSM Intrm. 123 (Pon. 1991) (30 July 1991)

FEDERATED STATES OF MICRONESIA
SUPREME COURT TRIAL DIVISION
Cite as Panuelo v. Pepsi Cola Bottling Co. of Guam, [1991] FMSC 36; 5 FSM Intrm. 123 (Pon. 1991)

[1991] FMSC 36; [5 FSM Intrm. 123]

IOANIS PANUELO, d/b/a
PANUELO'S ENTERPRISES,
Plaintiff,

v.

PEPSI COLA BOTTLING CO. OF GUAM,
Defendant.

FSM CIV. NO. 1990-072

OPINION

Edward C. King
Chief Justice
Trial: June 26, 1991
Decision: July 30, 1991

APPEARANCES:
For the plaintiff:
Fredrick Ramp, Esq.
Attorney-at-Law
P.O. Box 1483
Kolonia, Pohnpei FM 96941

For the defendant:
Maketo Robert, Esq.
Attorney-at-Law
P.O. Box 979
Kolonia, Pohnpei FM 96941

[5 FSM Intrm. 124]

HEADNOTES

Contracts - Installment
In a contract for installment shipments of goods where the parties' agreement was not in writing and there was no oral agreement or other manifestation of intent that the buyer's obligation to accept shipments was to be conditioned upon each prior shipment having arrived in timely fashion and in good condition, a nonoccurrence of the event or act is a breach of promise which gives rise to a claim for damages, rather than a failure of a condition to performance, which frees the other party from any further duty to perform the promised acts. Panuelo v. Pepsi Cola Bottling Co. of Guam, [1991] FMSC 36; 5 FSM Intrm. 123, 127 (Pon. 1991).

Contracts
Where time of delivery was not of the essence of the contract and the contract was flexible in the agreed arrangements for delivery, a delivery of a bad container should not be seen as a failure of a condition to further obligations under the contract. Panuelo v. Pepsi Cola Bottling Co. of Guam, [1991] FMSC 36; 5 FSM Intrm. 123, 127 (Pon. 1991).

Contracts
A breach of contract which is material justifies a halt in performance under the contract by the injured party. Whether a breach is material is a question of fact depending on several factors, particularly where the breach deprives the injured party of the benefits of the contract. Panuelo v. Pepsi Cola Bottling Co. of Guam, [1991] FMSC 36; 5 FSM Intrm. 123, 128 (Pon. 1991).

Contracts - Damages
The measure of damages is the difference between the agreed price buyer was to have paid and the general market price at which seller could sell to another buyer. Panuelo v. Pepsi Cola Bottling Co. of Guam, [1991] FMSC 36; 5 FSM Intrm. 123, 128 (Pon. 1991).

Contracts - Mitigation of Damages
A court will not compensate an injured party for a loss that he could have avoided by making efforts appropriate, in the eyes of the Court, to the circumstances. Panuelo v. Pepsi Cola Bottling Co. of Guam, [1991] FMSC 36; 5 FSM Intrm. 123, 129 (Pon. 1991).

* * * *

COURT'S OPINION

EDWARD C. KING, Chief Justice:

The disputes in this case arise out of a "standing order" arrangement whereby the defendant and counterclaimant, Pepsi Cola Bottling Co. of Guam, was to send two shipping containers of soft drinks to the plaintiff, Panuelo's Enterprises, each month during 1988. For the reasons discussed here the Court has concluded that the basic claims of both parties are well-founded, and

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would result in a net liability of Panuelo's to Pepsi of about $11,000. However, these damages could easily have been avoided by Pepsi. Pepsi having failed to mitigate its damages, the Court will not award relief.

I. Factual Background

The following findings of fact are based upon stipulations, the documents admitted into evidence, and testimony during the trial, which was held on June 26.

Panuelo's and Pepsi established through oral agreement a kind of installment sales arrangement. The arrangement presumably was subject to termination upon reasonable notice at any time, but no such notice was given by either party until the events related here had transpired. Thus, at the times when the shipments in question were shipped and delivered, the agreement was that Pepsi, in Guam, was to ship to Panuelo's, in Pohnpei, two shipping containers of soft drinks per month. Panuelo's was to accept the containers upon arrival by paying in full sight drafts in the amount of the sales price for the containers, thereby obtaining from the Bank of Hawaii the bill of lading which enabled Panuelo's to obtain possession of the containers.

The arrangement worked smoothly up until September 1988. A bill of lading, dated September 1, 1988, reflects shipment by Pepsi of two containers of soft drinks to Panuelo's Enterprises on the Asian Lily No. 43. The Pepsi export invoice shows September 6, 1988 as the shipping date. This was to have been the September shipment to Panuelo's. However, for reasons unexplained in the record, the Asian Lily No. 43 did not arrive in September, but instead reached Pohnpei on October 11, 1988.

Panuelo's promptly paid the sight draft for the Asian Lily containers but, when the containers were examined at Panuelo's warehouse, it was learned that the soft drinks in one of the containers had been damaged. The Pohnpei Environmental Health officer, Perez Ioanis, was called in to inspect the shipment. He found that some of the soft drink cans were empty, others were half full, many were leaking and all of the cases inside the container were soaked. He concluded that all the soft drinks in that container should be regarded as "unfit for human consumption."

In the meantime, Pepsi was arranging for the October shipment to be sent to Panuelo. On October 7, the Kyowa Rose No. 28 left Guam, carrying two soft drink containers for Panuelo's. Those containers arrived in Pohnpei on October 16, 1988.

A copy of the bill of lading for this shipment was picked up by an employee of Panuelo's, Penny Jimmy, on October 20. In addition, the Bank of Hawaii on October 19 mailed to Panuelo's notice that it had received the sight draft documents concerning the shipment. At almost the same time, the bank called Panuelo's Enterprises on the telephone to confirm arrival of the documents. Based upon these factors, the Court concludes that Panuelo's was

[5 FSM Intrm. 126]

charged with knowledge as of October 20 that the containers were available on Pohnpei.

Nonetheless, for a considerable period of time, Panuelo's failed to acknowledge that the containers had arrived on the Kyowa Rose No. 28 and the containers remained at the dock. Finally, on December 13, 1988, Ioanis Panuelo telexed Pepsi that he had "just" learned of the two containers from the Kyowa Rose No. 28. The telex suggested that Panuelo's would pay cash for one of the two Kyowa Rose containers but that the other should be turned over to Panuelo's as credit for the defective container which had arrived earlier on the Asian Lily No. 43. Pepsi did not respond. The containers continued to sit on the dock and sometime thereafter the soft drinks in the container spoiled.

Panuelo's, the plaintiff in this case, seeks reimbursement of the amounts paid for the defective container that arrived on the Asian Lily, and denies any responsibility for the containers shipped on the Kyowa Rose. Pepsi counterclaims, asserting that it is entitled to be paid for the containers shipped to Pohnpei on the Kyowa Rose.

II. Legal Analysis

A. Law To Be Applied

Before considering whether the problems with the September shipment on the Asian Lily justified Panuelo's refusal to pay for the Kyowa Rose shipment, the Court must first determine the law to be applied. In Semens v. Continental Air Lines, Inc., [1985] FMSC 3; 2 FSM Intrm. 131 (Pon. 1985), the Court decided that the law of Pohnpei should be applied to interpret the contract at issue in that case. That decision was based on the fact that Pohnpei had the most significant relationship to the case, because the plaintiff was a resident of Pohnpei, the contract governed performance to be carried out in Pohnpei, and the key events which gave rise to the dispute occurred in Pohnpei. Those same considerations are present here and lead to the conclusion that Pohnpei law should also be applied to resolve the contract issues in this case. No party has asserted that principles of custom and tradition, or even general Micronesian values, should be looked to as a primary basis for resolving this dispute. Therefore the focus will be on principles developed from decisions of courts.

In deciding a matter of state law, this Court attempts to apply the law the same way the highest court in that state would. Edwards v. Pohnpei, [1988] FMSC 6; 3 FSM Intrm. 350, 360 n.22 (Pon. 1988). There are no existing Pohnpei state court decisions resolving the contract issues before the Court in this case so the Court here looks to its own previous decisions concerning the law of contracts in Pohnpei.

B. Conditions and Promises.

When an obligor, like Panuelo's in this case, points to the nonoccurrence of a particular act or event as justification for the obligor's failure to

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carry out its own promised performance under the contract, the court must consider carefully the contractual status of the act or event which did not occur. Federated Shipping Co. v. Ponape Transfer & Storage, Inc., 4 FSM Intrm. 3, 9 (Pon. 1989). As a first step, the court must determine whether the nonoccurrence of the event was a breach of promise, which merely gives rise to a claim for damages, or the failure of a condition to performance, which frees the other party from any further duty to perform promised acts under the contract.

For several reasons, including a wish as a matter of policy to protect parties who commit themselves in reliance upon the promises of the other party, and a view that forfeitures should be avoided, courts generally tend to interpret an act or event specified in a contract as a promise, rather than as a condition to further performance. Id. Parties may create a condition through "plain and unambiguous language," through "necessary implication" manifested by the contract itself, or in some other way that makes their intent to create a condition clear. In the absence of some such showing, courts find promises, not conditions to further performances. Id.

Nothing in this "standing order" arrangement overcomes that general tilt in favor of promises over conditions. The agreement was not in writing and Panuelo's does not assert that there was any plain and unambiguous oral agreement, or other manifestation of intent, that the obligation of Panuelo's to accept shipments was to be conditioned upon each prior shipment having arrived in timely fashion and in good condition.

Nor does the nature of the standing order arrangement necessarily imply that the parties regarded time of delivery to be of the essence. The standing order apparently was based upon Panuelo's general estimate of its needs from month to month. No particular day of delivery was pointed out as crucial. Indeed the agreement itself provided a range of an entire month within which delivery could be made. Given this flexibility in the agreed arrangements, it would be anomalous to conclude that the parties originally intended that all obligations of Panuelo's would simply fizz away if one shipment of soft drinks arrived only eleven days late. Similar considerations persuade the Court that the one bad container should not be seen as the failure of a condition to Panuelo's further obligations under the standing order arrangement.

C. Breaches of Promise.

Pepsi's failure to make timely delivery in September, 1988 of two containers of soft drinks in acceptable condition was nonetheless a breach of Pepsi's promise under the standing order arrangement. Panuelo's was required to make payment in full pursuant to the sight draft arrangement in order to obtain possession of the containers which arrived on the Asian Lily. Panuelo's is entitled to be reimbursed for the purchase price of the defective soft drinks plus expenses incurred in disposing of them.

Sometimes a particular breach may be so material to the purpose of a

[5 FSM Intrm. 128]

contract that the injured party is justified in halting performance under the contract. 4 A. Corbin, Corbin on Contracts § 946 (1951). Whether a breach is material is a question of fact depending on several factors, especially whether the breach deprives the injured party of the benefits of the contract. E. Farnsworth, Contracts § 8.16 (1982).

Here there is no indication that Panuelo's ever ran out of usable soft drinks. The defects in the September shipment were not sufficient to cause a reasonable buyer to believe that it could no longer depend upon a reliable supply of soft drinks from Pepsi. This is especially clear since Pepsi did ship the soft drinks on the Asian Lily in early September. Panuelo's would have learned this from the shipping documents when the Asian Lily finally arrived on October 11, 1988.

Moreover, the arrival of the Kyowa Rose just a few days later was additional reassurance to Panuelo's that the basic standing order arrangement was still intact and effective. Thus while Pepsi's failure to make timely delivery of two containers in good condition was a breach, the breach was not of a kind or magnitude to erase the obligation of Panuelo's to pay for the soft drinks which were shipped on the Kyowa Rose No. 28.

Those Kyowa Rose containers arrived in timely fashion and in satisfactory condition, all in accordance with the understanding of the parties. The failure of Panuelo's to accept and pay for those containers was a breach of Panuelo's obligations under the contract, for which Panuelo's must be held liable to Pepsi.

The result of all that has been said thus far is that Panuelo's is liable to Pepsi for the agreed purchase price of the two containers shipped on the Kyowa Rose. This is offset in part by the right of Panuelo's to be reimbursed for the purchase price paid for the defective container which arrived on the Asian Lily, plus the expenses incurred in disposing of those unusable soft drinks. Thus, Panuelo's would under this analysis be liable to Pepsi in the approximate amount of $11,000.00.

D. Mitigation of Damages.

One last factor requires consideration. Normally, the measure of damages to compensate Pepsi for the failure of Panuelo's to pay for the containers would not be the entire purchase price of the containers. Instead, it would be the difference between the agreed price Panuelo's was to have paid and the general market price at which Pepsi could sell to another buyer in Pohnpei. This would be so because Pepsi would still retain ownership of the soft drinks themselves and presumably could sell the containers to somebody else, thereby reducing Pepsi's loss as a result of the failure of Panuelo's to pay.

Indeed, the law places upon Pepsi an obligation to make reasonable efforts to reduce its damages. "A court ordinarily will not compensate an injured party for loss that he could have avoided by making efforts

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appropriate, in the eyes of the court, to the circumstances." E. Farnsworth, Contracts 858 (1982).

If Pepsi had sold the two containers to somebody else on Pohnpei or elsewhere, Pepsi's losses and its claim against Panuelo's for damages, would have been reduced by the amount of the sales price minus any additional expenses incurred by Pepsi before the sale was made. However, the two Kyowa Rose containers were not resold but instead sat on the dock and spoiled. Therefore, Pepsi seeks the full agreed purchase price as damages.

However, it is apparent that Pepsi could easily have mitigated its damages. On December 13, Panuelo's advised Pepsi by telex of its willingness to accept both containers. Panuelo's offered to pay cash for one, asking that Pepsi transfer the other one to Panuelo's to replace the defective container from the Asian Lily for which Panuelo's had already paid.

Pepsi's acceptance of this wholly reasonable offer could have prevented the entire loss of which Pepsi now complains. Pepsi has given no reason for failing to accept the offer. The Court concludes that, by failing to take appropriate steps to avoid its loss of the soft drinks, Pepsi deprived itself of any right to assistance from the Court.

Conclusion

Although Pepsi otherwise would have been entitled to recover some $11,000 in damages from Panuelo's, Pepsi does not deny that it could have avoided its damages by crediting Panuelo's for the defective container shipped on the Asian Lily and by selling the other Kyowa Rose container to Panuelo's. Under the circumstances of this case, Pepsi's failure to mitigate its own damages bars its $11,000 claim.

The Court finds that neither party is entitled to recover anything from the other. Therefore all claims are dismissed.