Gadwall Products, Inc. v. Barry Fletcher and Barry Fletcher Afrodisiac Holistic Hair Care System, Inc.
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ARKANSAS COURT OF APPEALS
NOT DESIGNATED FOR PUBLICATION
WENDELL L. GRIFFEN, JUDGE
DIVISION III
CA06-1265
GADWALL PRODUCTS, INC.
APPELLANT
May 30, 2007
AN APPEAL FROM JEFFERSON
COUNTY CIRCUIT COURT
[CV2003-400-1]
V.
HON. BERLIN C. JONES, JUDGE
BARRY FLETCHER and BARRY
FLETCHER AFRODISIAC HOLISTIC
HAIR CARE SYSTEM, INC.
APPELLEES
AFFIRMED
In an order filed April 11, 2006, the Jefferson County Circuit Court dismissed appellant
Gadwall Products, Inc.’s breach-of-contract claim against appellees, Barry Fletcher and Barry
Fletcher Afrodisiac Holistic Hair Care System, Inc., and awarded appellees damages and
attorney’s fees for their breach-of-contract counterclaim against appellant. Appellant brings
this appeal, contending that the circuit court erred (1) in finding that it breached the contract
with appellees; (2) in awarding $250,000 in compensatory damages; (3) in awarding damages
of $16,598.72 for un-reimbursed expenses in violation of the parol evidence rule and for
expenses not authorized by appellant; and (4) in awarding attorney’s fees that were
unreasonable and not supported by the evidence. We affirm.
Facts
The dispute in this case arose over an agreement between the parties to promote and
sell a line of hair and skin care products. Charles “A.C.” Freeman originally was part of Hot
Head of Arkansas, Inc., which would later be renamed Gadwall Products, Inc. He and Jana
Binns eventually met with Fletcher to discuss the products they wanted to sell. Freeman
wanted to work with Fletcher because Fletcher had tremendous experience in the hair-care
industry, including authorship of two books, twenty-five years as a hairstylist, and clientele
including Tina Turner, Maya Angelou, Halle Barry, and Toni Braxton. Fletcher and Binns
traveled to California to promote the products shortly after their initial meeting. Freeman did
not direct them to go to California; however, he approved of Fletcher and Binns doing so. In
California, Fletcher and Binns attended an appreciation dinner for a Wal-Mart executive, and
the two gave away samples of the new products and copies of Fletcher’s book Why Are Black
Women Losing Their Hair? At trial, Freeman agreed that costs incurred in furtherance of the
business would be a reimbursable business expense.
Hot Head and appellees signed an agreement on February 28, 2002. Under the terms
of the agreement, Fletcher was to use his best efforts to develop and market the products. He
was also obligated to assist in the identification and selection of a manufacturer for the
products.1 Fifty percent of Fletcher’s intellectual property rights in the developed products
1
The relevant language of the agreement provided:
3.1
Fletcher shall use his best efforts to develop and market the Concept Products
as well as new hair or skin care products exclusively for the benefit of Hot
Head. Fletcher shall devote his best efforts in connection with the development
and marketing of the Concept Products as requested by Hot Head. Fletcher
shall participate in any marketing efforts, including but not limited to personal
appearances in television programming or other marketing campaigns, as
requested by Hot Head. Fletcher shall assist Hot Head in the development and
implementation of all marketing or advertising campaigns undertaken by Hot
Head in connection with the Concept Products. In addition, Fletcher shall be
available as requested by Hot Head for assistance and consultation in connection
with the development and improvement of the Concept Products.
3.2
Fletcher will be responsible for maintaining the quality of the Concept Products
and shall take all steps necessary to ensure that the nature and quality of all
products sampled, sold, or otherwise disposed of by Hot Head and covered by
the Trademarks shall be free of design or manufacturing defect, are
merchantable, and fit for the product’s intended purpose.
3.3
Fletcher shall assist in the identification and selection of a contract manufacturer
for the Concepts Products and shall take all necessary steps to ensure that such
manufacturer has the ability to manufacture the product to the quality standards
2
were conveyed to Hot Head. The agreement provided Fletcher would be paid 7.5% of the net
sales of the products; however, the agreement provided that Hot Head would pay a minimum
of $150,000 during the first year the products were on the market and $200,000 during the
second year. Fletcher also received $100,000 when the agreement was executed. The
agreement contained a number of “boilerplate” clauses, including a merger clause, which
provided, “This Agreement merges all prior agreements and constitutes the complete
agreement between the parties and shall not be amended or supplemented, except by further
written agreement.” Freeman acknowledged that Fletcher would work with Binns and Harvey
Farr on developing and selling the merchandise and that appellant was to provide the financial
backing.
Zach Mahaffy became involved with the project at some point after Hot Head changed
its name to Gadwall Products. Mahaffy wanted to be involved in the company, and Freeman
wanted to cut back his involvement. Mahaffy took over day-to-day control of the business and
eventually became 95% owner of the company. Freeman did not have any discussions with
Fletcher after Mahaffy took over. Mahaffy first met with Fletcher in Little Rock in April
2002. According to Mahaffy, Fletcher thanked him for wiring the $100,000 (per the
agreement). Mahaffy stated that one of the first things he did when becoming involved with
the business was open a corporate checking account in the name of Hot Head and deposited
$150,000. During the April 2002 meeting, Fletcher told Mahaffy that he was working with
Nature’s Formula in Dallas to finalize the product. Fletcher was also working on artwork and
established by Fletcher or Hot Head. Fletcher shall assist with the set up of the
plant and shall establish and supervise a quality control program for the
manufacture of Concepts Products by such contract manufacturer, and for the
packaging, storage and shipment of the Concepts Products.
3.4
Fletcher will review, test and, if appropriate approve or submit
recommendations for improvement of all formulations submitted to it by Hot
Head.
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photos of the products. Mahaffy testified that he authorized $2500 for a photo shoot.
Mahaffy opined that everything was proceeding at a rapid pace by April 15, 2002. He
stated that Fletcher did not express any concerns at that time and that any holdup in the process
was due to Fletcher wanting to get the products just right. Mahaffy testified that he was still
waiting for a final product and final pricing in July or August 2002 and thought that everything
was still proceeding well after a July 2002 meeting with Wal-Mart representatives.
On August 9, 2002, Dennis Gebhart, Nature’s Formula’s vice president of sales and
marketing, sent a fax to Wal-Mart informing it that Nature’s Formula would manufacture and
fill all of the orders and that Nature’s Formula had been working closely with Fletcher to
formulate the products. Mahaffy stated that no products were ordered at that time because
there were no products to order. He stated that he saw no preliminary pricing until August 13,
2002; however, he did not understand those prices to be firm. Mahaffy testified that he did
not receive a firm proposal until August 29, 2002, and he would have signed the proposal had
it been acceptable. He stated that Nature’s Formula claimed to own all of the formulas and
refused to release the formulas to him. Without the formulas, he could not acquire insurance
for the products. Mahaffy also noted that Nature’s Formula wanted a large number of
products to be run on each individual item and that it wanted millions of dollars in business
before it would release the ingredients of the formulas. He testified that he started weighing
other options after receiving the proposal because Nature’s Formula was not an option. Soon
after, Fletcher attempted to buy out appellant.2 Mahaffy testified that he proposed a
counteroffer and that, at that time, he wanted to find another filler. Instead, he received a letter
on September 24, 2002, stating that Fletcher was terminating the agreement.
On cross-examination, Mahaffy stated that he funded the venture from his initial
2
The record contains a letter from Fletcher dated September 13, 2002, indicating an offer
of $50,000.
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involvement until the termination of the contract. He stated that he received the startup capital
from a loan from a family corporation. He acknowledged that he signed a promissory note for
$334,562.67 in favor of the family corporation on August 30, 2003, but denied that the note
had anything to do with this case. He denied that he ever relied on outside funding. Mahaffy
testified that he had the money to run the products in August 2002, but that he did not order
the products because the August 2002 proposal was not acceptable. He asserted that he
received no firm proposal until August 29, 2002, and stated that he did not do anything when
receiving a fax dated June 17, 2002, because the prices on that fax did not represent the final
numbers. However, Mahaffy did acknowledge that the numbers given to him in June 17, 2002,
were the same as those provided to him on August 29, 2002.
Dennis Gebhart testified that his involvement in the project began when Binns and Farr
introduced him to Freeman. The goal was to launch a retail brand for sale at mass grocery and
drug retailers. After the meeting, Fletcher worked with Nature’s Formula on the products;
however, the process was long because many of Fletcher’s products were not compatible with
the company’s formulas.
Gebhart recalled the fax sent June 17, 2002, which listed prices for the products. He
testified that Nature’s Formula has the capacity to produce products at those prices that day
and that the company needed a deposit before producing. He noted that he never received
capital from appellant. He stated that the fax sent August 29, 2002, merely outlined the
agreement as far as price and minimums. He disagreed with Mahaffy’s testimony that he did
not produce cost numbers until August 2002. Gebhart also recalled a conference call with
Mahaffy, where Mahaffy claimed to own the formulas. Gebhart asserted that Nature’s
Formula developed and owned the formulas.
Fletcher testified that prior to entering into the agreement with appellant, he had a wellrespected salon in Maryland with celebrity clientele. He noted that he first met with Freeman,
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Farr, and Binns at the end of November 2001 to discuss a new product line. Fletcher thought
that Freeman had a good reputation with business and trusted that Freeman was willing to
invest. In the contract negotiations, Fletcher insisted on a contract bonus, which he received
soon after signing the contract.
negotiations.
He sold his salon in December 2001, soon after the
He testified that he stopped styling hair because the business was time
consuming and because he was looking for residual income. He opined that he could have
lived off the guaranteed payments in the contract.
Fletcher testified that he started working on the products in November 2001, soon after
the initial negotiations, and that the formulations for the products were nearly completed before
he signed the agreement in February 28, 2002. He wanted to have the products ready for WalMart by the following July. He also testified about the trip to California to inform people
about the new products. Over appellant’s objection, he submitted an invoice dated February
14, 2002, showing that he spent $13,654.38 on gifts, which included product samples and
thirty-two copies of his book. He had not been reimbursed for those costs.
Fletcher testified that he knew nothing about Mahaffy until he received a letter in June
17 stating that Mahaffy was replacing Freeman and that the name of the company had
changed. However, Fletcher testified that Mahaffy “put everything on halt” by spending a
minimal amount of money on the project. For example, when planning a promotional photo
shoot, Fletcher was able to negotiate a cost of $46,000. Mahaffy thought that the cost was
preposterous. Fletcher was able to streamline the shoot and have it at a cost of $12,000;
however, Mahaffy only committed $2500. Fletcher had to use a local freelance photographer,
who charged $4800. Fletcher had to pay $1300 of his own money. He also spent $189.50 on
a flight and $416 on a hotel in Chicago, to meet with representatives from North Star, Inc.
Fletcher testified that Mahaffy told him that he did not have any money and that he needed a
purchase order from Wal-Mart to make things work. At this point, Fletcher opined that
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Freeman had backed out of the contract.
Fletcher also discussed the trip to Wal-Mart headquarters in July 2002. He stated that
while he had products, he did not have the packaging or labeling. Wal-Mart informed him that
it would not purchase anything without having the final product with bar codes. He noted that
he did not have big financial backing from appellant at that time. He noted that he paid his
own expenses to meet with Wal-Mart representatives, including $236 for the flight and $81.45
for the hotel. Fletcher understood that the order from Wal-Mart was “life or death” to the
project. However, there was no money invested in the production other than the $100,000
bonus and the startup capital. Fletcher testified that he had phone contact with Mahaffy “all
the time” and that he asked Mahaffy to at least take care of expenses if the project was going
to go slow. Fletcher testified that he attempted to launch the product on his own after he
terminated the contract; however, he stated that he was out $16,000, and possibly more, as a
result.
On April 11, 2006, the circuit court filed an order listing forty-eight findings of fact.
The court noted in paragraphs 41 through 46:
41.
That all acts necessary for general production of the twelve (12) developed
products and approved by all necessary enties [sic] were completed by July 20,
2002 and were ready for financing of orders by Gadwall.
42.
That Gadwall never placed any orders for any products after having been
notified that finished products were ready for production for retail sales.
43.
That Hot Head of Arkansas, AC Freeman, Gadwall Products, Inc nor Zach
Mahaffy provided any financing for production of the twelve (12) products that
had met all prerequests [sic] for production and all parties to said agreement had
been so notified.
44.
That Fletcher was not reimbursed for certain expenses he incurred promoting
and preparing for production of the said products.
45.
That by Plaintiff’s [appellant’s] failing to complete and submit the Wal-Mart
application to provide the requested financial information, to not consider any
other distributors before complection [sic] of the Wal-Mart venture, and
notifying Fletcher that Gadwall and Mahaffy were insolvent and could not
provide financing of the developed products, therefore plaintiff’s inability,
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46.
refusal, or failure to perform the contract constituted a default and therefore; a
breach of the contract.
That defendant’s letter terminating the contract occurred after plaintiff[‘s]
breach of the contract, and defendant’s inability to proceed further under the
contract, without funding.
The circuit court awarded appellees $16,598.72 in un-reimbursed expenses and
$250,000 in damages. On April 25, 2006, appellees filed a motion for attorney’s fees.
Included with the motion was an affidavit from their attorney stating that he was admitted to
the Arkansas bar in 1999; that he began practicing in 1999; that he started his own firm in
2002; and that he was a member of the national, state, and local bar associations. He further
alleged that his normal billing rate was $150 per hour and that he spent 97.6 hours on this case
during the three years the matter had been pending. As a result, he requested $14,640 in fees.
In an order entered June 6, 2006, the court found that counsel’s fees were fair and reasonable
and awarded appellees the requested fees.
Standard of Review
In bench trials, the standard of review on appeal is not whether there is substantial
evidence to support the findings of the court, but whether those findings were clearly erroneous
or clearly against the preponderance of the evidence. Flagstar Bank v. Gibbins, 367 Ark. 225,
— S.W.3d — (2006). A finding is clearly erroneous when, although there is evidence to
support it, the reviewing court on the entire evidence is left with a firm conviction that a
mistake has been committed. Id. Disputed facts and determinations of credibility are within the
province of the fact-finder. Id.
Breach of Contract
Appellant argues that the circuit court erred in finding that appellant breached the
agreement. It contends that appellee failed to prove that appellant violated any provision of
the contract. It also contends that the court relied heavily on Fletcher’s testimony regarding
appellant’s financial status, that Fletcher’s testimony was disputed, and that this court should
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not give any deference to that testimony.
When performance of a duty under a contract is contemplated, any nonperformance of
that duty is a breach. Harness v. Curtis, 87 Ark. App. 337, 192 S.W.3d 267 (2004). As a
general rule, the failure of one party to perform his contractual obligations releases the other
party from his obligations. Vereen v. Hargrove, 80 Ark. App. 385, 96 S.W.3d 762 (2003).
To be released from a contractual obligation, the other party’s breach must be material. Id.
Where there is no provision as to the time of the performance of the contract, the law implies
that it must be performed within a reasonable time. Taylor v. George, 92 Ark. App. 264, 212
S.W.3d 17 (2005). What would be a reasonable time depends upon the intention of the parties
at the time the contract was made, the facts and circumstances surrounding its making, or, in
general, what was contemplated by the parties at the time. Id. Where the pivotal issue is the
credibility of the interested parties whose testimony is in direct conflict, this court defers to the
circuit court’s judgment. Id. As the finder of fact, it is within the trial judge’s province to
believe or disbelieve the testimony of any witness. Id.
The record supports the circuit court’s finding that appellant was either unable or
unwilling to perform its contractual duties with respect to financing the production and
marketing of the products. Gebhart’s testimony establishes that Nature’s Formulas was ready
to produce the products as early as June 2002 and that the company merely needed a deposit
to start production. While there is some testimony to show that the proposals from Nature’s
Formula were unacceptable to appellant and that appellant had the right to reject unacceptable
proposals, the record also shows appellant’s unwillingness to finance the project after Mahaffy
became primary stockholder. Further, Fletcher testified that Mahaffy stated that he did not
have any money. A fact finder could reasonably infer that appellant’s rejection of the previous
proposals resulted from this inability to finance the project. While appellant urges this court
to disregard Fletcher’s testimony regarding appellant’s financial status due to the number of
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inconsistencies between Fletcher’s trial and deposition testimonies, it offers no legal basis for
this court to substitute its own credibility determination for that of the circuit court. Our
standard of review requires us to accept the circuit court’s determination that Mahaffy stated
an inability to finance the operation.
The record supports the circuit court’s finding that appellant failed to financially support
Fletcher’s efforts to develop the products. Appellant’s inability or unwillingness to perform
constituted a material breach of the agreement. We affirm on this point.
Compensatory Damages
Appellant argues that there was no evidence to support the award of $250,000 in
damages. It contends that appellees had the burden of showing damages and that any amount
of damages awarded by the circuit court could only be the result of speculation and conjecture.
Damages recoverable from breach of contract are those damages that would place the
injured party in the same position as if the contract had not been breached. First United Bank
v. Phase II, Edgewater Addition Residential Prop. Owners Improvements Dist. No. 1 of
Maumelle, 347 Ark. 879, 69 S.W.3d 33 (2002). The burden of proof is on the party claiming
damages, and such proof must consist of facts, not speculation. Grand State Marketing v.
Eastern Poultry Dist., Inc., 63 Ark. App. 123, 975 S.W.2d 439 (1998). If it is reasonably
certain that profits would have resulted had the contract been carried out, then the complaining
party is entitled to recover lost profits. Id. The loss may be determined in any manner that is
reasonable under the circumstances. Id. The question of damages, both as to measure and
amount, is a question of fact. Industrial Elec. Supply, Inc. v. Lytle Mfg., L.L.C., 94 Ark. App.
81, — S.W.3d — (2006).
Appellant argues that appellees did not request damages in the amount of $250,000 and
that appellees did not present evidence supporting the damage award of $250,000. In its reply
brief, appellant contends that the provisions setting the minimum compensation were
10
insufficient evidence of the damages suffered and that proof that appellees would have
received certain payments under the contract does not establish that appellees lost profits as
a result of the alleged breach. However, the payments to which appellees were entitled to
under the contract are the lost profits resulting from appellant’s breach. But for appellant’s
breach, appellees would have received 7.5% of the net sales of the products and no less than
$350,000 over the first two years. The circuit court did not err in awarding appellees $250,000
in damages. We affirm on this point.
Un-reimbursed Expenses
Appellant argues that the circuit court erred in awarding damages for expenses incurred
prior to the execution of the contract. It contends that the awards were in violation of the parol
evidence rule and in absence of any evidence showing that the expenses were authorized.
The parol evidence rule is a rule of substantive law in which all antecedent proposals
and negotiations are merged into the written contract and cannot be added to or varied by parol
evidence. Hagans v. Haines, 64 Ark. App. 158, 984 S.W.2d 41 (1998). Where a contract is
plain, unambiguous, and complete in its terms, parol evidence is not admissible to contradict
or add to the written terms. Id. However, parol evidence may be admitted to prove an
independent, collateral fact about which the written contract was silent. Ultracuts Ltd. v. WalMart Stores, Inc., 343 Ark. 224, 33 S.W.3d 128 (2000). A merger clause extinguishing all
prior and contemporaneous negotiations, understandings, and verbal agreements is simply an
affirmation of the parol evidence rule. McNamara v. Bohn, 69 Ark. App. 337, 13 S.W.3d 185
(2000).
Appellant relies heavily on Hagans, supra. That case was an appeal from the denial
of a request for specific performance of a contract for the sale of commercial real estate. One
of the appellees testified that he signed the document in question, but that he did not sign it as
an “offer and acceptance” because the document had no provisions regarding a rental provision
11
to which the parties had previously agreed. Over appellants’ objection, the appellees testified
that they signed the document because, among other things, there was no stipulation regarding
rent. This court reversed, holding that the testimony violated the parol evidence rule, noting
that testimony of an order rental agreement could properly be admitted to show a subsequent
modification of the terms of a written contract, but not of any terms prior to the existence of
the contract. The court held that the testimony was in abrogation of the clear, unambiguous
terms of the written agreement and in violation of the merger clause.3
However, the outside evidence in Hagans altered the material terms of the agreement.
Here, the contract is silent as to the payment of expenses to promote the products. The
payment of expenses is a matter collateral to the execution of the contract; thus, the parol
evidence rule does not bar the admission of such evidence.
Appellant also argues that some of the expenses were unauthorized and that appellees
did not present proof of damages totaling $16,598.72. However, Freeman acknowledged that
appellant was to provide financial backing for the project and that costs incurred in furtherance
of the business should be reimbursed. These expenses would include costs incurred for
promotional travel, meetings, and the photo shoot. As to the calculation of damages, the
circuit court did not state how it calculated the damages, and appellant made no request for
specific findings. In light of Fletcher’s testimony that he was “out $16,000, maybe a little
more,” and the fact that the expenses came close to the amount awarded, we hold that the
circuit court did not clearly err in awarding appellees $16,598.72 in damages for un-reimbursed
expenses.
Attorney’s Fees
3
Appellees rely on Bank of America, N.A. v. C.D. Smith Motor Co., 353 Ark. 228, 106
S.W.3d 425 (2003). They state that the case criticized and distinguished the decision in
Hagans. This is incorrect. While the court distinguished Hagans from the case before it–the
former being a non-UCC case, and the latter being a UCC case–the supreme court gave no
indication that Hagans was no longer good law.
12
Finally, appellant argues that the circuit court abused its discretion in awarding
attorney’s fees. It contends that the award was unreasonable and not based upon any
evidentiary material bearing on the amount of the fee.
The Arkansas Code allows a circuit court to award attorney’s fees to the prevailing
party in a contract dispute. See Ark. Code Ann. § 16-22-308 (Repl. 1999). The decision to
award attorney’s fees and the amount of that award are reviewed under the abuse-of-discretion
standard. Harris v. City of Ft. Smith, 366 Ark. 277, — S.W.3d — (2006).
In arguing that the circuit court erred in awarding attorney’s fees, appellant relies on
Rule 54(e) of the Arkansas Rules of Civil Procedure, which addresses motions for attorney’s
fees. The Addition to Reporter’s Notes, 1997 Amendment provides in relevant part:
The new subdivision does not require that the motion for attorneys’ fees be
supported at the time of filing with the evidentiary material bearing on the fees. This
material must be submitted in due course, according to such schedule as the court may
direct in light of the circumstances of the case. What is required is the filing of a
motion sufficient to alert the adversary and the court that there is a claim for fees and
the amount of such fees or a fair estimate.
Appellant contends that an award based only on counsel’s assertion that he devoted 97.6
hours to the case, without detailed records to determine how much time was actually spent,
was unreasonable. However, this court recognizes the superior perspective of the circuit court
in determining whether to award attorney’s fees. Taylor, supra. Counsel’s affidavit was
sufficient to alert appellant and the circuit court of the basis for his request. We hold that the
circuit court did not abuse its discretion in relying on counsel’s affidavit in setting the amount
of attorney’s fees.
Affirmed.
P ITTMAN, C.J., and B IRD , J., agree.
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