Unpublished Disposition, 868 F.2d 1272 (9th Cir. 1982)

MEMORANDUM^* 

Desserts Without Guilt, Inc. (Desserts), a New York corporation, brought suit against Coffee Barrel (Barrel) a partnership doing business in Northridge, California. Barrel removed the case to the District Court for the Eastern District of New York, which in turn transferred the case to the Central District of California. Diversity jurisdiction exists.

After a bench trial the district court gave judgment for Desserts and ordered rescission of its contract with Barrel. Desserts nonetheless appeals, claiming that the district court erred in its analysis and conclusions of law. We agree. We reverse and remand.

BACKGROUND

On February 10, 1982 Desserts and Barrel entered into a written agreement. The preamble represented that Desserts wanted to use "the secret recipes and concepts" of Barrel. The contract went on to say that for $12,000 Barrel sold Desserts "the exclusive right to use their recipes and know-how in the County of Nassau" along with Barrel's "secret recipe book" and the training of personnel of Desserts in the proper use of the products and the recipes. The contract further provided that it was to be construed by the law of California and that if there was any litigation it would be within Los Angeles County.

At its restaurant Barrel provided for the convenience of its customers what was styled an Accountable Sheet. It purported to give the nutritional equivalent of various bakery products, e.g., chocolate fudge cookies had an exchange value of one teaspoon of diet margarine, two ounces of non-fat milk, 3/4 ounces of cereal, and 1/8 cup of currants.

Estelle Citrin, one of the owners of Desserts, visited the Coffee Barrel and liked the idea of the Accountable Sheet. She considered the sheet one of the concepts or part of the know-how that Desserts was acquiring in the sale. Barrel in fact had put the Accountable Sheet together on the basis of information from Weight Watchers clubs but then had changed it casually as Barrel developed new products. After the sale, Desserts sent its bakers to be trained at Coffee Barrel. In this training period they did learn about the exchange values of the different products.

Subsequently, Desserts discovered that the Accountable Sheet was not accurate and there was no scientific basis for the exchange values given. Desserts brought a suit setting out what are in effect four causes of action: First, that Barrel "falsely and fraudulently warranted and represented" that its secret recipes had exchange values with certain food products; second, that these representations and warranties were made recklessly; third, that Barrel and its partners had conspired to defraud Desserts by these warranties and representations; fourth, that there had been a failure of consideration. Barrel sought rescission and the refund of the $12,000 paid as well as $1.5 million for the fraud.

The district judge restricted the evidence as to fraud and, on the basis of the evidence he admitted, held that Desserts had failed to make its case. The district court further concluded that there was an ambiguity in the contract. Desserts had meant to buy a concept or know-how whose centerpiece was the Accountable Sheet. Barrel did not believe that it was selling the Accountable Sheet. Finding there had been a mutual mistake as to the meaning of the central term in the contract, the court held the contract null, ordered it rescinded and provided that Desserts should get its $12,000 back, with interest at 7 percent calculated from February 10, 1982 and its costs of the action.

ANALYSIS

The district court erred in excluding evidence under California's parol evidence rule. It is not clear whether the written agreement was intended to be an integration. If it was not, extrinsic evidence of other contract provisions which did not contradict the writing--including the alleged warranty--was admissible. Masterson v. Sine, 68 Cal. 2d 222, 225, 65 Cal. Rptr. 545 (1968) (Traynor, J.). Moreover, even if the writing was intended to be an integration, parol evidence was admissible both to demonstrate that the writing was ambiguous and to clarify such ambiguity. Id. at 226; see also Cal.Code of Civil Procedure Secs. 1856(b), (c), (g). However, if the writing was intended to be integrated, parol evidence is not admissible to "add to or vary [its] terms." Masterson, 68 Cal. 2d at 225.

The district court also misapplied the parol evidence rule to bar evidence relating to Desserts' claim of fraudulent misrepresentation. The district court only admitted evidence of representations made by Barrel before the contract was signed. California Code of Civil Procedure Sec. 1856(g) provides that the parol evidence rule "does not exclude other evidence ... to establish illegality or fraud." See, e.g., Perry v. Magee, 116 Cal. App. 2d 155 (1953); Spencer v. Di Ghilini, 50 Cal. App. 2d 232 (1942). Desserts desired to present evidence that would show that Barrel understood that what Barrel was selling Desserts was the know-how to produce desserts that would fit into a unique weight-watchers program. Evidence on this point, even if it consisted in representations and conduct after the contract was formed, was not barred by the parol evidence rule. The evidence, if in fact probative, could have established that Barrel had fraudulently induced Desserts to buy know-how that was valueless. On remand, Desserts should be afforded the opportunity to present all of the evidence going to its fraudulent misrepresentation claim.

The district court rescinded the contract on the basis of mutual mistake. That decision may stand depending on the outcome of Desserts' fraudulent misrepresentation claim on remand. If Desserts proves fraud, then there will have been no mutual mistake since Desserts' misapprehension of the terms of the contract resulted from the active deception of Barrel. If however Desserts fails to prove fraud, the existence of a mutual mistake would be clear: Desserts thought it was buying the Accountable Sheet as part of the dietary concept but Barrel did not believe it was selling the Sheet. See, e.g., French v. Construction Laborers Pension Trust, 44 Cal. App. 3d 479, 488 (1975).

Should the court find on remand that rescission is still the appropriate relief, it may award consequential damages to Desserts. Under California law, the prevailing party to a rescision is entitled to "complete relief," including "any consequential damages to which he is entitled," although the court may "adjust the equities" as its judgment directs. Cal.Civil Code Sec. 1692; see also Runyan v. Pacific Air Indus., Inc., 2 Cal. 3d 304, 311 (1970).

Under California law, a victim who is threatened with or suffers detriment to person, property, or business either through the breach of contract or the commission of a tort is required to do all he reasonably can in order to minimize the damage accruing to him. If he negligently fails to meet this requirement, he is not permitted to recover the damages stemming from the detriment he might have prevented, whether or not the wrongful act was wilfully or negligently committed. See Henrici v. South Feather Land & Water Co., 177 Cal. 442, 449 (1918); Green v. Smith, 261 Cal. App. 2d 392, 396 (1968); see generally 6 B. Witkin, Summary of California Law Sec. 1382 (9th ed. 1987). Desserts may have been negligent in its naive acceptance of Barrel's fabulous claims. If the district court finds that Desserts breached its duty to mitigate its damages, it may deny some or all consequential damages.

The contract provides that " [i]n the event that litigation shall become necessary by either party to enforce the terms of this Agreement, the prevailing party shall recover from the losing party reasonable attorney's fees and court costs...." California Civil Code Sec. 1717(a) provides that

[i]n any action on a contract, where the contract specifically provides that attorney's fees and costs, which are incurred to enforce the provisions of the contract, shall be awarded either to one of the parties or to the prevailing party, then the party who is determined to be the prevailing party ... shall be entitled to reasonable attorney's fees in addition to costs and necessary disbursements.

This section applies even though the contract which is the subject of the litigation is rescinded. See Star Pacific Investments, Inc. v. Oro Hills Ranch, Inc., 121 Cal. App. 3d 447, 460-61 (1981). The determination of reasonable attorney's fees is placed in the sound discretion of the district court. See Diamond v. John Martin Co., 753 F.2d 1465, 1467 (9th Cir. 1985) (applying California law).

Desserts is also entitled to attorney's fees for this appeal. Cal.Civil Code Sec. 1717; Hadley v. Krepel, 167 Cal. App. 3d 677, 687, 214 Cal. Rptr. 461 (1985). Attorney's fees will be awarded in a sum to be determined upon our receipt of an application accompanied by affidavits detailing expenditures on appeal. This application shall be filed within 14 days of the filing of this memorandum disposition. Barrel shall have 7 days to respond if it wishes to do so.

REVERSED AND REMANDED.