Postal Instant Press, Inc. v. Sealy - 43 Cal. App. 4th 1704, 51 Cal. Rptr. 2d 365 (1996)

Rule:

Cal. Civ. Code § 3359 states that damages must, in all cases, be reasonable, and where an obligation of any kind appears to create a right to unconscionable and grossly oppressive damages, contrary to substantial justice, no more than reasonable damages can be recovered.

Facts:

Plaintiff and respondent Postal Instant Press, Inc. (PIP) was an internationally known franchisor of printing businesses. In 1979, plaintiff entered into a 20-year franchise agreement with appellants and defendants, Sue and Steve Sealy, where it agreed to provide its trademark and certain services to defendants in exchange for royalty fees and advertising fees payable monthly. Among its other terms, the lengthy franchise agreement also lists a number of possible failures on the part of the franchisee, any one of which would constitute a material breach. One of these is any failure to make a monthly royalty or advertising fee within 10 days after notice it is unpaid. This franchise agreement remained in effect for almost 13 years. However, defendants failed and then again failed to timely make several of their monthly fee payments and fell delinquent on the note as well. Ultimately, plaintiff declared the overdue payments for past royalties constituted a material breach and sent defendants a termination letter. A month later, plaintiff filed a breach of contract action against defendants. After a bench trial, the court awarded plaintiff the amount plus prejudgment interest, attorney fees, and expenses and costs. Defendants did not dispute the portion of the judgment representing damages for past royalty and advertising fees they owe and thus those damages are not a part of this appeal. However, they challenged the trial court's award of unpaid future royalty and advertising fees for the remaining term of the franchise agreement, a period of almost eight years. 

Issue:

Did the trial court err in awarding the unpaid future royalty and advertising fees to plaintiff?

Answer:

Yes.

Conclusion:

The court explained that plaintiff was entitled to recover only those damages that were the proximate cause of appellants' breach. The court found a natural and direct causal connection between defendant's breach and the loss of the past royalty payments. The court stated, however, that appellants' failure to timely pay past royalties was not the proximate or natural and direct cause of plaintiff’s loss of future royalties and advertising fees. The court, thus, concluded that a further award of lost future royalties would be disproportionate, unreasonable, unconscionable, and grossly oppressive. Hence, the court affirmed the judgment of the trial court awarding plaintiff its past royalties and reversed the trial court's award of lost future expectancy damages in the form of franchise royalty and advertising fee payments.