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Court of Appeal:
‘Constructive Termination’ of Contract Is Not Viable Theory
An Exception, Justice Hoffstadt Says, Is Where Parties, in Their Agreement, Recognize It as Basis for Liability
By a MetNews Staff Writer
A cause of action does not exist for a “constructive termination” of a contract, Div. Two of the Court of Appeal for this district has held.
The opinion by Justice Brian M. Hoffstadt was filed Friday. It reverses a judgment, pursuant to a jury verdict, by Los Angeles Superior Court Judge Maurice A. Leiter in favor of plaintiff Carolina Beverage Corporation and related entities.
The defendant, FIJI Water Company, LLC, sells bottled water from the South Pacific. Under a contract, Carolina was to distribute the product within a specified territory; FUJI could terminate the contract but was obliged in that event to make a “termination payment”; it had a right to invade Carolina’s territory by selling directly to retailers, but would then have to pay an “invasion fee.”
FIJI wound up taking over 85 percent of the market in Carolina’s territory. That, Carolina argued, constituted a “constructive termination” of the contract, contending it was owed $1,972,375.
A jury set damages at $1,993,670.
Hoffstadt Poses Question
“Is ‘constructive termination’ of a distribution contract a viable theory of recovery under California common law?” Hoffstadt asked. He answered:
“We hold that it is not.”
He explained that “if a contract does not itself recognize the concept of constructive termination, the courts may not graft that concept onto that contract.”
The jurist declared:
“The agreement contains four different ways in which it may be terminated, and none of them is based on constructive termination of the agreement through a substantial breach of its provisions. Not only does the agreement fail to declare a substantial breach to be a constructive termination, the agreement’s invasion clause specifically authorizes FIJI to breach the agreement under certain circumstances and places no cap on how much of Carolina Beverage’s territory may be invaded. Thus, the agreement does not allow for its constructive termination.”
Hoffstadt added that even if constructive termination “were a viable theory under either the common law or the agreement, the contract-based verdicts in Carolina Beverage’s favor must still be vacated because the undisputed facts—even viewed in the light most favorable to Carolina Beverage—establish that Carolina Beverage did not treat the agreement as being terminated even after FIJI almost fully invaded its territory.”
District Court Decision
Carolina relied on a 2019 decision by U.S. District Court Judge Michael W. Fitzgerald of the Central District of California in KST Data, Inc. v. Northrop Grumman Systems Corp. Hoffstadt said:
“KST does appear to rule, implicitly at least, that constructive termination is a viable theory in all contract actions. Of course, KST is an unpublished federal district court decision, which is, at best, persuasive authority and only if we find it persuasive….But we do not, because it makes no effort to square its ruling with the whole of California law to the contrary.”
In a portion of the opinion that was not certified for publication he discussed two rulings.
In addition to the judgment being reversed with directions to enter a judgment for FIJI, the denial of FIJI’s motion for a judgment notwithstanding the verdict was reversed and an award to Carolina Beverage of $4,343,712 in attorney fees was ordered vacated.
The case is Carolina Beverage Corporation v. FIJI Water Company, LLC, 2024 S.O.S. 1756.
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