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Wagstaff v. Protective Apparel Corp.

May 3, 1985


Appeal from the United States District court for the Western District of Oklahoma (D.C. No. Civ. 82-2166-E).

Barrett and McKay, Circuit Judges, and Winder, District Judge.*fn*



This case arises out of a business deal which resulted in the death of plaintiff's decedent and the frustration of an on-going business relationship between the plaintiff's decedent and the defendants.

The defendants are manufacturers and sellers of various items of security equipment. Plaintiff's decedent was the proprietor and operator of a small electronics business. In the fall of 1981, plaintiff's decedent became interested in security equipment for an electronics business. At that time he purchased $20,000 worth of equipment from the defendants. Later he was contacted by the defendants with the prospect of becoming one of their distributors. He was told that to become a distributor he was required to purchase $50,000 worth of equipment but that the $20,000 worth of equipment that he had earlier purchased could be credited toward his distributor account. He was also told that someone else in his area was interested in the distributorship and that the first of the contenders to come up with the $50,000 would be named the distributor for that area. After deciding to become a distributor for the defendants, plaintiff's decedent executed a "distributorship agreement," paid the defendants $10,000, and promised to pay the additional $20,000 as consideration for the distributorship. Shortly afterward, while making a public demonstration of the defendants' protective clothing, plaintiff's decedent was stabbed to death due to a defect in defendants' equipment. Plaintiff filed a diversity action seeking recovery for the wrongful death of her husband as a result of the defect in defendants' equipment, and for fraud and rescission of the contract based on frustration of purpose.

The jury found for plaintiff on the wrongful death claim and that decision has not been appealed. The trial court sustained a directed verdict on the issue of fraud, holding that the plaintiff on the issue of rescission. Both parties appeal. Plaintiff claims that the district court erred in directing a verdict on the fraud claim, and defendants claim that submission of the rescission claim to the jury was improper.

I. Rescission

Defendants make two arguments why the rescission decision was incorrect. First they argue that, under Oklahoma law, frustration of purpose is not grounds for rescission of a contract. This argument is spurious. While 15 Okla. Stat. § 233 (1966) does not specifically mention frustration of purpose as one of the statutory grounds for rescission, the Oklahoma Supreme Court has held:

Rescission or cancellation of a contract may be ordered where that which was undertaken to be performed in the future was so essential a part of the bargain that the failure of it must be considered as destroying or vitiating the entire consideration of the contract, or so indispensable a part of what the parties intended that the contract would not have been made with that condition omitted.

Wright v. Fenstermacher, 270 P.2d 625, 627 (Okla. 1954) (quoting Davis v. Hastings, 261 P.2d 193 (Okla. 1953)). Thus frustration constitutes a failure of consideration and is therefore within the statutory grounds for rescission enumerated in 15 Okla. Stat. § 233.

Defendants also contend that, even if frustration is a ground for rescission in Oklahoma, the trial court's finding that frustration occurred was clearly erroneous. In support of this contention defendants argue that the transaction was merely a sale of goods and was therefore totally completed prior to the death of plaintiff's decedent. The evidence presented at trial, however, persuasively demonstrated otherwise. The transaction itself was memorialized on a document describing it as a "distributorship agreement." In addition, the jury listened to tapes of telephone conversations in which the decedent was told that if he failed to obtain the needed $50,000 within a short period of time, there was a good chance that the distributorship would be given to another. In addition, numerous memoranda between the parties indicate that plaintiff's decedent was greatly concerned with his ability to market the defendants' goods and with the effectiveness of defendants' help in developing a profitable market for the distributorship. All this evidence belies defendants' assertion that the transaction involved was nothing but a sale of goods. Since the transaction was not a sale of goods but truly a distributorship agreement, the court's instruction to the jury regarding frustration and the jury's determination thereon are both supported by the law and the facts in this case. Therefore, the district court's decision with respect to rescission is affirmed.

II. Fraud

Plaintiff's argument that the defendants were guilty of fraud relied principally on two alleged misrepresentations by the defendants. The first was the statement on an envelope in which the distributorship agreement materials were mailed to the plaintiff's decedent that the defendants were suppliers of security equipment to the U.S. Olympics. The second was defendants' representations that they had a good reputation and particularly that they were highly respected by police departments. Plaintiff asserted that both of these representations were false. The evidence showed that defendants were not suppliers of security equipment to the U.S. Olympics and that defendants were guilty of several violations of the law that would tend to blemish their reputation with law enforcement personnel. Defendants argue that the assertion that the defendants had a good reputation with law enforcement officials was merely a matter of opinion and therefore could not form the basis of a fraud claim and that plaintiffs failed to show that plaintiff's decedent relied upon the assertion that defendants were suppliers to the U.S. Olympics. It is doubtful that these arguments would be sufficient to support the district court's directed verdict even were these misrepresentations the only evidence of fraud that plaintiff produced. Plaintiff introduced other evidence of fraud, however, that makes it clear that a directed verdict was improper.

The evidence clearly established that plaintiff's decedent was interested in establishing a successful distributorship. The jury listened to tape-recorded telephone conversations between representatives of the defendants and the plaintiff's decedent in which the defendants assured the plaintiff's decedent that a viable distributorship could be operated in the Oklahoma City area and that the defendants would participate with plaintiff's decedent in the establishment of such a distributorship. One of defendants' own employees testified that there was no real expectation within defendants' organization that a distributorship would be successful and continue, and that one of defendants' top executives had stated on more than one occasion that none of the distributors could possibly be successful. Given this evidence, a jury could have concluded that defendants had represented to plaintiff's decedent that he was purchasing a ...

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