Garlock Sealing Technologies, LLC v. Nak Sealing Technologies Corp.

Based on the specifications and information provided by Garlock in RA-37, Mao Shun prepared the technical drawings for the seals. Mao Shun created a new mold for a step case radial lip-type oil seal based on Garlock’s specifications and sent Garlock samples of the newly configured step case seal, including a slab of the brown viton compound from which the seals were to be made. Garlock maintains three testing facilities onsite: a chemical testing lab; a physical testing lab; and a functional testing lab. The functional testing lab can be used to duplicate the circumstances under which an oil seal is used in the field to check its performance. Garlock tested the Mao Shun samples for purposes of ensuring they were the proper configuration, dimension, and otherwise met specification requirements. Garlock did the normal tests designated by the American Society for Testing and Materials (ASTM) to check the basic physical properties of the rubber brown viton compound. The seals met specifications and passed the standard ASTM tests. Garlock did not do any functional testing of the samples. Although Garlock would normally do functional testing for a newly configured component with a new compound, Garlock considered these seals to be a standard design configuration not made with a new compound. The seals were not something on which Garlock felt compelled to do functional testing. Garlock had no reason to suspect Mao Shun’s brown viton seals contained abrasives.

Mao Shun manufactured the new step case seals with its brown viton compound molded around a steel insert. The raw viton material used by Mao Shun for these seals was provided to Mao Shun by a Taiwanese distributor for DuPont. Mao Shun then combined the viton with several fillers, pigment, processing agents and livening agents to make the compound material for the seals according to its own formula. The pigment was a red oxidized iron powder supplied by a distributor for Bayer Corporation, a reputable supplier of pigment. Mao Shun ordered Bayer’s grade 225 iron oxide. In 1998 Mao Shun’s purchasing specifications for the pigment did not include anything regarding particle size. Mao Shun did not test for particle size or sift the pigment. However, Bayer provided an inspection report and certification of its materials to Mao Shun, which Mao Shun verified by standard testing.

In the fall of 1998 Garlock placed orders for the Mao Shun brown viton step case oil seals with Sunrise Trading. Depending on the delivery time requirements, Mao Shun either shipped the manufactured brown viton oil seals to Sunrise Trading by sea, or air freighted them directly to Garlock. Oil

In late 1997 Rockwell started using a brown viton oil seal manufactured by Mao Shun for one model of gear reducer that was having the most significant leak rate with the nitrile oil seals. Subsequently, Rockwell incorporated the brown viton seals into other models of its gear reducers. Rockwell sold its gear reducers with the brown viton oil seals to at least seven or eight original equipment manufacturers who incorporated them into conveyance systems for large distribution centers operated by, for example, Anheuser-Busch, Coke, Pepsi, and Wal-Mart. Also, if a Rockwell customer had a leaking nitrile seal, Rockwell replaced those seals with a brown viton seal. Garlock was Rockwell’s sole supplier of brown viton seals.

Vici Bushey, Rockwell’s warranty administrator, began noticing a trend of claims for gear reducers with brown viton seals that were leaking oil in late 1997 or early 1998. Rockwell referred the problem to its engineers and quality control people. Eventually, Rockwell experienced almost a 30 percent leak rate for the brown viton sealed units. This was considered a catastrophic leakage rate. Rockwell lost customers. When new business was bid, some companies specified Rockwell would not be accepted as a supplier.

William Pizzichil testified his principal duty when hired as Rockwell’s gear engineering manager in November 1998 was to solve the leakage problem. He visited many customer facilities and observed considerable oil leakage on many gear reducers. The gear reducers were brought back to Rockwell facilities, where engineers disassembled them for examination. The primary characteristic found was excessive damage or grooving to the rotating shaft in the gearbox. Grooving of the shaft can reduce the contact between the seal and the shaft resulting in oil leakage, possible oil carbonization, and eventual wear of the seal. If all of the oil in .the gearbox is lost, the gearbox will burn up. It was a very unusual failure. Some of the failures were occurring after only 150 hours (about six days) of operation.

Toward the end of 1998 Rockwell brought the problem to the attention of Garlock. Garlock contacted Sunrise Trading in December 1998 into January 1999 regarding the problem. Sunrise Trading immediately referred the matter to Mao Shun and told Garlock to speak directly with Mao Shun.

Garlock took samples of Mao Shun’s brown viton, the brown viton oil seals, and samples of green and black viton to McCrone Associates, Inc., for scanning electron microscopy and X-ray diffraction analysis. The laboratory analysis found the only material present in any of the samples that could cause the damaged steel shafts was large iron oxide particles with smooth faces and sharp edges found in Mao Shun’s brown viton sample and seals. The material was determined to be magnetite, a very hard and potentially abrasive substance. A test of magnetite by Garlock showed it scratched glass. The presence of particles of abrasive magnetite at the lip edge of the oil seal would account for the grooving of the steel shaft in the gear reducer. The presence of abrasive material resulted in defective seals. Garlock’s expert, Leslie Horve, stated one of the purposes of oil seals is to prevent premature oil leakage and when a seal experiences premature leakage it has not performed its intended purpose and has failed.

Horve testified if Mao Shun had run a dispersion test on its batches of brown viton, Mao Shun may have been able to identify the problem particles in the compound. Mao Shun did not run dispersion tests on its compound in 1998 and 1999.

Garlock questioned Mao Shun as to whether the problem could be a bad batch of brown viton. When Garlock did not get information from Mao Shun that it was a bad batch, Garlock believed the only safe conclusion was that all of the brown viton seals were bad.

On October 4, 2002, Garlock filed this action against Mao Shun and Sunrise Trading for declaratory relief regarding implied equitable indemnity, breach of express warranties, breach of implied warranties, breach of contract, and breach of the implied covenant of good faith and fair dealing. Mao Shun and Sunrise Trading each filed cross-complaints against each other.

After a court trial, the trial court concluded, among other things, that Sunrise Trading was acting as Mao Shun’s agent in consummating the brown viton sales transactions with Garlock and that Mao Shun breached the implied warranty of merchantability. The court awarded Garlock damages of $1,870,424 in lost profits, consequential and incidental damages, plus interest and costs of suit against Mao Shun. It denied Oarlock’s claim of equitable indemnity against Mao Shun. The trial court ordered Garlock take nothing by its complaint against Sunrise Trading and awarded Sunrise Trading its costs of suit against Garlock. The trial court ordered Mao Shun take nothing by its cross-complaint against Sunrise Trading and awarded Sunrise Trading on its cross-complaint against Mao Shun its legal costs, expenses and fees incurred in defending Garlock’s action.

DISCUSSION

MAO SHUN’S APPEAL

The Implied Warranty of Merchantability Does Apply to This Case

Mao Shun argues the implied warranty of merchantability is inapplicable to this case for two reasons. First, according to Mao Shun, such implied warranty is inconsistent with the trial court’s finding of fact and conclusion of law that Mao Shun manufactured the brown viton oil seals in compliance

Where the appellant challenges the sufficiency of the evidence, the reviewing court starts with the presumption that the record contains evidence sufficient to support the judgment; it is the appellant’s affirmative burden to demonstrate otherwise. (Foreman & Clark Corp. v. Fallon (1971) 3 Cal.3d 875 , 881 [ 92 Cal.Rptr. 162 , 479 P.2d 362 ] (Foreman & Clark)] Baxter Healthcare Corp. v. Denton (2004) 120 Cal.App.4th 333 , 368 [ 15 Cal.Rptr.3d 430 ].) The appellant’s brief must set forth all of the material evidence bearing on the issue, not merely the evidence favorable to the appellant, and must show how the evidence does not sustain the challenged finding. (Foreman & Clark, supra, at p. 881; Baxter Healthcare Corp. v. Denton, supra, at p. 368.) If the appellant fails to set forth all of the material evidence, its claim of insufficiency of the evidence is forfeited. (Foreman & Clark, supra, at p. 881; Road Sprinkler Fitters Local Union No. 669 v. G & G Fire Sprinklers, Inc. (2002) 102 Cal.App.4th 765 , 782 [ 125 Cal.Rptr.2d 804 ].)

Furthermore, “[i]n reviewing the sufficiency of the evidence, we must consider all of the evidence in the light most favorable to the prevailing party, accept as true all the evidence and reasonable inferences therefrom that tend to establish the correctness of the trial court’s findings and decision, and resolve every conflict in favor of the judgment. (Howard v. Owens Corning (1999) 72 Cal.App.4th 621 , 630-631 [ 85 Cal.Rptr.2d 386 ].) ‘It is not our task to weigh conflicts and disputes in the evidence; that is the province of the trier of fact. Our authority begins and ends with a determination as to whether, on the entire record, there is any substantial evidence, contradicted or uncontradicted, in support of the judgment.’ (Ibid.)” (Baxter Healthcare Corp. v. Denton, supra, 120 Cal.App.4th at p. 369, italics omitted.)

Mao Shun fails to set forth all of the material evidence relevant to the question of whether Garlock should have discovered the latent problem with the abrasiveness of the oil seal lips. Indeed, Mao Shun not only cites just the evidence in its favor, it takes much of such evidence out of context, thereby misrepresenting the actual substance of the testimony. For example, Mao Shun claims Rockwell’s gear engineering manager Pizzichil testified, “functional testing should always be done when determining the applicability of an

We are required, however, to “ ‘start[] with the presumption that the record contains evidence to sustain every finding of fact.’ [Citations.]” (Foreman & Clark, supra, 3 Cal.3d at p. 881.) And indeed, in this case it does. As the trial court noted, “[i]f . . . goods contain an impurity of such a nature as to render them unusable, and therefore unsaleable, for the general uses and purposes of goods of the kind described, the goods are not merchantable.” (Burr v. Sherwin Williams Co. (1954) 42 Cal.2d 682 , 694 [ 268 P.2d 1041 ].) The goods must be “fit for the ordinary purposes for which such goods are used.” (§ 2314, subd. (2)(c).) Evidence was submitted at trial that the selection of a radial lip-type oil seal made from viton was an appropriate selection for the gearbox application of Rockwell based on consideration of shaft speed, size compatibility, and heat tolerance. The operating conditions for Rockwell’s use of the seals were not unusual or excessive for viton seals. It was a typical application, even if specially designed for Rockwell. A viton polymer properly formulated should have been able to handle the application easily. However, almost 30 percent of the Mao Shun brown viton radial lip-type oil seals leaked. This was considered a catastrophic leakage rate in the industry. Garlock’s expert, Leslie Horve, stated that one of the purposes of oil seals is to prevent premature oil leakage and when a seal experiences premature leakage it has not performed its intended purpose and has failed. When Rockwell replaced all brown viton seals with green viton seals, the leakage rate immediately went down to 1 or 2 percent and there was no shaft grooving.

The trial court’s conclusion that Mao Shun breached the implied warranty of merchantability was supported by both substantial evidence and its express findings of fact.

The Trial Court’s Award of Damages for the Breach of the Implied Warranty of Merchantability

The trial court awarded consequential damages to Garlock, concluding “[t]he type of damage caused to Rockwell’s products by Mao Shun’s seals,

Mao Shun attacks the trial court’s award to Garlock of consequential damages and contends Garlock obtained the standard remedy for breach of a warranty when prior to any litigation Mao Shun provided replacement seals at no charge. Mao Shun also contends the award of additional consequential damages under section 2715, subdivision (2), was not proper as the damages were not reasonably foreseeable, were not supported by substantial evidence, and included damages related to oil seals purchased outside the statute of limitations period and used after Garlock had actual notice of the alleged defect. We consider each of these claims in turn.

A. Reasonable Foreseeability of Consequential Damages

Section 2714, subdivision (2) (buyer’s damages for breach in regard to accepted goods), provides: “The measure of damages for breach of warranty is the difference at the time and place of acceptance between the value of the goods accepted and the value they would have had if they had been as warranted, unless special circumstances show proximate damages of a different amount.” (Italics added.) “Consequential damages resulting from the seller’s breach include [][] (a) Any loss resulting from general or particular requirements and needs of which the seller at the time of contracting had reason to know and which could not reasonably be prevented by cover or otherwise; and [f] (b) Injury to person or property proximately resulting from any breach of warranty.” (§ 2715, subd. (2) [buyer’s incidental and consequential damages].)

Mao Shun contends Garlock received the value of the goods as warranted when it provided replacements for the brown viton seals without charge (§ 2714, subd. (2)) and that any further consequential damages for the cost to replace complete gear reducers were not reasonably foreseeable by Mao Shun. (§ 2715, subd. (2)(a).)

Garlock contends, however, substantial evidence supports the award of consequential damages under section 2715, subdivision (2)(b), for damages from injury to property proximately resulting from Mao Shun’s breach of warranty and suggests Mao Shun’s foreseeability arguments should be considered under the rubric of whether Mao Shun has shown “these other alleged ‘superseding causes’ eliminate its liability as a matter of law.” (See Brewer v. Teano (1995) 40 Cal.App.4th 1024 , 1030-1031 [ 47 Cal.Rptr.2d 348 ] [considering the interplay of the rules of intervening and superseding causes in the

Mao Shun does not provide any legal analysis in its briefs of section 2715, subdivision (2)(b), does not address Garlock’s claim that the evidence established Mao Shun’s brown viton oil seals were a substantial factor in damaging, i.e., proximately causing the damage to, Rockwell’s gear reducer shafts, and does not address Garlock’s analysis of its foreseeability arguments as “superseding causes.”

Mao Shun complains Garlock had knowledge of leakage problems as early as 1997 and that it was not reasonably foreseeable Garlock would fail to disclose this information to Sunrise Trading or Mao Shun and would continue to sell brown viton oil seals to Rockwell when it knew they were failing. Mao Shun contends: (1) it was not reasonably foreseeable it would be responsible for an alleged defect when it manufactured the seals in compliance with the RA-37 specification; (2) it was not reasonably foreseeable Garlock would fail to do appropriate testing of the seals; (3) it was not reasonably foreseeable Garlock would continue to use the seals when it knew they were not working in the Rockwell applications; (4) it was not reasonably foreseeable the failure of a $1 oil seal would lead to replacement of a $400 gear reducer given the lack of any prior complaints or concerns about the abrasiveness of Mao Shun’s seals; and, (5) it was not reasonably foreseeable Garlock would include broad express warranties in its contract with Rockwell and then try to attempt to hold Mao Shun responsible for damages stemming from those obligations.

We need not consider Garlock’s claim that damages were properly awarded under section 2715, subdivision (2)(b), nor whether superseding cause analysis is applicable in this contractual breach of warranty, setting because we conclude Mao Shun has not met its burden to show substantial evidence does not support the trial court’s finding of reasonable foreseeability. Mao Shun has not shown the award of consequential damages under section 2715, subdivision (2)(a), was improper.

Under section 2715, subdivision (2)(a), consequential damages include any loss “resulting from general or particular requirements and needs of which the seller at the time of contracting had reason to know and which could not reasonably be prevented by cover or otherwise.” (Italics added.)

“ ‘It is often said that damages must be “foreseeable” to be recoverable for breach of contract. The seminal case announcing this doctrine, still generally accepted as a limitation on damages recoverable for breach of

Again we note, although the issue raised by Mao Shun involves an application of the substantial evidence standard, Mao Shun has failed to summarize all the material evidence and argue how it fails to support the trial' court’s decision. Mao Shun does not show it should not have been expected to know Garlock would be exposed to loss, through Rockwell’s complaints and demands for replacement costs of the damaged gearboxes, if the brown viton seals sold by Mao Shun were unmerchantable because of the abrasiveness of the pigment. Mao Shun does not show how it was unreasonable to expect it to know of Garlock’s exposure to loss—it simply argues its view of the evidence.

Thus, Mao Shun complains Garlock had knowledge of leakage problems as early as 1997 and that it was not reasonably foreseeable Garlock would fail to disclose this information to Sunrise Trading or Mao Shun and would continue to sell brown viton oil seals to Rockwell when it knew they were failing. Actually, the evidence shows Garlock had knowledge of the nitrile oil seals leaking in 1997 and may have had some knowledge of a. small number of gear reducer units with brown viton oil seals leaking by the second quarter of 1998, but there is no evidence Garlock knew the cause of the leakage problems or that it continued to sell the seals to Rockwell after it knew the cause of the leakage problem and had an available alternative. In fact, Mao Shun’s argument really goes to whether Garlock could have prevented or limited the loss, but, as we have already discussed, substantial evidence supports the trial court’s finding that the abrasiveness of the oil seal lips was not a defect that Garlock ought to have discovered in 1997 or 1998. There was evidence that Garlock continued to sell Rockwell the brown viton seals once it was known they were defective only because there was no other available material for the seals and Rockwell still needed to meet its

Mao Shun’s arguments that it was not reasonably foreseeable it would be responsible for an alleged defect when it manufactured the seals in compliance with the RA-37 specification and that it was not reasonably foreseeable Garlock would fail to do appropriate testing are a reprise of its claims that it should not be responsible for an implied warranty of merchantability in this case. These arguments do not establish Mao Shun could not have reasonably foreseen Garlock’s loss if it breached the warranty of merchantability.

Mao Shun claims it was not reasonably foreseeable the failure of a $1 oil seal would lead to replacement of a $400 gear reducer given the lack of any prior complaints or concerns about the abrasiveness of Mao Shun’s seals. On the contrary, as a longtime manufacturer of oil seals, Mao Shun should have known a radial lip-type oil seal is intended to ride on a rotating shaft so as to seal lubrication in and contaminants out. Thus, it would have understood the seal could not be used without being incorporated into other machinery, which could be damaged and require replacement if the seal abraded the shaft on which it was set. The lack of prior complaints or concerns about the abrasiveness of its seals is evidence Mao Shun did not have prior actual knowledge of the abrasiveness of its brown viton seals. However, the lack of prior complaints and the lack of prior actual knowledge of the abrasiveness of the brown viton seal does not establish Mao Shun did not have reason to know at the time of contracting that its oil seals should not include abrasive materials and that if they did, substantial property damage to the equipment in which they were installed could follow.

Finally, Mao Shun argues it was not reasonably foreseeable Garlock would include broad express warranties in its contract with Rockwell and then try to attempt to hold Mao Shun responsible for damages stemming from those obligations. It is true Rockwell’s purchase order to Garlock contained express, as well as implied, seller warranties, but the existence of warranties in the Garlock/Rockwell contract beyond the implied warranty of merchantability did not make the Mao Shun brown viton oil seals any less defective and more merchantable. Based solely on the abrasiveness of the brown viton oil seal Mao Shun manufactured which Garlock supplied to Rockwell, Garlock breached the implied warranty of merchantability it gave to Rockwell and no resort to any further or additional warranties would have been necessary for Garlock to have been liable to Rockwell in the federal lawsuit for the damages caused by its breach.

The trial court concluded Garlock had proved recoverable consequential damages in the amount of $1,678,267. The statement of decision explains how the court arrived at this figure as follows: “Garlock demonstrated that there existed a high probability that Rockwell would recover $2,176,556.00 in damages against Garlock for the Mao Shun seal failure. This figure is composed of $1,892,882.00 ‘costs of replacement’ (not including Rockwell’s airfare, travel, ‘other’ labor, lost profits, or attorney’s fees), and interest upon that amount at 10% for a period of 18 months in the amount of $283,673.00. This figure constitutes 73.79% of the total figure of $2,949,418.00 which was characterized by Garlock as the ‘high probability’ Rockwell damage risk, a figure used by Garlock to calculate its ultimate settlement with Rockwell. Garlock paid Rockwell $2,274,383.00 to settle the parties’ dispute (the court values the product discounts, incurred or anticipated, at $74,383.00). The sum of $1,678,267.00 represents the percentage of Oarlock’s actual settlement payment that corresponds to the portion of Rockwell’s damages, the recovery of which was highly probable and sufficiently established by the evidence at trial.” (Capitalization omitted.)

The trial court’s figures are drawn directly from exhibit H to the damages summary prepared by James Skorheim, Oarlock’s accounting expert, who testified at trial regarding Garlock’s economic losses from its dispute with Rockwell regarding the defects in the brown viton seals produced by Mao Shun. The figures are fully supported by Skorheim’s testimony and supporting documentation to his summary.

Nevertheless, Mao Shun claims on appeal the award of damages is not supported by substantial evidence. Mao Shun contends the “trial court’s calculation of damages erroneously focuses on the reasonableness of Garlock’s settlement with Rockwell in light of the testimony of its expert [Skorheim] regarding the probability of incurring an adverse judgment at various monetary levels.” (Capitalization omitted.) Mao Shun claims this was legal error because the proper analysis is whether Garlock proved the damages were proximately caused by Mao Shun’s purported breach of the implied warranty of merchantability. Mao Shun claims Garlock did not meet this burden and there is not substantial evidence to support the award. Mao Shun claims the trial evidence is clear Garlock’s liability to Rockwell stemmed from the broad express warranty and separate indemnification provision in its contract with Rockwell.

Mao Shun’s argument is based on the flawed premise that Garlock’s liability to Rockwell was not based on Garlock’s [Mao Shun’s] breach of the implied warranty of merchantability. In fact, the evidence shows Skorheim

A. Factual Background

Dr. Ping-Chi Mao started Sunrise Trading as an import/export business in 1973. Initially he thought he would import gift items. He bought and imported wind chimes, but as he did not have any contacts for the sale of the chimes, he ended up trying to get rid of the chimes at Denio’s Sunday Market, a flea market in Roseville. It took him years to sell all of the chimes. After that experience, Mao gave up on purchasing and importing items to sell in the United States. He decided it would be better to provide service as an American agent for an Asian company.

In 1981, after Mao gave a speech for the Sacramento Chamber of Commerce regarding trade with Taiwan, he was contacted by Mao Shun. Mao met with Joseph Shek, the president of Mao Shun, and Jensen Chen, the general manager of Mao Shun. Shek and Chen told Mao they wanted to sell Mao Shun products in the United States and they needed an agent to find buyers and take care of the language problem. When Mao told them he had no knowledge of their products and could not buy their products, Shek and Chen assured him he did not need to worry. Mao Shun would be responsible for explaining their merchandise and would take care of all quality issues. Mao emphasized he had no knowledge of oil seals. He could only act as an agent, as a facilitator. Shek and Chen told Mao that Mao Shun would be 100 percent responsible for quality and liability. They just needed Mao to be their agent. Mao, Shek and Chen signed an agreement that day, written in Chinese, to set up their relationship. The agreement stated in part: “Ping-Chi Mao, of Sunrise Trading Company, will be the representative of Mao Shun in the United States. The responsibility for Sunrise Trading Company is to help promote the merchandise . . . produced by Mao Shun Company and help to secure the orders and ship and merchandise will be directly shipped out from Mao Shun.” The same word is used in Chinese for “agent” or “representative.” The agreement provided for Mao Shun to pay Sunrise Trading a base 5 percent commission for its sales.

After signing the agreement, Sunrise Trading sent out promotional fliers for Mao Shun products. Garlock subsequently contacted Sunrise Trading regarding purchasing Mao Shun oil seals. A Garlock representative came to Sacramento to meet with Mao and Mao’s assistant, April Chi. Following that meeting, Mao set up a meeting between Shek and Chen of Mao Shun and Garlock representatives at Garlock’s offices in New York state. At that meeting in New York, Mao explained Sunrise Trading was the agent for Mao Shun.

Cook was the person from Garlock having personal contact with Sunrise Trading and Mao Shun until 1988, when he changed positions. Cook testified the only written contracts between Garlock and Mao Shun were the purchase orders. Each purchase order would govern the material in that order.

Sunrise Trading and Mao Shun operated under their original agreement without any amendment between 1981 and 1986. In 1986, Cook talked to Chi about Garlock increasing its volume of orders from Mao Shun. Garlock wanted to stop using expensive air freight and use ocean shipping. Cook asked Sunrise Trading if they would be able to assist. Chi discussed the proposed change in shipping with either Shek or Chen. To use ocean shipping, Sunrise Trading had to pick up the products from Oakland, pay the customs charges, and arrange for a freight forwarder. Mao Shun authorized Sunrise Trading to add an additional percentage to the product price to cover Sunrise Trading’s additional costs. The total standard markup became 28 percent. It was agreed Sunrise Trading could start taking shipments into the United States for Garlock.

Mao Shun never told Chi the change in procedure made Sunrise Trading the seller of the oil seals. There was no new agreement written between Sunrise Trading and Mao Shun. Mao testified Sunrise Trading and Mao Shun were still operating under the 1981 agreement except for an oral understanding that there was a change in Sunrise Trading’s compensation. Mao understood Sunrise Trading was still acting as the representative of Mao Shun. There was simply a change in the process to save Garlock costs made at the request of both Garlock and Mao Shun. Mao Shun would ship to Sunrise Trading, who would receive the product, clear customs and then ship it to Garlock. According to Chi, the purpose of the change was administrative efficiency.

Darin Thibideau' was in charge of day-to-day operations for Sunrise Trading in 1997, 1998 and 1999. He was told when he was hired that the nature of Sunrise Trading’s work was managing the flow of communications and products between Mao Shun and its customers in the United States. Thibideau understood Sunrise Trading was acting as an agent for Mao Shun. No one with Mao Shun ever told him Mao Shun considered Garlock to be Sunrise Trading’s customer.

. Thibideau testified Sunrise Trading never offered warranties or limitations on Mao Shun products because Mao Shun, not Sunrise Trading, was the warrantor. When a common warranty question arose, he would communicate it to Mao Shun and await their instructions.

Joseph Shek, president, of Mao Shun, testified Mao Shun’s agreement with Sunrise Trading changed in 1986 or 1987. Before such change, Sunrise Trading was compensated on a commission basis. After the change, the parties dealt on a quoting basis, i.e., Mao Shun would give a quote and Sunrise Trading' would place an order. Sunrise Trading would ship the products and Mao Shun would receive payment from Sunrise Trading. After the change in the agreement, Mao Shun always sold directly to Sunrise Trading. After the change Mao Shun did not have an agreement with Sunrise Trading that limited who Sunrise Trading could buy seals from or whom they could sell them to in the United States. Mao Shun did not know the price Sunrise Trading charged for the seals. Shek had never authorized anyone at Sunrise Trading to enter into an agreement on behalf of Mao Shun.

B. Actual Agency

“ ‘The essential characteristics of an agency relationship as laid out in the Restatement are as follows: (1) An agent or apparent agent holds a power to alter the legal relations between the principal and third persons and between the principal and himself; (2) an agent is a fiduciary with respect to matters within the scope of the agency; and (3) a principal has the right to control the conduct of the agent with respect to matters entrusted to him. [Citation.]’ (Alvarez v. Felker Mfg. Co. (1964) 230 Cal.App.2d 987 , 999 [ 41 Cal.Rptr. 514 ]; see also Civ. Code, § 2295 [‘An agent is one who represents another, called the principal, in dealings with, third persons’].)” (Lewis v. Superior Court (1994) 30 Cal.App.4th 1850 , 1868-1869 [ 37 Cal.Rptr.2d 63 ].)

After noting this law, the trial court considered eight factors relevant to determining whether a company that receives goods for resale is an agent or buyer of the manufacturer. The eight factors were “whether the company: (1) obtains legal title and possession of the goods; (2) deals with the purchaser of the goods in its own name and does not disclose that the goods are those of another; (3) bears the risk of accident or casualty to the goods; (4) can fix the price at which it sells the goods without accounting to the manufacturer for the difference between what it obtains and the price it pays; (5) has the right to purchase goods of another manufacturer; (6) must pay for the goods regardless of whether it can resell them; (7) receives a commission for its services in reselling the goods; and (8) is obligated to complete preparation or manufacture of the goods.” After considering the evidence in light of these factors, the trial court came to the conclusion the relationship between Mao Shun and Sunrise Trading was one of agency. According to the trial court, “the essential facts of the parties’ relationship demonstrate that [Sunrise Trading’s] duty was primarily to act for the benefit of Mao Shun, not itself, in its transactions with Garlock.” (Capitalization omitted.)

The existence of an agency relationship is a factual question for the trier of fact, whose determination must be affirmed on appeal if supported by substantial evidence. (Violette v. Shoup (1993) 16 Cal.App.4th 611 , 619 [ 20 Cal.Rptr.2d 358 ]; Inglewood Teachers Assn. v. Public Employment Relations Bd. (1991) 227 Cal.App.3d 767 , 780 [ 278 Cal.Rptr. 228 ]; Wickham v. Southland Corp., supra, 168 Cal.App.3d at p. 55.) “Only when the essential facts are not in conflict will an agency determination be made as a matter of law.” (Wickham v. Southland Corp., supra, at p. 55; see Violette v. Shoup, supra, at p. 619.)

Mao Shun contends the trial court incorrectly applied the law to the facts in concluding Sunrise Trading was entitled to indemnity because it was Mao Shun’s agent. Mao Shun claims the trial court gave undue weight to conduct that occurred prior to the 1986 modifications to the 1981 agreement. Mao Shun then reanalyzes the eight factors considered by the trial court in the

V.

Summary of Our Conclusions on Mao Shun’s Appeal

We conclude Mao Shun’s sale of the brown viton radial lip-type oil seals in this case included an implied warranty of merchantability. The trial court’s conclusion that Mao Shun breached the implied warranty of merchantability is supported by both substantial evidence and the trial court’s express findings of fact. We reject each of Mao Shun’s claims regarding the trial court’s award of consequential damages. We conclude substantial evidence supports the trial court’s finding that Sunrise Trading was the actual agent of Mao Shun in the transactions with Garlock.

Based on these conclusions, we affirm the trial court’s judgment awarding Garlock damages for Mao Shun’s breach of the implied warranty of merchantability and ordering Mao Shun to indemnify Sunrise Trading for its costs of defending the Garlock action. We turn to Garlock’s appeal.

GARLOCK’S APPEAL

The Trial Court Erred in Limiting Implied Contractual Indemnity to Cases Involving a Negligent Breach of Contract

“Indemnity may be defined as the obligation resting on one party to make good a loss or damage another party has incurred.” (Rossmoor Sanitation, Inc. v. Pylon, Inc. (1975) 13 Cal.3d 622 , 628 [ 119 Cal.Rptr. 449 , 532 P.2d 97 ].) It arises from two sources: “First, it may arise by virtue of express contractual language establishing a duty in one party to save another harmless upon the occurrence of specified circumstances. Second, it may find its source in equitable considerations brought into play either by contractual language not specifically dealing with indemnification or by the equities of the particular case. [Citations.]” (E.L. White, Inc. v. City of Huntington Beach (1978) 21 Cal.3d 497 , 506-507 [ 146 Cal.Rptr. 614 , 579 P.2d 505 ]; see Bay Development, Ltd. v. Superior Court (1990) 50 Cal.3d 1012 , 1029 [ 269 Cal.Rptr. 720 , 791 P.2d 290 ] (Bay Development); see Rossmoor Sanitation, Inc. v. Pylon, Inc., supra, at p. 628.) Both the latter doctrines of implied indemnity “rest on the equities of the circumstances, i.e., tortfeasors

Relying primarily on language found in Bear Creek Planning Com. v. Title Ins. & Trust Co. (1985) 164 Cal.App.3d 1227 , 1237 [ 211 Cal.Rptr. 172 ] (Bear Creek), disapproved on other grounds in Bay Development, supra, 50 Cal.3d 1012 , 1032 and footnote 12, to the effect that a contractual obligation ‘carries with it an implied agreement to indemnify and to discharge foreseeable . . . damages resulting to the plaintiff [indemnitee] from the defendants’ [indemnitor’s] negligent performance’ ” (italics changed by the trial court), the trial court in this case determined implied contractual indemnity is only available when the indemnitee proves the indemnitor failed “to use reasonable care in performing its contractual duties owing to plaintiff, and that failure of care was a substantial factor in causing the damages for which the plaintiff seeks indemnification.” The trial court concluded Garlock had proved Mao Shun had breached the warranty of merchantability, but had not proved Mao Shun’s breach was the result of its failure to use reasonable care in performing its contractual duties. Therefore, the trial court concluded Mao Shun was not liable to Garlock for implied contractual indemnity. Garlock contends the trial court’s limitation of the doctrine of implied contractual indemnity to negligent breaches of contract was error. We agree.

It is important to understand some of the historical context of California’s recognition of implied contractual indemnity.

The doctrine’s first clear recognition in California came in the case of S. F. Unified Sch. Dist. v. Cal. Bldg. etc. Co. (1958) 162 Cal.App.2d 434 , 449 [ 328 P.2d 785 ] (S. F. Unified Sch. Dist.). (Montgomery Ward & Co. v. KPIX Westinghouse Broadcasting Co. (1962) 198 Cal.App.2d 759 , 762 [ 18 Cal.Rptr. 341 ].) In S. F. Unified Sch. Dist., the defendant maintenance company had a contract to wash the windows of the plaintiff district’s high schools. The contract required that, “ ‘In all schools that have Hauser window sashes, stepladders must be used from inside’ ” and “ ‘the Contractor is held responsible for payment of any and all damages resulting from his operations.’ ” (162 Cal.App.2d at p. 437.) An employee of the maintenance company was injured while washing a Hauser-type window while not using a stepladder. {Id. at pp. 437-438.) The injured employee sued the school district on the ground it

The court in S. F. Unified Sch. Dist., supra, 162 Cal.App.2d 434 , 442, found persuasive authority for its conclusion in two United States Supreme Court cases, Ryan Co. v. Pan-Atlantic Corp. (1956) 350 U.S. 124 [ 100 L.Ed. 133 , 76 S.Ct. 232 ] (Ryan) and Weyerhaeuser S.S. Co. v. Nacirema Co. (1958) 355 U.S. 563 [ 2 L.Ed.2d 491 , 78 S.Ct. 438 ] (Weyerhaeuser). In both Ryan and Weyerhaeuser the United States Supreme Court held a shipowner could claim implied contractual indemnity against a stevedoring company whose employees had recovered a judgment against the shipowner for injuries sustained while unloading a ship. The cases held the stevedoring company could be liable for reimbursement to the shipowner where the injuries to the longshoreman resulted from the unsafe stowage of cargo (in Ryan) and an unsafe winch shelter erected by the stevedoring company (in Weyerhaeuser). (Ryan, supra, 350 U.S. at p. 125 [100 L.Ed. at pp. 137-138]; Weyerhaeuser, supra, 355 U.S. at p. 566 [2 L.Ed.2d at p. 493].) Citing to Ryan the Supreme Court in Weyerhaeuser stated that “[w]hile the stevedoring contract contained no express indemnity clause, it obligated respondent ‘to faithfully furnish such stevedoring services as may be required,’ and to provide all necessary labor and supervision for ‘the proper and efficient conduct of the work.’ As this Court said in Ryan Stevedoring Co. v. Pan-Atlantic S. S. Corp., supra, such language constitutes ‘a contractual undertaking to [perform] “with reasonable safety,” ’ 350 U.S., at 130 , and to discharge ‘foreseeable damages resulting to the shipowner from the contractor’s improper performance.’ 350 U.S., at 129 , footnote 3.” (Weyerhaeuser, supra, at p. 565 [2 L.Ed.2d at p. 493], fn. omitted.)

Following S. F. Unified Sch. Dist., supra, 162 Cal.App.2d 434 , the First District Court of Appeal, in Alisal Sanitary Dist. v. Kennedy (1960) 180 Cal.App.2d 69 [ 4 Cal.Rptr. 379 ], concluded the plaintiff had stated a cause of action for indemnity where the complaint alleged in substance the plaintiff engaged the defendants to do engineering work for which the defendants represented themselves to be skilled specialists, that the work was negligently done, and such negligence caused personal injuries for which the plaintiff was obliged to pay damages. (Id. at p. 79.) The court stated, “The gist of the

In Montgomery Ward & Co. v. KPIX Westinghouse Broadcasting Co., supra, 198 Cal.App.2d 759 , the complaint alleged the defendant, pursuant to a contract, originated a telecast from the plaintiff’s premises, had exclusive control and supervision over the technicians, employees and equipment involved in the telecast, and had negligently performed the accompanying duty and obligation to ensure the work was performed in a safe and careful manner, under appropriate supervision and in a safe place to work, which resulted in an employee of the defendant being injured while working on the telecast. The complaint alleged the injured employee had sued the plaintiff and that the plaintiff had entered into a reasonable settlement with the employee. The complaint sought indemnification from the defendant. (Id. at p. 760.) According to the appellate court, these allegations stated a cause of action for implied contractual indemnity, which “arises out of the relationship of the parties, their agreement, and the alleged negligent conduct on the part of the defendant.” (Id. at p. 761.)

In Great Western Furniture Co. v. Porter Corp. (1965) 238 Cal.App.2d 502 [ 48 Cal.Rptr. 76 ] (Great Western), the plaintiff entered into a contract with the defendant to install, manage and supervise a “Thrift Club” in its stores. The defendant was. to employ, manage and supervise the personnel. (Id. at p. 504.) One of the employees hired by the defendant assaulted a customer, who filed an action against the plaintiff and the defendant. (Id. at pp. 505-506.) Summary judgment was granted to the defendant. The plaintiff then settled with the customer and filed an action for declaratory relief and indemnity against defendant. (Id. at pp. 504, 506-507.) The appellate court affirmed the trial court’s award of implied contractual indemnity based on the defendant’s negligent management of its employee. (Id. at pp. 508, 521.) In the course of its discussion on appeal, the appellate court stated: “where the right of implied indemnity arises from a contractual relationship between the indemnitor and the indemnitee, it is predicated upon the indemnitor’s breach of such contract, the rationale of the cases being that a contract under which the indemnitor undertook to do work or perform services necessarily implied an obligation to do the work involved in a proper manner and to discharge forseeable [frc] damages resulting from improper performance absent any participation by the indemnitee in the wrongful act precluding recovery. [Citations.]” (Id. at p. 517.)

Distinguishing the equitable indemnity doctrine applicable between joint tortfeasors from implied contractual indemnity, this court referred to the language of Great Western quoted ante and then stated (the language relied on the trial court here): “In short, implied contractual indemnity is based upon the premise that a contractual obligation to perform ‘carries with it an implied agreement to indemnify and to discharge foreseeable . . . damages resulting to the plaintiff [indemnitee] from the defendants’ [indemnitor’s] negligent performance.’ ” (Bear Creek, supra, 164 Cal.App.3d at p. 1237, quoting Alisal Sanitary Dist. v. Kennedy, supra, 180 Cal.App.2d 69 , 79, italics added in Bear Creek.) As additional authority this court cited a number of the cases we have just reviewed here. (Bear Creek, supra, at p. 1237, citing Ryan, supra, 350 U.S. 124 , 129-132 [ 100 L.Ed. 133 , 139-141]; Weyerhaeuser, supra, 355 U.S. 563 , 565-567 [ 2 L.Ed.2d 491 , 493-494]; S. F. Unified Sch. Dist., supra, 162 Cal.App.2d 434 , 444-449; Montgomery Ward & Co. v. KPIX Westinghouse Broadcasting Co., supra, 198 Cal.App.2d 759 , 762.) However, the opinion goes on to later emphasize, “An action for implied contractual indemnity is not a claim for contribution from a joint tortfeasor; it is not founded upon a tort or upon any duty which the indemnitor owes to the injured third party. It is grounded upon the indemnitor’s breach of duty owing to the indemnitee to properly perform its contractual duties.” (Bear Creek, supra, at pp. 1238-1239, original italics.) Of note, it does not appear from the Bear Creek opinion that the trial court made a finding the title insurer had been negligent in failing to record the CC & R’s, only that it had breached the contract in failing to do so. The breach of contract was the trigger for the contractual indemnity, which this court affirmed. (Id. at pp. 1240-1241, 1250.)

In West v. Superior Court, supra, 27 Cal.App.4th 1625 , buyers sued the sellers and real estate brokers who sold a damaged house to them. (Id. at pp. 1628-1629.) Sellers cross-complained against the brokers for equitable indemnity and implied contractual indemnity. The trial court dismissed the cross-complaint based on the statute of limitations and granted a motion for good faith settlement determination between the buyers and the brokers. (Id. at pp. 1629-1630.) The appellate court concluded the trial court erred and issued a writ of mandate vacating the trial court’s order. (Id. at p. 1637.) Although the issues before the reviewing court were the statute of limitations and good faith settlement motion, it is interesting to note the court’s discussion of the implied contractual indemnity cause of action. The appellate court discusses it in terms of the brokers’ failure to “fully perform” or “properly perform” their contractual obligations and responsibilities in connection with the sale. There is no mention of negligent performance as a requirement. (Id. at pp. 1632-1633.)

The case of Sehulster Tunnels/Pre-Con v. Traylor Brothers, Inc./Obayashi Corp., supra, 111 Cal.App.4th 1328 , involved a cost overrun dispute regarding construction of a tunnel under the Pacific Ocean to discharge treated sewage into the sea. (Id. at p. 1331.) Ultimately the appellate court determined there could be no implied contractual indemnity in favor of the general contractor against the City of San Diego because the city had not breached their contract. (Id. at pp. 1345-1346, 1351.) However, it is again interesting that the court’s summary of implied contractual indemnity states' that the doctrine is based on the indemnitor’s breach of contract, i.e., its failure to properly perform its contractual responsibilities. (Id. at p; 1351.) There is no mention of any negligence on the part of the alleged indemnitor.

In Bay Development, supra, 50 Cal.3d 1012 , the California Supreme Court concluded implied contractual indemnity is a form of equitable indemnity, a claim of which is barred by a good faith settlement under Code of Civil Procedure section 877.6, subdivision (c). (Bay Development, supra, at pp. 1029-1033, 1035.) In a footnote the court observed the indemnity claim at issue rested on an alleged breach of an implied warranty in the contract for the sale of real property. (Id. at p. 1033, fn. 13.) The Supreme Court was not called upon, however, to discuss the nature of the alleged breach of such warranty, whether it was negligent or not.

As our review of the cases demonstrates, a duty to indemnify has been implied from the obligation of the contracting parties to perform their promises, the reasoning being that a promise to perform includes an implied promise to perform properly. Where the cases have factually involved a negligent failure to perform, it is not surprising the opinions contain language regarding the contracting party’s implied obligation to “carefully” perform or

DISPOSITION

The portion of the judgment denying Garlock’s claim for implied contractual indemnity is reversed. In all other respects, the judgment is affirmed. Sunrise Trading shall recover its costs on appeal. (Cal. Rules of Court, rule 8.276. ) Garlock shall recover its costs on appeal. (Cal. Rules of Court, rule 8.276. ) The matter is remanded to the trial court with directions to consider Garlock’s claim of implied contractual indemnity in light of the discussion in this opinion.

Raye, Acting R L, and Butz, J., concurred.

A petition for a rehearing was denied April 17, 2007, and the opinion was modified to read as printed above.