Appeal from the United States District Court for the Central District of California. DC No. CV-86-7051-WJR. William J. Rea, District Judge, Presiding.
Before: Brunetti, O'scannlain, and T. G. Nelson, Circuit Judges.
Thriftway Company ("Thriftway") was granted a declaratory judgment the effect of which was that Hawaiian Independent Refinery, Inc. ("HIRI") contribute towards the cost of a Department of Energy ("DOE") order which required Thriftway to refund improperly paid crude oil refining entitlement benefits.
HIRI alleges that the Hawaiian statute of limitations, or the limitation period in paragraph 4.4(d) of the processing agreement ("agreement") barred Thriftway from bringing this action. The district court found that paragraph 4.4(d) was ambiguous and heard testimony regarding the parties' intentions if the Federal Energy Administration ("FEA"), the predecessor of the DOE, were to bring an action against Thriftway for entitlements violations. Contract interpretation is a question of law. L.K. Comstock & Co. v. United Engineers and Constructors, Inc., 880 F.2d 219, 221 (9th Cir. 1989); Hanagami v. China Airlines, Ltd., 688 P.2d 1139, 1144 (Haw. 1984). However, the intent of the parties is a question of fact. Hanagami, 688 P.2d at 1144-45.
The district court was correct that the agreement is ambiguous. Paragraph 5.3 which requires Thriftway to indemnify HIRI conflicts with and makes ambiguous the meaning of paragraph 4.4(d) that Thriftway had the right to obtain refunds from HIRI if FEA took an action against Thriftway regarding the entitlements.
An ambiguity arises when a term of a contract is capable of being reasonably understood in more than one way. Airgo, Inc. v. Horizon Cargo Transport, Inc., 670 P.2d 1277, 1280 (Haw. 1983); Stewart v. Brennan, 748 P.2d 816, 821 (Haw. App. 1988). A court can then consider extrinsic evidence, surrounding circumstances, and the parties' subsequent conduct in construing an ambiguous contract. Stewart, 748 P.2d at 821. Paragraph 4.4(d) is reasonably capable of being understood in more than one way. Hence, it is ambiguous, and the district court properly concluded that the parties did not intend to limit Thriftway's rights if FEA instituted a refund action beyond the time limit contained in the second clause of paragraph 4.4(d).
Thriftway's action was timely within the limitation of Hawaiian Revised Statutes § 490:2-725(1) & (2). The action did not accrue until HIRI breached its contractual promise to refund Thriftway its share of the entitlements, paragraph 4.4(c), after "FEA determined that Thriftway [was] not entitled to additional entitlements." P4.4. A contractual cause of action only accrues once a contract breach has occurred. Au v. Au, 626 P.2d 173, 180 (Haw. 1981).
The FEA determination occurred at the earliest in June 1985 when the DOE issued Thriftway a Notice of Probable Violation. The DOE, finding violation, then issued a final Remedial Order against Thriftway in August 1986. Thriftway appealed the order, and also began attempts to secure entitlement refunds from HIRI. HIRI refused to pay, and only at that time can it be said that it allegedly breached its contract. Regardless of whether the breach occurred in 1985 or 1986, Thriftway's filing against HIRI in March 1988 occurred before the four year statute ran after the cause of action accrued. Haw. Rev. Stat. § 490:2-725(2). The district court correctly found that Thriftway's action was not time barred by paragraph 4.4(d) or the Hawaiian statute of limitations.
The district court correctly allowed an equitable recovery because Hawaiian courts will apply equity to contract actions. Cf. Young v. McQuerrey, 508 P.2d 1051, 1054-55 (Haw. 1973) (court considered applying equitable relief to a land sale contract); Emalia Haahaa Akiona Hee v. Kahiwa Hee Chung, 39 Haw. 364, 367 (1952) (equity can cancel a contract); Molokai Ranch, Ltd, v. Morris, 36 Haw. 219, 227 (1942) (equity can enforce an oral contract for a sale of land); Yoshimasu v. Venhuizen, 27 Haw. 292, 296 (1923) (equity can restrain a breach of contract if the damage will be irreparable); Bank of Hawaii v. Davis Radio Sales & Service, Inc., 727 P.2d 419, 427 (Haw. App. 1986) (bank action on loan contract transformed into equity action when bank amended complaint to include mortgage foreclosure claim). In fact, the Hawaiian remedy of equitable subrogation is "'broad enough to include every instance in which one party pays a debt for which another is primarily answerable, and which in equity and good conscience should have been discharged by the latter.'" Alamida v. Wilson, 495 P.2d 585, 589 (Haw. 1972) (quoting Kapena v. Kaleleonalani, 6 Haw. 579, 583 (1885) (emphasis added)).
Thriftway is liable for the entire refund. HIRI, having received 70% of the total, would unjustly profit if Thriftway refunds all the entitlements. In this situation, a Hawaiian court will fashion a decree "to do Justice." Fleming v. Napili Kai, Ltd., 430 P.2d 316, 319 (Haw. 1967). Ordinarily, a party with unclean hands, such as Thriftway, would not be allowed to profit by his misconduct, but the doctrine is not invoked when to do so would work an inJustice. Shinn v. Edwin Yee, Ltd., 553 P.2d 733, 744 (Haw. 1976). It would be an inJustice to require Thriftway to pay the entire refund. HIRI should equitably contribute the entitlements it improperly received.
The district court did not reform the contract nor improperly ignore the indemnity clause in paragraph 5.3. Paragraph 5.3 only covers Thriftway's obligation to indemnify HIRI, and conflicts with paragraph 4.4(b)-(d) under which Thriftway could collect from HIRI if the FEA brought an action regarding the entitlements. The district court was correct in finding an ambiguity because ...