Michael Colaco v. Cavotec SA

Michael Colaco, and April Barry appeal from the judgment entered against them in this action

arising from Inet’s sale of its assets to respondents Cavotec SA and Cavotec Inet US, Inc.

(collectively Cavotec). Colaco was Inet’s sole shareholder and its chief executive officer

and Barry was Inet’s director of administration. After the transaction, Colaco became

Cavotec Inet US, Inc.’s president and a member of its board of directors, and Barry

became the company’s chief financial officer.

Following a lengthy trial, the jury awarded Cavotec $1.313 million against

Inet, Colaco, and Barry, jointly and severally, based on the jury’s findings that (1) Inet

breached its asset purchase agreement with Cavotec by failing to forward all postclosing

customer payments Inet received on Cavotec’s behalf; (2) Colaco and Barry breached the

fiduciary duties they owed as Cavotec officers by causing Inet to withhold customer

payments and creating false and backdated invoices to conceal Inet’s failure to pay;

(3) Colaco’s conduct breached the employment contract he entered into as Cavotec Inet

US Inc.’s president; and (4) Colaco and Barry converted Cavotec’s funds for their

personal use. The jury also awarded Cavotec $2 million in punitive damages against

Colaco only.

On appeal, Inet argues the trial court erred in denying its motion for

judgment notwithstanding the verdict (JNOV) because the undisputed evidence showed

Cavotec breached the asset purchase agreement by failing to make its final $2 million

payment. Inet contends the trial court should have offset that $2 million against the

$1.313 million Inet failed to pay to Cavotec, and the net result is a judgment for $687,000

in Inet’s favor.



1

Inet Airport Systems, LLC is Inet Airport Systems, Inc.’s successor in

interest, but for convenience we refer to them collectively as Inet.

3

We agree the trial court erred in denying Inet’s motion. Cavotec’s

obligation to make the final $2 million payment and Inet’s obligation to turn over all

postclosing payments to Cavotec are independent covenants under the asset purchase

agreement. Inet’s breach of its obligation therefore did not excuse Cavotec from its

obligation. Rather, Cavotec was contractually required to perform and then seek

damages or an offset from Inet. The jury’s verdict, however, excused Cavotec from its

obligation based on Inet’s breach and awarded Cavotec damages for the same breach.

That is an impermissible windfall that allows Cavotec to retain the assets it purchased

from Inet without paying the full purchase price.

Colaco contends the trial court erred in refusing to apply Delaware law to

the claims against him because Cavotec Inet US, Inc., was incorporated in Delaware, and

therefore the internal affairs doctrine required the court to apply Delaware law in

resolving the issues regarding Colaco’s performance as an officer of Cavotec Inet US,

Inc. Colaco asserts he was entitled to judgment on Cavotec’s fiduciary duty and punitive

damages claims because Delaware law bars fiduciary duty claims that arise from

contractual obligations and prohibits punitive damages on fiduciary duty claims.

We disagree. In Colaco’s employment agreement, he and Cavotec Inet US,

Inc. agreed California law would govern all their rights and liabilities. California law

recognizes a strong public policy favoring enforcement of choice-of-law provisions and

our courts may refuse to enforce a provision bearing a reasonable relationship to the

parties or their transaction only when the opponent shows a state other than the one on

which the parties agreed has a materially greater interest in the determination of the

particular issues involved. Colaco fails to explain how Delaware has a materially greater

interest in applying its law on the fiduciary duty claims raised in this case. Instead, he

simply argues the internal affairs doctrine establishes a bright line rule that overrides the

parties’ choice-of-law provision. It does not, and Colaco fails to explain how applying

California law on these particular issues will impair internal corporate affairs.

4

Barry also argues the internal affairs doctrine required the trial court to

apply Delaware law regarding the fiduciary duty and punitive damages claims against

her. Barry’s position differs from Colaco’s because she did not enter into a contract with

Cavotec Inet US, Inc. and she never agreed California law would govern her rights and

liabilities. Nonetheless, we need not decide whether the internal affairs doctrine required

the trial court to apply Delaware law because the result on the claims against Barry are

the same under both Delaware and California law, and therefore Barry cannot establish

any error was prejudicial.

We also reject Colaco’s contention the asset purchase agreement barred

Cavotec’s claims for breach of his employment contract and punitive damages. As

explained below, the exclusive remedy provision on which Colaco relies only applies to

claims arising under the asset purchase agreement, but Cavotec sued Colaco for

breaching his fiduciary duties and his employment agreement, not the asset purchase

agreement. Contrary to Colaco’s contention, the jury’s decision to award Cavotec

damages on its claim against Inet for breach of the asset purchase agreement and award

the same amount of damages for Colaco’s breach of his employment contract does not

mean the jury held Colaco liable for Inet’s breach of the asset purchase agreement.

Rather, it simply means the breach of those separate agreements resulted in the same

damages, nothing more. Similarly, the punitive damages waiver in the asset purchase

agreement does not apply to Cavotec’s punitive damages claim against Colaco because

that claim is not made under the asset purchase agreement.

We conclude Cavotec’s $1.313 award against Inet must be offset against its

failure to make the second $2 million payment owed under the APA. Finally, for the

reasons expressed at the end of this opinion, we leave undisturbed Cavotec’s $2 million

punitive damage award against Colaco.

5

I

FACTS AND PROCEDURAL HISTORY

Inet was headquartered in Fullerton, California. It designed, manufactured,

and installed stationary and mobile airport and aircraft servicing equipment at airports

around the world. Michael Colaco was Inet’s chief executive officer and its sole

shareholder. April Barry was Inet’s director of administration. Cavotec SA is a global

engineering company headquartered in Lugano, Switzerland. It has 42 subsidiaries that

operate in 30 countries.

In August 2011, Colaco and Inet entered into the “Asset Purchase

Agreement and Plan of Reorganization” (APA) with Cavotec SA and Cavotec Inet US

Inc., a Delaware corporation Cavotec SA formed as a subsidiary for this transaction.

2



Under the APA, Inet agreed to sell substantially all of its assets to Cavotec, including

Inet’s long-term, in-process customer contracts, Inet’s inventory and equipment, all

leasehold improvements to Inet’s manufacturing facility, and Inet’s intellectual property.

In exchange, Cavotec agreed to transfer to Inet 7.7 million shares of Cavotec SA stock

and make two, $2 million “Performance Earn-out Payments” to Inet, one on the APA’s

first anniversary in August 2012 and another on its second anniversary in August 2013.

In the APA, the parties valued the Cavotec SA shares at nearly $21 million. Although

Colaco was a signatory to the APA, he gave only a limited number of warranties and

assumed minor obligations that are not at issue.

When the APA closed, Colaco became Cavotec Inet US, Inc.’s president

and a member of its board of directors, and Barry became the company’s chief financial

officer. To govern the terms of Colaco’s employment, he and Cavotec entered into a

“Contract of Employment” (Employment Contract) that required Colaco to “devote his



2

At the time of this transaction, Cavotec SA was known as Cavotec MSL

Holdings Ltd.

6

best efforts and all his business time to the business and operations of [Cavotec].” The

Employment Contract also included a choice-of-law provision that stated, “All the rights

and liabilities of the parties shall be governed by and construed in accordance with the

law of California.” Barry did not enter into an employment agreement with Cavotec.

The in-process customer contracts were the primary assets Cavotec

acquired under the APA. Inet could not transfer those contracts to Cavotec without the

customers’ consent, but the parties closed on the APA before any customers consented.

Inet and Cavotec therefore executed an additional document entitled the “Guidelines for

Contracts” (Guidelines). Under the Guidelines, Inet agreed to cooperate with Cavotec in

obtaining each customer’s consent and to continue performing each contract until the

customer consented to the transfer. The Guidelines also provided that Inet was

responsible for all costs and entitled to all profits that were incurred or earned on a

contract before the APA closed, and Cavotec promised to reimburse Inet for any costs it

incurred after the APA closed, but Cavotec would be entitled to any postclosing profits.

Inet agreed to forward to Cavotec any postclosing payments it received from customers

to which Inet was not entitled under the Guidelines. After the deal closed, numerous

disagreements arose between Colaco and Cavotec regarding Inet’s business, the efforts of

Colaco and Inet to obtain the consents necessary to transfer the customer contracts, and

whether Inet transferred all required customer payments to Cavotec. Based on these

disagreements, Cavotec refused to make the first Performance Earn-out Payment when it

came due in mid-August 2012, and it asked Colaco to step down as president of Cavotec

Inet US, Inc. In late August 2012, Cavotec SA’s chairperson and its chief executive

officer met with Colaco to discuss how they amicably could part ways. These

discussions resulted in a one-page document entitled, “Memorandum of Understanding”

(MOU). Under the MOU, Cavotec agreed to pay the first Performance Earn-out Payment

and accelerate the second so that the entire $4 million would be paid by mid-September

2012. It also agreed to pay Colaco for certain tenant improvements identified in the

7

APA. In return, Colaco agreed to immediately resign as both a director and president of

Cavotec Inet US, Inc., and to cooperate in completing the transition of Inet’s business to

Cavotec.

A few days after the parties entered into the MOU, Cavotec locked Colaco

and Barry out of its facilities because it suspected they were soliciting employees to start

a competing business and destroying or stealing files rather than working cooperatively to

transition Inet’s business to Cavotec. Cavotec paid the first Performance Earn-out

Payment by the September date specified in the MOU and told Colaco it was withholding

the second $2 million payment until it completed an investigation of Colaco’s and

Barry’s conduct. After completing its investigation, Cavotec refused to make the second

payment because it concluded Inet had failed to forward customer payments it received

on Cavotec’s behalf. Cavotec also found Colaco and Barry had falsified invoices and

backdated others to inflate the amount of customer payments Inet was entitled to retain,

had instructed employees to send customers improper or defective products to damage

Cavotec’s business, and had sabotaged Cavotec by stealing and destroying files.

In October 2012, Colaco and Inet filed this lawsuit alleging Cavotec

breached the APA as amended by the MOU. The complaint sought the second $2 million

Performance Earn-out Payment and other payments Cavotec agreed to make under both

the APA and the MOU.

3

Cavotec answered the complaint, alleging the amendments to

the APA made by the MOU were unenforceable because Colaco fraudulently induced

Cavotec to enter into the MOU through misrepresentations and false promises he did not

intend to perform. Cavotec further alleged Inet’s breach of the APA excused its

performance under the contract.



3

The complaint also asserted a fraudulent inducement claim, alleging

Cavotec SA’s chairperson and chief executive officer induced Colaco to enter into the

MOU by falsely promising to make both Performance Earn-out Payments in September

2012. The jury rejected that claim and it is not at issue on appeal.

8

Cavotec also filed a cross-complaint against Inet, Colaco, and Barry.

Cavotec alleged Inet breached the APA and the Guidelines, and also alleged a common

count for money had and received based on the postclosing customer payments Inet

received on Cavotec’s behalf, but failed to forward to Cavotec. Cavotec separately

alleged Colaco breached his Employment Contract and the fiduciary duties he owed as an

officer of Cavotec Inet US, Inc. by creating false and backdated invoices and engaging in

other misconduct that caused Inet to withhold customer payments owed to Cavotec.

4



Based on her cooperation with Colaco, Cavotec also alleged Barry breached her fiduciary

duty as an officer of Cavotec Inet US, Inc. Finally, Cavotec alleged Colaco and Barry

converted certain of its funds to their personal use. As damages, the cross-complaint

sought the customer payments Inet withheld and the lost profits caused by Colaco and

Barry’s misconduct. Cavotec also sought punitive damages against Colaco and Barry.

Shortly before trial, Colaco and Barry moved ex parte to strike Cavotec’s

fiduciary duty claims because Delaware law governed and did not authorize a jury trial

for breach of fiduciary duty. Colaco and Barry argued the court should apply Delaware’s

internal affairs doctrine, which is a conflict of law principle that generally provides the

law of the incorporating state governs the corporation’s internal affairs. The trial court

denied the motion, concluding the internal affairs doctrine did not apply because

Cavotec’s fiduciary duty claims are “more about a series of purported actions . . . that

contravene both statutory law and the public policy of California” than anything

“‘peculiar’” to the relationship between a corporation and its officers. The court

explained its decision to apply California law was based on the nature of the misconduct



4

Cavotec also alleged that Colaco engaged in other misconduct that harmed

its business, but the jury awarded damages based solely on the amount of customer

payments Inet withheld from Cavotec. Cavotec does not challenge the jury’s verdict.

9

alleged in the cross-complaint, but it would reconsider the ruling if the evidence at trial

disclosed additional or different misconduct.

The trial court conducted a six-week jury trial in May and June 2015. On

the complaint, Inet and Colaco asked the jury to award nearly $3.8 million for Cavotec’s

breach of the APA and MOU based on Cavotec’s failure to make the second, $2 million

Performance Earn-out Payment and various other sums it failed to pay under those

agreements. On the cross-complaint, Cavotec sought approximately $3.8 million it

claimed Inet collected, but failed to pay to Cavotec under the APA and the Guidelines

plus approximately $15.4 million in lost profits stemming from Colaco and Barry’s

breach of their fiduciary duty. At the close of evidence, Colaco and Barry renewed their

request for the court to apply Delaware law to the fiduciary duty claims, but the court

again concluded California law governed.

The jury returned a verdict for Cavotec on the complaint, finding it was not

liable to Colaco or Inet. On the cross-complaint, the jury returned a verdict for Cavotec

and awarded $1.313 million in damages against Colaco, Barry, and Inet, jointly and

severally. Specifically, the jury found (1) Inet was liable for breach of the APA and the

Guidelines, and for money had and received; (2) Colaco was liable for breach of the

Employment Contract, breach of fiduciary duty, and conversion; and (3) Barry was liable

for breach of fiduciary duty and conversion. On the conversion claims, the jury found

Colaco had converted $6,000 of Cavotec’s funds and Barry had converted $20,000, but

those amounts were included in the $1.313 million award. Finally, the jury found Colaco

and Barry acted with malice, oppression, or fraud, but Inet did not. Following a separate

phase of the trial regarding Colaco’s and Barry’s financial condition, the jury awarded

Cavotec $2 million in punitive damages against Colaco and no punitive damages against

Barry.

After the trial court entered judgment on the jury’s verdict, Inet, Colaco,

and Barry filed a JNOV motion. First, Colaco and Barry argued both the breach of

10

fiduciary duty claims and the punitive damages claims failed as a matter of Delaware law

because the claim for breach of the APA necessarily subsumed the breach of fiduciary

duty claims and Delaware law did not authorize punitive damages for breach of fiduciary

duty. Next, Colaco argued the exclusive remedy provision in the APA barred the claim

for breach of the Employment Contract and any punitive damage claim. Finally, Inet

argued it was entitled to an offset for the second, $2 million Performance Earn-out

Payment Cavotec admittedly did not pay because Cavotec’s obligation to make that

payment was independent of Inet’s obligation to turn over the customer payments it

received. Inet further argued Cavotec would receive a windfall unless the court applied

an offset because the jury’s verdict both excused Cavotec from paying the final

$2 million under the APA based on Inet’s failure to forward the sums it collected on

Cavotec’s behalf, and awarded damages against Inet for those same sums. According to

Inet, the net result of this offset is a nearly $700,000 judgment in its favor against

Cavotec based on the amount of the damages the jury found on the cross-complaint.

The trial court denied the motion. In rejecting Colaco’s argument that

Delaware law governed the claims against him, the trial court cited its earlier ruling on

the ex parte application to strike Cavotec’s jury demand and also emphasized that

Colaco’s Employment Contract included a choice-of-law clause that provided California

law would govern Colaco’s and Cavotec’s rights and liabilities. This appeal followed.

II

DISCUSSION

A. Inet Was Entitled to Judgment Notwithstanding the Verdict on Its Claim Cavotec

Breached the APA

Inet contends the trial court erred in denying the motion for judgment

notwithstanding the verdict on Inet’s claim for breach of the APA because Cavotec’s

obligation to pay the final $2 million Performance Earn-out Payment was independent of

11

Inet’s obligation to forward the postclosing customer payments it received on Cavotec’s

behalf. According to Inet, it was entitled to judgment on its claim for breach of the APA

because Cavotec did not dispute it failed to make the final $2 million payment and

Cavotec’s successful claim Inet breached the APA by failing to forward customer

payments merely provided an offset, not an excuse for nonperformance. We agree.

“On appeal from the denial of a . . . motion [for judgment notwithstanding

the verdict], we ‘review[] the record in order to make an independent determination

whether there is any substantial evidence to support the jury’s findings.’ [Citation.] ‘The

scope of the review is limited to determining whether there is any substantial evidence,

contradicted or not, to support the jury’s verdict. [Citation.] Applying the substantial

evidence rule, we resolve “all conflicts in the evidence and all legitimate and reasonable

inferences that may arise therefrom in favor of the jury’s findings and the verdict.

[Citations.]” [Citation.] Thus, this court must accept as true the evidence supporting the

verdict, disregard conflicting evidence, and indulge every legitimate inference to support

the verdict. [Citation.] Accordingly, we do not weigh the evidence or judge the

credibility of the witnesses. [Citation.] If sufficient evidence supports the verdict, we

must uphold the trial court’s denial of the . . . motion [for judgment notwithstanding the

verdict].’” (Scott v. Ford Motor Co. (2014) 224 Cal.App.4th 1492, 1499; see Linear

Technology Corp. v. Tokyo Electron, Ltd. (2011) 200 Cal.App.4th 1527, 1532.)

The obligations of the parties to a contract are either dependent or

independent. (Verdier v. Verdier (1955) 133 Cal.App.2d 325, 334 (Verdier).) The

parties’ obligations are dependent when the performance by one party is a condition

precedent to the other party’s performance. In that event, one party is excused from its

obligation to perform if the other party fails to perform. (Kaupke v. Lemoore Canal &

Irr. (1937) 20 Cal.App.2d 554, 557-558 (Kaupke); Starr v. Davis (1930) 105 Cal.App.

632, 635 (Starr).) If the parties’ obligations are independent, the breach by one party

does not excuse the other party’s performance. Instead, the nonbreaching party still must

12

perform and its remedy is to seek damages from the other party based on its breach of the

contract. (Fresno Canal & Irr. Co. v. Perrin (1915) 170 Cal. 411, 416 (Perrin); Hall v.

Dekker (1941) 45 Cal.App.2d 783, 788 (Hall); Starr, at p. 635.)

“The law is settled that where covenants of a contract are to be performed

at different times, they are independent, and the breach by one party of his covenant does

not excuse the performance by the other party of his covenant or relieve him of liability

for damages for a breach thereof.” (Hall, supra, 45 Cal.App.2d at p. 788; see Perrin,

supra, 170 Cal. at p. 416; Kaupke, supra, 20 Cal.App.2d at pp. 557-558.) “‘The payment

of money cannot be made dependent on the performance by the other party of a condition

which, by the very terms of the contract, is not to be performed, or may not be performed

until after the date at which the money is to be paid.’” (Starr, supra, 105 Cal.App. at

p. 635.) Moreover, “‘[w]hen a covenant or promise goes only to a part of the

consideration, and a breach thereof may be paid for in damages, it is an independent

covenant or promise.’” (Ibid.; see Verdier, supra, 133 Cal.App.2d at p. 334)

Whether specific contractual obligations are independent or dependent is a

matter of contract interpretation based on the contract’s plain language and the parties’

intent. (Verdier, supra, 133 Cal.App.2d at p. 334.) Dependent covenants or

“[c]onditions precedent are not favored in the law [citations], and courts shall not

construe a term of the contract so as to establish a condition precedent absent plain and

unambiguous contract language to that effect.” (Frankel v. Board of Dental Examiners

(1996) 46 Cal.App.4th 534, 550; see Verdier, at p. 334 [“To construe covenants as

dependent is to work a forfeiture as to one party, and no obligation of a contract is to be

regarded as a condition precedent unless made so by express terms or necessary

implication”]; Starr, supra, 105 Cal.App. at p. 635 [“‘Courts are disinclined . . . to

construe the stipulations of a contract as conditions precedent, unless compelled by the

language of the contract plainly expressed’”].) Where, as here, the parties present no

extrinsic evidence on the meaning of their contract, we independently interpret the

13

contract to determine whether its covenants are independent or dependent. (See Banning

Ranch Conservancy v. Superior Court (2011) 193 Cal.App.4th 903, 915-916.)

In Starr, the plaintiff sold his florist business to the defendant. The parties’

contract provided for the defendant to make a down payment and give the plaintiff a

promissory note for the balance. The contract also included a noncompetition provision

that prevented the plaintiff from engaging in a competing business during a specified

period. When the defendant failed to pay on the promissory note, the plaintiff sued to

recover the balance. The defendant argued the plaintiff had breached the noncompetition

provision and thereby excused the defendant from his obligation to pay the balance.

(Starr, supra, 105 Cal.App. at p. 633.) The trial court rejected this defense, but on the

defendant’s cross-complaint, the court awarded the defendant the damages caused by the

plaintiff’s breach as an offset against the amount due under the purchase agreement and

note. (Id. at p. 634.)

The Court of Appeal affirmed, finding the plaintiff’s obligation to pay and

the defendant’s obligation not to compete were independent covenants because they

required performance at different times and the plaintiff could compensate the defendant

with damages caused by the plaintiff’s breach of the noncompetition provisions. (Starr,

supra, 105 Cal.App. at pp. 635-636.) The court further explained, “[T]he effect of

upholding [defendant’s contention] would be to say that as a penalty for plaintiff’s

breach, defendant might keep the business without paying therefor. In other words, that

if ‘A’ purchased a business from ‘B,’ agreeing to pay therefor $10,000, and paying at the

time of agreement merely $100 with promissory notes for the balance, and ‘B’ had

agreed not to carry on a similar business within legally permissible limits, then upon

‘B’s’ slightest breach of this covenant ‘A’ should retain the business and be absolved

from the obligation evidenced by the notes. Such is not the law.”

5

(Id. at pp. 634-635;



5

Cavotec asserts Starr is inapposite because it involved the nonpayment of a

promissory note, but Cavotec fails to explain how Starr and the principles it applies are

14

see Verdier, supra, 133 Cal.App.2d at pp. 334-335 [wife’s breach of separation

agreement provision barring her from molesting husband did not excuse husband’s

obligation to pay monthly support under agreement, but rather established claim for

damages caused by wife’s breach]; Hall, supra, 45 Cal.App.2d at p. 788.)

Under the APA, Inet agreed to transfer to Cavotec substantially all of its

assets, and Cavotec agreed to transfer to Inet nearly $21 million in Cavotec SA stock and

make two, $2 million Performance Earn-out Payments. Recognizing Inet’s ongoing

customer contracts required the approval of its customers for Inet to transfer the contracts

and those consents would not be obtained before the deal closed, the parties also agreed

on certain guidelines that required Inet to continue performing on the contracts until they

obtained the necessary consents, to work with Cavotec to obtain the consent of

customers, and to forward to Cavotec customer payments Inet received for work

performed and products delivered after the closing.

Nothing in the APA or the Guidelines conditioned Cavotec’s obligation to

make the second Performance Earn-out Payment on Inet timely and properly forwarding

to Cavotec all postclosing customer payments. These agreements required Cavotec and

Inet to perform at different times the obligations at issue. Cavotec was to transfer the

stock to Inet at the closing, and make the Performance Earn-out Payments on the APA’s

first and second anniversaries. Inet was to transfer all of its assets at closing except the

ongoing customer contracts. As to those ongoing contracts, Inet agreed to continue

honoring the contracts until the customers consented to the transfer and it agreed to

forward customer payments to Cavotec under those contracts as Inet received them. The

parties expressly acknowledged the ongoing contracts could be transferred in a matter of



limited to cases involving a promissory note. Not surprisingly, those principles have

been applied in a number of cases that did not involve a promissory note. (See, e.g.,

Perrin, supra, 170 Cal. at pp. 415-416; Verdier, supra, 133 Cal.App.2d at pp. 333-335;

Kaupke, supra, 20 Cal.App.2d at pp. 557-559.)

15

weeks or could require Inet to perform and forward the payments for an indefinite period.

Finally, the customer payments Inet agreed to forward to Cavotec represented only a

portion of the consideration Inet contributed to the transaction and damages could be

awarded for Inet’s breach of that obligation.

We therefore conclude Cavotec’s obligation to make the final $2 million

Performance Earn-out Payment was independent of Inet’s obligation to forward to

Cavotec any postclosing customer payments. (Perrin, supra, 170 Cal. at p. 416; Verdier,

supra, 133 Cal.App.2d at p. 334; Hall, supra, 45 Cal.App.2d at p. 788; Kaupke, supra,

20 Cal.App.2d at p. 5557-558; Starr, supra, 105 Cal.App. at p. 635.) Inet’s breach of the

APA and Guidelines by failing to forward certain customer payments to Cavotec

therefore did not excuse Cavotec from its obligation to make the final Performance Earnout

payment. Instead, Inet’s breach resulted in a damage award on Cavotec’s breach of

contract claim alleged in the cross-complaint. Cavotec was still required to make the

final Performance Earn-out Payment and the undisputed evidence shows Cavotec

breached the APA by failing to make that payment.

6

The trial court nonetheless denied Inet’s motion for judgment

notwithstanding the verdict because it concluded Inet had to prove it performed under the

APA as an element of its claim, and substantial evidence supported a jury finding that



6

The MOU does not change our analysis. Although the MOU accelerated

the second Performance Earn-out Payment, it did not make the payment conditional on

Inet timely and properly forwarding all postclosing customer payments to Cavotec. In

our analysis, we focus on the terms of the APA and the Guidelines because both sides

argued at trial that the other fraudulently induced them to enter into the MOU through

false promises. The jury appears to have rejected these claims and found the MOU

enforceable because it did not award either side damages on their false promise claim

regarding the MOU. Nonetheless, regardless of whether the MOU was enforceable and

modified the APA, we conclude Cavotec’s obligation to make the second Performance

Earn-Out Payment is independent of Inet’s obligation to forward the postclosing

customer payments to Cavotec under the original APA and the APA as modified by the

MOU.

16

Inet failed to perform all of its obligations under the APA, including the obligation to

transfer the ongoing customer contracts and to create a cooperative working relationship

with Cavotec. Although we agree substantial evidence supports a finding Inet failed to

perform all of its obligations under the APA, we disagree that failure excused Cavotec

from its obligation to make the final Performance Earn-out Payment. The jury’s verdict

and the court’s ruling denying Inet’s motion failed to appreciate Cavotec’s obligation to

make the final Performance Earn-out Payment was independent of any obligation Inet

failed to perform under the APA.

Moreover, the trial court’s ruling fails to account for the damages the jury

awarded Cavotec on its cross-complaint. Setting aside the independent nature of

Cavotec’s obligation to make the final Performance Earn-out Payment, the court’s denial

of Inet’s motion for judgment notwithstanding the verdict results in a windfall for Inet

because the verdict both excuses Cavotec from its obligation to make the final $2 million

payment under the APA and awards Cavotec $1.313 million in damages based on the

same breach of the APA by Inet. Indeed, when we consider the verdicts on the complaint

and cross-complaint together, the jury effectively awarded Cavotec $3.313 million in

damages even though it only found Cavotec suffered $1.313 million in damages.

Cavotec suggests the jury’s verdict should be upheld because the jury may

have found Inet breached the APA in more ways than just failing to turn over the

customer payments Inet received on Cavotec’s behalf. This argument fails because the

jury awarded the identical amount on Cavotec’s claim for money had and received as it

awarded on Cavotec’s claim for breach of the APA, which showed the jury based its

breach of contract finding only on Inet’s failure to turn over customer payments. The

argument also ignores the independent nature of Cavotec’s obligation to pay the final

Performance Earn-out Payment. That obligation was not tied to any contractual

obligations that Inet breached, and therefore Inet’s breach of those obligations did not

excuse Cavotec from its obligation to make the final payment.

17

Finally, Cavotec contends we should uphold the jury’s verdict on Inet’s

breach of the APA because Inet’s right to receive the Performance Earn-out Payments

was conditional under the APA’s express language and Inet failed to show it satisfied

those conditions. In support, Cavotec points to section 2.8 of the APA, which states the

Performance Earn-out Payments are “subject to the conditions set forth below” and then

provides as follows: “[Inet] shall earn and become entitled to the Performance Earn-out

Payments, or a pro rata portion thereof, based on the performance and satisfaction of

reasonable objectives of the Business, designated by [Cavotec] following the Closing,

and agreed to by [Inet], not to be unreasonably withheld, which shall include, but not be

limited to, goals for new market penetration of the products and services of the Business

(both within the United States and internationally), increasing sales and market share of

the products and services of the Business, customer introductions, and integration of

products and services used in the aviation ground support markets with [Cavotec’s] (and

[Cavotec’s] affiliates) products and services used in maritime port markets.”

Cavotec waived this argument because it failed to assert it during trial or in

opposition to Inet’s motion for judgment notwithstanding the verdict (City of San Diego

v. D.R. Horton San Diego Holding Co., Inc. (2005) 126 Cal.App.4th 668, 685

[“Contentions or theories raised for the first time on appeal are not entitled to

consideration”]), and the record nonetheless lacks substantial evidence to support the

argument. Cavotec never argued to the jury that Inet’s right to receive the Performance

Earn-out Payments was conditioned on the performance and satisfaction of reasonable

objectives for the business, and Cavotec cites no evidence showing it ever designated any

objectives for the business as contemplated by section 2.8 of the APA. To the contrary,

the evidence shows the parties treated the passage of time as the only condition to the

18

Performance Earn-out Payments and that Cavotec made the first Performance Earn-out

Payment without showing any business objectives were met.7



Cavotec cites an isolated reference in Colaco’s testimony and another in his

attorney’s closing argument that the Performance Earn-out Payments were tied to the

business’s financial success. Cavotec, however, takes these statements out of context and

were made only to rebut Cavotec’s argument that Colaco sought to destroy the business

after the closing so he could repurchase it at a discount. These statements are not

substantial evidence supporting the verdict against Inet on its breach of the APA claim

because Cavotec never argued to the jury Inet failed to satisfy the conditions that would

entitle it to receive the Performance Earn-out Payments.

Accordingly, based on the undisputed evidence that Cavotec failed to make

the final $2 million Performance Earn-out Payment, we conclude the trial court erred in

denying Inet’s motion for judgment notwithstanding the verdict on Inet’s claim for

breach of the APA. We address how this error affects the overall judgment in the final

section of this opinion.



7

To the extent the jury found the MOU enforceable, the MOU’s

modification of the APA defeats Cavotec’s contention the jury rejected Inet’s breach of

contract claim because Inet failed to show it satisfied the conditions for receiving the

second Performance Earn-out Payment. In accelerating the second payment by nearly a

year, the MOU eliminates or declares satisfied any condition the APA placed on that

payment. Specifically, the MOU states, “Cavotec S.A. confirms and agrees that the

complete earnout payment in the amount of 4million USD dollars will be released on

September 14th, 2012.”

19

B. The Trial Court Properly Applied California Law to the Claims Against Colaco

1. Governing Conflict of Law Principles

a. Choice-of-Law Provisions

California law reflects a strong public policy favoring enforcement of freely

negotiated choice-of-law clauses. (Nedlloyd Lines B.V. v. Superior Court (1992)

3 Cal.4th 459, 462, 464-465 (Nedlloyd).) Provided the parties or their transactions have a

substantial relationship to the state whose laws they selected, or some other reasonable

basis for the parties’ choice of law exists, California courts will enforce a choice-of-law

provision unless (1) the chosen state’s law conflicts with a fundamental public policy of

the state whose law otherwise would apply, and (2) the other state “has a ‘materially

greater interest than the chosen state in the determination of the particular issue.’”

(Nedlloyd, at p. 466; see Expansion Pointe Properties Limited Partnership v. Procopio,

Cory, Hargreaves & Savitch, LLP (2007) 152 Cal.App.4th 42, 59.)

The Supreme Court adopted this standard from the Restatement Second of

Conflicts of Laws, section 187, subdivision (2). (Nedlloyd, supra, 3 Cal.4th at

pp. 464-465.) The Restatement provides the following rationale for this rule: “Prime

objectives of contract law are to protect the justified expectations of the parties and to

make it possible for them to foretell with accuracy what will be their rights and liabilities

under the contract. These objectives may best be attained in multistate transactions by

letting the parties choose the law to govern the validity of the contract and the rights

created thereby. In this way, certainty and predictability of result are most likely to be

secured. Giving parties this power of choice is also consistent with the fact that, in

contrast to other areas of the law, persons are free within broad limits to determine the

nature of their contractual obligations.” (Rest.2d Conf. of Laws, § 187, com. e, p. 565.)

The party seeking to enforce the choice-of-law provision bears the burden

to establish a sufficient relationship to the state whose law the parties chose, but the party

20

opposing the provision’s enforcement bears the burden to establish a fundamental

conflict in the states’ laws and the nondesignated state’s materially greater interest in the

determination of the particular issue. (Washington Mutual Bank, FA v. Superior Court

(2001) 24 Cal.4th 906, 917 (Washington Mutual).) When, as here, the relevant facts are

undisputed, enforcement of a choice-of-law provision presents a question of law we

review de novo. (Rincon EV Realty LLC v. CP III Rincon Towers, Inc. (2017)

8 Cal.App.5th 1, 10.)

In Nedlloyd, the plaintiff corporation sued one of its shareholders for

breaching a shareholders’ agreement and the shareholder’s fiduciary duties to the

corporation. In ruling on the shareholder’s demurrer, the trial court applied California

law because it found unenforceable a choice-of-law provision in the shareholders’

agreement that designated Hong Kong law to govern the parties’ agreement. (Nedlloyd,

supra, 3 Cal.4th at pp. 462-463.) The Supreme Court reversed, finding the parties and

their transactions had a substantial relationship with Hong Kong because the corporation

was incorporated there, it had a registered office in Hong Kong, and another shareholder

resided there. (Id. at pp. 467-468.) Moreover, the court determined the corporation, as

the party opposing enforcement of the choice-of-law clause, failed to identify a

fundamental California public policy that would be offended by the application of Hong

Kong law to the parties’ dispute. Absent such a fundamental public policy, the Court

concluded the corporation could not avoid its agreement to be bound by Hong Kong law.

(Id. at pp. 470-471.)

b. Internal Affairs Doctrine

“‘“The internal affairs doctrine is a conflict of laws principle which

recognizes that only one State should have the authority to regulate a corporation’s

internal affairs—matters peculiar to the relationships among or between the corporation

and its current officers, directors, and shareholders—because otherwise a corporation

21

could be faced with conflicting demands.”‘“ (Lidow v. Superior Court (2012)

206 Cal.App.4th 351, 358-359 (Lidow); see Friese v. Superior Court (2005)

134 Cal.App.4th 693, 706 (Friese); State Farm Mutual Automobile Ins. Co. v. Superior

Court (2003) 114 Cal.App.4th 434, 442 (State Farm).)

“‘Matters falling within the scope of the [internal affairs doctrine] . . .

include steps taken in the course of the original incorporation, the election or appointment

of directors and officers, the adoption of by-laws, the issuance of corporate shares,

preemptive rights, the holding of directors’ and shareholders’ meetings, methods of

voting including any requirement for cumulative voting, shareholders’ rights to examine

corporate records, charter and by-law amendments, mergers, consolidations and

reorganizations and the reclassification of shares.’” (Lidow, supra, 206 Cal.App.4th at

p. 359, quoting Rest.2d Conf. of Laws, § 302, com. a, p. 307; see Friese, supra,

134 Cal.App.4th at p. 707.) The internal affairs doctrine recognizes “‘[i]t would be

impractical to have matters . . . which involve a corporation’s organic structure or internal

administration[] governed by different laws.” (Lidow, at p. 359, quoting Rest.2d Conf. of

Laws, § 302, com. e, p. 310; see Friese, at p. 707.)

“‘The policy underlying the internal affairs doctrine is an important one

. . . : “Under the prevailing conflicts practice, neither courts nor legislatures have

maximized the imposition of local corporate policy on foreign corporations but have

consistently applied the law of the state of incorporation to the entire gamut of internal

corporate affairs. In many cases, this is a wise, practical, and equitable choice. It serves

the vital need for a single, constant and equal law to avoid the fragmentation of

continuing, interdependent internal relationships. . . . It facilitates planning and enhances

predictability. . . .”‘“ (State Farm, supra, 114 Cal.App.4th at pp. 443-444; see Lidow,

supra, 206 Cal.App.4th at p. 359.)

“‘[T]he law of one state [therefore generally] governs the relationships of a

corporation to its stockholders, directors and officers in matters of internal corporate

22

governance. The alternatives present almost intolerable consequences to the corporate

enterprise and its managers. With the existence of multistate and multinational

organizations, directors and officers have a significant right . . . to know what law will be

applied to their actions. Stockholders also have a right to know by what standards of

accountability they may hold those managing the corporation’s business and affairs.’”

(State Farm, supra, 114 Cal.App.4th at p. 444; see Lidow, supra, 206 Cal.App.4th at

p. 359.)

Although California courts generally follow the internal affairs doctrine and

apply the laws of a corporation’s state of incorporation to resolve disputes concerning a

corporation’s internal affairs, they do not blindly apply the doctrine. Instead, California

courts carefully examine the specific issue and conduct to determine whether the

corporation’s internal affairs truly are implicated and whether the doctrine’s policies

require its application in the particular case. (See Lidow, supra, 206 Cal.App.4th at

pp. 359, 362-363; see Friese, supra, 134 Cal.App.4th at pp. 707-709; State Farm, supra,

114 Cal.App.4th at pp. 446-449.)

In State Farm, for example, the Court of Appeal concluded the internal

affairs doctrine required it to apply Illinois law to a nationwide shareholder class action

alleging an Illinois insurance corporation failed to pay its shareholders dividends required

by the shareholders’ policies. (State Farm, supra, 114 Cal.App.4th at pp. 438-439.)

Even though the shareholders described their claims as simple causes of action for breach

of contract and breach of the implied covenant of good faith and fair dealing, the State

Farm court concluded those claims involved internal corporate affairs peculiar to the

relationship between the corporation and its shareholders because the corporation’s

bylaws and other documents granted the corporation’s board of directors discretion to

decide whether to declare a dividend. Indeed, the decision whether to declare a dividend

was a quintessential internal affair affecting only the corporation and its shareholders.

Allowing courts to apply the law of states other than the state of incorporation therefore

23

could lead to holders of the same class of shares having different rights to receive

dividends. (Id. at pp. 446-447.)

In contrast, the Friese court concluded the internal affairs doctrine did not

prevent it from applying California law to a foreign corporation’s insider trading claims

against former directors and officers under a California statute that authorized the

corporation to recover treble profits. The court explained the internal affairs doctrine did

not prevent states other than the state of incorporation from regulating the sale of

securities because such laws are part of a broader public policy to protect investors in

general and do not interfere with a corporation’s internal affairs. (Friese, supra,

134 Cal.App.4th at pp. 707-710.) Indeed, holding a former director and officer liable to a

corporation for insider trading does not subject the corporation to inconsistent obligations

and applying different state laws to different transactions does not undermine the policies

supporting the internal affairs doctrine. (Id. at p. 707-708; see Rest.2d Conf. of Laws,

§ 309, com. c, pp. 333-334.)

Similarly, in Lidow, the Court of Appeal concluded the internal affairs

doctrine did not prevent application of California law to a claim for wrongful termination

in violation of public policy alleged by a foreign corporation’s CEO. Although a

corporation’s decision to remove its CEO typically involves the corporation’s internal

governance and triggers the internal affairs doctrine, the Lidow court concluded the

CEO’s allegations that he was removed for complaining about illegal and unethical

activities went beyond internal governance and touched upon broader public interest

concerns. Moreover, applying California law would not subject the corporation to

conflicting demands or affect its organic structure. (Lidow, supra, 206 Cal.App.4th at

p. 362.)

24

2. The Internal Affairs Doctrine Did Not Override the Employment Contract’s

Choice-of-Law Provision

Colaco contends the internal affairs doctrine provides the controlling

conflict of laws analysis and therefore the trial court should have applied Delaware law

because Cavotec was incorporated in Delaware. We conclude Nedlloyd provides the

controlling conflict analysis based on the parties’ choice-of-law clause and the trial court

properly applied California law because Colaco failed to show Delaware had a materially

greater interest in the determination of the particular issues he raised.

As explained, California has a strong public policy that requires its courts

to enforce reasonable choice-of-law provisions unless the party opposing enforcement

shows a state other than the one the parties designated has a materially greater interest in

the particular issues involved. (Washington Mutual, supra, 24 Cal.4th at p. 917;

Nedlloyd, supra, 3 Cal.4th at pp. 462, 464-465.) The internal affairs doctrine and the

policies underlying it must be considered in determining whether a state other than the

one the parties selected has a materially greater interest (see Grosset v. Wenaas (2008)

42 Cal.4th 1100, 1107), but to simply apply the internal affairs doctrine without

considering the parties’ choice-of-law provision would ignore the strong public policy

our Supreme Court has declared in favor of the enforcing choice-of-law provisions.

Here, the Employment Contract provides that California law shall govern

all of Colaco’s and Cavotec’s rights and liabilities.8

There is no dispute Colaco, Cavotec,

and Colaco’s employment with Cavotec had a substantial relationship with California and

a reasonable basis existed for designating California law to govern their rights and



8

The APA also included a choice-of-law provision designating California

law: “This Agreement and all disputes or controversies arising out of or relating to this

Agreement or the transactions contemplated hereby shall be governed by, and construed

in accordance with, the laws of the State of California, without regard to the laws of any

other jurisdiction that might be applied because of the conflicts of laws principles of the

State of California.” As stated above, Colaco was a signatory to the APA, but his

obligations under the APA were limited.

25

liabilities. Indeed, before Cavotec purchased Inet’s assets, Inet was based in Orange

County, California and Colaco worked out of Inet’s offices and facilities in Orange

County. Upon selling Inet’s assets to Cavotec, Colaco entered into the Employment

Contract and agreed to work primarily from the offices and facilities in Orange County.

Under Nedlloyd, the burden therefore shifted to Colaco to identify a

fundamental conflict between California and Delaware law and show that Delaware had a

materially greater interest in the determination of the particular issues involved.

(Washington Mutual, supra, 24 Cal.4th at p. 917; Nedlloyd, supra, 3 Cal.4th at p. 466.)

The particular issues Colaco raised are (1) whether Cavotec could recover punitive

damages on a breach of fiduciary duty claim and (2) whether Cavotec’s claim against Inet

for breach of the APA barred Cavotec’s claim against Colaco for breach of fiduciary

duty.

Colaco failed to identify in the trial court, and does not identify on appeal, a

fundamental Delaware policy regarding these issues, nor does he explain how Delaware

has a materially greater interest in the determination of these particular issues. Instead,

he simply argues the internal affairs doctrine overrides the parties’ choice-of-law

provision because it establishes a bright-line rule that dictates the governing law in all

cases involving internal corporate affairs, and all issues concerning a corporate officer’s

fiduciary duties are internal corporate affairs. We do not share Colaco’s simplistic view

of the issue.

Colaco fails to cite any California authorities to support his contention, and

our independent research has uncovered no California decision resolving a conflict

between a choice-of-law provision and the internal affairs doctrine. Colaco cites several

foreign cases, but they fail to persuade us. One of Colaco’s cases actually applied

California law to conclude a choice-of-law provision prevailed over the internal affairs

doctrine, several other cases do not reach the conclusion Colaco suggests, and the two

that concluded the internal affairs doctrine prevailed over a choice-of-law clause are

26

readily distinguishable. (See Johnson v. Myers (N.D.Cal. 2011) 2011 U.S. Dist. Lexis

112897 (Johnson); Heine v. Steamline Foods, Inc. (N.D.Ohio 2011) 805 F.Supp.2d 383

(Heine); Clark v. Kelly (Del.Ch. 1999) 1999 Del. Ch. Lexis 148 (Clark); BBS Norwalk

One, Inc. v. Raccolta, Inc. (S.D.N.Y. 1999) 60 F.Supp.2d 123 (BBS Norwalk);

Rosenmiller v. Bordes (Del. Ch. 1991) 607 A.2d 465 (Rosenmiller); Bagdon v.

Bridgestone/Firestone, Inc. (7th Cir. 1990) 916 F.2d 379 (Bagdon).)

In Johnson, a federal district court applied California law to conclude the

parties’ choice-of-law clause took precedence over the internal affairs doctrine on the

plaintiff’s claim for breach of a stock purchase agreement. The court reasoned

California’s strong public policy favoring enforcement of choice-of-law clauses and its

unwillingness to reflexively apply the internal affairs doctrine required that result.

(Johnson, supra, 2011 U.S. Dist Lexis 112897, *26-*28.) Colaco focuses on the Johnson

court’s decision to apply Great Britain’s law to the plaintiff’s tort claims, but the court in

reaching that decision did not determine the internal affairs doctrine overrode the parties’

choice of law. Rather, the court simply applied the internal affairs doctrine without

considering the parties’ choice-of-law clause because the clause’s language was not

broad enough to apply to the plaintiff’s tort claims. (Id. at pp. *25-*27.)

In Bagdon, the Seventh Circuit applied the internal affairs doctrine to

determine the controlling law instead of a choice-of-law clause in the parties’ agreement

because it concluded the parties waived the choice-of-law clause by failing to argue or

brief whether it applied, not because the internal affairs doctrine overrode the parties’

choice-of-law clause. To the contrary, the Bagdon court explained in dicta that it was

inclined to conclude the choice-of-law clause controlled if the parties had not waived the

issue because the agreement addressed the employment terms for one of the parties and

each parties’ ownership interest in the corporation, but it “d[id] not speak to corporate

governance.” (Bagdon, supra, 916 F.2d at p. 383.)

27

In Clark, the court applied the internal affairs doctrine to determine the

controlling law, but it did not conclude the doctrine superseded the choice-of-law clause

in the parties’ contract. Rather, the court concluded the clause did not apply to the

particular issue. (Clark, supra, 1999 Del. Ch. Lexis 148, *12-*15.) Clark involved a

dispute regarding whether a member of a Delaware limited liability company had

transferred its ownership interest and thereby surrendered control under the company’s

operating agreement. The member was a closely held California corporation and the

issue turned on whether the stock in that corporation was community property. (Id. at

pp. *2-*9.) Although the limited liability company’s operating agreement designated

Delaware law as controlling, the court relied on the internal affairs doctrine and applied

California law to determine whether the shares in the closely held corporation were

community property because the corporation was a California corporation and its affairs

were not controlled by the operating agreement for the Delaware limited liability

company. (Id. at pp.*12-*15; see BBS Norwalk, supra, 60 F.Supp.2d at p. 129 [court

applied internal affairs doctrine to determine controlling law because parties’ choice of

law provision did not apply to claims at issue])

Rosenmiller and Heine are the only cases Colaco cites in which the courts

actually concluded the internal affair doctrine overrode an otherwise applicable choiceof-law

provision. Those cases, however, are readily distinguishable. In Rosenmiller, the

issue was the validity of a stockholder voting agreement that included a choice-of-law

provision. (Rosenmiller, supra, 607 A.2d at p. 466.) Applying the Restatement analysis

our Supreme Court adopted in Nedlloyd, the Rosenmiller court concluded the

corporation’s state of incorporation had a paramount interest in applying its laws to

disputes regarding internal corporate governance, and “[n]othing is more central to the

internal management of a corporation than a stockholder’s right to vote in the election of

its directors.” (Rosenmiller, at pp. 467-468.)

28

Heine involved a minority shareholder’s breach of fiduciary duty claims

against a corporation and its majority shareholder for allegedly making unauthorized

transfers to another entity the majority shareholder owned. (Heine, supra, 805 F.Supp.2d

at p. 387.) The federal district court applied the internal affairs doctrine instead of the

parties’ choice-of-law clause to determine the governing law, but the court failed to

conduct the analysis required by Nedlloyd. Instead, the court simply cited two other

cases that reached the same result without conducting any analysis of the conflicting state

interests. Moreover, similar to Rosenmiller, the two cited cases involved quintessential

internal governance issues—whether a corporation had the required surplus to redeem

stock and a claim for dissolution. (Heine, at pp. 390-391.)

Here, the particular issues Colaco raised do not involve whether he owed

Cavotec a particular duty or the scope of the fiduciary duties he owed as an officer of

Cavotec. Colaco also does not suggest California and Delaware law conflict on the

duties he owed. The two issues Colaco raised solely concern the remedies available to

Cavotec for Colaco’s breach of duty.

Applying California law to these issues will not alter the duties Colaco

owed as an officer nor will it subject Cavotec’s officers to different duties. Cavotec will

not be subjected to conflicting demands if California law is applied, its organic structure

will not be affected, and its shareholders’ rights will not be altered. Rather, applying

California law on these issues will promote certainty and predictability because Colaco

and Cavotec agreed in a freely negotiated agreement that California law would govern all

of their rights and liabilities. Colaco fails to explain how the internal affairs doctrine

overrides the parties’ choice-of-law clause on these issues or why it allows him to avoid

application of the law to which he agreed. Applying Delaware law based on the internal

affairs doctrine would undermine the certainty and predictability the parties sought by

including a choice-of-law provision in their agreement. We therefore conclude the trial

court did not err in applying California law.

29

Finally, Colaco contends Corporations Code section 2116 (section 2116)

required the trial court to apply Delaware law. According to Colaco, that statute codifies

the internal affairs doctrine and “mandate[s] that claims for ‘violation of official duty’ by

executives of foreign corporations are to be governed by ‘applicable laws of the state or

place of incorporation whether committed or done in this state or elsewhere.’” Colaco

overstates section 2116’s import and we conclude that statute does not govern in this

case.

Section 2116 only partially codifies the internal affairs doctrine and does

not mandate applying the law of the incorporating state to all misconduct claims against

the corporation’s “executives.” (See Friedman et al., Cal. Practice Guide: Corporations

(The Rutter Group 2017) ¶ 3:4.3, pp. 3-2 to 3-3.) For example, in Friese, the Court of

Appeal concluded section 2116 did not prohibit application of California law to a foreign

corporation’s insider trading claim against its former directors because the claims did not

interfere with internal corporate affairs. (Friese, supra, 134 Cal.App.4th at pp. 706-709.)

More importantly, section 2116’s plain language only applies to claims against a

corporation’s directors, not to claims against a corporation’s officers.9

Colaco cites no

authority that would allow us to read the term officer into the statute. (Code Civ. Proc.

§ 1858 [“In the construction of a statute or instrument, the office of the Judge is simply to

ascertain and declare what is in terms or in substance contained therein, not to insert what

has been omitted, or to omit what has been inserted”]; People v. Guzman (2005)

35 Cal.4th 577, 587 [“‘insert[ing]’ additional language into a statute ‘violate[s] the



9

Section 2116 states, “The directors of a foreign corporation transacting

intrastate business are liable to the corporation, its shareholders, creditors, receiver,

liquidator or trustee in bankruptcy for the making of unauthorized dividends, purchase of

shares or distribution of assets or false certificates, reports or public notices or other

violation of official duty according to any applicable laws of the state or place of

incorporation or organization, whether committed or done in this state or elsewhere.

Such liability may be enforced in the courts of this state.” (Italics added.)

30

cardinal rule of statutory construction that courts must not add provisions to statutes’”].)

The Legislature’s omission of officers from section 2116 appears consistent with the

Legislature’s determination to define directors’ duties by statute, but to leave an officer’s

duties to the common law and the corporation’s bylaws and resolutions. (See Friedman

et al., Cal. Practice Guide: Corporations (The Rutter Group 2017) ¶ 6:281, p. 6-92

[“Although it seems clear that corporate officers owe duties of care to the corporation,

there is no statute prescribing what duty is owed, as there is with corporate directors”],

¶ 6:281.2, p. 6-92 [“In the absence of statute, the degree of care turns on the officer’s

particular responsibilities in connection with the transaction in question”].)

Our conclusion that section 2116 did not require the trial court to apply

Delaware law to the claims against Colaco should not be interpreted as a conclusion the

internal affairs doctrine never applies to claims against corporate officers. Rather, we

simply conclude section 2116 did not apply to the claims against Colaco as a Cavotec

officer. On appropriate facts, the common law internal affairs doctrine may determine

which law applies to claims against a corporate officer, but as explained above, the

common law doctrine did not override the parties choice-of-law provision in this case.

C. Barry Failed to Show Prejudicial Error in Applying California Law

Barry also contends the internal affairs doctrine required the trial court to

apply Delaware law to the claims against her. Like Colaco, she contends Cavotec’s

breach of fiduciary duty and punitive damage claim against her fail as a matter of

Delaware law. We again disagree.

Barry is not in the same position as Colaco. Although she also was a

Cavotec officer, unlike Colaco she did not have an employment contract with Cavotec

and she never agreed California law would govern her rights and liabilities. But we need

not decide whether the internal affairs doctrine required the trial court to apply Delaware

law to the claims against Barry because the result is the same under both California and

31

Delaware law, and therefore Barry failed to show she suffered any prejudice in the trial

court’s selection of the governing law.

Even when a trial court errs, we may reverse its judgment only if the error

resulted in a miscarriage of justice. (Cal. Const., art. VI, § 13 [“No judgment shall be set

aside, or new trial granted, . . . unless, after an examination of the entire cause, including

the evidence, the court shall be of the opinion that the error complained of has resulted in

a miscarriage of justice”]; Code Civ. Proc. § 475.) “‘[A] “miscarriage of justice” should

be declared only when the court, “after an examination of the entire cause, including the

evidence,” is of the “opinion” that it is reasonably probable that a result more favorable to

the appealing party would have been reached in the absence of the error.’” (Cassim v.

Allstate Ins. Co. (2004) 33 Cal.4th 780, 800.) “‘[A] “probability” in this context does not

mean more likely than not, but merely a reasonable chance, more than an abstract

possibility.’” (Ibid.)

Barry contends Cavotec’s breach of fiduciary duty claim fails as a matter of

law because “Delaware law requires a party to proceed by way of a breach of contract

cause of action where, as here, a contract defines the very obligations that a party

allegedly breached in his or her fiduciary capacity.” Relying on Delaware cases, Barry

contends we must reverse the jury’s fiduciary duty finding because the jury awarded the

same $1.313 million in damages on Cavotec’s claim against Inet for breach of the APA

and Cavotec’s breach of fiduciary duty claim against Barry. (See Nemec v. Shrader (Del.

2010) 991 A.2d 1120, 1129 (Nemec); Renco Group, Inc. v. MacAndrews AMG Holdings

LLC (Del.Ch. 2015) 2015 Del. Ch. Lexis 25, *24-*25 (Renco).) We disagree because we

do not read these Delaware cases as broadly as Barry.

Under Delaware law, “[i]t is a well-settled principle that where a dispute

arises from obligations that are expressly addressed by contract, that dispute will be

treated as a breach of contract claim. In that specific context, any fiduciary claims arising

out of the same facts that underlie the contract obligations would be foreclosed as

32

superfluous.” (Nemec, supra, 991 A.2d at p. 1129; see Lee v. Pincus (Del.Ch. 2014)

2014 Del. Ch. Lexis 229, *25 (Lee) [“Under Nemec, a contract must ‘expressly’ address

an issue, and thereby create a right that is ‘solely a creature of contract,’ for the contract

to preempt the default fiduciary relationship between directors and stockholders”].)

Delaware law nonetheless permits a fiduciary duty claim where “there

exists an independent basis for the fiduciary duty claims apart from the contractual

claims, even if both are related to the same or similar conduct.” (PT China LLC v. PT

Korea LLC (Del.Ch. 2010) 2010 Del. Ch. Lexis 38, *26 (PT China); see Renco, supra,

2015 Del. Ch. Lexis 25, *24-*25.) “The issue is whether the duty sought to be enforced

arises out of the parties’ contractual, as opposed to their fiduciary, relationship.” (Gale v.

Bershad (Del. Ch. 1998) 1998 Del. Ch. Lexis 37, *20.)

In Nemec, the plaintiff was a retired officer of a corporation who held

corporate shares he received under the corporation’s stock plan. That plan granted the

corporation the right to redeem a retired officer’s shares at any time. Shortly before the

corporation completed a corporate spin-off that significantly increased the value of its

stock, the corporation’s directors voted to redeem the plaintiff’s shares. The plaintiff

sued the corporation for breach of the stock plan and the directors for breach of fiduciary

duty, alleging the directors violated their duty of loyalty by redeeming the plaintiff’s

shares before the spin-off closed because it allowed the directors to receive a greater

percentage of the profit from the transaction. The trial court dismissed the plaintiff’s

fiduciary duty claim for failing to allege sufficient facts to state a cause of action.

(Nemec, supra, 991 A.2d at pp. 1122-1125.)

Based on the primacy of contract doctrine, the Delaware Supreme Court

affirmed. Although the directors caused the corporation to redeem the plaintiff’s shares

before the spinoff, the court concluded the plaintiff based his breach of fiduciary duty

claim on the corporation’s exercise of its contractual right to redeem the shares at any

time and therefore was barred by the breach of contract claim: “[The right to redeem the

33

plaintiff’s shares] was not one that attached to or devolved upon all the Company’s

common shares generally, irrespective of a contract. Rather, that right was solely a

creature of contract, and attached only to those shares that retired stockholders acquired

under the Stock Plan. As a consequence, the nature and scope of the Directors’ duties

when causing the Company to exercise its right to redeem shares covered by the Stock

Plan were intended to be defined solely by reference to that contract. Any separate

fiduciary duty claims that might arise out of the Company’s exercise of its contract right,

therefore, were foreclosed.” (Nemec, supra, 991 A.2d at p. 1129, fn. omitted.)

Similarly, the Renco court concluded the plaintiff’s breach of contract claim

barred its breach of fiduciary duty claim because the alleged misconduct violated specific

rights and obligations created by the operating agreement the plaintiff and defendant

entered into as members of a limited liability company. The court explained, “the Holdco

Agreement provisions supersede the fiduciary duties that otherwise might apply to the

conduct challenged here. The Holdco Members chose to govern their relationship with a

complex, negotiated agreement. If Defendants have violated any of Plaintiff’s rights, the

Holdco Members’ agreement—not some general duty of loyalty or care—governs the

remedy to which Plaintiff is entitled.” (Renco, supra, 2015 Del. Ch. Lexis 25, *27.)

In contrast, the Lee court concluded a breach of contract claim did not

foreclose a breach of fiduciary duty claim based on the directors’ general duty of loyalty

even though the directors’ actions affected the plaintiff shareholders’ contractual rights.

(Lee, supra, 2014 Del. Ch. Lexis 229, *28.) In Lee, the corporation had lockup

agreements with its shareholders that prohibited them from selling their shares for a

designated period following the corporation’s initial public offering. Shortly after the

offering, the directors voted to modify the lockup restrictions to allow certain shareholder

groups to sell their shares before others. These modifications allowed some of the

directors to sell their shares before many of the other shareholders and at a significantly

higher price. The plaintiff shareholders sued the directors for breach of fiduciary duty,

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alleging the modifications breached the duty of loyalty the directors owed to all the

corporation’s shareholders because it allowed them to sell their shares at a higher price

while other shareholders were bound by the original lockup agreement. (Id. at pp. *1-*4,

*7-*14.)

The Lee court concluded the primacy of contract doctrine did not bar the

plaintiff’s breach of fiduciary duty claim because the claim was based on the general

fiduciary duties the directors owed to all shareholders, not the exercise of any specific

contractual right: “[T]he fact that the [plaintiffs’] shares were governed by contracts

containing lockup restrictions does not eliminate the fiduciary duties of the Director

Defendants to act loyally to all Zynga stockholders—especially when the challenged

action did not involve the exercise of any contractual right governing [the plaintiffs’]

shares but instead involved modifications to the contractual provisions governing their

own shares.” (Lee, supra, 2014 Del. Ch. Lexis 229, *28; see PT China, supra, 2010 Del.

Ch. Lexis 38, *25-*26, *31-*32 [although limited liability company’s operating

agreement expressly restricted its members’ ability to engage in related business

endeavors, primacy of contract doctrine did not bar one member’s claim for breach of

fiduciary duty against another for usurping company’s business opportunities because

claim “inherently” arose from member’s common law duty of loyalty, not its contractual

obligations].)

Here, we conclude Delaware’s primacy of contract doctrine does not bar

Cavotec’s breach of fiduciary duty claim against Barry. The APA did not expressly grant

Inet the right to withhold from Cavotec any payment Inet received from customers after

the closing. Unlike in Nemec, Inet had no discretion to determine when or whether to

turn over payments it received from customers, and therefore Barry did not cause Inet to

exercise any contractual right it had. More importantly, Cavotec sued Barry for

breaching duties she owed as a Cavotec officer, not as an Inet officer. Whether she

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caused Inet to exercise a contractual right it purportedly had therefore is irrelevant to

whether she breached her fiduciary duties to Cavotec.

Similarly, an independent basis for the breach of fiduciary duty claim

existed apart from any contractual claim under the APA. The jury found Inet liable for

breach of the APA because Inet failed to pay Cavotec the customer payments it received

on Cavotec’s behalf. The jury found Barry liable because she breached the general

fiduciary duties she owed as a Cavotec officer. Substantial evidence supports the finding

that Barry not only caused Inet to withhold payments to Cavotec, but she also backdated

invoices and created other false invoices to conceal Inet’s failure to make the required

payments. The jury also found that Barry converted $20,000 of Cavotec’s funds to her

personal use. These actions go well beyond causing Inet not to turn over all the payments

it received and nothing in the APA or any other contract modified or limited the duties

Barry owed as a Cavotec officer.

Barry contends Cavotec’s claim against Inet for breach of the APA barred

its claim against Barry for breach of fiduciary duty because the jury awarded the identical

damages on both claims. The breach of distinct duties, however, may cause the same

damages (see Cleveland v. Johnson (2012) 209 Cal.App.4th 1315, 1344-1345), and Barry

cites no authority holding that a claim is foreclosed merely because the damages on the

claim are identical to the damages on another claim.

Finally, Barry contends Delaware law barred Cavotec’s punitive damages

claim against her because Delaware does not allow punitive damages on a breach of

fiduciary duty claim. Assuming the trial court erred in applying California law on

punitive damages, Barry suffered no prejudice because the jury did not award any

punitive damages against her.

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D. The APA’s Limits on Liability Did Not Apply to Cavotec’s Claims Against Colaco

1. The APA’s Exclusive Remedy Provision Did Not Bar Cavotec’s Claim

Against Colaco for Breach of the Employment Contract

Colaco contends we must reverse the jury’s damage award for breaching

his Employment Contract because the jury awarded Cavotec the same damages on the

claim against Inet for breaching of the APA. Colaco asserts that result is barred by the

APA’s exclusive remedy provision and its integration clause. We disagree with Colaco’s

interpretation of both the jury’s verdict and the APA.

The interpretation of a jury’s verdict is a question of law we review de

novo. (Saxena v. Goffney (2008) 159 Cal.App.4th 316, 325; City of San Diego v. D.R.

Horton San Diego Holding Co., Inc. (2005) 126 Cal.App.4th 668, 678.) Similarly,

interpretation of a contract is a question of law we review de novo when, as here, the

parties offer no extrinsic evidence on the contract’s meaning. (Founding Members of the

Newport Beach Country Club v. Newport Beach Country Club, Inc. (2003)

109 Cal.App.4th 944, 955 (Founding Members).)

In interpreting a contract, our basic goal “is to give effect to the parties’

mutual intent at the time of contracting. [Citations.] When a contract is reduced to

writing, the parties’ intention is determined from the writing alone, if possible.

[Citation.] ‘The words of a contract are to be understood in their ordinary and popular

sense.’” (Founding Members, supra, 109 Cal.App.4th at p. 955.) “If contractual

language is clear and explicit and does not involve an absurdity, the plain meaning

governs.” (Service Employees Internat. Union, Local 99 v. Options-A Child Care &

Human Services Agency (2011) 200 Cal.App.4th 869, 879.)

Colaco’s argument assumes the jury held him liable for Inet’s breach of the

APA simply because the jury awarded the same amount of damages on the claims for

breach of the APA and breach of the Employment Contract, and those damages represent

the amount of customer payments Inet failed to turn over to Cavotec under the APA.

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Although the jury awarded the same damages for breaching the two contracts, we may

not conclude the jury held Colaco responsible for Inet’s breach of the APA. Rather, the

verdict means nothing more than the jury found Colaco’s breach of the Employment

Contract resulted in the same damages as Inet’s breach of the APA.

In awarding damages against Inet, the jury determined Inet breached its

obligations under the APA to turn over the customer payments it received for work

performed and products delivered after the closing. The jury awarded damages against

Colaco because it determined he breached his obligation under the Employment Contract

to devote his best efforts to Cavotec’s business and operations. Substantial evidence

supports a jury finding that Colaco breached that obligation by causing Inet to withhold

payments Cavotec otherwise was due under the APA and by concealing that conduct

through the submission of backdated and other false invoices. Although they may be

related, Inet’s obligations under the APA are separate from Colaco’s obligations under

the Employment Contract. The breach of these separate obligations by two distinct

parties gave rise to separate causes of action. Colaco cites no authority excusing his

breach of the Employment Contract merely because that breach caused Inet to breach the

APA.

To support his contrary conclusion, Colaco points to the exclusive remedy

provision of article 7 in the APA, which defines the parties’ obligations to indemnify one

another for losses relating to the APA, the limits of those obligations, and the procedures

for seeking indemnification. Section 7.2(a) defines Inet’s obligation to indemnify

Cavotec for losses caused by Inet’s breach of any representation, warranty, covenant, or

agreement Inet made in the APA “or in connection with the transactions contemplated

[by the APA].” Section 7.2(b) defines Colaco’s obligation to indemnify Cavotec, but that

obligation is narrower than Inet’s because section 7.2(b) simply requires Colaco to

indemnify Cavotec for losses caused by Colaco’s breach of any representation, warranty,

38

covenant, or agreement he made in the APA. Section 7.2(b) does not extend Colaco’s

indemnification obligations more broadly to the transactions contemplated by the APA.

Section 7.9 sets forth the exclusive remedy provision on which Colaco

relies. That section provides, “The indemnification provisions of this Article 7 are the

sole and exclusive remedy following the Closing for any breaches or alleged breaches of

any representation, warranty or other provision of this Agreement or the transactions

contemplated hereby.” Cavotec, however, did not sue Colaco for breaching any of the

representations, warranties, or promises he made in the APA. Rather, it sued him for

separately breaching the promises he made in his Employment Contract. Moreover, as

stated above, Colaco’s indemnification obligations under the APA extend only to his

breach of the representations, warranties, or promises he made in that agreement; those

obligations do not extend more broadly to all transactions contemplated by the APA.

Colaco fails to explain how the APA’s indemnity provisions provide the exclusive

remedy for breach of an obligation that is not subject to the indemnity provisions. We

therefore do not interpret the exclusive remedy provision to apply to Cavotec’s claim

Colaco separately breached his Employment Contract.

Finally, based on the APA’s integration clause,10

Colaco argues the APA

supersedes the Employment Agreement and all other contemporaneous agreements

addressing the same subject matter as the APA, and therefore prevents Cavotec from

using any obligations he assumed under the Employment Contract to hold him liable for

Inet’s breach of the APA. We do not interpret the APA in the same manner.



10 Section 8.5 of the APA states, “This Agreement, together with the

Disclosure Schedules and the exhibits and schedules hereto, constitutes the entire

agreement among the parties with respect to its subject matter and supersedes all prior or

contemporaneous agreements, understandings and negotiations, both written and oral,

among the parties with respect to such subject matter.”

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All parties acknowledge the Employment Agreement is a contemporaneous

agreement that was entered into as part of the larger transaction contemplated by the

APA. As such, we interpret the APA together with the Employment Contract. Although

the APA includes an integration clause, it makes little sense to view the APA as

superseding the contemporaneously created Employment Contract. Adopting Colaco’s

argument would mean the parties intended the APA to render the simultaneously created

Employment Contract superfluous, an odd result because there would have been no

reason to create the Employment Contract at all. (Civ. Code, § 1642 [“Several contracts

relating to the same matters, between the same parties, and made as parts of substantially

one transaction, are to be taken together”]; R.W.L. Enterprises v. Oldcastle, Inc. (2017)

17 Cal.App.5th 1019, 1031 [“courts have construed together contemporaneously

executed writings under Civil Code section 1642 even if one of the writings contains an

integration clause”]; Hilb, Rogal & Hamilton Ins. Services v. Robb (1995)

33 Cal.App.4th 1812, 1826 & fns. 10 & 11 [construing corporate merger agreement

containing integration clause with employment agreement where the two were drafted

contemporaneously and cross-referenced each other].)

The APA and the Employment Contract present no difficulty when

interpreted together: the APA governed the terms of Cavotec’s purchase of Inet’s assets

and the Employment Contract governed the terms of Colaco’s employment with Cavotec.

The APA recognized that Colaco would work for Cavotec after the closing, but it did not

establish any terms or conditions for that employment. Instead, the terms and conditions

for Colaco’s employment were set forth in the Employment Agreement, and those terms

included his obligation to devote his best efforts to Cavotec’s business and operations.

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2. The APA Did Not Prevent a Punitive Damages Award Against Colaco

Colaco also contends the APA included a punitive damages waiver that

prevented the jury from awarding punitive damages against him on Cavotec’s breach of

fiduciary duty claim. He is mistaken.

Section 7.3 of the APA provides, “Notwithstanding anything herein to the

contrary, neither [Inet], Colaco, [nor Cavotec] shall have any liability under this

Agreement for, and Losses shall not include, any punitive, special, consequential, indirect

or incidental damages, unless paid pursuant to a Third Party Claim.” (Italics added.)

The italicized language limits the punitive damages waiver to liabilities

under the APA. As explained above, Colaco’s liability to Cavotec does not arise under

the APA, but rather the common law fiduciary duties he owed as an officer of Cavotec

and the Employment Contract. Cavotec raised this waiver limitation in its responding

brief, and Colaco’s reply fails to explain why this limitation does not apply.

E. The Effect of Granting JNOV on the Existing Judgment

As we have explained, Cavotec remained liable to Inet for the second

$2 million payment owed under the APA, despite Inet’s failure to fully perform its

obligations under that agreement.11 Thus, Inet is entitled to recover on its complaint for



11 In its supplemental brief, Cavotec argues the $2 million payment would

have been owed to Colaco, rather than Inet, under the terms of the APA because Inet, Inc.

was dissolved. However, the parties have made no significant effort to distinguish

between Inet Inc. and Inet LLC throughout this litigation, and the latter has been treated

as Inet Inc.’s successor in interest. We conclude Cavotec has waived any right to claim

otherwise on appeal.

But even if the claim were not waived, we would not find it persuasive.

Because Colaco is jointly and severally liable with Inet (and Barry) for the $1.313 million

in compensatory damages awarded to Cavotec, the distinction between Inet and Colaco is

immaterial for purposes of analyzing the effect of Cavotec’s liability as an offset against

that compensatory award.

We recognize Cavotec’s overarching point is somewhat different, however.

It contends that if Colaco, rather than Inet, were recognized as the proper recipient of the

$2 million payment, then the offset attributable to that obligation would most

appropriately be applied against Colaco’s punitive damage award – the award for which

41

Cavotec’s failure to make that payment, and the trial court erred by denying Inet’s motion

for JNOV to account for Cavotec’s liability.

We asked the parties to provide us with supplemental briefing, addressing

how the offset of Cavotec’s liability against the amounts awarded to it in the judgment

would affect the judgment in relation to each of them. Having considered their

arguments, we conclude the trial court should enter a new judgment in favor of Inet and

against Cavotec for $687,000 in compensatory damages on the complaint; in favor of

Cavotec and against Colaco for $2 million in punitive damages on Cavotec’s crosscomplaint;

and in favor of Cavotec and against Barry on Cavotec’s cross-complaint.

We begin with the basic proposition that “[t]he offset is the equivalent of

payment.” (Margott v. Gem Properties, Inc., supra, 34 Cal.App.3d. at p. 856.) Thus, the

offset of Inet’s right to recover $2 million from Cavotec on the complaint against



he is solely liable – thus leaving intact Cavotec’s judgment against all three crossdefendants,

jointly and severally, for compensatory damages. We do not find this

argument persuasive.

First, as a matter of procedure, the offsetting compensatory damage claims

should have been fully resolved, and thus any offset applied, as part of the trial’s liability

phase – before any award of punitive damages had been made. And second, as a matter of

policy, compensatory damage awards within a case should first be offset against each

other, rather than against any punitive damage award, because the former are

dischargeable in a bankruptcy, while the latter would not be. It would undermine the rule

of nondischargeability, and operate as a windfall, if a party could satisfy its punitive

damage liability by offsetting a compensatory award in the same case, while preserving

that defendant’s own compensatory liability, which then could be discharged.

And finally, in the absence of such overriding considerations that determine

how offsetting awards would be applied within a case, the rule would be that if Colaco

were the party entitled to claim the offset, it is he who would decide. “Offset is

expressed as a right of the judgment debtor. [Citations.] Since it is his right, the

judgment debtor may elect to exercise or to refrain from exercising it. Where he has

several rights of offset, the judgment debtor may similarly elect which of them to

exercise in a particular action.” (Margott v. Gem Properties, Inc. (1973) 34 Cal.App.3d.

849, 855 [discussing the right in the context of a defendant’s right to rely on a separate

judgment against the plaintiff as an offset to the liability established in the case] .)

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Cavotec’s right to recover $1.313 million against Inet on the cross-complaint effectively

pays Inet’s liability in full, and leaves Cavotec owing Inet a net amount of $687,000 on

the complaint.

Moreover, Inet’s effective payment of the compensatory damages owed to

Cavotec also relieved Colaco and Barry of their joint and several liability for those same

damages: “[I]t has long been recognized that if one tortfeasor pays partial compensation

to the plaintiff, the liability of other tortfeasors will be correspondingly reduced: ‘. . .

payments by one tortfeasor on account of a harm for which he and another are each

liable, diminish the amount of the claim against the other whether or not it was so agreed

at the time of payment and whether the payment was made before or after judgment.”

(Krusi v. Bear, Stearns & Co. (1983) 144 Cal.App.3d 664, 673.)

Colaco claims that because the offset wipes out his liability for

compensatory damages, we must also reverse the award of punitive damages imposed

against him. (See Berkely v. Dowds (2007) 152 Cal.App.4th 518, 530 [“‘[a]n award of

exemplary damages must be accompanied by an award of compensatory damages”].) We

disagree. As Cavotec points out, the satisfaction of a compensatory damage award by

offset does not mean those damages were never awarded. As we have explained, it

merely means the award was effectively paid. Hence, “‘where a claimant’s award of

compensatory damages was completely offset, he could still receive punitive damages.’”

(Fullington v. Equilon Enterprises, Inc. (2012) 210 Cal.App.4th 667, 686-687

(Fullington); see Esparza v. Specht (1976) 55 Cal.App.3d 1, 9 (Esparza).)

Colaco’s attempt to distinguish Fullington and Esparza is unpersuasive.

He argues those cases involve an offset between two distinct claims, but the offset here is

an “internal” adjustment within “the breach of contract claim,” and therefore the claim

“fails for lack of harm.” (Italics and underlining omitted.) But these offsetting liabilities

do not arise within a single breach of contract claim – they arise out of entirely separate

breaches of contract by opposing parties, each of which gave rise to a distinct harm.

43

Indeed, it is that conclusion which lies at the heart of our determination that Inet’s breach

of the APA did not excuse Cavotec’s payment obligation under that same contract.

We also reject Colaco’s suggestion that we should remand the punitive

damages award for reconsideration in light of the offset determination. In support,

Colaco relies on Krusi v. Bear, Stearns & Co., supra, 144 Cal.App.3d at p. 681. There,

the court remanded a punitive damage award for reconsideration following its

determination that offsets should have reduced the compensatory award. But the offsets

were attributable to payments from unrelated third parties, not involved in the lawsuit,

which had the effect of reducing the harm caused by the defendant’s act of conversion.

Here, by contrast, the offset was attributable to a party held jointly and severally liable

with Colaco for the harm intentionally caused, and it did not reduce that harm. We can

conceive of no reason why Inet’s satisfaction of the joint liability shared with Colaco

would reduce Colaco’s culpability for his proven misconduct. Consequently, no

reconsideration of the punitive damage award is warranted.

The judgment is reversed and we remand to the trial court with instructions

to enter a new judgment in favor of Inet and against Cavotec for $687,000 in

compensatory damages on Inet’s complaint; in favor of Cavotec and against Colaco for $2 million in punitive damages on Cavotec’s cross-complaint; and in favor of Cavotec and against Barry on Cavotec’s cross-complaint. All parties are to bear their own costs on appeal.