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June 30, 1953


The opinion of the court was delivered by: DIMOCK

In this action, United States Plywood Corporation, which I shall call 'Plywood', sues Hudson Lumber Company and Eagle Pencil Company, which I shall call 'Hudson' and 'Eagle' respectively, to recover $ 193,180.65 alleged to be due for cedar logs sold and delivered by Plywood to Hudson under a contract guaranteed by Eagle. The answer of Hudson and Eagle contains a counterclaim for rescission of the contract.

Plywood has made this motion for summary judgment striking out that counterclaim pursuant to Rule 56, F.R.C.P., 28 U.S.C.A.

 The counterclaim asks rescission of the contract on two alternative grounds: first, that Hudson entered into it under a mistake as to the proper construction of the provisions for fixing the price of the logs and that Plywood was guilty of certain unrelated breaches so that there arose a right of rescission, and second, that if Hudson was correct as to its construction, Plywood's insistence upon payment according to the incorrect construction plus the unrelated breaches of the contract gave rise to a right of rescission.

 The motion is based upon the position that any right of Hudson to rescind has been lost by delay and acts of affirmance of the contract for a long period after knowledge of all of the alleged grounds for rescission except those too trivial to be significant.

 The contract was dated December 9, 1947. It called for the sale and delivery by Plywood to Hudson of all the merchantable cedar logs to be derived by Plywood from a tract of about one billion feet of timber in the State of California, known as the LaTour Timber, and the payment therefor by Hudson of Plywood's cost of such logs, as defined in the contract, plus 10% of such cost. A time limit of 25 years was fixed by the contract.

 The LaTour Timber consisted of pine and fir besides the cedar. The contract recited that all of the timber was to be cut at the same time and the logs of all three kinds delivered at substantially the same point, the cedar for Hudson and the pine and fir for Plywood. It provided in substance that, of the cedar logs, only those which scaled 50% merchantable should be delivered.

 The definition of cost included 'logging costs' and provided 'logging costs * * * shall be computed on a common cost per M ft. for all species derived from the LaTour timber and this common cost will be the cost per M ft. of cedar logs delivered to Hudson hereunder.'

 A few months after the signing of the contract and before any logs had been delivered a controversy arose over the interpretation of this definition which is the basis of Hudson's plea for rescission on the ground of mistake. Plywood contended that the common cost should be divided in proportion to the gross footage delivered of each of the three kinds of logs while Hudson and Eagle contended that the apportionment should be according to the net merchantable footage delivered of each. This makes a substantial difference because there is a larger unmerchantable content in the average cedar log than in the average pine or fir log. Thus if the logging cost were apportioned according to the merchantable footage in each log delivered to the common destination instead of the total footage in each log delivered there, the cedar would bear a much smaller part of it.

 The contract provides for tentative monthly billings and the monthly bills have been rendered on the gross footage rather than the net footage basis. Costs are to be finally determined, the contract directs, at the close of each calendar year by Arthur Andersen & Co., certified public accountants. 'Determination of cost of logs by said certified public accountants shall be final and binding upon the parties hereto.' Arthur Andersen & Co. determined the cost for the period ended December 31, 1948, on the gross basis contended for by Plywood, arriving at a figure of $ 58,163.32. They used the same basis for the years 1949, 1950 and 1951 and Plywood used it in the tentative billings for 1952, giving the following as Plywood's calculation of cost plus 10% to December 31, 1952. Arthur Andersen & Co. report 6 mos. ending 12/31/48 $ 58,163.32 " " " " " yr. ending 12/31/49 182,084.07 " " " " yr. ending 12/31/50 210,720.84 " " " " yr. ending 12/31/51 198,149.47 Plywood estimate yr. ending 12/31/52 175,825.33 $ 824,943.03

 Hudson has steadfastly maintained throughout that the net basis should be used. It claims to have learned in May, 1949 from Arthur Andersen & Co. that their first calculation had been on the net basis and that Plywood had induced them to change it to the gross basis.

 In August, 1949, Hudson brought an action against Plywood in the Supreme Court of California for a declaratory judgment construing the contract and for an injunction against the compelling of arbitration by Plywood pursuant to the provisions of the agreement. In the complaint Hudson stated 'Plaintiffs (Hudson and its affiliate Elkins Sawmill, Incorporated) are ready, able, and willing and hereby offer to do equity, and perform the contract as the same may be interpreted by the Court herein.'

 That action was removed to the United States District Court for the Northern District of California and then stayed pending arbitration under a mandatory arbitration provision of the contract. The order staying the action was affirmed by the Court of Appeals on May 5, 1950, 181 F.2d 929.

 In March 1951 Hudson demanded arbitration and on November 5, 1951, a majority of the arbitrators handed down an award as follows:

 '1. That the theory and basis of cost accounting as followed in the audits and reports of Arthur Andersen & Co. for the years 1948 and 1949 are pursuant to the proper ...

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