COMPUTER SYSTEMS OF AMERICA, INC. vs. WESTERN RESERVE LIFE ASSURANCE COMPANY OF OHIO.

GREANEY, C.J. This is an action by Computer Systems of America, Inc. (CSA), against Western Reserve Life Assurance Company of Ohio (Western Reserve) for breach of a lease of computer equipment. A judge of the Superior Court, after trial without a jury, concluded that Western Reserve had properly terminated the lease and, further, that because CSA had not

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complied with certain provisions of the lease it was not entitled to be paid a termination charge as called for by the lease. CSA has appealed. [Note 1] We reverse.

The following facts are taken from the judge's findings with some supplementation from the record. On September 13, 1973, Western Reserve executed an agreement with CSA for the lease of an IBM 360/30 F computer system for Western Reserve's business. The lease consists of eighteen pages, three appended schedules, and an exhibit, and was drawn by CSA in accordance with its standard form for the lease of computer equipment. In section 1 and schedule 1 of the lease, the system is described. It consists of six items or parts of hardware: the 2030 processing unit, 1051 control unit, and 1052 printer keyboard (and related equipment) which together form the CPU (central processing unit); and the 2821 control unit, 2540 card read punch, and 1403 printer (and related equipment) which together form the I/O (input/output unit). [Note 2] (Schedule 1, containing a description of each piece of leased hardware, is attached to this opinion as Appendix A). In sections 2 and 3, the term of the lease is established at sixty months from October 15, 1973, the date of the first rental payment. Western Reserve was obligated to pay rent in sixty installments based on a factor of .011748 of the invoice cost of each item set forth in schedule 1, with payments due on the fifteenth of each month.

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The critical provision of the lease, insofar as this controversy is concerned, is the first paragraph of section 12.2, captioned "Termination with Respect to Items of Equipment." This provision allows Western Reserve to terminate the lease with respect to the "Equipment or any Item of Equipment having a model number, serial number and Invoice cost as set forth on Schedule 1" (see Appendix A), when Western Reserve determines that the equipment or any item of equipment is "obsolete or surplus to [its] requirements." The provision leaves this determination to Western Reserve's "sole judgment," but requires ninety days' prior notice of termination. [Note 3]

Approximately one year after execution of the lease, Western Reserve decided that an increase in its volume of business necessitated upgrading the CPU. It entered into negotiations with CSA for replacement of the CPU with a larger CPU. These negotiations continued until the fall of 1975, when Western Reserve concluded that agreement could not be reached on the terms of a new lease and decided to purchase its own larger CPU. On October 21, 1975, Western Reserve notified CSA by letter of its intention to terminate the entire lease within ninety days, reasoning that section 12.2 gave it the right to terminate completely when the CPU became obsolete. The letter also sought further discussions concerning an offer Western Reserve had made to purchase a larger CPU. Despite the request for discussions, Western Reserve, one week later, purchased a larger CPU from another company.

Subsequently, the parties engaged in further negotiations about disposition of the old system. On November 7, 1975, Western Reserve offered to buy the entire old system from CSA

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for its "termination value" (see part 2 of this opinion, infra). On December 3, 1975, it renewed this offer and reaffirmed its intention to terminate the entire lease. On December 4, 1975, CSA responded by stating that it would agree to termination of the lease with respect to the CPU, but not the I/O, [Note 4] which it believed was neither obsolete nor surplus. This position was consistent with CSA's construction of the termination provision during the parties' prior discussions (namely, that termination could be effected only as to individual items of equipment which had become obsolete or surplus). CSA also offered to sell Western Reserve the old CPU component and to continue leasing it the I/O component.

In January, 1976, the parties agreed to extend the termination date of the lease to February 15, 1976. On January 28, Western Reserve withdrew its offer to purchase the entire old system. By that date it had purchased a new I/O from another company to replace the old I/O which it had been using until then with its new CPU. On February 15, Western Reserve considered the lease terminated and stopped paying rent on the entire system. On February 19, 1976, Western Reserve requested instructions from CSA as to disposition of the I/O and reiterated its position as to the meaning of the termination provision of the lease. For its part, CSA continued billing monthly rental fees on the I/O through April, 1976. At that time, it removed the I/O, reserving its rights under the lease. This lawsuit followed.

1. Termination of the lease. Surprisingly, both parties agree that the lease is unambiguous -- an agreement which renders construction of the lease, on the facts, a matter of law, for this court. [Note 5] See Monadnock Display Fireworks, Inc. v. Andover,

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388 Mass. 153, 157 (1983); Edwin R. Sage Co. v. Foley, 12 Mass. App. Ct. 20, 27 (1981). Moreover, the parties' agreement that the lease is free from ambiguity requires that the critical words and phrases of the lease be construed in accordance with their ordinary and usual sense, see Ober v. National Cas. Co., 318 Mass. 27, 30 (1945); Fried v. Fried, 5 Mass. App. Ct. 660, 663 (1977), giving reasonable meaning to each of the provisions of the lease. [Note 6] See McMahon v. Monarch Life Ins. Co., 345 Mass. 261, 264 (1962); St. Germain & Son v. Taunton Redevelopment Authy., 4 Mass. App. Ct. 46, 49 (1976).

The language in dispute here is "obsolete or surplus to lessee's requirements," "in lessee's sole judgment," and "equipment or any item of equipment." CSA maintains that this language

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permits Western Reserve to terminate the lease only as to items of hardware which, using its reasonable judgment, it determines are individually no longer functionally usable or needed for its business. CSA argues that the lease can be terminated with respect to the system as a whole only when both of its major components, the CPU and the I/O, are no longer functionally usable or needed. Western Reserve, on the other hand, contends that it has the right to terminate the lease with respect to the entire system when, using its reasonable judgment, it determines that the heart of the system, the CPU, can no longer functionally satisfy its needs. Western Reserve urges that sound business practice, as well as functional use, constitute valid bases for deciding that all of the equipment was no longer needed.

We agree with CSA's construction of the lease. Lexicographers define the word "obsolete" as "no longer active or in use" [Note 7] or as "[n]o longer used or useful, because of outmoded design or construction." [Note 8] With respect to the computer equipment involved in this case, the word "obsolete" refers, in our view, to Western Reserve's technical or functional requirements. If the equipment, or some part of it, became technologically outmoded or no longer capable of handling Western Reserve's day-to-day business needs, the lease could be terminated as to the equipment or that item. "Surplus" has the different connotation of "excess" or whatever "remains when use or need is satisfied." [Note 9] In our view, surplus pertains to Western

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Reserve's over-all business purposes and operations. If Western Reserve decided, for example, that its operations had changed to the point where the equipment was no longer required or capable of carrying them out effectively, it would have the right to terminate the lease under the surplus prong of section 12.2. Although there may be some overlap in the two terms, they are not redundant.

Everyone agrees that the CPU had become obsolete and that Western Reserve could properly terminate the lease as to that component. The I/O, on the other hand, was completely compatible with the new CPU and in fact was used with it by Western Reserve for several months while the parties discussed settlement of their dispute over termination. The I/O was, therefore, not obsolete. Nor was it surplus. There is no question that the I/O could have been used thereafter with the new CPU, and the judge made no finding (and none would have been warranted by the evidence) that the I/O was inadequate to Western Reserve's needs. She found it to be surplus only by stretching the term surplus to cover nonfunctional situations. This construction, however, gives the word surplus the meaning of "not wanted," rather than "not needed or used," and would allow Western Reserve to reject the I/O simply on the basis of cost or convenience. [Note 10] Such a construction would, in effect, completely nullify any limitation on Western Reserve's right to terminate and would transform section 12.2 from a clause which contemplates termination only in specific circumstances into a broad termination at-will provision. Whenever Western Reserve concluded, for whatever reason, that any major component of the system was undesirable, it could simply claim that the component had become surplus to its needs (viz. not

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wanted) and reject the entire lease. We think that, if the parties had intended at-will termination, they could have said so, either expressly or by omitting the language limiting the right to terminate.

We also believe that the text section 12.2, and other parts of the lease, support our construction because acceptance of Western Reserve's construction would render meaningless the careful distinctions in the lease between "equipment" and "item of equipment." These distinctions appear first, in section 1, which describes the system in terms of a detailed line-by-line itemization of equipment in schedule 1 (see Appendix A); thereafter, in the provision in dispute; and later, in the third through fifth paragraphs of section 12.2 dealing with the computation of the termination charge. The precise wording of section 12.2 is particularly revealing: "If the Equipment or any Item of Equipment having a model number, serial number and Invoice Cost as set forth in Schedule 1 hereto describing such Item [Appendix A] shall be obsolete or surplus to Lessee's requirements in Lessee's sole judgment, then Lessee may, at its option . . . terminate this Lease with respect to such Equipment or Item . . ." The repetition of the phrase "item of equipment," combined with (1) the reference to the individual breakdown in schedule 1 of the items of hardware which make up the CPU and I/O by model and serial number and invoice cost (see Appendix A), and (2) the use of the limiting word "such," expresses an intention to allow termination of only those items of hardware which Western Reserve found individually to be obsolete or surplus, rather than termination of the system as a whole (unless the system as a whole had become obsolete or surplus). Applicable here is the canon of construction that every word and phrase of a contract should, if possible, be given meaning, and that none should be treated as surplusage if any other construction is rationally possible. [Note 11]

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National Shawmut Bank v. Joy, 315 Mass. 457, 466 (1944). See Tupper v. Hancock, 319 Mass. 105, 108 (1946). Hagerty v. Myers, 333 Mass. 387, 389 (1955).

We conclude that this construction gives meaning to all of the language used in section 12.2, and elsewhere in the lease, and comports best with common sense and the probable intention of the parties. See Stop & Shop, Inc. v. Ganem, 347 Mass. 697, 701 (1964); Fried v. Fried, 5 Mass. App. Ct. at 664. Western Reserve obtains, on the one hand, the right to acquire new hardware as its business needs dictate and as new, more versatile hardware becomes available in the rapidly developing field of computer technology. Until those conditions are met CSA obtains, on the other hand, the right to insist that a major component of the system, the I/O, which accounts for one-third of the lease value, be maintained in use so long as it remains compatible with any upgraded CPU. The careful amortization of the value of the leased equipment at a factor of .011748 of each item of hardware is thus preserved, and the risk of loss by reason of obsolescence, or change in the character of Western Reserve's business, is fairly allocated.

2. Damages. Section 12.2 of the lease also requires Western Reserve to pay a charge upon the rightful exercise of its option to terminate. The provision requires both parties to "use their respective best efforts to solicit and to obtain firm written bids for the purchase or lease of such Equipment or Item" terminated, and to "submit to the other a copy of each and every offer so received." On the effective date of termination, CSA is to sell or lease the equipment to the highest bidder and Western Reserve is to pay CSA the difference between the termination value of the equipment (as fixed by schedule 2 of the lease) and the sum received by CSA from the sale or lease of the equipment.

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The judge ruled that CSA had not complied with the termination requirements, and was, therefore, not entitled to recover the termination charge. She construed the requirement of solicitation of bids as a "condition precedent" to Western Reserve's payment of any charge, and she faulted CSA for soliciting bids for the CPU only, rather than for the entire system. This determination, however, was based on the judge's acceptance of Western Reserve's construction of the lease. Since we have concluded that Western Reserve could terminate the lease with respect to the CPU only, rather than with respect to the entire system, CSA's solicitation of bids for the CPU only was of necessity in complete compliance with the termination provisions. [Note 12]

It appears that there is no other dispute over the calculation of the termination charge and thus no need to have any additional hearing on damages in the trial court. Accordingly, CSA is entitled to recover damages of $64,279.24. This figure is arrived at by subtracting $10,000 (the amount realized by CSA from the sale of the CPU to the highest bidder upon termination of the lease), from $74,279.24 (the termination value of the CPU set forth in schedule 2).

3. Conclusion. There was no formal judgment in the sense of a docketed separate piece of paper. The order for judgment in the judge's memorandum, however, meets the test for a judgment set forth in Lewis v. Emerson, 391 Mass. 517, 518-520 (1984), and disposes of all the claims in the case. Treating that order as the judgment for purposes of Mass.R.Civ.P. 58(a), as amended, 371 Mass. 908 (1977), we direct that so much of

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that judgment dealing with "Count I" of the complaint (see note 1, supra), is reversed. A new portion of the judgment is to be entered on that count which finds for CSA and awards damages of $64,729.24 with interest. The balance of the judgment is affirmed.

So ordered.

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APPENDIX A.

SCHEDULE 1

This Schedule is appended to and made a part of the Lease between COMPUTER SYSTEMS OF AMERICA, INC., Lessor, and WESTERN RESERVE LIFE ASSURANCE COMPANY OF OHIO, Lessee, dated September 13, 1973.