Glen Distributors Case Summary 8.3 Cover-2
docx
keyboard_arrow_up
School
Florida SouthWestern State College, Lee *
*We aren’t endorsed by this school
Course
1000C CGS1
Subject
Law
Date
Jan 9, 2024
Type
docx
Pages
71
Uploaded by quyensky98
Glenn Distributors v. Carlisle Plastics
Summary
stating that “[t]he standard for granting summary judgment under Rule 56 ‘mirrors the standard for a directed verdict under [Fed.R.Civ.P.] 50’ ”
Summary of this case from Price v. Trans Union, L.L.C.
See 4 Summaries
Opinion
Nos. 00-2710, 00-2790. Argued December 18, 2001.
Filed July 24, 2002. James T. Smith (Argued), Rebecca D. Ward, Blank, Rome, Comisky McCauley, Philadelphia, Pennsylvania, for appellant. David B. Snyder (Argued), Mindee J. Reuben, Fox, Rothschild, O'Brien Frankel, Philadelphia, Pennsylvania, for appellee. Before: SLOVITER and McKEE, Circuit Judges, and DEBEVOISE, District Judge. Honorable Dickinson R. Debevoise, United States Senior District Judge for the District of New Jersey, sitting by designation.
OPINION OF THE COURT McKEE, Circuit Judge. This appeal arises out of a lawsuit Glenn Distributors Corp. filed against Carlisle Plastics, Inc. for breach of a contract in which Glenn had agreed to purchase certain merchandise from Carlisle. At trial, the jury agreed that Carlisle had breached the contract and it awarded Glenn actual damages as well as lost profits. However, the district court thereafter granted Carlisle's motion for judgment as a matter of law as to the award of lost profits. The court held that,
although Glenn proved the amount of its lost profits, Glenn's failure to establish that it made reasonable efforts to "cover" precluded recovery of those consequential damages. Glenn appeals the court's order vacating the award of lost profits, and Carlisle has filed a cross-
appeal in which it argues that the district court erred in failing to hold as a matter of law that it did not breach the contract with Glenn. For the reasons that follow, we will affirm the district court's ruling as to Carlisle's liability, but reverse the order vacating the jury award for lost profits. As we note more fully below, on September 7, 1999 the district court initially granted summary judgment in favor of Carlisle. However, the court thereafter granted Glenn's motion for reconsideration and vacated that order. The matter then proceeded to trial before a jury.
I. Glenn is a purchaser and reseller of various types of close-out merchandise. Carlisle manufactures plastic goods, particularly trash bags, and sells them to wholesale and retail customers, including close-out purchasers such as Glenn. Glenn and Carlisle have had a business
relationship since at least 1995. On June 5, 1997, Carlisle faxed Glenn a list of close-out merchandise that Carlisle had available for sale. That list specified several types and quantities of
trash bags. The phrase, "[a]ll quantities subject to change," or "[q]uantities subject to change" appeared at the bottom of each of the five pages comprising the June 5 list. J.A. at 41-46. Glenn Segal, the president of Glenn Distributors, responded to the fax on June 12, 1997 by sending Purchase Order No. 10354 ("the Purchase Order") to Sandy Johnson at Carlisle. The Purchase Order was for all of the close-out goods on the June 5 list. The Purchase Order specifically referenced that list stating: "QUANTITIES ARE PER FAXED LIST FROM CARLISLE ON JUNE 5, 1997[.]" Id.
at 47 (capitals in original). The Purchase Order contained columns labeled: "Quantity," "Prod.
#," "Description," "Pack," "Price," and "Amount." Several quantities were listed in the "quantity"
column, and descriptions and prices were entered under the corresponding columns in rows reflecting the quantities that were listed for given items and prices. Id.
The Purchase Order also contained a handwritten entry asking Johnson to "PLEASE SIGN AND FAX BACK AND CALL
FOR DELIVERY APPTS." Id.
(capitals in original). On June 13, 1997, Johnson responded to the Purchase Order by sending Segal a letter thanking him for the order he had placed for "all of our close-outs." The letter also informed Segal that Johnson "had to enter the orders with a per case price so that if the quantities change we have a way to bill you for only what you have received." The June 13 letter also offered an additional 2,184 cases of merchandise for sale. Sometime thereafter, Segal faxed the letter back to Johnson accepting the additional cases Johnson had offered. Glenn offered to pay Carlisle a total amount of approximately $990,000. Between June and September 1997, Glenn sent Carlisle a total of $750,000 in eight separate payments, beginning with a $100,000 payment on June 12, 1997. Carlisle began shipping goods shortly after June 12, and continued shipping through August 1997. During that period, Carlisle
shipped approximately $736,000 worth of trash bags to Glenn. However, some of the goods that Glenn ordered from the June 5 list were never delivered because Carlisle sold them to other customers. On May 1, 1998, Glenn sued Carlisle alleging, inter alia,
that Carlisle's failure to deliver all of the trash bags listed in the June 5 fax constituted a breach of contract. Glenn claimed damages in the amount of $14,000 for payments it had made to Carlisle for goods that Carlisle never shipped, and lost profits in the amount of approximately $230,000. The latter sum represented the profit Glenn claimed it would have realized from the resale of the trash bags that Carlisle never shipped. Glenn and Carlisle eventually filed cross motions for summary judgment. Carlisle
claimed that the undisputed facts established as a matter of law that it was not under any binding obligation to sell any given quantity of goods. Glenn claimed the reverse. Glenn claimed it was entitled to summary judgment as to Carlisle's liability as a matter of law inasmuch as there was no dispute that Carlisle did not ship all of the items ordered by Glenn that were listed in the original fax. The district court, however, initially agreed with Carlisle and granted Carlisle summary judgment based upon the court's conclusion that the "subject to change" language in the June 5 fax clearly and unambiguously established that the quantities of goods Carlisle would sell could change at any time and for any reason. Accordingly, the court entered an order awarding Glenn only the $14,000 it had paid for merchandise it never received, and dismissing the remainder of Glenn's claim. However, on January 13, 2000, the court subsequently granted Glenn's motion for reconsideration and vacated the entry of summary judgment. All issues of liability and damages were then submitted to a jury at the ensuing trial. During that trial, Glenn Segal offered the following testimony about efforts he made to replace the merchandise that was ordered from the June 5 fax but never shipped: Q: Did you take any steps to cover — to cover the shortfall that had occurred as a result of this particular non-shipment?
A: I tried to, yes.
Q: Okay. Can you explain to the Court and to the members of the jury in substance the steps that you took?
A: Well, they shipped us two categories of trash bags, one was Ruffies, which is a brand name, and the other was supermarket names, which are like a — like a half-brand name, because people
know it's a certain quality when it's going to be — when it has a supermarket name on it. So, we went to trade shows, we asked salesmen, we were looking for another trash bag company where we could buy a name brand or we could buy supermarket labels at the closeout price, and we couldn't do it. We tried to — we tried to replace the goods, but really the only ones that could replace Ruffies was Carlisle, they're the only ones that make the product.
Q: Did you have any luck on the bags that weren't Ruffies?
A: No.
Q: Okay. Did you take steps to try to buy those too?
Your preview ends here
Eager to read complete document? Join bartleby learn and gain access to the full version
- Access to all documents
- Unlimited textbook solutions
- 24/7 expert homework help
A: We — we looked in the marketplace, went to trade shows, we spoke to salesmen, we — we couldn't replace them at that time.
J.A. at 303-04. On cross-examination, Carlisle's counsel questioned Segal about his earlier deposition testimony.
At his deposition, Segal had testified that he did not know who else made supermarket brand trash bags and he did not know how to discover who did. He stated, "[t]he only ones I knew had them were Carlisle and I tried to get them to do it[.]" Id.
at 308. He added that he would have to "go to the supermarket and buy up trash bags retail" to replace the ones Carlisle didn't ship. Id.
Segal had also testified in his deposition that despite twenty years in the business and numerous area contacts, he could not think of any way to replace the private label bags other than buying from Carlisle or purchasing bags at retail prices. See id.
at 309-10 As noted earlier, the jury returned a verdict in favor of Glenn, and awarded a total of $244,003.00 in damages, including $230,003.00 for the lost profit Glenn claimed resulted from not being able to resell the merchandise it expected to receive from Carlisle. Following trial, the district court denied Carlisle's Rule 50 motion for judgment as a matter of law as to liability, but granted it as to the award of lost profits. The court reasoned that Glenn failed to establish that it could not reasonably have avoided losing those profits by attempting to "cover" and entered judgment in favor of Glenn for $14,000 plus interest. This appeal and cross-appeal followed. The district court had subject matter jurisdiction over plaintiff's claims pursuant to 28 U.S.C. § 1331
. We have jurisdiction over the appeal and the cross-appeal under 28 U.S.C. § 1291
.
II. As noted earlier, Carlisle is cross-appealing the district court's order of January 13, 2000 by which the court vacated the order of September 7, 1999 granting partial summary judgment in favor of Carlisle. Inasmuch as our discussion of Glenn's appeal of the court's grant of Carlisle's motion for judgment as a matter of law overlaps the issues raised in Carlisle's cross-appeal, we need not address the court's summary judgment ruling separately. Our review of the district court's grant of Carlisle's Rule 50 motion is plenary. See Rhone Poulenc Rorer Pharmaceuticals, Inc. v. Newman Glass Works,
112 F.3d 695, 696
(3d Cir. 1997). In reviewing the grant of a judgment as a matter of law under Fed.R.Civ.P. 50
following a jury verdict, we must view the evidence in the light most favorable to the nonmoving party, and determine whether the record contains the "minimum quantum of evidence from which a jury might reasonably afford relief." Mosley v. Wilson,
102 F.3d 85, 89
(3d Cir. 1996), quoting Parkway Garage, Inc. v. City of Philadelphia,
5 F.3d 685, 691
(3d Cir. 1993). The standard for granting summary judgment under Rule 56 "mirrors the standard for a directed verdict under Fed.R.Civ.P. 50(a)
[.]" Anderson v. Liberty Lobby, Inc.,
477 U.S. 242, 250
, 106 S.Ct. 2505
, 91 L.Ed.2d 202
(1986); see also Beers-Capitol v. Whetzel,
256 F.3d 120, 130
n. 6 (3d
Cir. 2001). A moving party is entitled to summary judgment "if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that
there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Fed.R.Civ.P. 56(c)
; see also Celotex Corp. v. Catrett,
477 U.S. 317
,
106 S.Ct. 2548
, 91 L.Ed.2d 265
(1986). Accordingly, we must determine if the evidence here was sufficient to establish a binding contractual obligation on the part of Carlisle to sell a given quantity of merchandise to Glenn. If it was, we must then consider if Glenn presented sufficient evidence to prove consequential damages in the form of lost profits that resulted from Carlisle's breach. In resolving this latter inquiry, we must consider Glenn's argument that the district court improperly placed the burden of proving reasonable efforts to cover on Glenn rather than requiring Carlisle to establish Glenn's
failure to cover as an affirmative defense. A. The district court concluded that the substantive law of Pennsylvania controlled this dispute, and that is not challenged on appeal. It is well-settled under Pennsylvania contract law that the meaning of a clear and unambiguous written contract and the intent of the contracting parties must be determined from the four corners of the contract. See Steuart v. McChesney,
498 Pa. 45
, 444 A.2d 659, 661
(1982). However, if the written contract is ambiguous, a court may look to extrinsic evidence to resolve the ambiguity and determine the intent of the parties. See Bohler-
Uddeholm Am., Inc. v. Ellwood Group, Inc.,
247 F.3d 79, 93
(3d Cir. 2001). We have explained that a contract is ambiguous under Pennsylvania law Inasmuch as the district court was exercising diversity jurisdiction, it was required to apply the substantive law of Pennsylvania, the forum state. See Erie R.R. Co. v. Tompkins,
304 U.S. 64, 78
,
58 S.Ct. 817
, 82 L.Ed. 1188
(1938); McKenna v. Pacific Rail Serv.,
32 F.3d 820, 825
(3d Cir. 1994). Our analysis is therefore controlled by applicable decisions of the Pennsylvania Supreme Court. If that Court has not decided an issue before us, we look to decisions of the intermediate appellate courts of Pennsylvania for guidance. See McKenna,
32 F.3d at 825
; Nationwide Ins. Co. v. Resseguie,
980 F.2d 226, 229
(3d Cir. 1992). Of course, our analysis is also controlled by applicable state statutes as interpreted by Pennsylvania's appellate courts.
if, and only if, it is reasonably or fairly susceptible of different constructions and is capable of being understood in more senses than one and is obscure in meaning through indefiniteness of expression or has a double meaning. A contract is not ambiguous if the court can determine its meaning without any guide other than a knowledge of the simple facts on which, from the nature of the language in general, its meaning depends; and a contract is not rendered ambiguous by the mere fact that the parties do not agree on the proper construction.
Duquesne Light Co. v. Westinghouse Elec. Corp.,
66 F.3d 604, 614
(3d Cir. 1995) ( quoting Samuel Rappaport Family Partnership v. Meridian Bank,
441 Pa.Super. 194
, 657 A.2d 17, 21-22
(1995)). Here, the June 5 fax from Carlisle to Glenn clearly and unambiguously set forth specified quantities for each description of merchandise offered for sale to Glenn. However, as noted, the fax also stated: "quantities subject to change" and "quantities per faxed list." J.A. at 41-46. The
district court concluded that Carlisle's specification of precise quantities while at the same time informing the buyer that the quantities were "subject to change" created an ambiguity as to the intent of the parties regarding the quantity Carlisle intended to sell, and the quantity Glenn intended to buy from the faxed list. We agree. The Purchase Order specifically stated that Glenn wanted to buy the "quantities . . . per faxed list
. . . on June 5, 1997." Id.
at 47. Moreover, as noted above, the Purchase Order stated the specific quantities of each item Glenn was agreeing to buy, and those quantities were taken directly from Carlisle's June 5 fax. Given this scenario, Carlisle may have intended the notification that "quantities [were] subject to change" to inform Glenn that Carlisle was not promising any specific quantity and that the quantities on the list were only illustrative of the quantities Carlisle might
have available for sale. However, Glenn did not interpret the fax in this manner as Glenn took some care to specify the quantities it wanted to purchase, and the specific price for each of the types of merchandise it wanted. Moreover, Glenn thereafter began paying Carlisle based upon the quantities specified in the Purchase Order. Carlisle may also have intended the reservation of quantities listed in the June 5 fax to inform Glenn that, although Carlisle may have been offering the specific quantities set forth therein, Carlisle's obligation to sell them was contingent upon availability. This would have allowed Carlisle room to adjust for problems in manufacturing the items listed, and offered flexibility in the event of inventory error. Given that the language was susceptible to at least these two opposing reasonable alternatives (and perhaps others), the district court allowed extrinsic evidence of the intent of the contracting parties. Courts must be mindful to "adopt an interpretation [of ambiguous language] which under all circumstances ascribes the most reasonable, probable, and natural conduct of the parties, bearing in mind the objects manifestly to be accomplished." Metzger v. Clifford Realty Corp.,
327 Pa.Super. 377
, 476 A.2d 1, 4
(1984).
Glenn called Sandra Johnson as an adverse witness at trial in an effort to establish the meaning of
the reservation as to quantity. The explanation that she offered was that the reservation on the June 5 fax was intended to allow for any discrepancies in inventory. However, she also admitted that the merchandise that had been offered to Glenn on June 5 had been sold to other customers. She also testified that the "`quantities subject to change' on there allowed [Carlisle] to be able to ship all, none or some of a particular item." J.A. at 433. When questioned more closely, "All, none or some?" she confirmed, "Yes." Id.
Glenn's counsel then impeached Johnson with her deposition testimony. During her deposition, Glenn's counsel had asked Johnson if the reservation was intended to guard against "some inaccurate number in the computer inventory report[,]" to which Johnson responded, "Yes." Id.
at 439-40. She specifically denied that the qualification as to quantities was intended to allow Carlisle to ignore an offer from a buyer in the
event that a better deal came along. The jury obviously rejected Johnson's testimony that the disputed language was intended to allow for discrepancies in inventory or that it allowed Carlisle to sell some or all of the items listed. The jury's finding that Carlisle breached its agreement with Glenn is clearly supported by the evidence, and the district court correctly concluded that Carlisle was not entitled to judgment
Your preview ends here
Eager to read complete document? Join bartleby learn and gain access to the full version
- Access to all documents
- Unlimited textbook solutions
- 24/7 expert homework help
as a matter of law against Glenn on Glenn's breach of contract claim. Accordingly, we will affirm
the orders denying Carlisle's Rule 50(b)
motion as to liability as well as the January 13, 2000 order granting Glenn reconsideration and vacating the partial summary judgment order in favor of Carlisle. However, we do not agree that the district court was correct in granting Carlisle's Rule 50(b)
motion for judgment as a matter of law as to lost profits. B. Pennsylvania has adopted the Uniform Commercial Code ("UCC"). Under the UCC, a buyer can recover consequential damages resulting from a seller's breach of contract. See
13 PA. CONST.STAT. ANN. § 2714(c) (2002); Nat'l Controls
Corp. v. Nat'l Semiconductor Corp.,
833 F.2d 491, 495
(3d Cir. 1987). However, a buyer may recover lost profits only to the extent that the loss was not reasonably avoidable. See
13 PA. CONST.STAT.ANN. § 2715(b)(1) (2002). Accordingly, Pennsylvania imposes a duty of mitigation or "cover." That duty is defined as making "in good faith and without unreasonable delay any reasonable purchase of or contract to purchase goods in substitution for those due from the seller." See
13 PA. CONST. STAT.ANN. § 2712(a) (2002). Here, the district court concluded that Glenn had the burden of proving its reasonable efforts to cover. The court stated, "Glenn . . . must present sufficient evidence of its reasonable efforts to `cover,' that is, to purchase and resell replacement goods in an effort to offset its anticipatory losses." Glenn Distrib. Corp. v. Carlisle Plastics, Inc.,
No. CIV.A. 98-2317, 2000 WL 1224941, at *10 (E.D.Pa. Aug.29, 2000). The court stretched that duty to include not only trash bags, but anything else that "reasonably" could have been sold to a customer to recover some or all of Glenn's lost profit. The court concluded: Glenn's cover duty required it not only to look for replacement trash bags to sell to the same customers, as had bought previous Carlisle products, but to look for any replacement close-out items from any of its suppliers that Glenn could re-sell to any customers to recover some or all of
its profit. For example, Glenn could have recouped some of its lost profits by purchasing and reselling Hershey product to some customer, although perhaps not to the same customers which would have purchased the trash bags. However, there is no evidence that Glenn took any steps to look for, purchase, or sell items other than trash bags.
Id.
The court therefore required Glenn to demonstrate reasonable efforts to obtain items for resale to customers "from a myriad of manufacturers, including Hershey, Nestle, Carnation, and Johnson Johnson[.]" Id.
We conclude that was error. We hold that Carlisle, not Glenn, had the burden of proof as to Glenn's efforts to cover. Moreover, we do not believe that the Supreme Court of Pennsylvania would require a reseller to attempt to obtain any and all items that might conceivably be resold in order to mitigate lost profits resulting from a reseller's inability to acquire a particular close-out item. 1.
It is a familiar rule of law that a party who suffers a loss due to a breach of contract has a duty to make reasonable efforts to mitigate his losses. Put another way, the amount recoverable by the damaged party must be reduced by the amount of losses which could have been avoided by that party's reasonable efforts to avoid them. Furthermore, the party who has breached the contract or caused the loss has the burden of showing the losses could have been avoided through the reasonable efforts of the damaged party.
State Public School Bldg. Auth. v. W.M. Anderson, Co.,
49 Pa.Cmwlth. 420
, 410 A.2d 1329, 1331
(1980) (emphasis added; citations omitted). Thus, in applying Pennsylvania law, we stated in S.J.
Groves Sons Co.,
576 F.2d 524
(3d Cir. 1978) that "the cover rules are an expression of the general duty to mitigate damages and usually the same principles apply. The burden of proving that losses could have been avoided by reasonable effort and expense must be borne by the party who has broken the contract.
" S.J. Groves Sons Co.,
576 F.2d at 528-29
(emphasis added; citations omitted). Therefore, Pennsylvania requires that the plaintiff attempt reasonable efforts to cover in order to mitigate damages, and the failure to do so is an affirmative defense to be proven by the defendant/seller. See Koppers Co., Inc. v. Aetna Cas. and Surety Co.,
98 F.3d 1440,
1448
(3d Cir. 1996); see also Williams v. Masters, Mates Pilots of Am.,
384 Pa. 413
, 120 A.2d 896, 901
(1956); Aircraft Guar. Corp. v. Strato-Lift, Inc.,
991 F.Supp. 735, 738
(E.D.Pa. 1998); Carl Beasley Ford, Inc. v. Burroughs Corp.,
361 F.Supp. 325, 335
(E.D.Pa. 1973), aff'd,
493 F.2d
1400
(3d Cir. 1974). The district court rested its burden of proof analysis upon Big Knob Volunteer Fire Co. v. Lowe Moyer Garage, Inc.,
338 Pa.Super. 257
, 487 A.2d 953
(1985). There, the court did place the burden of proving the inability to cover on the plaintiff/buyer. See Big Knob Volunteer Fire Co.,
487 A.2d at 959-960
. However, Big Knob
involved a claim for replevin of a specific, customized item under UCC § 2-716. It is therefore distinguishable. The Official Comment to 13 PA.CONS.STAT.ANN. § 2712, which mirrors UCC § 2-712 (duty to "cover"), makes clear that the rules and burdens relating to the duty to "cover" are based upon the extent to which goods are
fungible: [T]he operation of the [UCC] section on specific performance of contracts for "unique" goods must be considered [when applying to duty to "cover"] for availability of the goods to the particular buyer for his particular needs is the test for that remedy and inability to cover is made an express condition to the right of the buyer to replevy the goods.
Official Comment, 13 PA.CONS.STAT.ANN. § 2712, P. 3. Specific performance is only appropriate where the uniqueness of goods precludes a remedy in damages. The law therefore requires the plaintiff/buyer to show the goods under a breached contract were unique. This does not apply here as the items involved, trash bags, are largely fungible. Moreover, we are bound by our prior resolution of the appropriate burden of proof as set forth in S.J. Groves Sons Co., supra.
Accordingly, it is clear that if the breaching seller believes that the plaintiff's efforts to cover were not adequate, that defendant must present sufficient evidence to allow a reasonable fact finder to deny recovery to the buyer on that basis.
Here, the district court concluded that Glenn's evidence was "not detailed or specific enough to establish that Glenn took reasonable efforts [to cover] under the circumstances[,]" because Glenn
did not provide evidence that similar merchandise could not have reasonably been acquired. Glenn,
2000 WL 1224941, at *10. However, it was up to Carlisle to establish that reasonably similar items were available and that it would have been reasonable for Glenn to acquire them. Inasmuch as Carlisle did not introduce sufficient evidence to prevail on what should have been an affirmative defense, the record supports the jury's award of lost profits. 2. Moreover, the Official Comment to 13 PA.CONS.STAT.ANN. § 2712 is instructive as to the types of goods that may be purchased as substitute merchandise in an effort to mitigate loss. Paragraph 2 of the Comment provides that a buyer may purchase "goods not identical with those involved but commercially usable as reasonable substitutes
under the circumstances of the particular case[.]" Official Comment, 13 PA.CONS.STAT.ANN. § 2712, P. 2 (emphasis added). The duty is therefore more narrow than that imposed by the district court. It does not include all
merchandise that might be resold no matter how dissimilar it might be to the original product. The district court did not cite any cases to support its conclusion that Glenn's duty of mitigating the lost sales of trash bags required it to go into the market in search of products from such diverse sources as Hershey, Nestle, Carnation, or Johnson Johnson, and our research has not disclosed any Pennsylvania appellate cases that suggest that is the law. Moreover, even assuming
arguendo that it was commercially reasonable for Glenn to look for other classes of merchandise from sources such as those, it was up to Carlisle, not Glenn, to introduce the relevant evidence and establish the commercial feasibility of doing so. Thus, we hold that the district court erred in vacating the jury award for lost damages based upon Glenn's purported failure to cover. C. In its cross-appeal, Carlisle also argues that irrespective of Glenn's duty to cover, "Glenn's evidence [as to the $230,003.00 in lost profits] was nothing more than unsubstantiated speculation and the district court's decision may be affirmed on that basis as well." Carlisle's Br. at 25. We again disagree. The district court thoroughly and adequately disposed of this argument in its Memorandum Opinion dated August 29, 2000. See Glenn,
2000 WL 1224941, at *8. There, the district court correctly noted that evidence of lost profits "need not be mathematically precise, but the evidence must establish the fact with a fair degree of probability." Id.
(internal quotations omitted), quoting Advent Sys. Ltd. v. Unisys Corp.,
925 F.2d 670, 680
(3d Cir. 1991). Moreover, the district court meticulously set forth the evidence Glenn presented in support of its claim for lost profits, and the methodology Glenn Segal used in calculating the figure that the jury awarded. We agree with the district court's analysis of this issue and reject Carlisle's challenge to the award of lost profits substantially for the reasons set forth by the district court. Under Pennsylvania law, a buyer is entitled to recover lost profits as consequential damages of a seller's breach of contract when the seller knows (or has reason to know) the buyer is purchasing
Your preview ends here
Eager to read complete document? Join bartleby learn and gain access to the full version
- Access to all documents
- Unlimited textbook solutions
- 24/7 expert homework help
goods for resale. National Controls Corp. v. National Semiconductor Corp.,
833 F.2d 491
(3d Cir. 1987). Carlisle does not claim that it did not know that Glenn was purchasing for resale. Moreover, this record would not support that argument as it is clear from the circumstances, including the quantities involved and the relationship between the buyer and seller, that Carlisle knew, or should have known, that Glenn was not going to use the trash bags itself.
The district court concluded that the following evidence sufficiently established the amount of Glenn's lost profits: The only evidence from Glenn as to the amount of its lost profits is the Damages Report prepared by [Glenn] Segal and his testimony. Carlisle challenges the reliability of the Damages Report, that is, Carlisle argues that the Report is unreliable and fails to establish the amount of lost profits with reasonable certainty or a fair degree of probability. The reliability of evidence goes to its weight rather than to its admissibility. . . .
Segal [testified] that approximately 60 cases of 20 different items used in calculating net lost profits were not Carlisle products and were not sold to Glenn under this contract. Segal did recalculate the lost profits without those 60 items, however, and Glenn urges that any difference in the final figures is infinitesimal. The jury apparently agreed and there is no basis to disturb that finding. [Sandra] Johnson testified, based on her knowledge of the products that Carlisle sells, that other items used by Segal in creating the Damages Report were not on the June 5 list or June 13 letter and were not shipped as part of P.O. No. 10354. . . . Johnson also reviewed several pages of the Report at random and testified that there were a number of items contained therein that were not sold to Glenn as part of P.O. No. 10354. However, Johnson conceded that every item included in the Damages Report had, at one time or another, been produced by Carlisle. Segal also testified that every item included in the Damages Report was received from Carlisle since June 1997, the relevant time period for this transaction, and that Glenn did not purchase private-label trash bags from any producer other than Carlisle. Johnson also testified that she did not know whether substitutions had been made at the warehouse at the time of shipping, although she did state that the shipping department had no authority to do so.
The jury heard all of this evidence and was entitled to consider all of it, particularly the credibility of witnesses. The jury apparently believed Segal's testimony that the only items that Glenn sold and included in the Damages Report had been shipped by Carlisle during the relevant
time period and that any private-label bags had been received from Carlisle. The [sic] apparently concluded, therefore, that the Damages Report was sufficiently reliable as to be accorded controlling evidentiary weight and that it accurately reflected the amount of Glenn's lost profits. There was sufficient evidence to support that finding and no basis to disturb it.
Glenn,
2000 WL 1224941, at *8 (internal citations omitted).
III.
For the foregoing reasons, the district court's order of January 13, 2000 granting Glenn's motion for reconsideration and vacating the entry of summary judgment in favor of Carlisle is affirmed. We will vacate the district court's order dated August 29, 2000 granting Carlisle's motion for judgment as a matter of law as to damages for lost profits, and remand to the district court for entry of judgment in favor of Glenn in the full amount of the jury award. Advent Systems Ltd. v. Unisys Corp.
Summary
holding that software fits within the definition of "good" in the UCC and commenting that the majority of academic commentary espouses this view
Summary of this case from DIGITAL ALLY, INC. v. Z3 TECHNOLOGY, LLC
See 25 Summaries
Opinion
Nos. 90-1069, 90-1070. Argued August 20, 1990.
Decided February 14, 1991. Rehearing and Rehearing In Banc Denied March 18, 1991. Tom P. Monteverde (argued), John M. Myers, Jean C. Hemphill, Cynthia Ruggerio, Monteverde, Hemphill, Maschmeyer Obert, Philadelphia, Pa., for appellant Advent Systems Ltd. Scott D. Patterson (argued), Michael R. Lastowski, Saul, Ewing, Remick Saul, Philadelphia, Pa., for appellant Unisys Corp. Appeal from the United States District Court for the Eastern District of Pennsylvania. Before STAPLETON, COWEN, and WEIS, Circuit Judges. OPINION OF THE COURT
WEIS, Circuit Judge. In this diversity case we conclude that computer software is a good within the Uniform Commercial Code; in the circumstances here a non-exclusive requirements contract complies with the statute of frauds; and expert testimony on future lost profits based on prior projections is
suspect when actual market performance data are available. Because the district court ruled that the Code did not apply, we will grant a new trial on a breach of contract claim. We also decide that a parent corporation is privileged in disrupting prospective contractual negotiations of its subsidiary with another party and therefore will affirm a judgment in favor of the defendant on a tortious interference count. Plaintiff, Advent Systems Limited, is engaged primarily in the production of software for computers. As a result of its research and development efforts, by 1986 the company had developed an electronic document management system (EDMS), a process for transforming engineering drawings and similar documents into a computer data base. Unisys Corporation manufactures a variety of computers. As a result of information gained by its
wholly-owned United Kingdom subsidiary during 1986, Unisys decided to market the document management system in the United States. In June 1987 Advent and Unisys signed two documents, one labeled "Heads of Agreement" (in British parlance "an outline of agreement") and, the other "Distribution Agreement." In these documents, Advent agreed to provide the software and hardware making up the document systems to be sold by Unisys in the United States. Advent was obligated to provide sales and marketing material and manpower as well as technical personnel to work with Unisys employees in building and installing the document systems. The agreement was to continue for two years, subject to automatic renewal or termination on notice. During the summer of 1987, Unisys attempted to sell the document system to Arco, a large oil company, but was unsuccessful. Nevertheless, progress on the sales and training programs in the United States was satisfactory, and negotiations for a contract between Unisys (UK) and Advent were underway. The relationship, however, soon came to an end. Unisys, in the throes of restructuring, decided it would be better served by developing its own document system and in December 1987 told Advent their arrangement had ended. Unisys also advised its UK subsidiary of those developments and, as a result, negotiations there were terminated. Advent filed a complaint in the district court alleging, inter alia,
breach of contract, fraud, and tortious interference with contractual relations. The district court ruled at pretrial that the Uniform Commercial Code did not apply because although goods were to be sold, the services aspect of the contract predominated. A jury found for Unisys on the fraud count, but awarded damages to Advent in the sum of $4,550,000 on the breach of contract claim, and $4,350,000 on the count for wrongful
Your preview ends here
Eager to read complete document? Join bartleby learn and gain access to the full version
- Access to all documents
- Unlimited textbook solutions
- 24/7 expert homework help
interference with Unisys U.K. The district court granted judgment n.o.v. to defendant on the interference claim but did not disturb the verdict awarding damages for breach of contract. On appeal Advent argues that the Distribution Agreement prohibited Unisys from pressuring its UK subsidiary to terminate negotiations on a corollary contract. Unisys contends that the relationship between it and Advent was one for the sale of goods and hence subject to the terms of statute of frauds in the Uniform Commercial Code. Because the agreements lacked an express provision on quantity, Unisys insists that the statute of frauds bans enforcement. In addition, Unisys contends that the evidence did not support the damage verdict. I. [11] THE TORTIOUS INTERFERENCE COUNT
In granting judgment n.o.v. on the tortious interference claim, the district judge reasoned that Advent was required to prove that absent interference it would have achieved an advantageous contract and that Unisys' action was not privileged. Because the parent corporation had a financial interest in the U.K. subsidiary, the court concluded that Unisys had the right to protect its own long-range interests by discouraging its subsidiary from entering into a development contract with Advent for a competing system. To prevail on a claim of intentional interference with prospective contractual relations under Pennsylvania law, plaintiff must show the following: (1) a prospective contractual relationship; (2) a purpose or intent to harm plaintiff by preventing the relationship from occurring; (3) the absence of privilege or justification on the part of the defendant; and (4) occurrence of actual damage. Silver v. Mendel,
894 F.2d 598, 601-02
(3d Cir.), (citing Thompson Coal Co. v. Pike Coal Co.,
488 Pa. 198
, 412 A.2d 466, 471
(1979)), cert. denied,
___ U.S. ___, 110 S.Ct. 2620, 110 L.Ed.2d 641 (1990). The Distribution Agreement provided that Pennsylvania law would govern.
When discussing interference with prospective contractual relations, the Pennsylvania Supreme Court has not adopted the language of the Restatement (Second) of Torts
§ 766B (1977) that favors an analysis of "proper" conduct rather than "privileged." See Glenn v. Point Park College,
441 Pa. 474
, 272 A.2d 895
(1971). Thus, privilege is still a matter for consideration in cases of prospective contractual relations. Silver,
894 F.2d at 601
. Privilege is closely related to intent, id.
at 603 n. 7, and admits of no precise definition. When a defendant acts at least in part to protect some legitimate concern that conflicts with an interest of the plaintiff, a line must be drawn and the interests evaluated. Glenn,
441 Pa. 474
, 272 A.2d at 899
. The central inquiry in the evaluation is whether the interference is "sanctioned" by the "`rules of the game' which society has adopted [defining] socially acceptable conduct which the law regards was privileged." Id.
Green v. Interstate United Management Services Corp.,
748 F.2d 827
(3d Cir. 1984), is an existing, rather than a prospective, contractual interference case but illustrates Pennsylvania law on the propriety of conduct by a parent corporation. There, defendant instructed its subsidiary not
to sign a lease tendered by the plaintiff real estate broker after an appraiser had determined that
the contract was a bad bargain. Basing our ruling on section 767 of the Restatement (Second) of Torts,
which applied in that situation, we held the interference was proper because the defendant's motive was to prevent dissipation of its subsidiary's resources. "[T]he social interests in protecting the freedom" of the defendant outweighed the plaintiff's "contractual interests." Id.
at 831. Here, although plaintiff claims interference with a prospective contractual relationship, we think a similar approach applies. We agree with the district court's reasoning that Unisys' interest in the
financial stability of its subsidiary and the need to avoid a situation where the two would be working at cross-purposes justified the disruption of negotiations with Advent. Nothing in the agreement between Advent and Unisys changed its relationships with its U.K. subsidiary, or purported to regulate that company's negotiations with Advent. That arrangements between Advent and Unisys U.K. were to be distinct from those with the parent in the United States is obvious in the fact that separate discussions were conducted in the United Kingdom. Accordingly, the judgment n.o.v. in favor of the defendant on the tortious interference count will be affirmed. II. [20] SOFTWARE AND THE UNIFORM COMMERCIAL CODE
The district court ruled that as a matter of law the arrangement between the two parties was not within the Uniform Commercial Code and, consequently, the statute of frauds was not applicable. As the district court appraised the transaction, provisions for services outweighed those for products and, consequently, the arrangement was not predominantly one for the sale of goods. In the "Heads of Agreement" Advent and Unisys purported to enter into a "joint business collaboration." Advent was to modify its software and hardware interfaces to run initially on equipment not manufactured by Unisys but eventually on Unisys hardware. It was Advent's responsibility to purchase the necessary hardware. "[I]n so far as Advent has successfully completed [some of the processing] of software and hardware interfaces," Unisys promised to reimburse Advent to the extent of $150,000 derived from a "surcharge" on products purchased. Advent agreed to provide twelve man-weeks of marketing manpower, but with Unisys bearing certain expenses. Advent also undertook to furnish an experienced systems builder to work with Unisys personnel at Advent's prevailing rates, and to provide sales and support training for Unisys staff as well as its customers. The Distribution Agreement begins with the statement, "Unisys desires to purchase, and Advent desires to sell, on a non-exclusive basis, certain of Advent hardware products and software licenses for resale worldwide." Following a heading "Subject Matter of Sales," appears this sentence, "(a) Advent agrees to sell hardware and license software to Unisys, and Unisys agrees to buy from Advent the products listed in Schedule A." Schedule A lists twenty products, such as computer cards, plotters, imagers, scanners and designer systems.
Advent was to invoice Unisys for each product purchased upon shipment, but to issue separate invoices for maintenance fees. The cost of the "support services" was set at 3% "per annum of the prevailing Advent user list price of each software module for which Unisys is receiving revenue from a customer." Services included field technical bulletins, enhancement and maintenance releases, telephone consultation, and software patches, among others. At no charge to Unisys, Advent was to provide publications such as installation manuals, servicing and adjustment manuals, diagnostic operation and test procedures, sales materials, product brochures and similar items. In turn, Unisys was to "employ resources in performing marketing efforts" and
develop "the technical ability to be thoroughly familiar" with the products. In support of the district court's ruling that the U.C.C. did not apply, Advent contends that the agreement's requirement of furnishing services did not come within the Code. Moreover, the argument continues, the "software" referred to in the agreement as a "product" was not a "good" but intellectual property outside the ambit of the Uniform Commercial Code. Because software was a major portion of the "products" described in the agreement, this matter requires some discussion. Computer systems consist of "hardware" and "software." Hardware is the computer machinery, its electronic circuitry and peripheral items such as keyboards, readers, scanners and printers. Software is a more elusive concept. Generally speaking, "software" refers to the medium that stores input and output data as well as computer programs. The medium includes hard disks, floppy disks, and magnetic tapes. In simplistic terms, programs are codes prepared by a programmer that instruct the computer to perform certain functions. When the program is transposed onto a medium compatible with the computer's needs, it becomes software. The process of preparing a program is discussed in some detail in Whelan Associates, Inc. v. Jaslow Dental Laboratory, Inc.,
797 F.2d 1222, 1229
(3d Cir. 1986), cert. denied,
479 U.S. 1031
, 107 S.Ct. 877
, 93 L.Ed.2d 831
(1987) and Apple Computer, Inc. v. Franklin Computer Corp.,
714 F.2d 1240
(3d Cir. 1983), cert. dismissed,
464 U.S. 1033
, 104 S.Ct. 690
, 79 L.Ed.2d 158
(1984). See also
Rodau, Computer Software: Does
Article 2 of the Uniform Commercial Code Apply?,
35 Emory L.J. 853, 864-74 (1986). The increasing frequency of computer products as subjects of commercial litigation has led to controversy over whether software is a "good" or intellectual property. The Code does not specifically mention software. In the absence of express legislative guidance, courts interpret the Code in light of commercial and technological developments. The Code is designed "[t]o simplify, clarify and modernize the law governing commercial transactions" and "[t]o permit the continued expansion of commercial
practices." 13 Pa.Cons.Stat.Ann. § 1102 (Purdon 1984). As the Official Commentary makes clear: "This Act is drawn to provide flexibility so that, since it is intended to be a semipermanent piece of legislation, it will provide its own machinery for expansion of commercial practices. It is intended to make it possible for the law embodied in this Act to be developed by the courts in the
light of unforeseen and new circumstances and practices."
Your preview ends here
Eager to read complete document? Join bartleby learn and gain access to the full version
- Access to all documents
- Unlimited textbook solutions
- 24/7 expert homework help
Id.
comment 1. The Code "applies to transactions in goods." 13 Pa.Cons.Stat.Ann. § 2102 (Purdon 1984). Goods
are defined as "all things (including specially manufactured goods) which are moveable at the time of the identification for sale." Id.
at § 2105. The Pennsylvania courts have recognized that "`goods' has a very extensive meaning" under the U.C.C. Duffee v. Judson,
251 Pa. Super. 406
, 380 A.2d 843, 846
(1977); see also Lobianco v. Property Protection, Inc.,
292 Pa. Super. 346
, 437 A.2d 417
(1981) ("goods" under U.C.C. embraces every species of property other than real estate, choses in action, or investment securities.). Our Court has addressed computer package sales in other cases, but has not been required to consider whether the U.C.C. applied to software per se. See Chatlos Systems, Inc. v. National Cash Register Corp.,
635 F.2d 1081
(3d Cir. 1980) (parties conceded that furnishing the plaintiff with hardware, software and associated services was governed by the U.C.C.); see also Carl Beasley Ford, Inc. v. Burroughs Corporation,
361 F. Supp. 325
(E.D.Pa. 1973) (U.C.C. applied without discussion), aff'd
493 F.2d 1400
(3d Cir. 1974). Other Courts of Appeals have also discussed transactions of this nature. RRX Industries, Inc. v. Lab-Con, Inc.,
772 F.2d 543
(9th Cir. 1985) (goods aspects of transaction predominated in a sale of a software system); Triangle Underwriters, Inc. v. Honeywell, Inc.,
604 F.2d 737, 742-43
(2d Cir. 1979) (in sale of computer hardware, software, and customized software goods aspects predominated; services were incidental). Computer programs are the product of an intellectual process, but once implanted in a medium are widely distributed to computer owners. An analogy can be drawn to a compact disc recording
of an orchestral rendition. The music is produced by the artistry of musicians and in itself is not a
"good," but when transferred to a laser-readable disc becomes a readily merchantable commodity. Similarly, when a professor delivers a lecture, it is not a good, but, when transcribed as a book, it becomes a good. That a computer program may be copyrightable as intellectual property does not alter the fact that once in the form of a floppy disc or other medium, the program is tangible, moveable and available in the marketplace. The fact that some programs may be tailored for specific purposes need not alter their status as "goods" because the Code definition includes "specially manufactured goods." The topic has stimulated academic commentary with the majority espousing the view that software fits within the definition of a "good" in the U.C.C. Among the articles and notes that have reviewed extant caselaw are: Boss Woodward, Scope of the Uniform Commercial Code; Survey of Computer Contracting Cases,
43 Bus.Law. 1513 (1988); Owen, The Application of Article 2 of the Uniform Commercial Code To Computer Contracts,
14 N. Kentucky L.Rev. 277 (1987); Rodau, Computer Software: Does Article 2 of the Uniform Commercial Code Apply,
35 Emory L.J. 853 (1986); Holmes, Application of Article Two of the Uniform Commercial Code to Computer System Acquisitions,
9 Rutgers Computer Technology L.J. 1 (1982); Note, Computer Software As A Good Under the Uniform Commercial
Code: Taking a Byte Out of the Intangibility Myth,
65 B.U.L.Rev. 129 (1985); Note, Computer Programs as Goods Under the U.C.C.,
77 Mich.L.Rev. 1149 (1979).
Applying the U.C.C. to computer software transactions offers substantial benefits to litigants and
the courts. The Code offers a uniform body of law on a wide range of questions likely to arise in computer software disputes: implied warranties, consequential damages, disclaimers of liability, the statute of limitations, to name a few. The importance of software to the commercial world and the advantages to be gained by the uniformity inherent in the U.C.C. are strong policy arguments favoring inclusion. The contrary arguments are not persuasive, and we hold that software is a "good" within the definition in the Code. The relationship at issue here is a typical mixed goods and services arrangement. The services are not substantially different from those generally accompanying package sales of computer systems consisting of hardware and software. See Chatlos Systems, Inc. v. National Cash Register Corp.,
479 F. Supp. 738, 741
(D.N. J. 1979); Beasley Ford,
361 F. Supp. at 328
. Although determining the applicability of the U.C.C. to a contract by examining the predominance of goods or services has been criticized, we see no reason to depart from that practice here. As we pointed out in De Filippo v. Ford Motor Co.,
516 F.2d 1313, 1323
(3d Cir.), cert. denied,
423 U.S. 912, 96 S.Ct. 216, 46 L.Ed.2d 141 (1975), segregating goods from non-
goods and insisting "that the Statute of Frauds apply only to a portion of the contract, would be to make the contract divisible and impossible of performance within the intention of the parties." We consider the purpose or essence of the contract. Comparing the relative costs of the materials supplied with the costs of the labor may be helpful in this analysis, but not dispositive. Compare RRX,
772 F.2d at 546
("essence" of the agreement) with Triangle,
604 F.2d at 743
("compensation" structure of the contract). In this case the contract's main objective was to transfer "products." The specific provisions for training of Unisys personnel by Advent were but a small part of the parties' contemplated relationship. The compensation structure of the agreement also focuses on "goods." The projected sales figures introduced during the trial demonstrate that in the contemplation of the parties the sale of goods clearly predominated. The payment provision of $150,000 for developmental work which Advent had previously completed, was to be made through individual purchases of software and hardware rather than through the fees for services and is further evidence that the intellectual work was to be subsumed into tangible items for sale. We are persuaded that the transaction at issue here was within the scope of the Uniform Commercial Code and, therefore, the judgment in favor of the plaintiff must be reversed. III. [45] THE STATUTE OF FRAUDS
This brings us to the Unisys contention that the U.C.C. statute of frauds bars enforcement of the agreement because the writings do not contain a quantity term. Section 2-201(a) provides that a contract for the sale of goods of $500 or more is not enforceable
unless in writing. "[A] contract . . . is not enforceable . . . unless there is some writing sufficient to indicate that a contract for sale has been made. . . . A writing is not insufficient because it omits . . . a term agreed upon but the contract is not enforceable . . . beyond the quantity of goods
shown in such writing." 13 Pa.Cons.Stat.Ann. § 2201(a) (Purdon 1984). The comment to this section states that although the "required writing need not contain all the material terms" there are "three definite and invariable requirements as to the memorandum," one of which is that "it must specify a quantity." Id.
comment 1. The statute of frauds has been frequently criticized as a means for creating rather than preventing
fraud, Harry Rubin Sons, Inc. v. Consolidated Pipe Co.,
396 Pa. 506
, 153 A.2d 472, 476
(1959), and there have been calls for its total repeal. See
J. Murray, Murray On Contracts
§ 68, at 302 (3d ed. 1990). Serious considerations therefore counsel courts to be careful in construing its provisions so that undesirable rigidity does not result in injustice. The limited scope of section 2-201 should not be overlooked. "It is also clear that a sufficient writing merely satisfies the statute of frauds under the Code, i.e., it does not, in itself, prove the terms of the contract." J. Murray, Murray on Contracts
§ 74, at 337 (3d ed. 1990). See Conaway v. 20th Century Corp.,
491 Pa. 189
, 420 A.2d 405, 411-12
(1980); Rubin,
396 Pa. 506
, 153 A.2d at 476
(1959) ("All that is required is that the writing afford a basis for believing that the offered oral evidence rests on a real transaction."); 13 Pa.Cons.Stat.Ann. § 2201 comment 1 (Purdon 1984). Moreover, compliance with the statute of frauds must be distinguished from enforcement of a remedy. At this point we focus on the statute of frauds, reserving for discussion enforcement under § 2-204. See
Part IV infra.
Courts have generally found that a quantity term must be stated for compliance with the Code, and commentators have agreed. See
2 R. Anderson, Uniform Commercial Code
§ 2-201:110, at 68 (3d ed. 1982) (1970) ("[t]he requirement that the writing state a quantity is mandatory, and a writing which fails to do so does not satisfy the statute"); J. Calamari J. Perillo, The Law of Contracts
§ 19-34, at 826 (3d ed. 1987) (memorandum "must specify a quantity"); 2 E. Farnsworth, Farnsworth on Contracts
§ 6.7, at 141 (2d ed. 1990) (UCC "significantly relaxes the
requirement that the memorandum state all the essential terms by insisting only that it state the quantity of goods"). A contrary view, however, has been advanced. In her article The Weed and the Web: Section 2-
201's Corruption of The U.C.C.'s Substantive Provisions
— The Quantity Problem,
1983 U.Ill.L.Rev. 811, Professor Bruckel argues that the quantity section of the statute of frauds should be construed so that the contract is not enforceable beyond the quantity shown in the writing — if a quantity is specified. If no quantity is mentioned, the omission should not be fatal.
Your preview ends here
Eager to read complete document? Join bartleby learn and gain access to the full version
- Access to all documents
- Unlimited textbook solutions
- 24/7 expert homework help
Respected scholars concede some force to this argument. As White and Summers state, "All commentators say the memo must state a quantity term. However, a close reading of section 2-
201 indicates that all commentators may be wrong. An alternative explanation is that only if the writing states a quantity term is that term determinative." 1 J. White R. Summers, Uniform Commercial Code
§ 2-4, at 81-82 n. 12 (3d ed. 1988). See also
J. Calamari J. Perillo, The Law of
Contracts
§ 19-34, at 827 (3d ed. 1987) ("It would be unfortunate if a rigid application of the quantity requirement of the Statute of Frauds were to subvert the substance of the Code."); T. Le E. Murphy, Sales and Credit Transactions Handbook
§ 2.32, at 65 (1985) ("According to the Uniform Commercial Code (Code) comments, the writing must specify a quantity, and this view has been adopted by the courts. But it is difficult to see how this view can be derived from the statute itself, for a writing surely might `indicate' that a contract for sale has been made even if there is no stipulation of quantity. Actually, the Code nowhere states that quantity must be specified in the writing."). This liberal approach found an interested audience in Riegel Fiber Corp. v. Anderson Gin Co.,
512 F.2d 784
(5th Cir. 1975), where the Court described that reasoning as "plausible," noting that
the quantity term offers little aid in the primary purpose of the statute of frauds. Once a party alleges that the agreement took place and proves a signed writing, "surely he is no more likely to lie about the agreed quantity term than about price, time of performance, or any other material term." Id.
at 789 n. 11. A Pennsylvania court also struck a sympathetic chord in discussing the effect of a memorandum that refers to an oral agreement. See Rubin,
396 Pa. 506
, 153 A.2d 472, 476
(1959). (The objective of the Code's revised statute of frauds "is the elimination of certain formalistic requirements adherence to which often resulted in injustice, rather than the prevention of fraud."). The circumstances here do not require us to adopt an open-ended reading of the statute but permit us to apply a narrower holding. Nothing in the Code commands us to ignore the practicality of commercial arrangements in construing the statute of frauds. Indeed, the Code's rule of construction states that the language "shall be liberally construed and applied to promote its underlying purposes and policies." 13 Pa.Cons.Stat.Ann. § 1102(a). As noted earlier, Comment 1 to that section observes that the Code promotes flexibility in providing "machinery for expansion of commercial practices." Following this guidance, we look to the realities of the arrangement between the parties. In the distribution agreement, Unisys agreed to engage in the business of selling identified document systems during the two-year term of the contract and to buy from Advent on stated terms the specified products necessary to engage in that venture. The detailed nature of the document, including as it does, such provisions as those for notice of breach, opportunity for cure, and termination leaves no doubt that the parties intended to create a contract. The parties were obviously aware that they were entering a new, speculative market and some uncertainty was inevitable in the amount of sales Unisys could make and the orders it would place with Advent. Consequently, quantity was not stated in absolute terms. In effect, the parties arrived at a non-exclusive requirements contract, a commercially useful device. We do not consider that in the circumstances here the arrangement raises the statute of frauds bar.
The Code recognizes exclusive requirements contracts in section 2-306, and imposes on the parties to such agreements a duty of good faith. For present purposes, the salient factor is that exclusive requirements contracts satisfy the quantity requirements of the statute of frauds, albeit no specific amount is stated. Zayre Corp. v. S.M. R. Co.,
882 F.2d 1145, 1154
(7th Cir. 1989); Gestetner Corp. v. Case Equipment Co.,
815 F.2d 806, 811
(1st Cir. 1987); O.N. Jonas Co. v. Badische Corp.,
706 F.2d 1161, 1165
(11th Cir. 1983); American Original Corp. v. Legend, Inc.,
652 F. Supp. 962, 967-68 (D.Del. 1986); 1 J. White R. Summers, Uniform Commercial Code
§ 3-
8, at 164 (3d ed. 1988). The reasons for excepting exclusive requirements contracts from the strictures of the statute of frauds are strong. The purchasing party, perhaps unable to anticipate its precise needs, nevertheless wishes to have assurances of supply and fixed price. The seller, on the other hand, finds an advantage in having a steady customer. Such arrangements have commercial value. To deny enforceability through a rigid reading of the quantity term in the statute of frauds would run
contrary to the basic thrust of the Code — to conform the law to business reality and practices. By holding that exclusive requirements contracts comply with the statute of frauds, courts have decided that indefiniteness in the quantity term is acceptable. If the agreement here does not satisfy the statute of frauds because of indefiniteness of a quantity term, then neither does an exclusive requirements contract. We find no reason in logic or policy to differentiate in the statute of frauds construction between the contract here and an exclusive requirements arrangement. The same reasons that led courts to dispense with a specific and certain quantity term in the exclusive requirements context apply equally when a continuing relationship is non-exclusive. The same regulating factor — good faith performance by the parties — applies and prevents the contracts from being illusory. The writings here demonstrate that the parties did not articulate a series of distinct, unrelated, simple buy and sell arrangements, e.g., Mid-South Packers, Inc. v. Shoney's, Inc.,
761 F.2d 1117
(5th Cir. 1985), but contemplated what resembles in some respects a joint venture or a distributorship. A construction of the statute of frauds that does not recognize the quite substantial difference between a simple buy and sell agreement and what occurred here is unduly restrictive. Section 2-
306 in recognizing exclusive requirements and output contracts does not purport to treat them as the only permissible types of open quantity agreements. We do not read section 2-306 as an exclusionary measure, but rather as one capable of enlargement so as to serve the purposes of the
Code. See
Bruckel, Consideration in Exclusive and Nonexclusive Open Quantity Contracts Under the U.C.C.: a Proposal for a New System of Validation,
68 Minn.L.Rev. 117 (1983). We emphasize once again that our focus has been on a technical requirement of the statute of frauds whose raison d'etre
is dubious. We have not yet considered the importance of evidence to support a remedy, an issue we consider to be addressed by section 2-204 rather than being comprehensively covered by the statute of frauds. See Riegel,
512 F.2d at 789
. The separation of the concepts advanced by the statute of frauds and section 2-204 has a very practical significance. If the statute of frauds was not satisfied, this case would be dismissed on
the complaint, but by surmounting that threshold, the litigation proceeds to a point where the terms of the contract and its enforcement may be determined. This disposition comports with the goals of the Code and gives due recognition to legitimate business practices. In sum, we hold that the writings here satisfy the statute of frauds. IV. [66] ENFORCEABILITY
Having concluded that the statute of frauds is not a bar, we now confront the issue of enforceability. Section 2-204 provides that a contract does not fail for indefiniteness even though one or more terms have been left open if the parties intended to make a contract and there is a reasonably certain basis for giving an appropriate remedy. 13 Pa.Cons. Stat.Ann. § 2204(c) (Purdon 1984). As Professor Murray has explained: "Rather than focusing upon what parties failed to say, the Code and RESTATEMENT 2d focus upon the overriding question of whether the parties manifestly intended to make a binding arrangement. If that manifestation is present, the only remaining concern is whether the terms are
definite enough to permit courts to afford an appropriate remedy. The second requirement assists courts to determine the degree of permissible indefiniteness."
J. Murray, Murray On Contracts
§ 38, at 85 (3d ed. 1990). Unlike the statute of frauds issue discussed earlier, the definiteness required to provide a remedy rests on a very solid foundation of practicality. A remedy may not be based on speculation and an
award cannot be made if there is no basis for determining if a breach has occurred. Unisys argues that because there are specific non-exclusive stipulations in the agreement, they negate the implication found in most exclusive requirements contracts that a "best efforts clause"
is included. That may be so, but that does not nullify the obligation of the parties to deal in good faith. Section 1-203 of the Code provides that contracts require a "good faith performance." This requires the parties to observe "reasonable commercial standards of fair dealing in the trade." The Pennsylvania Superior Court has concluded that in the absence of any express language, the law will imply an agreement by the parties to do those things that "according to reason and justice they should do in order to carry out the purposes for which the contract was made and to refrain from doing anything that would destroy or injure the other party's right to receive the fruits of the contract." Slater v. Pearle Vision Center, Inc.,
376 Pa. Super. 580
, 546 A.2d 676, 679
(1988). See
Restatement (Second) of Contracts
§ 205 (1979). One commentator opines that when
the contract does not have a "best efforts" clause, "the law will usually imply . . . that the dealer must act in good faith and use `reasonable efforts' to sell. This implied obligation requires the distributor to do more than the bare minimum to comply with a contract; the distributor must really make some attempt to sell." T. Banks, Distribution Law
226-27 (1990).
Your preview ends here
Eager to read complete document? Join bartleby learn and gain access to the full version
- Access to all documents
- Unlimited textbook solutions
- 24/7 expert homework help
The terms of the agreement between Unisys and Advent lend themselves to imply a good faith obligation on the parties of at least some minimal effort: "A fundamental assumption of both parties is that throughout the term of this agreement, Unisys will employ resources in performing
marketing efforts involving Advent Products and will develop the technical capability to be thoroughly familiar with these products." On remand, Advent may be able to show that it was inconsistent with good faith for a party that has committed itself to engage in particular business for a specified period of time to cease devoting any resources to that venture prior to the end of the stated period. See O'Boyle v. Jiffy Lube Int'l., Inc.,
866 F.2d 88
(3d Cir. 1989). We leave open the possibility that the performance of the parties following signing of the documents and perhaps pre-contractual expectations will provide evidence to satisfy the requirements of section 2-204. See
§§ 2-208, 1-205 (course of performance, usage of trade). On the other hand, it may be that the reason Unisys decided to devote no resources to the project of selling document systems is relevant to whether the standard of fair dealing in the trade was breached. Simply because no resources were devoted, does not mean in and of itself that there was a breach of the covenant of good faith. See, e.g., Angelica Uniform Group, Inc. v. Ponderosa
Systems, Inc.,
636 F.2d 232, 232
(8th Cir. 1980); R.A. Weaver Assoc., Inc. v. Asphalt Construction, Inc.,
587 F.2d 1315, 1321-22
(D.C.Cir. 1978); Southwest Natural Gas Co. v. Oklahoma Portland Cement Co,
102 F.2d 630, 632-33
(10th Cir. 1939); 1 J. White R. Summers, Uniform Commercial Code
§ 3-8, at 169 (3d ed. 1988). Whether Advent can establish the definiteness required to sustain a remedy is a serious question. The record before us consists of evidence submitted on the basis of the pretrial ruling denying application of the U.C.C. Our contrary holding will require the parties to reassess the proofs necessary to meet the Code. We are in no position to anticipate the evidence that may appear in further proceedings and, thus, at this juncture cannot rule whether the agreement between Unisys
and Advent is enforceable. V. [78] DAMAGES
To some lesser extent the same caveat applies to proof of damages. The fundamentals of the damage claims are unlikely to change substantially by shifting the theory of liability, and we think it might be of some help to the parties on retrial if we discuss this phase of the case. Under Pennsylvania law, loss of profits may be recovered in a contract action if there is (1) evidence to establish the damages with reasonable certainty; (2) they were the proximate consequence of the wrong; (3) they were reasonably foreseeable. Delahanty v. First Pennsylvania Bank, N.A.,
318 Pa. Super. 90
, 464 A.2d 1243, 1258
(1983). Proof of damages need not be mathematically precise, but the evidence must establish the fact "with a fair degree of probability." Exton Drive-In, Inc. v. Home Indemnity Co.,
436 Pa. 480
, 261 A.2d 319, 324
(1969), cert. denied,
400 U.S. 819
, 91 S.Ct. 36
, 27 L.Ed.2d 46
(1970). The Pennsylvania Supreme Court has been skeptical of claims for loss of profits by a "new and untried business." Exton
261 A.2d at 324
. See also Delahanty,
318 Pa. Super. 90
, 464 A.2d at
Your preview ends here
Eager to read complete document? Join bartleby learn and gain access to the full version
- Access to all documents
- Unlimited textbook solutions
- 24/7 expert homework help
1260
(1983); Pollock v. Morelli,
245 Pa. Super. 388
, 369 A.2d 458, 463
(1976). An award, however, may be made "where such a loss was reasonably foreseeable to the parties at the time that the contract was entered and where those damages are capable of proof of reasonable certainty." General Dynafab, Inc. v. Chelsea Industries, Inc.,
301 Pa. Super. 261
, 447 A.2d 958, 960
(1982). In that case, although arguably a newcomer to the business, plaintiff was able to show that "there was significant interest in [its] product before the contract breach occurred," as manifested by commitments for orders from four sources. Id.
This Court's decision, In re Merritt Logan, Inc.,
901 F.2d 349
(3d Cir. 1990), does not change the
law on prospective loss of profits. There, we predicted that New Jersey would no longer follow a per se
rule precluding all new businesses from recovering lost profits. Under the new rule, we decided that plaintiff could recover upon establishing the loss with "reasonable certainty."
In addressing proof of damages in National Controls Corp. v. National Semiconductor Corp.,
833 F.2d 491, 496
(3d Cir. 1987), we pointed out that it is necessary to consider the fact that the "damages sought must be a proximate consequence of the breach, not merely remote or possible. . . . The element of causation defines the range of socially and economically desirable recovery and requires not only `but for' causation in fact but also that the conduct be a substantial
factor in bringing about the harm." In that case the Court vacated an award for loss of profits based on the theory that one of plaintiff's customers would have purchased certain products from plaintiff. "An award of lost profits required speculation by the jury on the likelihood that, absent [defendant's] breaches, [a third-party] would have proceeded with the project and on the likelihood that [the third-party] would have chosen [plaintiff] as a supplier." Id.
at 498. National Controls
emphasizes the need for evidence sufficiently concrete to provide a reasonable
degree of certainty that the verdict is more than the result of a lottery or emotional reaction. Predicting the results of business dealings that might have, but never did, occur is of course a difficult matter of proof. When a business has become established, the Pennsylvania Supreme Court has mentioned several methods of proof to establish prospective loss profits: (1) evidence of past profits; (2) profits made by others or by similar contract where the facts were not greatly different; (3) testimony of experts if based on anything more than individual opinions or conjecture. Massachusetts Bonding Ins. Co. v. Johnston Harder, Inc.,
343 Pa. 270
, 22 A.2d 709, 714
(1941). Advent's profits depended on Unisys' efforts and ability to resell the document systems. These were comparatively new products in a market in which Unisys had high hopes, but little, if any, share. Significantly, Arco, one of the companies both Unisys and Advent had hoped to capture as
a customer, decided instead to look to IBM, although that company had not yet developed a comparable product. Other businesses such as Southwestern Bell, originally thought to be a prospective customer of Unisys, eventually bought Advent systems marketed through another company and, thus, cannot be the basis for any claim of loss here.
Your preview ends here
Eager to read complete document? Join bartleby learn and gain access to the full version
- Access to all documents
- Unlimited textbook solutions
- 24/7 expert homework help
Advent's case on loss of profits rested primarily on the testimony of its expert, Dr. Alfred Kuehn.
He relied heavily on industry projections prepared by Frost Sullivan in 1986 and a market analysis published by the Yankee Group in 1987. These studies both predicted dramatic increases
in sales of document systems. When the trial took place in August 1989, the two year period for which the court ruled that damages could be awarded had already expired. At the time the expert testified, actual results in the market-place during the pertinent two years, 1987-89, did not support the rosy predictions made earlier. Nevertheless he based his opinion on those outdated projections. For example, he forecast total industry sales in the United States in 1987 of $77 million dollars. But according to defendant's expert, actual sales that year were $12 million dollars. In 1988 plaintiff's forecast was
$255 million, but the actual figure was approximately $10 million dollars. When questioned whether he thought data of what actually occurred was more valuable than past
projections, Dr. Kuehn said, "Both were important along with other things that are equally important." He did not elaborate further, but apparently his reasoning was that because Unisys had not entered the market, the actual total sales figure in the United States were lower than they would have been otherwise. On this record that explanation is unconvincing at best. "An opinion based on false assumptions is unhelpful in aiding the jury in its search for the truth, and is likely to mislead and confuse." Wilkinson v. Rosenthal Co.,
712 F. Supp. 474, 479
(E.D.Pa.
1989). It is also true that a verdict may not be based on speculation, whether the testimony comes
from the mouth of a lay witness or an expert. See Pennsylvania Dental Ass'n. v. Medical Service Ass'n.,
745 F.2d 248, 262
(3d Cir. 1984), cert. denied,
471 U.S. 1016
, 105 S.Ct. 2021
, 85 L.Ed.2d
303
(1985). Federal Rule of Evidence 703
liberalizes the reception of expert testimony in the federal courts. It does, however, contain limitations. Although facts not otherwise admissible in evidence may form the basis for assumptions by an expert witness, the court must make a factual inquiry and finding as to what data experts in the field find reliable. In re Japanese Electronic Products Antitrust Litigation,
723 F.2d 238, 277
(3d Cir. 1983), rev'd on other grounds,
475 U.S. 574
, 106 S.Ct. 1348
, 89 L.Ed.2d 538
(1986). Neither party to this case requested the court to conduct such
an inquiry. In Olympia Equipment Leasing Co. v. Western Union Telegraph Co.,
797 F.2d 370, 382
(7th Cir. 1986), cert. denied,
480 U.S. 934
, 107 S.Ct. 1574
, 94 L.Ed.2d 765
(1987), the Court referred to the "old problem of expert witnesses" and criticized testimony on prospective lost profits. The Court observed that, "[t]he expert in this case dazzled the jury with `an array of figures conveying a delusive impression of exactness' — delusive because the figures had no relation to reality." We too have serious reservations about the validity of expert testimony based on prior predictions of sales for a given period when actual performance data for that same time span are available. The jury's verdict must also have been based to some extent on the defendant's own contemporaneous sales projections described the by the trial judge as "wildly optimistic." The
Your preview ends here
Eager to read complete document? Join bartleby learn and gain access to the full version
- Access to all documents
- Unlimited textbook solutions
- 24/7 expert homework help
same difficulty about the validity of those projections exists because apparently to some extent they too were based on the same studies cited by Dr. Kuehn. We have serious doubts that the evidence in this record is adequate to support the award for lost profits. That is not to say that all evidence of damages was lacking. The defendant concedes that "a reasonable jury could have awarded Advent the $150,000." Unisys Brief at 35. We, of course, cannot anticipate what proof on damages will be produced on remand. The judgment in favor of the defendant on the tortious interference claim will be affirmed. The judgment in favor of the plaintiff on the breach of contract claim will be reversed and the case will be remanded for further proceedings. Big Knob Volunteer Fire Co. v. Lowe & Moyer Garage, Inc.
Opinion
Argued March 21, 1984.
Filed January 23, 1985. Appeal from the Court of Common Pleas, Lehigh County, Civil No. 80-C-1475, Mellenberg, J. Robert W. Lewis, Jr., Ambridge, for appellant. Thomas R. Elliott, Jr., Easton, for appellee. Before SPAETH, President Judge, and BECK and TAMILIA, JJ. SPAETH, President Judge: This is an action in replevin for possession of a fire truck. Appellant, plaintiff below, claims the better right to possess the truck under Section 2403(b) of the Uniform Commercial Code, 13 Pa.C.S.A. § 2403(b), which provides that a merchant entrusted with possession of goods has "power to transfer all rights of the entruster to a buyer in ordinary course of business." The trial court held that appellant was not a buyer in ordinary course of business because "no actual sale to [appellant] occurred." Slip op. of trial ct. at 5. We hold that for one to become a buyer in ordinary course of business, it is not necessary that a sale occur, and that on the facts of this case,
appellant became a buyer in ordinary course of business when its name was placed on the fire
Your preview ends here
Eager to read complete document? Join bartleby learn and gain access to the full version
- Access to all documents
- Unlimited textbook solutions
- 24/7 expert homework help
truck, thereby identifying the truck to the contract for its sale. This conclusion, however, is not dispositive. Section 2716(c) of the Uniform Commercial Code, 13 Pa.C.S.A. § 2716 (c), provides
that "[t]he buyer has a right of replevin for goods identified to the contract if . . . the circumstances reasonably indicate" that an effort to cover the goods would have been unavailing.
The trial court made no finding on whether the circumstances here did so indicate. We therefore reverse and remand for further proceedings. Appellant's brief does not conform to Pa.R.A.P. 2111 et seq.,
which prescribe the form and content of briefs. While this failure is inexcusable, we have concluded that it is not so egregious that we should suppress the brief or quash the appeal. Pa.R.A.P. 2101. But see Commonwealth v. Stoppie,
337 Pa. Super. 235
, 486 A.2d 994
(1984). The Act of Nov. 1, 1979, P.L. 255, No. 86, 13 Pa.C.S.A. § 1101 et seq.,
transferred the former provisions of the Act of Apr. 6, 1953, P.L. 3, No. 1, known as the "Uniform Commercial Code," as reenacted, amended, and revised by the Act of Oct. 2, 1959, P.L. 1023, No. 426, 12A P. S. § 1-
101 et seq.,
to Title 13 of the Pennsylvania Consolidated Statutes. Because the transfer did not effect a substantive change in the law, Act of Nov. 1, 1979, P.L. 255, No. 86, § 7, we shall cite to the Code by section only and in the form used in the 1979 Act ( e.g.,
§ 2716(c)).
This action was commenced by complaint and a motion for writ of seizure. On appellant's filing a replevin bond in twice the amount of the value of the fire truck, a writ of seizure issued, and we
understand that appellant has since had possession of the truck under the bond.
On March 26, 1979, appellant, the Big Knob Volunteer Fire Department, agreed to purchase a fire truck from Hamerly Custom Productions, Inc., which was in the business of assembling various component parts into fire trucks. Two days later, the Volunteer Fire Department paid Hamerly $10,000 toward the purchase price of the fire truck. After a modification in the specifications, which increased the purchase price to $51,836, the Volunteer Fire Department paid Hamerly $38,000 more toward the purchase price. The contract for the fire truck provided that Hamerly would order the chassis for the truck, and would complete and deliver the truck within 20 to 70 days after receiving the chassis. The contract also provided: The title [to the fire truck] does not pass to Buyer until the purchase price is paid in full. The Buyer grants Seller a security interest in the fire apparatus [truck] until paid in full. Seller retains all rights and remedies afforded under the uniform commercial code and its pertinent sections.
Complaint, Exhibit A. On April 5, 1979, Hamerly ordered the chassis from appellee, Lowe Moyer Garage, Inc., which in turn ordered it from the International Harvester Company. In September 1979 International Harvester delivered the chassis to Lowe Moyer, reserving a security interest in the chassis, and obtaining a note in its favor for the purchase price. This note was assigned to International Harvester Credit Corporation, as Lowe Moyer's "floorplanner," and reassigned to the First National Bank of Allentown. On October 17, 1979, Lowe Moyer delivered the chassis to Hamerly.
Your preview ends here
Eager to read complete document? Join bartleby learn and gain access to the full version
- Access to all documents
- Unlimited textbook solutions
- 24/7 expert homework help
The trial court granted the bank, as assignee, leave to intervene and file a counterclaim, but made
no determination on the bank's claim. Since no exceptions were taken on the bank's behalf, its claim is not before us.
Hamerly began work on transforming the chassis into a fire truck, and at some point, painted the Volunteer Fire Department's name on the cab. However, Hamerly neither paid Lowe Moyer for the chassis, nor did it complete and deliver the truck to the Volunteer Fire Department, with the result that both Lowe Moyer and the Volunteer Fire Department sued Hamerly. In April 1980 Hamerly surrendered the truck to Lowe Moyer, whereupon Lowe Moyer discontinued its action against Hamerly. On its action against Hamerly, for specific performance, the Volunteer Fire Department obtained a default judgment. It then brought the present action for replevin of the fire truck against Lowe Moyer and Hamerly. The trial court found in favor of Lowe Moyer, for the chassis or its value, and the Volunteer Fire Department took this appeal. Hamerly did not respond to service of process and entered no appearance in the action, and the judgment entered is in favor of only Lowe Moyer. Thus, while the paper books designate both Hamerly and Lowe Moyer as appellees, in fact only Lowe Moyer is an appellee.
The Uniform Commercial Code preserves a buyer's right of replevin: The buyer has a right of replevin for goods identified to the contract if after reasonable effort he is unable to effect cover for such goods or the circumstances reasonably indicate that such effort will be unavailing,. . . . § 2716(c).
It is clear that the Volunteer Fire Department was a "buyer" of the fire truck, for the Code defines
a "buyer" as "[a] person who buys or contracts to buy
goods." § 2103(a) (emphasis added). It is also clear that the truck was "identified to the contract." Identification occurred when Hamerly painted the Volunteer Fire Department's name on the cab. § 2501(a)(2). Two issues remain, however. The first issue is whether the Volunteer Fire Department, as plaintiff in replevin, sustained its burden to prove that it has a better right to possess the fire truck than Lowe Moyer. Robinson v.
Tool-O-Matic, Inc.,
216 Pa. Super. 258
, 263 A.2d 914
(1970). The second issue is, if the Volunteer Fire Department did prove its better right to possession, did it also prove, either that after reasonable effort it was unable to effect cover for the fire truck, or that the circumstances reasonably indicated that such effort would be unavailing. -1-
The Volunteer Fire Department argues that it proved its better right to possess the fire truck under
§ 2403(b) of the Code, which provides that a merchant entrusted with possession of goods has "power to transfer all rights of the entruster to a buyer in ordinary course of business." In the Volunteer Fire Department's view, Lowe Moyer entrusted possession of the chassis for the fire truck to Hamerly, which thereby gained the power to transfer all of Lowe Moyer's rights in the chassis to the Volunteer Fire Department as "a buyer in ordinary course of business." The Code defines a buyer in ordinary course as [a] person who in good faith and without knowledge that the sale to him is in violation of the ownership rights or security interest of a
Your preview ends here
Eager to read complete document? Join bartleby learn and gain access to the full version
- Access to all documents
- Unlimited textbook solutions
- 24/7 expert homework help
third party in the goods buys in ordinary course from a person in the business of selling goods of that kind. . . . § 1201.
The trial court held that the Volunteer Fire Department was not a buyer in ordinary course because there was no sale to it. Relying on the definition of "sale" as "the passing of title from the seller to the buyer for a price," § 2106(a), the trial court held that "[n]either title to the truck passed, nor was delivery made to plaintiff." Slip op. of trial ct. at 3. The point at which a person becomes a buyer in ordinary course is subject to considerable controversy because the Code does not specify the moment at which the status is conferred. The controversy arises in the context of both § 9307(a) and § 2403(b) of the Code. The commentators are divided. Jackson and Peters, Quest for Uncertainty: A Proposal for Flexible Resolution of Inherent Conflicts between Article 2 and Article 9 of the Uniform Commercial Code, 87 Yale L.J. 907, 952 and n. 163 (1978) (passing of title is not necessary to be
a buyer in ordinary course for purposes of § 2403); Smith, Title and Right to Possession Under the Uniform Commercial Code, 10 B.C. Indus. Com.L.Rev. 39, 61 (1968) (possession by buyer is required to prevail under § 2403); The Buyer-Secured Party Conflict and Section 9-307(1) of the UCC: Identifying when a Buyer Qualifies for Protection as a Buyer in Ordinary Course, 50 Fordham L.Rev. 657, 686 n. 246 (1982) (identification of goods to the contract should be point at
which a person becomes a buyer in ordinary course under § 2403). The cases are also divided. Cases denying recovery to a party on the ground that the party was not a buyer in ordinary course reason that a sale is required, § 1201; a sale requires transfer of title, § 2106(a); and a transfer of title occurs either when agreed upon by the parties or upon physical delivery, § 2401(2). Absent satisfaction of these criteria, the buyer will not prevail even though some or all of the purchase price has been paid. See, e.g., Chrysler Corp. v. Adamatic,
Inc.,
59 Wis.2d 219
, 208 N.W.2d 97
(1973). This was the reasoning of the trial court, which cited
Chrysler
. Slip op. of trial ct. at 4. This reasoning places the buyer who has paid in advance for goods not yet delivered in an extremely vulnerable position. Emphasis upon a title-passing test means that until
title passes, either according to the contract or
through seller's delivery of the goods, the "executory buyer's" status is in jeopardy. He is subject to the superior rights of an inventory secured party and runs the risk of being advised that the sale to him is in violation of the security agreement, so that he may never become a buyer in ordinary course of business.
Skilton, Buyer in Ordinary Course of Business Under Article 9 of the Uniform Commercial Code
(and related matters), 1974 Wisc.L.Rev. 1, 18-19 (emphasis in original) (footnote omitted).
See also
Gordon, The Prepaying Buyer: Second Class Citizenship Under the Uniform Commercial Code Article 2, 63 Nw.U.L.Rev. 565 (1968); Speidel, Advance Payments in Contracts for Sale of Manufactured Goods: A Look at the Uniform Commercial Code, 52 Cal.L.Rev. 281 (1964). The modern trend in contests between a buyer without possession and a secured creditor, typically the inventory financer, is to ignore or deemphasize the concept of "sale." Buyer-Secured Party Conflict, supra,
at 680. Instead of focusing on passage of title (delivery), courts and commentators increasingly favor identification as the critical moment that
Your preview ends here
Eager to read complete document? Join bartleby learn and gain access to the full version
- Access to all documents
- Unlimited textbook solutions
- 24/7 expert homework help
determines when a buyer becomes a buyer in ordinary course. See, e.g., In re Pennsylvania Conveyor Co.,
31 B.R. 680
(Bankr.W.D.Pa. 1982); Holstein v. Greenwich Yacht Sales, Inc.,
122 R.I. 211
, 404 A.2d 842
(1979); Dolan, The Uniform Commercial Code and the Concept of Possession in the Marketing and Financing of Goods, 56 Tex.L.Rev. 1147 (1978); Buyer-Secured
Party Conflict, supra
. But see Wilson v. M W
Gear,
110 Ill.App.3d 538
, 66 Ill.Dec. 244
, 442 N.E.2d 670
(1982) (a person is a buyer in ordinary course when a person contracts to buy goods and those goods are in the dealer's inventory or being prepared for delivery). The Code's official comment that identification should have "limited effect," § 2501 comment 2, is set to one side by
proponents of this view, who point to several factors to reach their obviously pro-buyer conclusion. One factor is that the Code specifically provides that it should be "liberally construed and applied
to promote its underlying purposes and policies." § 1102(a). One of the fundamental purposes of the Code, evident in such a provision as § 9307, is to protect the innocent buyer. Cf.
J. White and R. Summers, Handbook of the Law Under the Uniform Commercial Code 1070 (2d ed. 1980) (conceding that the policy of § 9307 would seem to cover an innocent purchaser even when the security interest has not been created by the buyer's seller). Giving priority to the buyer over a secured party upon identification of goods to the contract furthers this purpose. Buyer-Secured Party Conflict, supra,
at 883. A second factor is that the Code expressly diminishes the importance of title in ascertaining rights in property, § 2505 comment 1, and analyses, such as that in Chrysler Corp. v.
Adamatic, Inc., supra,
are inconsistent with this approach. Skilton, supra,
at 17-18. A third factor is that the replevin section of the Code, § 2716(c), expressly requires identification but not delivery. "If a buyer has no replevin rights until title passes, as Chrysler,
[ supra
], held, there is no need for the replevin section to mention identification, since identification must occur before
title passes." Dolan, supra,
at 1155 (emphasis in original). A fourth factor is the comparison of § 9307(a) with one of its predecessors, The Uniform Trust Receipts Act § 9(2) (1933), which protected "a buyer in the ordinary course of trade," defined as a person "to whom goods are sold and delivered
. . . ." Id.
§ 1 (emphasis added). The omission of "delivered" or "delivery" from the definition of a buyer in ordinary course of business in § 1201 has been interpreted as intentional. Buyer-Secured Party Conflict, supra,
at 674. In this regard, it may be noted that the same omission is apparent in § 2403(b) when compared with its predecessor, § 25 of the Uniform Sales Act (1906), which required "delivery." The omission of the requirement of delivery in both §§ 2403(b) and 9307(a), which are different in origin, strongly supports the view that the drafters intended to protect certain buyers even in the absence
of delivery. Finally, some courts have concluded that the secured party is better able to absorb the loss than the buyer. See, e.g., Rex
Financial Corp. v. Mobile America Corp.,
119 Ariz. 176
, 580 P.2d 8
(Ariz.Ct.App. 1978); Herman v. First Farmers State Bank
of Minier,
73 Ill.App.3d 475
, 29 Ill. Dec. 787
, 392 N.E.2d 344
(1979); Chrysler Credit Corp. v. Sharp,
56 Misc.2d 261
, 288 N.Y.S.2d
525
(Sup.Ct. 1968); Holstein v. Greenwich Yacht Sales,
Inc., supra
. In contests between a buyer and an owner who has entrusted the property to the buyer's seller, the argument is made that the
Your preview ends here
Eager to read complete document? Join bartleby learn and gain access to the full version
- Access to all documents
- Unlimited textbook solutions
- 24/7 expert homework help
buyer should be protected because the owner, by placing the goods in commerce, is responsible for involving the buyer's seller. See, e.g., Coffman Truck Sales v. Sackley
Cartage Co.,
58 Ill.App.3d 68
, 15 Ill.Dec. 554
, 373 N.E.2d 1026
(1978); Atwood Chevrolet-Olds, Inc. v. Aberdeen Municipal
School District,
431 So.2d 926 (Miss. 1983). As a result of considering these several factors, courts have with increasing frequency held that passing of title (when agreed to or occurring upon delivery, § 2401(2)) is not essential to a person
becoming a buyer in ordinary course of business. See, e.g., Herman v. First Farmers State Bank of
Minier, supra; Tanbro Fabrics Corp. v. Deering Milliken, Inc.,
39 N.Y.2d 632
, 350 N.E.2d 590
, 385 N.Y.S.2d 260
(1976); Holstein v. Greenwich Yacht Sales, Inc., supra. See also Rex
Financial Corp. v. Mobile America Corp., supra; International
Harvester Credit Corp. v. Associates Financial Services Co.,
133 Ga. App. 488
, 211 S.E.2d 430
(1974); Chrysler Credit Corp.
v. Sharp, supra
. We agree with these courts, and hold that identification rather than delivery is the point at which a person becomes a buyer in ordinary course of business. Since here the fire truck was identified to the contract, the Volunteer Fire Company did become a buyer
in ordinary course of business. Upon entrusting the goods to Hamerly, which dealt in goods of that kind, Lowe Moyer gave Hamerly the power to transfer its rights to a buyer in ordinary course of business, and Hamerly exercised that power when it painted the Volunteer Fire Department's name on the cab of the fire truck, identifying the goods to the contract and making the Volunteer Fire Department a buyer in ordinary course of business. Cf.
Buyer-Secured Party Conflict, supra,
at 686 n. 246 (in rare cases where identification occurs prior to buyer taking possession, allowing buyer to prevail in entrusting situation justified by policy of § 2403(b) giving strong protection to innocent buyer who relies on seller's apparent authority). Thus, as to Lowe Moyer, the Volunteer Fire Department has shown under § 2403(b) a better right to possess the fire truck. The Volunteer Fire Department also argues that it is entitled to the fire truck under § 9307(a) in that Hamerly, as a buyer in ordinary course, cut off the floorplanner's security interest and the Department as Hamerly's buyer took free of that interest. This argument is beside the point because the contest here is between the Volunteer Fire Department and Lowe Moyer, not the floorplanner. The Volunteer Fire Department has only to establish that it had superior title to Lowe Moyer, not to the whole world. Lowe Moyer counterclaimed and argues that it had a security interest by retaining the bill of origin on the chassis. Thus, the claim is that the reservation of the security interest gave Lowe Moyer the right to retake possession, under § 9503, and upon repossession its security interest became perfected, § 9305. Brief for Appellee at 24. Lowe Moyer argues that the Volunteer Fire Department is not a buyer in ordinary course who can take free of the security interest. However,
we find that counsel for Lowe Moyer conceded during trial that Lowe Moyer had no security interest. N.T. 92. Thus, the contest here is between a buyer in ordinary course and an unsecured party in possession of the property. The exclusivity of § 9307(a) in situations in which §§ 2403 and 9307(a) may be arguably considered is consequently not at issue. Counsel's concession also negates any argument that § 9306 may apply. Although § 2402(a) gives priority to a buyer over an unsecured party, the Volunteer Fire Department failed to raise this theory of recovery when before the trial court and therefore has waived it.
Your preview ends here
Eager to read complete document? Join bartleby learn and gain access to the full version
- Access to all documents
- Unlimited textbook solutions
- 24/7 expert homework help
-2-
It remains to consider whether the Volunteer Fire Department also proved, either that after reasonable effort it was unable to effect cover for the fire truck, or that the circumstances reasonably indicated that such effort would be unavailing. As we have discussed, such proof is required if a buyer is to have a right of replevin under § 2716(c) of the Code. In his opinion, the trial judge made no finding regarding cover, resting his decision in favor of Lowe Moyer on his conclusion that the Volunteer Fire Department was not a buyer in ordinary course of business — a conclusion with which we have just expressed our disagreement. Nevertheless, we should reach the same decision as the trial judge, albeit on different reasoning, if the Volunteer Fire Department failed to meet its burden of proof regarding cover. In its opinion
sitting en banc
— the opinion being written by the trial judge — the trial court not only concluded that the Volunteer Fire Department was not a buyer in ordinary course, but also stated that the Department "failed to show cover was, in fact, unavailable." Slip op. of trial ct., en banc,
at 4. However, we are uncertain how to interpret this statement, which the trial court did not elaborate on. Section 2716(c) of the Code is in the disjunctive: the buyer must prove, either that "after reasonable effort he is unable to effect cover," or that "the circumstances reasonably indicate that such effort will be unavailing." The trial court's statement is not clearly addressed to
either of these alternatives. We are satisfied from our own examination of the record that the Volunteer Fire Department did not satisfy the first alternative, for it offered no proof that it had made any effort, much less a reasonable effort, to effect cover. See
§ 2712(a). However, with respect to the second alternative, we are unwilling to reach a conclusion, for to do so would require us to appraise the evidence, which we believe should initially be done by the trial court. We shall therefore remand for further
proceedings; while the trial court may of course hear argument and receive briefs, it should not receive further evidence, for that would give the parties a second chance to do what should have been done at trial. Incident to our remand, we offer the following observations in the hope that they may give some guidance to the parties in their arguments and the trial court in its decision on whether the circumstances did or did not reasonably indicate that an effort by the Volunteer Fire Department to cover the fire truck would have been unavailing. To "cover" means to "mak[e] in good faith and without unreasonable delay any reasonable purchase of or contract to purchase goods in substitution for those due from the seller." § 2712(a). In the context of § 2716(c), on the right of replevin, there is a dearth of case law on how
to decide whether the circumstances reasonably indicated that a reasonable effort to obtain cover would have been unavailing. However, we may learn from cases that discuss the necessity to mitigate damages by covering as a prerequisite to obtaining consequential damages upon breach of a contract for sale of goods. § 2715(b)(1) (consequential damages available only when foreseeable losses "could not reasonably be prevented by cover or otherwise;. . . ."). And see, Gerwin v. Southeastern
Association of Seventh Day Adventists,
14 Cal.App.3d 209
, 92 Cal.Rptr. 111
(1971), where the court referred to the replevin provision in its discussion of the necessity to cover for purposes of obtaining consequential damages.
Your preview ends here
Eager to read complete document? Join bartleby learn and gain access to the full version
- Access to all documents
- Unlimited textbook solutions
- 24/7 expert homework help
In some cases it will appear that the buyer could have reduced his consequential damages because equivalent goods could be easily found on the open market. In other cases, however, it will appear that cover was impossible because the goods were specially ordered or had qualities that could not be duplicated, at least not within the requisite period of time. See Whitaker v. Farmhand, Inc.,
173 Mont. 345
, 567 P.2d 916
(1977). See also Lake Village Implement Co. v. Cox,
252 Ark. 224
, 478 S.W.2d 36
(1972) (special order machinery needed to harvest crops unavailable in time to prevent loss). Cf. Bos v.
Dolajak,
167 Mont. 1
, 534 P.2d 1258
(1975). It may also be pertinent in determining the necessity to cover to consider the expense of replacement and the financial capabilities of the buyer. [O]ne is required only to take such steps as may be taken at small expense or with reasonable exertion, and where the expense is so large as to make the requirement [to cover] impracticable, the doctrine [of avoidable consequences] does not apply.
Lake Village Implement Co. v. Cox,
252 Ark. at 231
, 478 S.W.2d at 42
(citations omitted).
See also Gerwin v. Southeastern California Association of
Seventh Day Adventists, supra
("duty to mitigate does not require an injured party to take measures which are unreasonable or impractical or which require expenditures disproportionate to the loss sought to be avoided or which are beyond his financial means"); Schatz Distributing Co. v.
Olivetti Corp. of America,
7 Kan. App. 2d 676, 647 P.2d 820 (1982) (requirement to mitigate does not require subsequent sale
and replacement at any price; loss would have been $10,000); Whitaker v. Farmhand, Inc., supra
(plaintiffs did not have to cover where they did not have the financial capability to acquire other satisfactory devices). If the buyer has prepaid, these interrelated factors assume greater importance. Here, it appears to us that, accepting as true all of the Volunteer Fire Department's uncontradicted
evidence, one could find that the circumstances reasonably indicated that an effort to cover the fire truck would have been unavailing. Cf.
§ 2716, comment 3 (goods identified to contract subject to replevin when cover "reasonably unavailable"). The Volunteer Fire Department is a non-profit organization, the revenues of which are derived mainly from functions to raise money and direct solicitation of donations. N.T. 6, 42-43. After choosing the lowest bidder to supply the fire truck, the Department paid $48,000, in advance, on the total purchase price of some $51,000. N.T. 7, 9. This prepayment resulted under the contract in a 5 percent discount on the price. N.T. 10. This evidence may indicate limited resources and an
attempt to make the best use of those resources by reducing the total outlay for the fire truck. The fire truck was a special-order vehicle, as appears from the contract, which lists the particular component parts required by the Volunteer Fire Department. Lowe Moyer states that one of the Volunteer Fire Department's witnesses, a Chief Mohrbacher, "demonstrated personal knowledge that there were other available sources for a truck meeting his specifications." Brief for Appellee at 15. In the testimony cited, the Chief stated that four bids to supply the truck were submitted. No evidence was presented as to the time or cost in obtaining a replacement truck from these other original bidders. Given the special features of the desired truck, it may be reasonable to infer that an equivalent vehicle was not carried in stock by the other bidders, or elsewhere.
Your preview ends here
Eager to read complete document? Join bartleby learn and gain access to the full version
- Access to all documents
- Unlimited textbook solutions
- 24/7 expert homework help
The contract, which was appended to the complaint and admitted into evidence, N.T. 9, is over 40 pages long and specifies in detail the features of the fire truck to be delivered by Hamerly.
Between the date the contract was signed and the delivery of the chassis to Hamerly, Hamerly periodically reassured the Volunteer Fire Department that the chassis would be in production soon. N.T. 14. After the chassis was delivered to Hamerly, the Department called Hamerly weekly to ascertain when the fire truck would be delivered. N.T. 17. Eventually the Department learned that no part of its payment had been forwarded to Lowe Moyer, as supplier of the chassis, N.T. 15-16, 55-56, and that prepayment was unusual and Lowe Moyer had not been aware that Hamerly had already been paid, N.T. 15-16. A year after the contract had been signed and about six months after delivery of the chassis to Hamerly, the Department learned that the truck was still incomplete on Hamerly's premises. N.T. 17. A week before obtaining a default judgment in its suit against Hamerly for specific performance, the Department was informed by Lowe Moyer that it had acquired possession of the truck. N.T. 26-28. The Department then filed this action in replevin, and, after paying a premium of $1,036.72, to post a bond for twice the value of the truck, N.T. 34-36, obtained the still-unfinished truck from Lowe Moyer in June 1980, less than two months after learning that Hamerly no longer had possession. In conjunction with the other evidence, these circumstances may have reasonably indicated that an effort to cover the fire truck would have been unavailing, at least without extraordinary expense, delay, the risk of loss of the money already paid Hamerly, and the risk that Hamerly would not be able to satisfy damages incurred in obtaining cover. Cf. Tatum v. Richter,
280 Md. 332
, 373 A.2d 923
(1977) (buyer entitled to replevin where he paid $15,000 of $17,500 toward a specially-ordered car identified to the contract because buyer "unable to effect cover and there was no other way to
protect himself against loss of his deposit"). As the tone of the foregoing discussion has no doubt indicated, if we knew that the trial court had
accepted the Volunteer Fire Department's evidence as credible, we should consider ourselves able
to conclude that the Department had satisfied the cover requirement, and, as a buyer in ordinary course of business, was entitled to possession of the fire truck. However, we do not know how the trial court regarded the evidence, and, moreover, we have its statement that "[p]laintiff has also failed to show cover was, in fact, unavailable." It may be that this statement reflects a view of the law regarding cover, rather than a view of the quality of the evidence, but we are not so sure of this as to consider ourselves entitled to act on that assumption. Remanded for further proceedings consistent with this opinion. Jurisdiction is relinquished. S. J. Groves Sons Co. v. Warner Co.
Summary
holding that plaintiff was not obligated to mitigate damages by contracting with another subcontractor when it became apparent that defendant would not perform contract satisfactorily, where presence of two independent suppliers acting individually might create more severe problems than existed before and defendant itself was in better position to seek another subcontractor
Your preview ends here
Eager to read complete document? Join bartleby learn and gain access to the full version
- Access to all documents
- Unlimited textbook solutions
- 24/7 expert homework help
Summary of this case from National Communications Assoc. v. American Telephone Co.
See 5 Summaries
Opinion
No. 77-1802. Argued February 23, 1978.
Decided April 17, 1978. Edward W. Madeira, Jr., Stephen S. Phillips, Pepper, Hamilton Scheetz, Philadelphia, Pa., for appellant. Edward F. Mannino, Thomas A. Leonard, III, Lawrence D. Berger, Karen Marek McAlinn, Philadelphia, Pa., for appellee; Dilworth, Paxson, Kalish, Levy Kauffman, Philadelphia, Pa., of counsel. Appeal from the United States District Court for the Eastern District of Pennsylvania. Before ALDISERT, VAN DUSEN and WEIS, Circuit Judges. OPINION OF THE COURT
WEIS, Circuit Judge. A contract for the concrete work on a bridge being constructed over the Schuylkill River in Southwest Philadelphia resulted in heavy losses for appellant S.J. Groves Sons Company. Alleging that much of its loss was caused by the performance of its subcontractor who supplied ready-mixed concrete, Groves filed suit against Warner in the district court. At trial, however, efforts to recoup a substantial portion of the loss from the subcontractor met with only partial success. Concluding that disallowance of many of Groves' claims was based upon factual determinations supported by the record, we affirm the judgment of the district court except insofar as it too narrowly interpreted the duty to mitigate damages. As part of a highway improvement program, the Pennsylvania Department of Transportation undertook the erection of the Girard Point Bridge in Southwest Philadelphia and selected American Bridge Company as the prime contractor. Plaintiff-appellant Groves was awarded a subcontract for the placement of the bridge's concrete decks and parapets and contracted with the
defendant Warner for the delivery of ready-mixed concrete for use at the Girard Point site. Groves filed this lawsuit claiming extensive losses because of Warner's failure to deliver adequate supplies at scheduled times. The case was tried to the court and after preparing detailed
Your preview ends here
Eager to read complete document? Join bartleby learn and gain access to the full version
- Access to all documents
- Unlimited textbook solutions
- 24/7 expert homework help
findings of fact and conclusions of law, the trial judge entered judgment in favor of the plaintiff in the amount of $35,401.28. Dissatisfied with the denial of a large part of its claimed damages, Groves appealed. The total amount of the damages awarded was $55,659.73. From this, the court deducted $20,258.45 for material on which Groves had withheld payment as a setoff for its alleged damages.
The contract at issue provided that Warner would supply approximately 35,000 cubic yards of ready-mixed concrete at a rate of 40 cubic yards per hour and at times specified by Groves. Having its plant close to the job site, Warner was equipped to prepare and deliver large quantities
of concrete. The agreement was executed in March, 1970, and the first concrete was delivered to the job site in July of that year. Groves' progress was hindered by three lengthy strikes in the spring and summer of 1970, 1971, and 1972 which postponed completion of its contract from July of 1972 to October of 1972. The work was also delayed by rejections of concrete that failed to meet state specifications, although the number of rejections was within expectations on such a project. Although concrete pours were completed at a later date than anticipated, the number of weeks during which the pours were made remained substantially the same as was originally planned. In preparing to carry out its commitment toward the construction of the bridge, Groves considered, but rejected, the possibility of building its own cement batching plant at the job site and, instead, chose to contract with Warner.
Groves expected to pour concrete for the decks of the bridge in the mornings and then to use some of the crew to construct parapets in the afternoons. This general plan was frustrated by Warner's frequent failures to make deliveries in compliance with Groves' instructions. As a result, deck pours originally scheduled for the mornings often extended into the afternoons and evenings and created overtime labor expense. Concerned with its lagging progress, Groves considered securing other sources of concrete as early as 1971 but found no real alternatives. It was too expensive to build its own batching plant at the site and the only other source of ready-mixed concrete in the area was the Trap Rock Company, located near the Warner plant. Trap Rock, however, was not certified to do state work in 1971 and its price was higher than Warner's. Moreover, the production facilities at Trap Rock were limited, as was the number of trucks it had available. Meanwhile, Warner continued to assure Groves that deliveries would improve. Despite its promises, Warner's performance continued to be erratic and on June 21, 1972, the Pennsylvania Department of Transportation ordered all construction at Girard Point halted until the quality of Warner's service could be discussed at a conference. A meeting took place the next day with state officials and representatives from Warner, Groves, and other contractors in attendance. Based on Warner's renewed assurances of improved performance, state officials allowed work to resume on June 26, 1972. From that date until July 20, 1972, Warner's delivery service improved significantly, although it still did not consistently meet Groves' instructions. In
Your preview ends here
Eager to read complete document? Join bartleby learn and gain access to the full version
- Access to all documents
- Unlimited textbook solutions
- 24/7 expert homework help
the months following and until completion in October of 1972, Warner's performance continued to be uneven and unpredictable. On June 14, 1972, when Groves again approached Trap Rock, that firm maintained that it could service the job at the desired delivery rate but did not reduce its price. On July 11, 1972, Trap Rock was certified by the state and the next day agreed to accept the same price as Warner. Groves, nevertheless, decided to continue with Warner as its sole supplier. The district judge found that Warner had acted in bad faith by deliberately overcommitting its ability to manufacture and deliver enough concrete, providing an inadequate number of trucks to service Groves' project, and following a policy of providing delivery at only 75 percent of the ordered rate. On that basis, the court stripped Warner of the protection offered by the no-claim-
for-delay clause in its contract and awarded damages. In the court's view, on June 15, 1972 Groves had no reasonable expectation that Warner's performance would improve to "totally satisfactory levels" and by July 11, 1972, "there were no practical impediments to employing Trap Rock as a supplemental supplier." The court therefore concluded that "as of July 12, 1972, Groves had an obligation to utilize Trap Rock as a supplemental supplier . . in order to mitigate any possible `delay damages' resulting from Warner's service." Accordingly, the court did not award Groves all the delay damages it sought, allowing only $12,534 for overtime which had been paid on days when Warner's deliveries were late before, but not after, July 12, 1972. Claims for loss of productivity not resulting in overtime were denied because, despite its problems, Groves did complete the work it had scheduled on each day. Since the first pour on July 9, 1970 resulted in an unacceptable deck panel due to Warner's defective concrete and inadequate workmanship by Groves, the court allocated the cost of removing and replacing the panel. The total expenditure was $42,357.11 and Groves was awarded $10,589.43. In another mismanaged pour on June 20, 1972, Warner's deliveries were late and Groves was required to spend an additional $5,861.55. That sum was awarded to Groves
and is not now disputed. Neither is the sum of $26,674.75 attributed to Warner's miscalculation of the volume of concrete actually delivered. The court also disallowed Groves' claims for extra parapet crews, construction of extra forms, and loss of overhead and profits, having concluded the plaintiff had not met its burden of proof. Although Groves sustained heavy losses in its work on the bridge, the district court recognized that not all were properly attributable to Warner. The lengthy strikes — occurring each year at the very beginning of the pouring season — adverse weather, and an overly optimistic expectation of the efficiency which could be obtained on a project of this nature were also substantial factors leading to Groves' misfortune. Thus, rejection of many of Groves' claims was based primarily on factual findings which we may not disturb unless they are clearly erroneous. Krasnov v. Dinan,
465 F.2d 1298
(3d Cir. 1972). The trial judge was exceptionally painstaking in
his preparation of the extensive findings of fact and our review does not reveal any of them to be clearly erroneous. We find it necessary to refer to only two matters — both of a legal, rather than purely factual nature. The plaintiff contends it is entitled to all, not part, of the loss it sustained as a result of the defective slab poured on July 9, 1970. The trial judge found that there was an inadequate amount
Your preview ends here
Eager to read complete document? Join bartleby learn and gain access to the full version
- Access to all documents
- Unlimited textbook solutions
- 24/7 expert homework help
of retarder in the concrete which caused premature solidification, although the state did not reject
the concrete for that reason. In addition, some of the concrete which Warner supplied was too dry
and there was failure to observe instructions as to delivery times. The first truck was late in reaching the job site and the following two arrived too soon. Groves' crews, on the other hand, having a case of "first day jitters," functioned inefficiently, and weather conditions were extremely unfavorable. The court determined that Warner's poor performance was "a substantial cause" of the defective slab to the extent of one-fourth of the damages sought by Groves. Groves contends that Warner did not meet its contractual obligations on July 9 and should be liable for the entire loss. But the court's analysis of the incident demonstrates that the conduct of both parties contributed in some degree to the loss. The burden is on the plaintiff to establish proximate cause between breach and damage and if the loss caused by a breach cannot be isolated from that attributable to other factors, no damages may be awarded. Lichter v. Mellon-
Stuart Co.,
305 F.2d 216
(3d Cir. 1962). Here, the trial judge might well have decided that there was an inadequate basis for proration between damages precipitated by Warner's conduct and that of Groves, in which event there would have been no recovery. The judge, however, believed that there was enough evidence to determine that 25 percent was a proper allocation. Plaintiff's argument that it is entitled to all of its loss overlooks the fact that Groves accepted at least part of the responsibility for the mishap at the time it occurred. Furthermore, the trial court made specific findings of Groves' ineptness in the handling of its equipment and labor force on the day in question. Any error in the allocation could only be based on a lack of proof establishing the extent of harm caused exclusively by Warner. From that standpoint, Groves is the beneficiary of the district court's ruling and has no ground for complaint. The action of the trial judge in dividing the loss between the parties was a fair solution to a difficult problem and is
not reversible in the circumstances here. Whether it is proper to allocate damages in situations where specific amounts cannot be attributable to separate causes is not free from doubt. In Lichter v. Mellon-Stuart, supra,
the trial court was able to distinguish between items of damage which were compensable and those which
were not. Cf. Krauss v. Greenbarg,
137 F.2d 569
(3d Cir.) cert. denied,
320 U.S. 791, 64 S.Ct. 207, 88 L.Ed. 477 (1943). See
the discussion in Dobbs, Handbook on Law of Remedies, § 12.3 at
798-803 (1973).
The other matter of law which warrants attention is that of mitigation of damages. The district court determined that since the contract was essentially one for the sale of a product with an additional requirement of proper and timely delivery, the Uniform Commercial Code should govern. See Bevard v. Howat Concrete Co.,
140 U.S.App.D.C. 96
, 433 F.2d 1202
(1970). We agree that in this diversity case the Pennsylvania courts would treat the contract as one for the sale of goods and so we look to the Code. The court described the transaction between Groves and Warner as an installment contract as that
term is defined in Pa.Stat. Ann. tit. 12A, § 2-612(1) (Purdon 1970), that is, an agreement to deliver goods in "separate lots to be separately accepted." Where there is non-conformity with respect to one or more installments which substantially impairs the value of the whole contract, there is a breach of the whole. § 2-612(3). In the district court's view, such a breach occurred as
Your preview ends here
Eager to read complete document? Join bartleby learn and gain access to the full version
- Access to all documents
- Unlimited textbook solutions
- 24/7 expert homework help
of July 12, 1972 and should have been apparent to Groves. At that time Warner had been recertified by the Pennsylvania Department of Transportation and Trap Rock had also received state approval. The district court reasoned that in order to recover consequential damages for defective performance after that date, Groves had to prove that it had complied with the obligation to "cover" or otherwise mitigate damages incurred after Warner's breach in July, 1972.
All of the Pennsylvania statute references to the Uniform Commercial Code are found in Title 12A of Purdon's Statutes. In the interest of simplicity, all references to the Code hereafter will be only to section number.
Section 2-715 provides that the consequential damages a buyer may recover are those which "could not reasonably be prevented by cover or otherwise." Thus, generally, when a seller refuses
to deliver goods, the buyer must attempt to secure similar articles elsewhere as a prerequisite to receiving consequential damages. "Cover" is defined in § 2-712(1): "After a breach . . . the buyer may `cover' by making in good faith and without unreasonable delay any reasonable purchase of or contract to purchase goods in substitution for those due from
the seller."
Since Trap Rock was available in July, 1972 as a source of ready-mixed concrete, the district court held that Groves was under "a duty to attempt to prevent the consequential damages . . . by obtaining the supplemental supplier" and that Groves' failure to do so barred it, as a matter of law, from receiving such compensation. In this ruling the trial court erred. The requirement of cover or mitigation of damages is not an absolute, unyielding one, but is subject to the circumstances. Comment 2 to § 2-712 says: "[t]he test of proper cover is whether at the time and place the buyer acted in good faith and in a reasonable manner, and it is immaterial that hindsight may later prove that the method of cover used was not the cheapest or most effective."
Essentially the cover rules are an expression of the general duty to mitigate damages and usually the same principles apply. See R.I. Lampus Co. v. Neville Cement Products Corp.,
232 Pa. Super. 242
, 336 A.2d 397, 405
(1975), aff'd on other grounds,
474 Pa. 199
, 378 A.2d 288
(1977). The burden of proving that losses could have been avoided by reasonable effort and expense must be borne by the party who has broken the contract. Carl Beasley Ford, Inc. v. Burroughs Corp.,
361 F. Supp. 325, 335
(E.D.Pa. 1973), aff'd,
493 F.2d 1400
(3d Cir. 1974); 5 A. Corbin, Contracts § 1039 (1964). It has been said that there is not a "duty" on the part of a plaintiff to mitigate damages but rather the principle is that he is entitled to only those damages which he could not avoid by reasonable effort. The "duty" to mitigate cannot be enforced and it is only when recovery is sought that the defense may be invoked. See
Restatement of Contracts § 336, comment d; 5 A. Corbin, Contracts
§ 1039 (1964). D. Dobbs, Handbook on the Law of Remedies, § 3.7 at 188 (1973). The test for plaintiff's efforts is reasonableness, McCormick on Damages § 35 (1935).
Your preview ends here
Eager to read complete document? Join bartleby learn and gain access to the full version
- Access to all documents
- Unlimited textbook solutions
- 24/7 expert homework help
Here, the court found that as of July 12, 1972, Groves had no reasonable expectation that Warner's performance would improve to totally satisfactory levels, that there were no practical impediments to employing Trap Rock as a supplemental supplier, and therefore Groves had a duty to contract with Trap Rock to mitigate delay damages. We do not think that the premises justify the conclusion. In July, 1972, Groves found itself confronted with a breach by Warner and the consequent necessity to choose among a number of alternative courses of action. In the circumstances, Groves could have: 1. Declared the contract breached, stopped work, and held Warner liable for all damages. This was not a realistic alternative.
2. Set up its own cement batching plant at the job site. Time and expense made this impractical.
3. Accepted Warner's assurances that it would perform satisfactorily in the future, see
§ 2-609(1).
The court, however, found that it would have been unreasonable to have any faith in continued assurances from Warner.
Section 2-609(1) reads in part: "When reasonable grounds for insecurity arise with respect to the performance of either party the other may in writing demand adequate assurance of due performance and until he receives such assurance may if commercially reasonable suspend any performance for which he has not already received the agreed return."
4. Substituted Trap Rock for Warner for the remainder of the contract. The court made no finding
on the reasonableness of this choice but it appears questionable whether Trap Rock had the resources to meet all of Groves' requirements.
5. Engaged Trap Rock as a supplemental supplier; or
6. Continued dealing with Warner in the belief that though its performance would not be satisfactory, consequential damages might be less than if the other alternatives were adopted.
Of the six alternatives, Groves was seemingly faced with three practical ones — all subject to drawbacks. Groves had to: allow Warner to continue in the hope of averting even greater losses; substitute Trap Rock for all of Warner's work — a choice made doubtful by Trap Rock's ability to handle the project; or, lastly, use Trap Rock as a supplemental supplier. The last choice — the option chosen by the district court — was subject to several difficulties which the court did not discuss. Even if Trap Rock supplied part of the contract with perfect scheduling, there would be no guarantee that Warner would do so. The element of erratic deliveries by Warner would not necessarily be cured, nor would the problems with the quality of concrete it delivered to the site. The presence of two independent suppliers acting separately might indeed pose problems more severe than those which existed before. Moreover, the record reveals that Trap Rock received some of its raw material from Warner and Groves suspected that Warner might not have been too cooperative if part of the Girard Bridge contract were taken away by Trap Rock.
Your preview ends here
Eager to read complete document? Join bartleby learn and gain access to the full version
- Access to all documents
- Unlimited textbook solutions
- 24/7 expert homework help
Confronted with these alternatives, Groves chose to stay with Warner, a decision with which the district court did not agree. The court's preference may very well have been the best; that, however, is not the test. As Judge Hastie wrote in In re Kellett Aircraft Corp.,
186 F.2d 197, 198-
99
(3d Cir. 1950): "Where a choice has been required between two reasonable courses, the person whose wrong forced the choice can not complain that one rather than the other was chosen. [McCormick on Damages, § 35 (1935).] The rule of mitigation of damages may not be invoked by a contract breaker as a basis for hypercritical examination of the conduct of the injured party, or merely for the purpose of showing that the injured person might have taken steps which seemed wiser or would have been more advantageous to the defaulter. . . . One is not obligated to exalt the interest
of the defaulter to his own probable detriment."
There are situations in which continuing with the performance of an unsatisfactory contractor will avoid losses which might be experienced by engaging others to complete the project. 5 Corbin, supra,
§ 1039 at 249. See also
Hillman, Keeping the Deal Together After Material Breach
— Common Law Mitigation Rules, The UCC, and the Restatement (Second) of Contracts,
47 U.Colo.L.Rev. 553 (1976). In such a setting, mitigation is best served by continuing existing arrangements. As the troubled Prince of Denmark once observed we The circumstances here stand in marked contrast to those in R.I. Lampus Co. v. Neville Cement Prod. Corp., supra,
where a buyer was found not justified in deliberately using defective material in manufacturing products for its customers. There, adequate materials could have been secured from the seller.
". . . rather bear those ills we have, Than fly to others that we know not of . . .." W. Shakespeare, Hamlet, Act III, scene I, lines 81-82.
There is another unusual feature in this case. Engaging Trap Rock as an additional source of supply was a course of action open to Warner as well as Groves. Indeed, on other commercial work Warner had
used Trap Rock as a supplemental supplier. When the Pennsylvania Department of Transportation approved Trap Rock, Warner could have augmented its deliveries to Groves by securing extra trucks and concrete from Trap Rock as needed. Such an arrangement
by Warner would have had the distinct advantage of having one subcontractor directly answerable to Groves for proper delivery, timing and quality. Where both the plaintiff and the defendant have had equal opportunity to reduce the damages by the same act and it is equally reasonable to expect the defendant to minimize damages, the defendant is in no position to contend that the plaintiff failed to mitigate. Nor will the award be reduced on account of damages the defendant could have avoided as easily as the plaintiff. See
Dobbs, Handbook on the Law of Remedies § 3.7 at 186 (1973). The duty to mitigate damages is not applicable where the party whose duty it is primarily to perform a contract has equal opportunity for performance and equal knowledge of the consequences of nonperformance. See Parker v. Harris Pine Mills,
206 Or. 187
, 291 P.2d 709
(1955).
Your preview ends here
Eager to read complete document? Join bartleby learn and gain access to the full version
- Access to all documents
- Unlimited textbook solutions
- 24/7 expert homework help
Here, where the alternative the court imposed upon Groves was available to Warner as well, Warner may not assert Groves' lack of mitigation in failing to do precisely that which Warner chose not to do. Particularly is this so in light of the finding that Warner breached the contract in bad faith. Thus, either upon the ground that Groves should not be faulted for choosing one of several reasonable alternatives or upon the basis that Warner was bound to procure an additional supplier, we hold that the district court erred in imposing on Groves as a matter of law a duty to engage Trap Rock. Accordingly, we vacate that portion of the court's judgment which allowed damages for delay only until July 12, 1972. We remand for assessment of damages from that point to completion of the contract on the same basis as that used for the pre-July 12 delay damages. In all other respects, the judgment of the district court will be affirmed. Bohler-Uddeholm America, Inc. v. Ellwood Group
Summary
holding that Pennsylvania law allows use of extrinsic evidence to establish a latent ambiguity
Summary of this case from In re Montgomery Ward Co., Inc.
See 25 Summaries
Opinion
No. 99-3773. Argued July 19, 2000.
Filed April 11, 2001. Appeal from the United States District Court for the Western District Court for the Western District of Pennsylvania, Robert Cindrich, J. H. Woodruff Turner, (Argued), Robert B. Sommer, David M. Aceto, Douglas A. Pearson, Kirkpatrick Lockhart, LLP, Pittsburgh, PA, Counsel for Appellants. Vincent J. Connelly, Alan J. Martin, (Argued), Daniel L. Ring, Eric S. Dreiband, Terri Hoskins, Audrey Fried-Grushcow, Mayer, Brown Platt, Chicago, IL, William M. Wycoff, Thorp, Reed Armstrong, Pittsburgh, PA, Counsel for Appellees. Before BECKER, Chief Judge, SLOVITER and NYGAARD, Circuit Judges.
Your preview ends here
Eager to read complete document? Join bartleby learn and gain access to the full version
- Access to all documents
- Unlimited textbook solutions
- 24/7 expert homework help
OPINION OF THE COURT BECKER, Chief Judge. This is an appeal by defendant Ellwood Group, Inc., (Ellwood) from a final judgment entered against it by the District Court for the Western District of Pennsylvania in favor of plaintiff Uddeholm Tooling AB (Uddeholm). This complicated commercial case emerges from the disintegration of a joint venture entered into by Ellwood, a Pennsylvania corporation in the business of forging steel ingots into various components of heavy machinery, and Uddeholm, a Swedish company that produces specialty tool steels. Uddeholm brought numerous claims against Ellwood, including breach of contract, breach of fiduciary duty, misappropriation of trade
secrets, and civil conspiracy. Resolution of this appeal requires us to address a number of questions of Pennsylvania contract, business tort, and damages law, along with two questions on the application of the Federal Rules of Evidence. The most important issue involves the question whether the joint venture agreement was ambiguous as a matter of law as to whether Ellwood could properly claim rebates for its sales to third parties of ingots produced by the Ellwood-Uddeholm Steel Company (EUS), the entity formed by the joint venture, or whether Ellwood was limited to rebates for sales by EUS to Ellwood for Ellwood's own use. Uddeholm maintains that the latter interpretation reflects not only the clear intent of the contracting parties but also the raison d'etre of the contract. We conclude that the District Court was correct in finding a contractual ambiguity. We also conclude,
however, that it erred in instructing the jury that Ellwood had the burden of establishing the meaning of the disputed terms in the agreement because of the fiduciary relationship between the
parties that was created by the joint venture. We must therefore vacate the jury verdict on the contract claim and remand for a new trial. Other important issues include: (1) whether Uddeholm's breach of fiduciary duty and misappropriation of trade secrets claims were covered and thus precluded by its breach of contract claim; (2) whether Ellwood's potential liability on the civil conspiracy claim was foreclosed because the jury found no other conspirator; (3) whether Uddeholm could recover on its contract claim for rebates Ellwood received in 1991; (4) the interest rate to be applied to sums
Uddeholm owed Ellwood for post-venture purchases of steel; and (5) two evidentiary questions: the admissibility of a document under Fed.R.Evid. 807
(the residual exception to the hearsay rule), and whether the court erred by requiring redaction of an Uddeholm employee's memo before admitting it into evidence. We will affirm the District Court's decision allowing Uddeholm to recover on its fiduciary duty claims, for the wrongful behavior that underlies this claim was not covered by the joint venture agreement. However, we will set aside both the verdict for Uddeholm on the misappropriation claim (because it was covered by the joint venture agreement) and the verdict on the civil
Your preview ends here
Eager to read complete document? Join bartleby learn and gain access to the full version
- Access to all documents
- Unlimited textbook solutions
- 24/7 expert homework help
conspiracy claim (as there was insufficient evidence of the existence of a second co-conspirator, which is required under Pennsylvania law). With respect to the latter issue, we reject Uddeholm's
contention that Ellwood did not validly preserve its objection. We will also set aside the District Court's order that applied a 6% interest rate to the sums Uddeholm owed Ellwood for steel that it
bought post-venture, and remand for further findings of fact on this issue. We will affirm the District Court's evidentiary rulings, because its application of Rule 807 and its redaction of the employee's memo were not abuses of the court's discretion. We therefore will affirm in part, reverse in part, and remand for further proceedings. I. Facts and Procedural History Prior to 1984, Ellwood relied on outside manufacturers to supply it with steel ingots for its steel-
forging business. In early 1984, Ellwood decided to construct an ingot mill in Ellwood City, PA, in order to produce its own supply of steel, which it did under the name Ellwood City Forge Steel Company (ECF). At around this time, Uddeholm decided that it wanted to set up a manufacturing plant in the United States in order to avoid quotas on imports of tool steel from Sweden, deliver steel more quickly, and avoid currency fluctuations. The two companies entered negotiations with an eye towards forming a joint venture in which Uddeholm would provide its steelmaking expertise and some funding for Ellwood's new mill, while Ellwood would provide Uddeholm with a U.S. source of tool steel as well as most of the financing of the mill. After nine months of negotiation, the two companies entered into a joint venture agreement which comprised several contracts executed in April and June 1985 (collectively, the Agreement). For the purposes of this appeal, the most important of these contracts are the Shareholders Agreement, the two Steel Purchase Agreements (one each for Ellwood and Uddeholm, covering their purchases from the new mill), and the Know How License Agreement.
Under the terms of the Agreement, Ellwood became an 80% shareholder and Uddeholm a 20% shareholder in ECF, which changed its name to the Ellwood-Uddeholm Steel Company (EUS). As it had with ECF, Ellwood continued to run the daily operations of EUS. The Agreement provided that EUS would sell steel ingots to Uddeholm and Ellwood at cost plus a percentage of this cost to cover overhead, which was set in the original contracts at 35%. "Overhead" is defined
in the Agreement as including "all interest, depreciation, selling, general and administrative costs
and all other costs and expenses which are not included as part of the `base costs' [of the ingots]."
Uddeholm had the right to purchase up to 10% of the ingots produced by EUS, and Ellwood had the right to purchase the rest. More specifically, the joint venture agreement was between Uddeholm and Ellwood City Forge Corporation, a subsidiary of the Ellwood Group. After the joint venture began, Uddeholm changed its name to the Bohler Uddeholm Corporation, but for simplicity we will use the name "Uddeholm" to refer to that corporation in this opinion.
The Agreement included the rebate provision (§ 2.3 of the two Steel Purchase Agreements contained within the overall Agreement) that is central to the current dispute. This clause provided for "rebates" in case one of the partners paid more than its allotted share of EUS's overhead, which was based on each partner's percentage control of EUS: 80% for Ellwood, 20% for Uddeholm. More specifically, if the amount of Ellwood's steel purchases that went to EUS's
Your preview ends here
Eager to read complete document? Join bartleby learn and gain access to the full version
- Access to all documents
- Unlimited textbook solutions
- 24/7 expert homework help
overhead (i.e., the 35% over the ingot cost) exceeded 80% of the total sums that went to overhead during the calendar year, then Ellwood was entitled to a rebate of the amount it paid in excess of this 80%. The same held true for Uddeholm, but at 20%. The Agreement also provided that if either partner's contributions to EUS's over head totaled less than its percentage control of the company (i.e., if Ellwood's contributions were less than 80% of EUS's overhead, or Uddeholm's contributions were less than 20%), that partner had to make payments to EUS in order to bring its share of the overhead paid to the level equivalent to their percentage control. This system was designed to ensure that Ellwood always paid exactly 80% of EUS's overhead, and Uddeholm paid for exactly 20%, no matter how much steel each was buying from EUS. As part of the Agreement, the parties established that after October 1, 1989, either party could cause EUS to buy Uddeholm's 20% stake in EUS at book value (thus making Ellwood the sole owner of EUS). The Agreement contained non-compete provisions that went into effect if this purchase option was exercised; the Agreement granted EUS an exclusive license for Uddeholm's "know-how," but prohibited EUS from using such know-how for three years after the end of the joint venture. The documents comprising the Agreement included the Business Plan for EUS, which was incorporated by reference into the Shareholders Agreement. The Business Plan stated that "[t]he principal purpose of EUS will be to supply high quality ingot to its owners, Ellwood City Forge Corporation and Uddeholm Tooling AB," and that "[i]ngots shall be cast in a variety of shapes and weights according to the requirements of Ellwood City Forge Corporation and Uddeholm Tooling AB." During the negotiations for the Agreement, Ellwood proposed a draft Business Plan which indicated that Ellwood desired to sell EUS's ingots to third-party purchasers in the general market. Ellwood's proposed Business Plan included the additional purpose for EUS that "[s]econdarily, [EUS] shall be operated with the purpose of earning the maximum possible profit from sale of its product to third parties." The proposal added that ingots shall be cast to the requirements of "third party purchasers" as well as Ellwood and Uddeholm, and that "[i]ngots may be sold to third parties to the extent permitted under the various contracts among EUS, Ellwood City Forge and Uddeholm Tooling." Uddeholm rejected these proposed alterations to the Business Plan, making clear to Ellwood that it did not want EUS's production to go to anyone but the shareholders. Ellwood agreed to delete from the Business Plan all language to the effect that the secondary purpose of EUS was to sell tool steel to third parties, though there is evidence in the record that the parties came to an understanding that perhaps marginal amounts of ingots would be sold by the shareholders to third parties if EUS's financial circumstances so required. The EUS plant commenced operation in 1985. It is disputed whether EUS and Ellwood provided Uddeholm with full disclosure in EUS's monthly and yearly financial statements during the term of the joint venture. Uddeholm claims that it requested full information and did not receive it, while Ellwood contends that it always provided full information. It is undisputed, however, that during the venture EUS sold a substantial amount of steel ingots that ended up going to third parties in unchanged form, i.e., not as forged steel products but as raw steel ingots. The proper characterization of these sales to third parties is the subject of strong disagreement between Ellwood and Uddeholm. Ellwood asserts that it bought the ingots from EUS and resold them to
Your preview ends here
Eager to read complete document? Join bartleby learn and gain access to the full version
- Access to all documents
- Unlimited textbook solutions
- 24/7 expert homework help
the third parties, so that it properly received a rebate on all these "purchases," as that term is defined in § 2.3 of the Steel Purchase Agreements. Uddeholm counters that the ingots were essentially sold directly by EUS to the third parties at Ellwood's direction, and that Ellwood was not entitled to rebates on these sales because they were not "purchases" as defined in § 2.3 of the Steel Purchase Agreements. In 1987, Uddeholm designated its employee Bertil Rydstad to be the person responsible for Uddeholm's relationship with Ellwood and EUS. In March 1988, Rydstad wrote a memo that is a
subject of dispute in this appeal. In that memo, Rydstad stated that he understood that Ellwood was free to resell the ingots bought from EUS: "Thus, there are only two purchasers of ingots. However, nothing precluded [sic] them from selling to a third party." At trial, the District Court ordered this language redacted from the memo before the memo was admitted into evidence because these statements involved a "legal interpretation by a non-legal person," and because the statements did not address the relevant issue of interpretation of the Agreement, namely, whether Ellwood was entitled to receive rebates for its ingot sales to third parties. On January 29, 1991, Ellwood notified Uddeholm of Ellwood's intention to exercise its right under the Agreement to have EUS buy Uddeholm's EUS shares at their December 31, 1990, book value. In March 1991, Deloitte Touche prepared a report for EUS detailing EUS's book value as of December 31, 1990. Uddeholm objected to the calculated book value because it was about half of the book value determination that Ellwood had related to Uddeholm in November 1990. Uddeholm informed Ellwood that it was willing to tender its shares at the Deloitte Touche calculated value subject to Uddeholm retaining its rights to make a legal claim for an increased book value. Ellwood insisted that Uddeholm accept the calculated book value for the stock without retaining any such right to a legal claim, threatening that otherwise it would refuse Uddeholm's tender of its stock, which would keep Uddeholm responsible for 20% of EUS's over-
head through 1991 and beyond. Uddeholm then brought suit in the District Court, contending that the Deloitte Touche book value
calculation was understated because the profits that Ellwood collected on the ingots that were sold to third parties should have gone to EUS (and thus 20% to Uddeholm), rather than directly and solely to Ellwood. Uddeholm alleged in an amended complaint that Ellwood had violated § 2.3 of the Steel Purchase Agreements by claiming rebates on these sales when the sales were not "purchases" as the term is used in that section. On November 14, 1991, the parties entered into a stipulation under which Uddeholm tendered its shares of EUS to Ellwood (thus ending the joint venture), while payment for Uddeholm's shares would be made pursuant to an order of the District Court at the resolution of this litigation. After the termination of the joint venture in November 1991, Ellwood created the Ellwood Specialty Steel Company (ESS) to sell common grades of tool steel. Ellwood recruited Ake Sundvall, a former president of Uddeholm who at that time was working for an Austrian steel company, A vesta, to become president of ESS. While Sundvall was still working at Avesta, Ellwood sent Uddeholm's confidential pricing, shipping, and customer information to Sundvall at
his Avesta office, an act which Uddeholm argues was a misappropriation of its trade secrets because Avesta was a competitor of Uddeholm's in the steel market. Uddeholm also contends that Sundvall and other Ellwood officials improperly persuaded sales representatives to leave
Your preview ends here
Eager to read complete document? Join bartleby learn and gain access to the full version
- Access to all documents
- Unlimited textbook solutions
- 24/7 expert homework help
Uddeholm for ESS, and then used these representatives to solicit and sell tool steel to Uddeholm's customers in violation of the non-competition provisions of the Agreement. Uddeholm asserts that ESS sold over $13 million worth of steel to Uddeholm's customers between 1991 and 1994, dramatically undercutting Uddeholm's share of the steel market. From the time the joint venture was terminated through May 1992, Uddeholm bought steel from Ellwood. During this time, Uddeholm did not pay Ellwood for approximately $345,000 worth of steel. Uddeholm does not dispute the existence of this debt, but the parties disagree over the rate of interest that should be applied to it. Ellwood argues that an 18% interest rate (which is the rate
on its invoice order form and the standard rate it charges all of its customers) should apply, while
Uddeholm argues that the statutory 6% rate should apply, as the steel was bought under an agreement that did not involve Ellwood's standard terms. The disputes between Ellwood and Uddeholm over the Agreement resulted in four different civil actions which were eventually consolidated. At trial, the District Court found that the Agreement was ambiguous as to whether Ellwood could properly claim rebates for the steel ingots sold to third parties, and it therefore sent the issue of the correct interpretation of the Agreement to the jury. The court also instructed the jury that Ellwood had the burden to prove by a preponderance of the evidence that these transactions were in accord with the terms of the Agreement. The jury returned a special verdict finding that Ellwood had breached the Agreement by including third party ingot sales in its rebate calculations, and awarded Uddeholm $4.1 million in compensatory damages and interest. The jury also found that Ellwood and David Barensfeld (a director of both EUS and Ellwood) had breached their fiduciary duties to Uddeholm, and awarded $45,000 in compensatory and $85,000 in punitive damages for Ellwood's breach, and $70,000 in compensatory and $300,000 in punitive damages for Barensfeld's breach. The jury found further that Ellwood had breached the Agreement's non-competition clauses and committed the torts of misappropriation of trade secrets and civil conspiracy; it awarded compensatory damages of $1 million on the non-compete claim, $150,000 on the misappropriation claim, and $70,000 in punitive damages on the civil conspiracy claim. (The jury exonerated the other alleged co-
conspirators.) The District Court entered a final judgment in this case on July 1, 1999. The parties reserved the issue of interest for post-trial determination. After the verdict, the District Court ruled on this issue and various post-trial motions. The court found that the post-
venture steel was purchased under an agreement that did not include Ellwood's standard terms as printed on its steel invoices, and thus the court applied the statutory 6% interest rate instead of the 18% invoice rate. The District Court also rejected Ellwood's argument that the rebates that Ellwood received between January 1 and November 14, 1991 should be excluded from the damages computation. The District Court then entered a superseding final judgment in favor of Uddeholm for $9,458,210.86 on September 13, 1999. This appeal timely followed. Because the appeal presents a plethora of issues, not all of which have been referenced above, it will be useful to set them forth seriatim, couched in terms of Ellwood's contentions: The District Court had jurisdiction over this action pursuant to 28 U.S.C. § 1332
, and we have jurisdiction pursuant to 28 U.S.C. § 1291
.
Your preview ends here
Eager to read complete document? Join bartleby learn and gain access to the full version
- Access to all documents
- Unlimited textbook solutions
- 24/7 expert homework help
1. Did the District Court err in finding that the Agreement was ambiguous as a matter of law regarding whether Ellwood could properly claim rebates for third-party sales of ingots produced by EUS (in contrast to being limited to rebates on purchases for its own use, which Uddeholm claims was the clear intent of the contracting parties)?
2. Did the District Court err in its instruction to the jury that Ellwood had the burden of establishing the meaning of disputed contract terms in the Agreement?
3. Did the District Court err in other jury instructions
i) by not specifically identifying the allegedly ambiguous terms in the Agreement and the alternative interpretations of these terms;
ii) by giving insufficient instruction on the applicable principles of contract interpretation;
iii) by giving the instruction that it was "undisputed" that both parties were to "share the benefits" of the joint venture, which Ellwood alleges was biased in favor of Uddeholm's interpretation of the Agreement;
iv) by giving an instruction on proving damages for lost profits from a breach of a covenant not to compete which Ellwood alleges was a misstatement of Pennsylvania law; and
v) by not instructing the jury that it should decide whether Ellwood's 420 Series of steel fell into the category of "tool steel" as defined under the covenant not to compete?
4. Did the District Court err in allowing the jury to consider the misappropriation of trade secrets tort claim because the behavior that was alleged to constitute this breach was covered by the terms of the Agreement?
5. Did the District Court err in allowing the jury to consider the breach of fiduciary duty claims because the behavior that was alleged to constitute this breach was also covered by the terms of the Agreement?
6. Did the District Court err in allowing the jury to consider the breach of fiduciary claim against
David Barensfeld (a director of both Ellwood and EUS), because, as Ellwood alleges, Uddeholm lacked standing to sue Barensfeld for this alleged breach?
7. Can Ellwood be liable for civil conspiracy given that all of the alleged co-conspirators were exonerated by the jury, and was this issue preserved in the District Court?
8. Did the District Court err in allowing Uddeholm to recover damages that included the rebates received by Ellwood from EUS in 1991?
9. Did the District Court err in admitting an affidavit by Bo Jonsson into evidence?
10. Did the District Court err in requiring redaction in the Bertil Rydstad memo before admitting it into evidence?
11. Did the District Court err by applying the statutory 6% interest rate instead of Ellwood's standard 18% rate to money that Uddeholm owed Ellwood for post-venture purchases of steel?
We address in the main text of this opinion only the issues numbered 1, 2, 4, 5, and 7 through 11.
Ellwood's contentions listed in numbers 3 and 6 are addressed in the margin infra
at footnotes 9 and 13; we summarily affirm the District Court on those issues. II. Was the Agreement Ambiguous?
Your preview ends here
Eager to read complete document? Join bartleby learn and gain access to the full version
- Access to all documents
- Unlimited textbook solutions
- 24/7 expert homework help
The District Court found, as a matter of law, that the Agreement was ambiguous as to whether Ellwood could make sales to third parties of ingots produced by EUS, keep the profits from these
sales to itself, and get rebates on these sales when its contributions to EUS's overhead reached more than 80% of EUS's total overhead costs. The court thus sent the matter of the interpretation of the Agreement to the jury, which found that Ellwood breached the Agreement and awarded Uddeholm $4.1 million in compensatory damages and interest for this breach. Ellwood challenges the District Court's determination that the contract was ambiguous. We have plenary review of this matter. See Pacitti v. Macy's,
193 F.3d 766, 773
(3d Cir. 1999); Harley-Davidson, Inc. v. Morris,
19 F.3d 142, 145
(3d Cir. 1994). The main disputed part of the Agreement is the following provision, which is contained in the Steel Purchase Agreement between EUS and Ellwood: § 2.3 Price Adjustment or Rebate for Contribution.
Within 90 days after the end of each calendar year of Seller [EUS], the prices with respect to the purchase of Products during the preceding calendar year by Buyer [Ellwood] shall be adjusted by way of rebate (after giving effect to quarterly estimated allowances) if Buyer's Purchases
(net of returns and allowances) in any year constitute more than 80% of the aggregate amount received by Seller in such year in excess of aggregate above defined "base costs" for such year (hereinafter for this Section 2.3 referred to as "Contribution").
(emphasis added). Ellwood argues that this clause unambiguously allowed it to get rebates on all
its purchases from EUS when Ellwood's contribution to EUS's overhead surpassed 80%, regardless of whether Ellwood turned around and immediately sold the purchased ingots to third parties. Uddeholm responds that this clause is ambiguous because it is not clear on its face whether "Buyer's Purchases" is limited to purchases for the buyer's own use only. Uddeholm contends that other evidence (both contained within the Agreement and extrinsic to it) shows that the disputed clause is limited to purchases for the buyer's own use, and thus the ingots that Ellwood bought from EUS and resold did not count as "Buyer's Purchases" for rebate calculation purposes. As we have noted, the District Court accepted Uddeholm's contention that the Agreement was ambiguous and sent the issue of interpreting the Agreement to the jury, which agreed with Uddeholm's proffered interpretation of the Agreement. Our task is to review this determination by the District Court, which requires us to examine the principles of contract interpretation under Pennsylvania law. Both parties agree that Pennsylvania law governs this case. A. Pennsylvania Law on Contract Interpretation
Pennsylvania law on contract interpretation and ambiguity is somewhat complicated; while the broad principles are clear, it is not a seamless web, and hence we will have to review some of the
relevant Pennsylvania cases before applying the law to the facts at bar. Pennsylvania contract law
begins with the "firmly settled" point that "the intent of the parties to a written contract is contained in the writing itself." Krizovensky v. Krizovensky,
425 Pa.Super. 204
, 624 A.2d 638, 642
(1993) (citing Steuart v. McChesney,
498 Pa. 45
, 444 A.2d 659
(1982)). "`Where the
Your preview ends here
Eager to read complete document? Join bartleby learn and gain access to the full version
- Access to all documents
- Unlimited textbook solutions
- 24/7 expert homework help
intention of the parties is clear, there is no need to resort to extrinsic aids or evidence,'" instead, the meaning of a clear and unequivocal written contract "`must be determined by its contents alone.'" Steuart,
444 A.2d at 661
(quoting East Crossroads Ctr., Inc. v. Mellon-Stuart Co.,
416 Pa. 229
, 205 A.2d 865, 866
(1965)). "[W]here language is clear and unambiguous, the focus of interpretation is upon the terms of the agreement as manifestly expressed,
rather than as, perhaps,
silently intended." Id.
"Clear contractual terms that are capable of one reasonable interpretation must be given effect without reference to matters outside the contract." Krizovensky,
624 A.2d at 642
. A court may, however, look outside the "four corners" of a contract if the contract's terms are unclear: "[w]here the contract terms are ambiguous and susceptible of more than one reasonable interpretation, . . . the court is free to receive extrinsic evidence, i.e., parol evidence, to resolve the ambiguity." Id.
But because Pennsylvania presumes that the writing conveys the parties' intent, a contract will be found ambiguous if, and only if, it is reasonably or fairly susceptible of different constructions and is capable of being understood in more senses than one and is obscure in meaning through indefiniteness of expression or has a double meaning. A contract is not ambiguous if the court can determine its meaning without any guide other than a knowledge of the simple facts on which, from the nature of the language in general, its meaning depends; and a
contract is not rendered ambiguous by the mere fact that the parties do not agree on the proper construction.
Duquesne Light Co. v. Westinghouse Elec. Corp.,
66 F.3d 604, 614
(3d Cir. 1995) (quoting Samuel Rappaport Family Partnership v. Meridian Bank,
441 Pa.Super. 194
, 657 A.2d 17, 21-22
(1993)) (internal quotation marks omitted). To determine whether ambiguity exists in a contract, the court may consider "the words of the contract, the alternative meaning suggested by counsel, and the nature of the objective evidence to be offered in support of that meaning." Mellon Bank, N.A. v. Aetna Bus. Credit, Inc.,
619 F.2d 1001, 1011
(3d Cir. 1980). Ambiguity in a contract can be either patent or latent. While a patent ambiguity appears on the face of the instrument, "a latent ambiguity arises from extraneous or collateral facts which make the meaning of a written agreement uncertain although the language thereof, on its face, appears clear and unambiguous." Duquesne Light,
66 F.3d at 614
(citing Easton v. Washington County Ins. Co.,
391 Pa. 28
, 137 A.2d 332
(1957)). A party may use extrinsic evidence to support its claim of latent ambiguity, but this evidence must show that some specific term or terms in the contract are ambiguous; it cannot simply show that the parties intended something different that was not incorporated into the contract. "[L]est the ambiguity inquiry degenerate into an impermissible analysis of the parties' subjective intent, such an inquiry appropriately is confined to `the parties linguistic reference.' . . . [T]he parties' expectations, standing alone, are irrelevant without any contractual hook
on which to pin them." Id.
at 614 n. 9 (quoting Mellon Bank,
619 F.2d at 1011
n. 12) (emphasis added). Furthermore, the alternative meaning that a party seeks to ascribe to the specific term in the contract must be reasonable; courts must resist twisting the language of the contract beyond recognition. "In holding that an ambiguity is present in an agreement, a court must not rely upon
Your preview ends here
Eager to read complete document? Join bartleby learn and gain access to the full version
- Access to all documents
- Unlimited textbook solutions
- 24/7 expert homework help
a strained contrivancy to establish one; scarcely an agreement could be conceived that might not be unreasonably contrived into the appearance of ambiguity. Thus, the meaning of language cannot be distorted to establish the ambiguity." Steuart,
444 A.2d at 663
. Pennsylvania law on ambiguity in contracts thus seems to contain a built-in tension between two principles: (1) a contract is not ambiguous, and thus must be interpreted on its face without reference to extrinsic evidence, "if the court can determine its meaning without any guide other than a knowledge of the simple facts on which, from the nature of the language in general, its meaning depends," Duquesne Light,
66 F.3d at 614
(quoting Meridian Bank,
657 A.2d at 21-22
); and (2) contractual terms that are clear on their face can be latently ambiguous, and "Pennsylvania law permits courts to examine certain forms of extrinsic evidence in determining whether a contract is ambiguous." Id.
Thus, when a court is faced with a contract containing facially unambiguous language, it seems that Pennsylvania law both requires that the court interpret the language without using extrinsic evidence, and
allows the court to bring in extrinsic evidence to prove latent ambiguity. Mellon Bank
resolves this tension by allowing only extrinsic evidence of a certain nature to establish latent ambiguity in a contract; a court should determine whether the type of extrinsic evidence offered could be used to support a reasonable alternative interpretation under the precepts of Pennsylvania law on contract interpretation. See Mellon Bank,
619 F.2d at 1011-14
. Once the court determines that a party has offered extrinsic evidence capable of establishing latent ambiguity, a decision as to which of the competing interpretations of the contract is the correct one is reserved for the factfinder, who would examine the content of the extrinsic evidence (along with all the other evidence) in order to make this determination. See Mellon Bank,
619 F.2d at 1011, 1013-14
. We will follow Mellon Bank's
approach. In particular, we think that the key inquiry in this context will likely be whether the proffered extrinsic evidence is about the parties' objectively manifested "linguistic reference" regarding the
terms of the contract, or is instead merely about their expectations. Duquesne Light Co. v. Westinghouse Elec. Corp.,
66 F.3d 604, 614
(3d Cir. 1995). The former is the right type of extrinsic evidence for establishing latent ambiguity under Pennsylvania law, while the latter is not. See id.
For example, if the evidence showed that the parties normally meant to refer to Canadian dollars when they used the term "dollars," this would be evidence of the right type. See
id.
at 1011 n. 12. Evidence regarding a party's beliefs about the general ramifications of the contract would not be the right type to establish latent ambiguity. See id.
at 1014 (rejecting extrinsic evidence that showed that one party to a disputed contract thought it bore some risk of borrower's default as insufficient to vary the clear meaning of the term "insolvent" as used in the contract). Put another way, a party offers the right type of extrinsic evidence for establishing latent ambiguity if the evidence can be used to support "a reasonable alternative semantic reference" for specific terms contained in the contract. Mellon Bank, N.A. v. Aetna Bus. Credit, Inc.,
619 F.2d 1001, 1012
n. 13 (3d Cir. 1980). See infra
pp. 94-97 n. 4.
Of course, any use of extrinsic evidence to support an alternative interpretation of facially unambiguous language must be careful not to cross the "point at which interpretation becomes alteration of the written contract." Id.
at 1011. This point is not clearly defined by Pennsylvania law. However, even a brief examination of the particular facts and holdings of some
Your preview ends here
Eager to read complete document? Join bartleby learn and gain access to the full version
- Access to all documents
- Unlimited textbook solutions
- 24/7 expert homework help
representative cases involving contract ambiguity summarized in the margin establish that: (1) mere disagreement between the parties over the meaning of a term is insufficient to establish that
term as ambiguous; (2) each party's proffered interpretation must be reasonable, in that there must be evidence in the contract to support the interpretation beyond the party's mere claim of ambiguity; and (3) the proffered interpretation cannot contradict the common understanding of the disputed term or phrase when there is another term that the parties could easily have used to convey this contradictory meaning. In Steuart v. McChesney,
498 Pa. 45
, 444 A.2d 659
(1982), the Pennsylvania Supreme Court considered whether there was ambiguity in a right of first refusal clause that stated that, upon the receipt of a bonafide offer, certain real property could be purchased at a price " equivalent
to the market value of the premises according to the assessment rolls." The trial court determined that the clause was ambiguous, and that the evidence showed that the clause really meant that the property could be purchased at " not less than
the market value of the premises according to the assessment rolls." The Pennsylvania Supreme Court roundly rejected this determination. "To no extent is the term, `equivalent', meaning, `equal', interchangeable with `not less than', and, since the parties specified the former, they shall be deemed to have intended the same," despite the fact
that the market value according to the assessment rolls was substantially less than several bonafide offers. Id.
at 664 (footnote omitted). Similarly, in Krizovensky v. Krizovensky,
425 Pa.Super. 204
, 624 A.2d 638
(1993), the Pennsylvania Superior Court reversed a trial court decision that found ambiguity in the phrase "fully reduced annuity." The trial court had concluded that, because the two parties disagreed over how to interpret this term, it was ambiguous, and thus it looked at extrinsic evidence. The Superior Court reversed because the interpretation accepted by the trial court changed the meaning of the phrase from "fully reduced annuity" to "partially reduced annuity." Since these two phrases mean entirely different things and thus in effect contradict one another (if an annuity
is fully reduced it is not partially reduced, and vice versa), the Superior Court held that the parties would not have used the one term when they meant the other, because they could easily have used this other term. "The construction urged by [the plaintiff] changes the meaning of a clearly defined term. . . . The terms of the agreement in this case were disputed, but they were not ambiguous." Id.
at 643. While an alternate interpretation that merely narrows or expands the definition of a term is acceptable, Krizovensky
rejects the wholesale change of a term's definition.
In Duquesne Light Co. v. Westinghouse Electric Corp.,
66 F.3d 604
(3d Cir. 1995), this Court rejected the plaintiff's contention that a contract was ambiguous as to whether it contained a 40 year guarantee for steam generators in a nuclear power plant. The plaintiff argued that contractual language that contained an assumption of a 42-year station life in setting out technical specifications for certain components could be interpreted as providing a 40-year guarantee for the steam generators. We rejected this interpretation as unreasonable because the "contractual hook" did not support the proffered interpretation: "Duquesne's reading would stretch this language to unimaginable proportions, as it would turn the 42-year station life by which certain components were to be judged into an express contractual guarantee that the steam
generators themselves would last for 40 years." Id.
at 614. Finally, in Mellon Bank N.A. v. Aetna Business Credit, Inc.,
619 F.2d 1001
(3d Cir. 1980), we considered whether sufficient evidence had been presented to justify finding ambiguity in the term "insolvent" in a contract between sophisticated commercial parties. Mellon used extrinsic
Your preview ends here
Eager to read complete document? Join bartleby learn and gain access to the full version
- Access to all documents
- Unlimited textbook solutions
- 24/7 expert homework help
evidence to argue that the liabilities and assets that accrued from the contracted-for project should not be used in determining whether a party was "insolvent" under the contract. The district court accepted Mellon's use of extrinsic evidence, but this Court reversed because "[t]he district court cited no basis in the contract document or wording of the insolvency clause for its conclusion." Id.
at 1009. While the term "insolvent" served as the basic contractual hook for Mellon's argument, there was scant further evidence in the contract itself to support Mellon's alternative interpretation, which in effect "made the [insolvency] condition a nullity." Id.
at 1013.
Such a radical re-interpretation, without evidence to support it in the actual wording of the contract, was "an impermissible rewriting of the words of the contract." Id.
at 1008. In our analysis, we differentiated between using extrinsic evidence to support an alternative interpretation of a term that sharpened its meaning (legitimate) and an interpretation that completely changed the meaning (illegitimate): "extrinsic evidence may be used to show that `Ten Dollars paid on January 5, 1980,' meant ten Canadian dollars, but it would not be allowed to
show the parties meant twenty dollars." Id.
at 1013. We thus held that there was no latent ambiguity in the contract.
In United Refining Co. v. Jenkins,
410 Pa. 126
, 189 A.2d 574
(1963), the Pennsylvania Supreme Court set out guidelines for an acceptable finding of ambiguity in a facially unambiguous term. Jenkins owed money to United and entered into a contract to sell United all the oil that he produced. The contested phrase in the oil contract stated that the contract was to continue "so long as there remains any unpaid indebtedness" of Jenkins to United. Id.
at 579. Jenkins defaulted on the loan, but then argued that the oil contract was still in force and that United had to buy his oil because he still owed money to United. United argued that the contested phrase in the oil contract should be interpreted to mean that the agreement would continue so long as Jenkins remained indebted to United and
Jenkins had not defaulted in his obligations. The Pennsylvania Supreme Court accepted United's interpretation of the phrase, even though doing so required the court to interpret a facially unambiguous phrase as meaning something different than what it appeared to mean on its face. The court reasoned that if Jenkins' contention is correct, United was bound to continue purchasing all Jenkins' oil . . . even though Jenkins failed to honor his obligation to United. . . . Such an interpretation of the language of this contract is both absurd and unreasonable. Under such an interpretation, Jenkins could take his profits from the "oil runs", dishonor his obligations to United and United would be
bound indefinitely to the agreement.
Id.
at 580. Thus, Jenkins
stands for the proposition that, if the plain meaning of a contract term would lead to an interpretation that is absurd and unreasonable, Pennsylvania contract law allows
a court to construe the contract otherwise in order to reach "the only sensible and reasonable interpretation" of the contract. Id.
To summarize: a contract that is unambiguous on its face must be interpreted according to the natural meaning of its terms, unless the contract contains a latent ambiguity, whereupon extrinsic
evidence may be admitted to establish the correct interpretation. However, a claim of latent ambiguity must be based on a "contractual hook": the proffered extrinsic evidence must support an alternative meaning of a specific term or terms contained in the contract, rather than simply
Your preview ends here
Eager to read complete document? Join bartleby learn and gain access to the full version
- Access to all documents
- Unlimited textbook solutions
- 24/7 expert homework help
support a general claim that the parties meant something other than what the contract says on its face. In other words, the ambiguity inquiry must be about the parties' "linguistic reference" rather
than about their expectations. Duquesne Light,
66 F.3d at 614
. Furthermore, a proffered alternative meaning for the contractual hook must be reasonable; that is, it must be supported by contractual evidence that goes beyond the party's claim that the contractual hook has a certain meaning, and the interpretation cannot contradict the standard meaning of a term when the parties could have easily used another term to convey this contradictory meaning. In determining
whether latent ambiguity exists in a facially unambiguous contract, a court must consider whether the extrinsic evidence that the proponent of the alternative interpretation seeks to offer is
the type of evidence that could support a reasonable alternative interpretation of the contract, given the foregoing principles. Finally, a court can consider an alternative interpretation of a facially unambiguous contract term when the plain meaning interpretation of the contract would lead to an absurd and unreasonable outcome. With these precepts in mind, we turn to the issue before us. B. The Interpretation of the Agreement
Ellwood argues that the language in the Agreement that concerns rebates on purchases of steel from EUS is straightforward and unambiguous. Section 2.3 of the Steel Purchase Agreement, which is the section covering the award of rebates, states that rebates shall be given if "Buyer's Purchases . . . constitute more than 80%" of EUS's overhead. Ellwood contends that the word "purchases" as used in this section has an accepted meaning: Black's Law Dictionary defines a "purchase" as the "[t]ransmission of property from one person to another by voluntary act and agreement, founded on a valuable consideration." Black's Law Dictionary 1110 (5th ed. 1979). There is no express limitation on the purpose for which the purchases can be made anywhere in the Agreement. Thus, Ellwood argues, "purchases" in § 2.3 of the Steel Purchase Agreements unambiguously includes all purchases, so that Ellwood rightfully received rebates on the steel ingots it purchased from EUS and immediately sold to third party customers. Ellwood further asserts that Uddeholm has not provided a reasonable alternative interpretation of "purchases," so that the District Court should have interpreted "purchases" in this straightforward manner, and thus should not have sent the interpretation of the Agreement to the jury. See Mellon Bank,
619 F.2d at 1011
. In contrast, Uddeholm's argument not only focuses on the term "Buyer's Purchases" in § 2.3 as the main "contractual hook" in its ambiguity argument, but also points to other provisions in the Agreement that support its interpretation that "Buyer's Purchases" in § 2.3 really means "purchases for Ellwood's/Uddeholm's own use only.
" As we noted above, this use of other provisions of the Agreement comports with Pennsylvania law, which provides that a court should
look to the contract as a whole for guidance in interpreting a term in the contract. See Duquesne Light,
66 F.3d at 615
(finding support for the court's interpretation of contested terms by examining the "format, construction and terms of the contract generally"). Uddeholm first points to a provision in the Shareholders Agreement (which is one of the contracts that comprise the Agreement) stating that "[u]nless the Shareholders shall agree otherwise, the total steel and other alloy metal output of EUS shall be purchased by the Shareholders in accordance with such Steel Purchase Agreements."
Your preview ends here
Eager to read complete document? Join bartleby learn and gain access to the full version
- Access to all documents
- Unlimited textbook solutions
- 24/7 expert homework help
Uddeholm argues that the most natural reading of this statement is that outside sales were not permitted absent the consent of both parties, and that if Ellwood could unilaterally use the joint venture to make sales to third parties as it pleased while keeping 100% of the benefits, there never would be a reason for the parties to "agree otherwise" and thus change the Agreement requirements on purchasing ingots. These provisions would thereby become meaningless, which would violate the well-established principle of contract construction "that a contract should be read so as to give meaning to all of its terms when read as an entirety." Contrans, Inc. v. Ryder Truck Rental, Inc.,
836 F.2d 163, 169
(3d Cir. 1987) (applying Pennsylvania law, citing Monti v. Rockwood Ins. Co.,
303 Pa.Super. 473
, 450 A.2d 24, 26
(1982)). Second, Uddeholm points to a provision of the Business Plan (which is incorporated into the Agreement, see supra
at page 88) that states that ingots "shall be cast in a variety of shapes and weights according to the requirements of Ellwood City Forge and Uddeholm Tooling AB." Uddeholm argues that the term "requirements" in this provision impliedly refers to requirements for the internal
use of Ellwood and Uddeholm; if the parties had intended otherwise, it submits, they would have used the phrase "according to the specifications ordered
by Ellwood and Uddeholm," or "according to the requirements of Ellwood, Uddeholm, and designated third parties.
" That is, because the process of making steel ingots involves casting each ingot to a specific shape and weight while the ingot is still hot (thus avoiding wasting excess steel), and because these specifications are determined by the ultimate end product into which the ingot will
be forged, Uddeholm argues that casting ingots "according to the requirements
of Ellwood City Forge" means tailoring the ingot to ECF's own forging process. The latter is the phrasing that Ellwood proposed for the Business Plan during negotiations, but this proposal was rejected by Uddeholm because Uddeholm made it clear that it wanted the ingot
purchases limited to the shareholders' own use. See supra
at page 88.
Third, the Business Plan also states that the joint venture's purpose was "to supply
high quality ingot to its owners, Ellwood City Forge Corporation and Uddeholm Tooling AB." (emphasis added) Uddeholm submits that the term "supply" in this clause clearly connotes a purpose to provide steel for Uddeholm's and Ellwood's own use in their steel toolmaking processes rather than for the immediate resale of the raw steel ingots. Uddeholm argues that one normally "supplies" raw materials to a manufacturer who then uses those materials himself; one does not normally "supply" raw materials to a middleman who then resells them. These three sections of the Agreement, along with § 2.3 of the Steel Purchase Agreements, are sufficient to serve as the required "contractual hook" in Uddeholm's ambiguity argument. Uddeholm's proffered interpretation of these sections does not contradict the common meaning of the terms contained therein but merely narrows those meanings, and Uddeholm's interpretation is reasonable when the sections are considered together. Uddeholm's reading of these sections thus serves to cast doubt on Ellwood's claim that § 2.3 is unambiguous. Our next step is to examine the extrinsic evidence that Uddeholm offers to support its alternative interpretation of § 2.3. Ellwood points out that § 5.2 of the Steel Purchase Agreements (dealing with the inspection of ingots bought from EUS) provides that "[d]efects attributable to shipment from the Steel Mill to
Your preview ends here
Eager to read complete document? Join bartleby learn and gain access to the full version
- Access to all documents
- Unlimited textbook solutions
- 24/7 expert homework help
Buyer or Buyer's customer
shall be the responsibility of the Buyer." (Emphasis added.) Although this language does support Ellwood's interpretation of the Agreement as allowing third-party sales, it is not enough to undermine Uddeholm's argument that other sections of the Agreement raise a question of ambiguity on this issue.
As we stated earlier, our concern here is whether Uddeholm's proffered extrinsic evidence could be used to support a reasonable alternative interpretation of the Agreement. See supra
note 3.
First, Guy Asterius, the Uddeholm General Counsel, testified at trial that the parties discussed sales to third parties during the negotiations leading up to the joint venture, and agreed that such sales might sometimes be necessary, but only if both shareholders agreed, and only in the marginal case. He testified that the parties understood that, other than in such marginal cases, the tool steel that EUS provided was to be used only for the two shareholder's businesses. Other evidence showed that, after preliminary discussions, Ellwood sent to Asterius a proposed version of the Business Plan for EUS which provided that, while the principal purpose of EUS was to supply ingots to the owners, the secondary purpose was to earn the maximum profit "from
sale of its product to third parties." The proposal included other references to sales by EUS to third parties, such as a provision that ingots shall be cast according to the requirements of Uddeholm, Ellwood, and "third party purchasers." Uddeholm was surprised over the inclusion of
the references to third party sales in Ellwood's proposal, and it met with Ellwood in order to clarify its understanding that the purpose of the joint venture was to supply ingots for Ellwood's and Uddeholm's use only. Thereafter, all references in the Agreement to third parties and third party sales were deleted, including the provision about the secondary purpose of EUS. Uddeholm
contends that this evidence strongly supports the inference that, after these deletions, both parties
understood that large volume third-party sales were not provided for under the Agreement. Finally, Bo Jonsson, who was the President of Uddeholm and also sat on the EUS board of directors, stated in an affidavit that During that time [1986-88] . . . I agreed to the sale of raw carbon and alloy steel ingots to third parties unrelated to either Uddeholm or ECF on the basis that such sales were necessary to help fill up EUS's steel mill and/or optimize production. . . . I also agreed to third party ingot sales because defendant Barensfeld represented to me that there would be at least some contribution received by EUS as a result of these sales; i.e., that EUS would receive from these sales some amount over and above the actual manufacturing cost or "base cost" of the steel ingots produced for sale to third parties. . . . I agreed on behalf of Uddeholm to the sale of raw steel ingots to third
parties, but only as a temporary, short term strategy for EUS. I did not agree to open-ended, unlimited sales of raw steel ingots by ECF to third parties.
We are persuaded (as was the District Court) by Uddeholm's argument that Asterius's testimony, Jonsson's affidavit, and the other evidence described above strongly supports the inference that Uddeholm had clearly communicated its understanding of the allowability of third party sales under the Agreement to Ellwood. We note additionally that it is a central principle of contract interpretation that if a party knew or had reason to know of the other parties' interpretation of terms of a contract, the first party should be bound by that interpretation. See Emor, Inc. v.
Your preview ends here
Eager to read complete document? Join bartleby learn and gain access to the full version
- Access to all documents
- Unlimited textbook solutions
- 24/7 expert homework help
Cyprus Mines Corp.,
467 F.2d 770, 775
(3d Cir. 1972) ("[T]he meaning given to the words by one party should be given effect if the other party knew or had reason to know that it was in fact so given.") (quoting 3 Arthur L. Corbin, On Contracts § 537, at 51 (1960)). Uddeholm points out that Ellwood was aware of Uddeholm's interpretation of the Agreement, while Uddeholm was unaware of Ellwood's competing interpretation; Uddeholm thus submits that Ellwood should be bound by Uddeholm's understanding. Furthermore, the extrinsic evidence proffered by Uddeholm concerns the parties' objectively manifested linguistic reference regarding certain terms of the contract, rather than merely their expectations. See Duquesne Light Co. v. Westinghouse Elec. Corp.,
66 F.3d 604, 614
(3d Cir. 1995). We thus conclude that the extrinsic evidence that Uddeholm offered in support of its interpretation supports its reasonable alternative
interpretation of the Agreement. At trial, Ellwood objected to the District Court's admission of Jonsson's affidavit into evidence, and it has appealed this ruling to this Court. For reasons set out in Section VII.C.1 infra,
we will hold that the District Court did not err in admitting Jonsson's affidavit under Fed.R.Evid. 807
, and hence the use of that affidavit here to support Uddeholm's ambiguity argument is proper.
In sum, the evidence proffered by Uddeholm, considered together, supports the conclusion that the District Court was correct in deciding that the Agreement contained latently ambiguous language and thus that the proper interpretation of the Agreement was an issue for the jury to decide. The sections of the Agreement that Uddeholm uses as the contractual hook for its ambiguity argument are sufficient to ground its argument, because Uddeholm offers a reasonable
alternate interpretation of these sections that does not contradict but merely narrows the plain meaning of the disputed terms. We thus find unavailing Ellwood's contention that extrinsic evidence should not have been considered because Uddeholm's alternative interpretation of the Agreement was unreasonable. When the sections of the Agreement that Uddeholm points to are considered alongside the extrinsic evidence outlined above — including the business plan, the parties' preliminary negotiations, Ellwood's rejected draft, and Jonsson's affidavit — there is considerable evidence supporting Uddeholm's claim that the Agreement was intended to set up a deal under which the parties would buy steel from EUS for their own purposes only, and would sell raw steel to third parties only in rare situations. Therefore, we hold that there is sufficient evidence for the District Court's conclusion that the Agreement was ambiguous as a matter of law, and thus the court did not err in sending the issue of the interpretation of the Agreement to the jury. III. Did the District Court Err in its Jury Instructions by Shifting the Burden of Proof to Ellwood on the Breach of Contract Claim?
Ellwood contends that the District Court erred in its instructions to the jury by putting the burden
on Ellwood to establish the meaning of any ambiguous terms in the Agreement. We review a jury
instruction to determine "`whether the charge, taken as a whole and viewed in light of the evidence, fairly and adequately submits the issues in the case to the jury' and reverse `only if the instruction was capable of confusing and thereby misleading the jury.'" Limbach Co. v. Sheet Metal Workers Int'l Ass'n,
949 F.2d 1241, 1259
n. 15 (3rd Cir. 1991) (en banc) (quoting Link v. Mercedes-Benz of North America, Inc.,
788 F.2d 918, 922
(3d Cir. 1986)). We exercise plenary review, however, over whether the District Court correctly stated the legal standard for the
Your preview ends here
Eager to read complete document? Join bartleby learn and gain access to the full version
- Access to all documents
- Unlimited textbook solutions
- 24/7 expert homework help
burden of proof in its jury instructions. See United States v. Johnstone,
107 F.3d 200, 204
(3d Cir.
1997). When the District Court sent the matter of the interpretation of the Agreement to the jury, it stated that, although ordinarily a party asserting that a contract was breached carries the burden of proving the breach, where a fiduciary relationship exits the burden shifts to the fiduciary to prove the absence of a breach. Because the court found that a fiduciary relationship existed between Ellwood and Uddeholm, its instructions to the jury placed the burden on Ellwood to establish the meaning of any ambiguous contract terms, even though Uddeholm was the party asserting the breach of contract. Ellwood contends that the District Court erred in shifting the burden of proof in this manner. Since this issue concerns the District Court's description of a legal standard in the jury instructions, our review is plenary. The court found that there was a fiduciary relationship between Ellwood and Uddeholm because Ellwood was the majority shareholder in a joint venture. A shareholder in such a position is under close scrutiny, and is expected to conform to the highest standards of conduct. See Ferber v. American Lamp Corp.,
503 Pa. 489
, 469 A.2d 1046, 1050
(1983) ("It has long been recognized
that majority shareholders have a duty to protect the interests of the minority."); Snellbaker v. Herrmann,
315 Pa.Super. 520
, 462 A.2d 713, 718
(1983) ("[A] joint venturer owes a duty of the utmost good faith and must act towards his associate with scrupulous honesty."). When occupying such a position, it is a breach of fiduciary duty to act to benefit oneself at the expense of the minority shareholder. See Ferber,
469 A.2d at 1050
. Pennsylvania law shifts the burden onto the fiduciary to prove that a transaction is fair and not fraudulent when the fiduciary acts to benefit himself while in the fiduciary role. See Ruggieri v. West Forum Corp.,
444 Pa. 175
, 282 A.2d 304, 307
(1971) ("[O]nce a fiduciary or confidential relationship is shown to exist, the burden is shifted to [the fiduciary] . . . to prove absence of fraud, and that the transaction was fair
and equitable."); In re Estate of Harrison,
745 A.2d 676, 682
(Pa.Super. 2000); Dresden v. Willock,
518 F.2d 281, 290
(3d Cir. 1975). Because Pennsylvania law shifts the burden onto fiduciaries to prove the fairness of a self-
benefitting transaction, and because Ellwood was a fiduciary as the majority shareholder in the joint venture, Uddeholm requested the District Court to place the burden on Ellwood to establish the meaning of the disputed terms in the Agreement. The District Court acceded to this request, but it cautioned the plaintiff's counsel that this was a risky move: You know, you realize that the plaintiff takes considerable risk in this case going to the jury this way. And what I mean is, if the plaintiff is confident on the merits of its case, this little burden shifting thing which I think interests Judges and lawyers more than it does juries because of the uncertainty in the law, and we have no idea what the Court of Appeals for the Third Circuit might
say about this ruling, the plaintiff takes considerable risk in submitting it in this fashion. And it may be doing you a disservice, but inasmuch as it was what you requested, or some of what you requested, and because I think, in good faith, that it is the law of Pennsylvania, that is the way it is going in.
The District Court's trepidation about shifting the burden onto Ellwood here was well-founded. Although it would seem to comport with Pennsylvania law to put the burden on a fiduciary to
Your preview ends here
Eager to read complete document? Join bartleby learn and gain access to the full version
- Access to all documents
- Unlimited textbook solutions
- 24/7 expert homework help
establish the meaning of disputed terms in a contract between the fiduciary and the beneficiary, we need not decide that issue, because Ellwood and Uddeholm were not in a fiduciary relationship when the Agreement was negotiated and executed. Ellwood's fiduciary duty to Uddeholm arose after the Agreement was executed: the Agreement created the joint venture, which itself then gave rise to the fiduciary relationship. See Snellbaker,
462 A.2d at 716
("The rights, duties, and obligations of joint venturers, as between themselves, depend primarily upon the terms of the contract by which they assume the relationship."); see also In Re Estate of Clark,
467 Pa. 628
, 359 A.2d 777, 781
(1976) (stating that it is "well-settled" that if a party contesting a gift shows that a confidential or fiduciary relationship between the donor and donee existed at the time of the gift,
the burden then shifts to the donee to show that the gift was free of any taint of undue influence or deception); Weisbecker v. Hosiery Patents, Inc.,
356 Pa. 244
, 51 A.2d 811, 813-14
(1947) (fiduciary duty to a minority shareholder arises as a result of being a majority shareholder). Although an asymmetry in power did arise between these parties after the Agreement was signed, no such asymmetry existed when the parties were hammering out its disputed and ambiguous terms, as the parties were not then in a majority-minority shareholder relationship in a joint venture. Thus, the reason for placing the burden of proof on a fiduciary in breach of contract cases — the fiduciary is in a position of control over the beneficiary or his property, and must therefore meet a higher standard in his dealings with the beneficiary — does not apply to this case. See Martinelli v. Bridgeport Roman Catholic Diocesan Corp.,
196 F.3d 409, 421
(2d Cir. 1999) (noting that a fiduciary has the burden of proof to explain a transaction which benefits himself at the expense of his beneficiaries because a "suspicion naturally arises that the fiduciary has gained by taking advantage of its special relationship"); Ferber,
469 A.2d at 1050
(stating that a majority shareholder's fiduciary duty to minority shareholder prevents him from using his power as a majority shareholder to deprive minority of a proper share of the benefits from the enterprise). While it makes perfect sense to place the burden on a fiduciary to explain business actions which benefitted itself over its beneficiary, the same logic does not hold for a breach of contract when there are dueling interpretations of the contract entered into at arms length by sophisticated corporations who are not in any kind of fiduciary relationship at the time the contract is formed. Uddeholm cites no cases in which a fiduciary relationship that was created by a contract caused a
court to shift the burden of proof on the interpretation of that contract. All of the cases Uddeholm
cites in support of its position shift the burden of proof onto the fiduciary because, at the time the
questionable transaction was consummated
by the defendant, the defendant already had an unequal or fiduciary relationship with the plaintiff. See, e.g., Weisbecker,
51 A.2d at 813-14
; Snellbaker,
462 A.2d at 716
; Martinelli,
196 F.3d at 421
; Bellis v. Thal,
373 F.Supp. 120, 125-27
(E.D.Pa. 1974), aff'd
510 F.2d 969 (3d Cir. 1975). Because it is hornbook law that (when no fiduciary relationship exists) the party alleging a breach of contract bears the burden of proving the elements of a breach of contract, the District Court should have placed the burden of proving the meaning of ambiguous terms in the Agreement on Uddeholm, not Ellwood. See In re Estate of Dixon,
426 Pa. 561
, 233 A.2d 242, 244
(1967) ("In any contract action, . . . the claimant bears the burden of proving the terms of the contract."). Uddeholm does not assert, nor could it credibly, that this burden-shifting error was harmless. Therefore, the jury verdict on this claim must be set aside, and the case remanded for a new trial.
Your preview ends here
Eager to read complete document? Join bartleby learn and gain access to the full version
- Access to all documents
- Unlimited textbook solutions
- 24/7 expert homework help
Ellwood maintains that several of the District Court's other instructions to the jury were in error as well. First, Ellwood contends that the court erred in giving an instruction that "[t]here is no dispute that ECF and Uddeholm formed a venture . . . from which both parties would share the benefits." Ellwood asserts that this was tantamount to directing a verdict for Uddeholm. We find no merit in this contention. Whether EUS was a "cost center" (as Ellwood contends) or a "profit center" (as Ellwood denies), the purpose of the Agreement was to benefit both sides, thus the "share the benefits" instruction left room for the two parties to present their varying theories on the way in which the benefits were to be shared. The "share the benefits" instruction, taken in the
context of the jury instruction as a whole and viewed in light of the evidence, fairly submitted the
issues to the jury and was not particularly liable to confuse or mislead the jury. See Limbach Co. v. Sheet Metal Workers Int'l Ass'n,
949 F.2d 1241, 1259
n. 15 (3d Cir. 1991) (en banc). This contention is therefore without merit. Ellwood also argues that the District Court erred by failing to include the following four matters in its jury instructions: (1) an identification of the specific disputed language from the Agreement
along with the parties' competing interpretations of that language; (2) a description of the relevant evidentiary and contract interpretation principles; (3) an instruction on the proximate cause requirement for measuring damages for a breach of a covenant not to compete; and (4) an instruction that the jury was to decide whether a type of steel that Ellwood produced after the joint venture ended (the "420 series" of steel) was generally regarded as "tool steel." We review a
district court's decision not to include a party's proffered jury instruction for abuse of discretion. See United States v. Pitt,
193 F.3d 751, 755
(3d Cir. 1999); Limbach,
949 F.2d at 1259
n. 15 ("Failure to instruct the jury as requested does not constitute error so long as the instruction, taken as a whole, properly apprises the jury of the issues and the applicable law.") None of these omissions rise to the level of reversible error. The District Court's instructions directed the jury to interpret certain sections of the Agreement. There is no authority to support Ellwood's claim that the court had to point out specific terms in the Agreement that were the focus of the ambiguity dispute, especially when Uddeholm's position was that the terms were ambiguous in the context of the Agreement as a whole. Furthermore, the record supports the conclusion that the court adequately instructed the jury on the relevant legal principles. Ellwood's claim that the District Court did not adequately instruct the jury on the proximate cause requirement for damages is plainly lacking in merit when portions of the court's instructions not mentioned by Ellwood are considered, as it is clear that the court's full jury instruction properly apprised the jury of the relevant law. Finally, the record is clear that the District Court's decision to omit an instruction concerning the jury's role in deciding whether the "420 series" was generally regarded as "tool steel" was based on the court's concern for jury confusion. In our view, this decision was not an abuse of discretion.
IV. Did the District Court Err in Allowing a Separate Breach of Fiduciary Duty Claim Against Ellwood?
The District Court allowed the jury to consider a separate breach of fiduciary duty claim against Ellwood for behavior that Ellwood contends was covered by the Agreement and hence was subsumed in the jury charge (and verdict) for breach of contract. Ellwood submits that Uddeholm
pressed this tort claim simply to circumvent the unavailability of punitive damages for contract claims under Pennsylvania law. The issue of whether the fiduciary duty claim is allowable here is
Your preview ends here
Eager to read complete document? Join bartleby learn and gain access to the full version
- Access to all documents
- Unlimited textbook solutions
- 24/7 expert homework help
a question of law over which our review is plenary. See Duquesne Light Co. v. Westinghouse Elec. Corp.,
66 F.3d 604, 618
(3d Cir. 1995). Pennsylvania courts use two methods to determine whether tort claims that accompany contract claims should be allowed as freestanding causes of action or rejected as illegitimate attempts to procure additional damages for a breach of contract: the "gist of the action" test and the "economic loss doctrine" test. Under the "gist of the action" test, While the Pennsylvania Supreme Court has neither accepted nor rejected the economic-loss doctrine, Pennsylvania intermediate appellate courts have applied the doctrine, see, e.g., REM Coal Co., Inc. v. Clark Equip. Co.,
386 Pa.Super. 401
, 563 A.2d 128
(1989), and this Court has predicted that the Pennsylvania Supreme Court would adopt the version of the economic loss doctrine that the United States Supreme Court developed in East River S.S. Corp. v. Transamerica Delaval, Inc.,
476 U.S. 858
, 106 S.Ct. 2295
, 90 L.Ed.2d 865
(1986), see King v. Hilton-Davis,
855 F.2d 1047, 1053-54
(3d Cir. 1988).
to be construed as a tort action, the [tortious] wrong ascribed to the defendant must be the gist of the action with the contract being collateral. . . . [T]he important difference between contract and tort actions is that the latter lie from the breach of duties imposed as a matter of social policy while the former lie for the breach of duties imposed by mutual consensus. Redevelopment Auth. of Cambria County v. International Ins. Co.,
454 Pa.Super. 374
, 685 A.2d 581, 590
(1996) (en banc) (quoting Phico Ins. Co. v. Presbyterian Med. Servs. Corp.,
444 Pa.Super. 221
, 663 A.2d 753, 757
(1995)). In other words, a claim should be limited to a contract claim when "the parties' obligations are defined by the terms of the contracts, and not by the larger social policies embodied in the law of torts." Bash v. Bell Telephone Co.,
411 Pa.Super. 347
, 601 A.2d 825, 830
(1992).
This Court described the "economic-loss doctrine" test in Duquesne Light
as "prohibit[ing] plaintiffs from recovering in tort economic losses to which their entitlement flows only from a contract." 66 F.3d at 618
. Duquesne Light
explained further that a plaintiff should be limited to a contract claim "when loss of the benefit of a bargain is the plaintiff's sole loss." Id.
(quotations marks omitted). Both parties argue that both tests support their positions. For the reasons set forth in the margin, we focus primarily on the "gist of the action" test. The application of the economic-loss doctrine to the instant case does not quite fit because that doctrine developed in the context of courts' precluding products liability tort claims in cases where one party contracts for a product from another party and the product malfunctions, injuring only the product itself. See East River S.S. Corp. v. Transamerica Delaval, Inc.,
476 U.S. 858, 866-71
, 106 S.Ct. 2295
, 90 L.Ed.2d 865
(1986); Duquesne Light,
66 F.3d at 618-20
. The "gist-of-the-action" test is a better fit for this non-products liability case.
Ellwood contends that the Agreement was exhaustively negotiated and completely defined the parties' relationship and obligations, so that Uddeholm's alleged losses arose only from alleged breaches of the Agreement. Ellwood asserts that, far from being "collateral" to the breach of fiduciary duty claim, see Redevelopment Auth. of Cambria County,
685 A.2d at 590
, the Agreement was "the only articulated predicate" for that claim. Appellants' Br. at 46. Conversely,
Your preview ends here
Eager to read complete document? Join bartleby learn and gain access to the full version
- Access to all documents
- Unlimited textbook solutions
- 24/7 expert homework help
Uddeholm contends that Ellwood's rebate claims for third-party sales and its covering up of these
sales breached its fiduciary duty to Uddeholm, because such actions involved Ellwood utilizing the joint venture for its own gain to the detriment of its minority partner. Uddeholm claims that these actions by Ellwood caused losses that went beyond the scope of the Agreement, thus giving
rise to a cause of action separate from the breach of contract claim. Uddeholm contends further that, because the existence of a contract between two parties does not preclude one of the parties from recovering in tort for a breached fiduciary duty, it should be allowed to recover for Ellwood's breached fiduciary duty in this case. See Valley Forge Convention Visitors Bureau v. Visitor's Servs., Inc.,
28 F.Supp.2d 947, 951
(E.D.Pa. 1998) ("That a plaintiff may not sue in tort for economic losses arising from a breach of contract, however, does not preclude the possibility of a tort action between parties to a contract.") (applying Pennsylvania law); see also United Int'l
Holdings, Inc. v. Wharf (Holdings) Ltd.,
210 F.3d 1207, 1226-27
(10th Cir. 2000) (holding that, under Colorado law, a breach of fiduciary duty that arises from the parties' status as joint venturers is independent of the contract that created the joint venture, thus the economic loss doctrine does not bar such a fiduciary duty claim). As we explained earlier, there was a fiduciary relationship between Ellwood and Uddeholm because Ellwood was the majority shareholder in a joint venture and had sole and virtually exclusive control over the object of the venture (i.e., EUS). Pennsylvania law imposes such a fiduciary duty on joint venturers, see Snellbaker v. Herrmann,
315 Pa.Super. 520
, 462 A.2d 713, 718
(1983), as well as on majority shareholders in their dealings with minority shareholders, see Ferber v. American Lamp Corp.,
503 Pa. 489
, 469 A.2d 1046, 1050
(1983). This duty imposed obligations on Ellwood that went well beyond the particular obligations contained in the Agreement itself. See Snellbaker,
462 A.2d at 718
(stating that a fiduciary duty includes the duty to act toward one's joint venturer in the utmost good faith and with scrupulous honesty); Ferber,
469 A.2d at 1050
(noting that a fiduciary duty prevents majority shareholder from "using their power in such a way as to exclude the minority from their proper share of the benefits accruing from the enterprise," so that, when a majority shareholder acts in its own interest, this action "must be also in the best interest of all shareholders and the corporation") (emphasis omitted). As suggested by the foregoing, the obligations that Uddeholm alleges Ellwood breached in its fiduciary duty claim were imposed "as a matter of social policy" rather than "by mutual consensus." See Redevelopment Auth. of Cambria County,
685 A.2d at 590
. That is, "the larger social policies embodied in the law of torts" rather than "the terms of the contract," are what underlie Uddeholm's breach of fiduciary duty claim. Bash,
601 A.2d at 830
. The "larger social policy" that defines Uddeholm's claim is the policy requiring fair dealing and solicitude from a majority shareholder to minority shareholders in a joint venture. See Snellbaker,
462 A.2d at 718
;
Ferber,
469 A.2d at 1050
; William Goldstein Co. v. Joseph J. Reynold H. Greenberg, Inc.,
352 Pa. 259
, 42 A.2d 551, 555
(1945) (citing Meinhard v. Salmon,
249 N.Y. 458
, 164 N.E. 545, 546
(N.Y. 1928)). We thus conclude that Uddeholm's fiduciary duty claim meets the "gist of the action" test: the tort wrong ascribed to Ellwood is the gist of the fiduciary duty action while the Agreement is collateral. See Redevelopment Auth. of Cambria County,
685 A.2d at 590
. We therefore find no error in the District Court's decision to allow the jury to consider a separate breach of fiduciary duty charge against Ellwood.
Your preview ends here
Eager to read complete document? Join bartleby learn and gain access to the full version
- Access to all documents
- Unlimited textbook solutions
- 24/7 expert homework help
Furthermore, while it is a closer question, we also believe that Uddeholm's fiduciary duty claim passes the "economic-loss doctrine" test. Because Uddeholm asserted that Ellwood took advantage of its position as a fiduciary to Uddeholm's detriment, the harm Uddeholm claimed to have suffered goes beyond the Agreement and the benefits Uddeholm was supposed to receive under the Agreement. See Duquesne Light Co. v. Westinghouse Elec. Corp.,
66 F.3d 604, 618
(3d
Cir. 1995).
Ellwood also asserts that the District Court erred in holding that David Barensfeld, a director and
officer of both Ellwood and EUS, could be individually liable to Uddeholm for breach of fiduciary duty. (Ellwood states that this is an issue of whether Uddeholm had standing to sue Barensfeld, but we believe that this claim is not about Uddeholm's standing but about whether Uddeholm has a viable claim against Barensfeld.) This issue arises because the jury also awarded
Uddeholm $70,000 in compensatory damages and $300,000 in punitive damages for a breach of fiduciary duty by Barensfeld. Ellwood argues that, under Pennsylvania law, a director's fiduciary duty runs only to the corporation and not directly to a shareholder like Uddeholm. A shareholder can enforce this duty only in the name of the corporation via a derivative action. See
15 Pa. Cons.Stat. §§ 1712, 1717. Uddeholm, however, presented evidence that Barensfeld personally manipulated rebates, manipulated books and records, failed to disclose the effect of ingot sales, misrepresented the book value of EUS, and misappropriated confidential trade secrets. Under Pennsylvania law, "an officer of a corporation who takes part in the commission of a tort by the corporation is personally liable" for the tortious activity. Wicks v. Milzoco Builders, Inc.,
503 Pa. 614
, 470 A.2d 86, 90
(1983). The harmed party then can sue the officer directly. See id.
The above alleged activities by Barensfeld constitute taking part in Ellwood's breach offiduciary duty.
Therefore, Uddeholm had a viable claim against Barensfeld individually for his part in Ellwood's
breach of its fiduciary duty, and we find no error in the District Court's instruction to the jury to consider whether Barensfeld violated a fiduciary duty to Uddeholm.
V. Did the District Court Err in Allowing a Separate Misappropriation of Trade Secrets Charge Against Ellwood?
The District Court allowed the jury to consider a misappropriation of trade secrets and confidential information claim against Ellwood, but Ellwood argues that the relationship regarding trade secrets was covered by: (1) the license to use Uddeholm's know-how, and (2) the covenant not to compete contained in the Know How Agreement section of the Agreement. Ellwood thus argues that the separate misappropriation claim was subsumed in the charge and verdict for breach of the covenant not to compete. Under this view, Uddeholm's misappropriation
claim is really a claim that Ellwood's use of Uddeholm's know-how went beyond the Agreement's terms. The same two tests described in Section IV supra
— the "gist of the action" test and the "economic loss doctrine" test — apply here for determining whether this tort claim should be allowed as its own claim or rejected as covered by the contract claim. See Redevelopment Auth. of Cambria County v. International Ins. Co.,
454 Pa.Super. 374
, 685 A.2d 581, 590
(1996) (en banc); Duquesne Light Co. v. Westinghouse Elec. Corp.,
66 F.3d 604, 618
(3d Cir. 1995). As in Section IV, we will primarily focus on the "gist of the action" test, see supra
note 11. This issue involves a question of law subject to plenary review. See Duquesne Light,
66 F.3d at 618
.
Your preview ends here
Eager to read complete document? Join bartleby learn and gain access to the full version
- Access to all documents
- Unlimited textbook solutions
- 24/7 expert homework help
Uddeholm argues that its misappropriation of trade secrets claim is separate and independent from its breach of contract claim in the following way: Appellants had no `license' to misappropriate Uddeholm's trade secrets and confidential information, especially during the three year noncompete period. Appellants violated the noncompete covenants and cannot now claim them as a `license' to do the very thing they were contractually prohibited from doing.
Appellee's Br. at 66. The key is the last part of that passage; Uddeholm admits that Ellwood was "contractually prohibited from doing" the actions that Uddeholm contends form the basis of its misappropriation claim. But if this is the case, then "the parties' obligations are defined by the terms of the contract, and not by the larger social policies embodied in the law of torts." Bash v. Bell Telephone Co.,
601 A.2d 825, 830
(Pa.Super. 1992) (outlining the gist of the action test). That is, Uddeholm admits in its own argument that the Know-How Agreement covers Ellwood's misappropriation of its know-how (the agreement "contractually prohibited" the misrepresentation), so the "gist" of Uddeholm's misappropriation action is actually breach of contract, at least as far as the use of Uddeholm's know-how is concerned. Thus, if the jury's verdict for Uddeholm on the misappropriation of trade secrets and confidential information claim
was based on Ellwood's misappropriation of Uddeholm's know-how, the verdict cannot stand. We reach a similar conclusion under the "economic loss doctrine" test, because Uddeholm's entitlement to economic losses from the misappropriation of its know-how flows only from the Agreement and not from tort. See Duquesne Light Co. v. Westinghouse Elec. Corp.,
66 F.3d 604, 618
(3d Cir. 1995).
However, Uddeholm argues further that, even if Ellwood's use and misuse of Uddeholm's know-
how
was covered by the Agreement, Ellwood's misappropriation of Uddeholm's client lists, pricing information, ship-to lists and customer profiles was sufficient to sustain the verdict of misappropriation, since that information is confidential information and/or a trade secret but is not covered by the Know-How Agreement. Section 1.02 of the Know How Agreement defines "Know-How" as "information (including rights under patents and license agreements, if any) proprietary to Licensor [Uddeholm] and useful in the manufacture and fabrication of Products." "Products" is in turn defined in § 1.03 as "carbon, alloy, tool, stainless and other specialty steel ingots." Section 1.02 also states that "Know-How" includes, but is not limited to, technical and engineering data and information on the manufacture and production of alloy, tool, stainless, and other specialty steel ingots. It is clear from our parsing of §§ 1.02 1.03 that less technical information like client lists and profiles, pricing information, and shipping-to information are not included in the coverage of the Know-How Agreement. Pennsylvania law is also clear that this kind of information can be a trade secret. See Robinson Elec. Supervisory Co. v. Johnson,
397 Pa. 268
, 154 A.2d 494, 496
(1959) ("[C]ustomer lists and customer information . . . [are] highly confidential and constitute a valuable asset. Such data has been held to be property in the nature of a `trade secret' for which an employer is entitled to protection, independent of a non-disclosure contract."); A.M. Skier Agency, Inc. v. Gold,
747 A.2d 936, 940
(Pa.Super. 2000) (quoting above passage from Johnson
).
Therefore, Uddeholm is correct that, if the jury's verdict on this claim was based on Ellwood's
Your preview ends here
Eager to read complete document? Join bartleby learn and gain access to the full version
- Access to all documents
- Unlimited textbook solutions
- 24/7 expert homework help
misappropriation of this latter type of confidential information rather than on misappropriation of
know-how, then the verdict is sustainable because it passes the gist of the action and economic loss doctrine tests. The problem with Uddeholm's argument here is that, in its jury instructions, the District Court did not distinguish between the misappropriation of know-how and the misappropriation of these
other types of confidential information. The jury's special verdict also did not distinguish between these two categories of misappropriation. Thus, we cannot determine whether the jury's verdict on the misappropriation claim was properly grounded on actions outside the scope of the Agreement. We therefore will set aside the verdict for Uddeholm on the misappropriation of trade secrets claim, and remand for a determination of this claim based solely on the misappropriation of trade secrets that do not include the know-how covered by the Know-How Agreement. VI. Ellwood's Challenge to the Civil Conspiracy Award The jury awarded Uddeholm $70,000 in punitive damages on its civil conspiracy claim against Ellwood. Uddeholm's complaint averred that Ellwood conspired with the Ellwood Specialty Steel Company, Ellwood Quality Steel Company, Bjorn Gabrielson, and David Barensfeld to misappropriate its trade secrets and confidential information. The jury found Ellwood liable on the conspiracy claim but found in favor of all the remaining conspiracy defendants (except Gabrielson, who had already been granted judgment as a matter of law under Fed.R.Civ.P. 50
), which means that the jury found only one defendant liable for conspiracy. Ellwood challenges this verdict on the grounds that under Pennsylvania law, civil conspiracy requires at least two co-
conspirators. See
Thompson Coal Co. v. Pike Coal Co.,
488 Pa. 198
, 412 A.2d 466, 473
(1979). Uddeholm does not dispute that two conspirators are required under Pennsylvania law, and that, if this issue had been preserved in the District Court, the conspiracy verdict would have to be set aside. Instead, Uddeholm argues that this issue was waived because Ellwood did not clearly object on this basis at trial. See Medical Protective Co. v. Watkins,
198 F.3d 100, 105
n. 3 (3d Cir.
1999). After the verdict, the District Court asked the parties if they wished to raise any objections
to the verdict, and the court noted specifically that there appeared to be only one conspirator. The
court's colloquy with the parties on this issue consisted solely of the following: Uddeholm argues in the alternative that, since we can affirm the conspiracy verdict if it has any rational basis, we should do so because of the possibility that the jury could have concluded that one Robert Raubolt served as the other co-conspirator. This argument is without merit. Uddeholm did not even mention Raubolt as a possible co-conspirator at trial, and raised this possibility for the first time in its reply brief. We will not reach this contention because Uddeholm waived this argument by not raising it in its opening brief. See Ghana v. Holland,
226 F.3d 175, 180
(3d Cir. 2000).
COURT: Civil conspiracy, I think they only found one defendant.
SOMMER (counsel for Ellwood): I believe that's correct, Your honor, just EGI.
MARTIN (counsel for Uddeholm): Yes.
Your preview ends here
Eager to read complete document? Join bartleby learn and gain access to the full version
- Access to all documents
- Unlimited textbook solutions
- 24/7 expert homework help
COURT: That's a difficult undertaking. I would think that it would require two or more.
MARTIN: I don't think the other defendant was joined, though, and that was Mr. Sundvall, when he was out at Avesta, because EGI was the defendant in the case.
COURT: That's correct, you did argue that he was a co-conspirator. Is there anything else in there
that pops out at you as being inconsistent?
Although Uddeholm argued that Sundvall could serve as the other co-conspirator, Sundvall had been previously granted summary judgment on all claims against him, including civil conspiracy.
The issue here, then, is whether Ellwood waived its argument that it could not be the only party liable for civil conspiracy by neglecting to assert that objection at trial. Ellwood argues that it objected by agreeing with the District Court when the court raised the problem with the conspiracy verdict. Ellwood contends that it should not be required to do more when the District Court itself raises the objection. Rule 46 of the Federal Rules of Civil Procedure states that a party need not make a formal exception to a ruling or order of a court, but instead "it is sufficient that a party, at the time the ruling or order of the court is made or sought, makes known to the court the action which the party desires the court to take or the party's objection to the action of the court and the grounds therefor." On the other hand, "`[i]t is well established that failure to raise an issue in the district court constitutes a waiver of the argument.'" Medical Protective Co.,
198 F.3d at 105
n. 3 (quoting Brenner v. Local 514, United Brotherhood of Carpenters and Joiners of America,
927 F.2d 1283, 1298
(3d Cir. 1991)). Although this issue is close, we are satisfied that Ellwood did not waive its argument that it could
not be liable as the sole conspirator. It is true that Ellwood should have done more than merely agree with the District Court when the court noted the problem with the conspiracy verdict. But passivity may be excusable when the District Court itself identifies the issue not only as problematic but as almost certain grounds for setting aside the verdict. It would be unfair to Ellwood to penalize it for failing to jump up and down or labor an objection that the District Court had placed in the record. Therefore, we hold that the verdict against Ellwood for civil conspiracy must be set aside, and that judgment must be entered for Ellwood on this claim. VII. Other Challenges to Trial Rulings A. Should Uddeholm Have Been Allowed to Recover Damages for 1991 Rebates?
On Uddeholm's breach of contract claim, the jury awarded compensatory damages for Ellwood's improper calculation of rebates under § 2.3 of the Steel Purchase Agreements. The parties agree that this amount included damages for Ellwood's 1991 rebates on steel purchases from EUS. Ellwood contends that, even if Uddeholm is entitled to rebate damages generally, it is not entitled
to any damages for post 1990 rebates, because Ellwood was entitled to buy out Uddeholm's share
of EUS at EUS's book value as of December 31, 1990, and in fact Ellwood initiated these buy-
out proceedings. Ellwood argues that the original Shareholders Agreement is quite clear that the buy-out price for Uddeholm's shares of EUS was to be the book value of EUS as of the month preceding the buy-out notice, which Ellwood gave in January 1991. Because the buy-out price was fixed prior to the 1991 rebates, Ellwood submits that these rebates could not have affected
Your preview ends here
Eager to read complete document? Join bartleby learn and gain access to the full version
- Access to all documents
- Unlimited textbook solutions
- 24/7 expert homework help
the value of Uddeholm's shares at the buy-out, and thus Uddeholm was not entitled to damages for the 1991 rebates. When Ellwood sought post-trial relief on this point, the District Court denied Ellwood's motion, ruling that the money the jury seemingly awarded for the 1991 rebates was really for Ellwood's breach of the Agreement in rejecting Uddeholm's tender of its EUS shares after Ellwood initiated
the buy-out. The Agreement stipulates that the settlement of the sale of Uddeholm's stock to Ellwood should take place as soon as is practicable after the decision is made, and in any event within 30 days after determination of the purchase price. Ellwood, however, never paid for Uddeholm's stock and in fact rejected Uddeholm's tender of stock. This action delayed the settlement of the buy-out, and thus extended the time that Uddeholm had to pay overhead for EUS well into 1991. Since the Agreement is silent on what is to happen in such a situation, the District Court found (post-trial) that the contract was ambiguous on this point. The court therefore ruled that it had been the jury's province to decide on the proper remedy for this breach by Ellwood, and that the jury had decided to award the amount of the 1991 rebates as damages. Ellwood raises two basic challenges to this ruling. First, it argues that the Agreement is not ambiguous on this issue: the Shareholders Agreement unambiguously fixes book value for buy-
out purposes at the sending of buy-out notice, and there is no provision in the Agreement to vary this. Second, Ellwood contends that the jury was not instructed on the issue of the ambiguity of the Agreement concerning a rejection of a share tender, nor did it return any kind of verdict on this issue in its special verdict. Ellwood thus argues that the award of the 1991 rebate damages cannot stand on the District Court's theory, because "[a] verdict cannot stand on a theory that the jury was never asked to consider." Appellants' Br. at 59. Ellwood's argument that the Agreement was unambiguous on this issue is unavailing. Ellwood is correct that the Agreement clearly sets out the method for calculating the stock purchase price (i.e., EUS's book value) in a buy-out, but it is just as clear in the Agreement that the settlement of
such a buy-out was to take place no later than 30 days after the determination of the purchase price. The settlement did not occur within the time period set by the Agreement, and there is no provision in the Agreement that provides for such a circumstance. It is simply not true that the Agreement unambiguously gives Ellwood the right to initiate the buy-out, set the purchase price for the stock, and then drag its heels for an indefinite time on the settlement of the buy-out while keeping the purchase price for the buy-out fixed — all the while collecting overhead costs from Uddeholm for EUS. Moreover, such an interpretation of the Agreement would be "absurd and unreasonable," so we will not interpret the Agreement in this manner. See United Refining Co. v. Jenkins,
410 Pa. 126
, 189 A.2d 574, 580
(1963). The District Court rightly concluded that the Agreement was ambiguous as to what should have occurred upon Ellwood's rejection of Uddeholm's tender, making this question an issue for the jury to consider. As for Ellwood's contention that the District Court improperly attributed a rationale for the jury's verdict using a theory that the jury was never asked to consider, we need not decide this issue because we will set aside the jury's award on the breach of contract claim on other grounds (i.e., the burden-shifting error; see Section III supra
). On remand, the District Court should instruct the jury on the issue of the ambiguity of the Agreement concerning a rejection of the share tender, so that the jury can explicitly decide whether Ellwood breached the Agreement by
Your preview ends here
Eager to read complete document? Join bartleby learn and gain access to the full version
- Access to all documents
- Unlimited textbook solutions
- 24/7 expert homework help
rejecting Uddeholm's tender, and whether the 1991 rebates should be included in the damage award as a remedy for this breach. B. The Interest Rate That Should Be Applied to Post Venture Sales of Steel.
After the joint venture between Uddeholm and Ellwood dissipated, Uddeholm bought approximately $345,000 worth of steel from Ellwood. Both parties agree that Uddeholm still owes Ellwood this $345,000 plus interest; this amount is to be set off against the money Ellwood
will owe Uddeholm on the claims in this lawsuit. The parties disagree, however, over the rate of interest that should be applied to this debt. In a post-verdict motion to the District Court, Ellwood
argued that the 18% interest rate that it charges all of its customers should be applied to the $345,000 and compounded semi-annually, as that rate was included in the terms and conditions that were attached to the invoice order form used for these steel purchases. Uddeholm counters that the statutory 6% rate should be applied because the agreement for this steel was part of a general commercial agreement that did not involve Ellwood's standard terms. In its September 13, 1999 Memorandum Order on Post Trial Matters, the District Court found that the steel was purchased via an agreement "which was not confined to the terms included on the backs of the related invoices, which is where defendants find the provision for the high rate of interest they seek." Dist. Ct. Mem. Order, Sept. 13, 1999 at 3. The court based this conclusion partially on evidence presented by Uddeholm that the parties entered into a commercial agreement with different terms from Ellwood's standard agreement, and partially on its conclusion that it would be "logical" for these parties not to confine their commercial dealings to the terms on the back of a form invoice, given that they had worked together for years as joint venturers. The District Court also reasoned that the 6% rate would be "otherwise fair," as the 6% rate applied to all the debts that Ellwood owed Uddeholm. The court thus applied the 6% statutory rate. Although the District Court determination that the post-venture steel sales agreement did not include the 18% invoice slip rate may be the best interpretation of the evidence adduced at trial, we cannot adequately review this determination because the District Court neither cited to nor described the evidence on which its decision was based. Moreover, if Ellwood sent the invoice slips within a reasonable time as a "definite and seasonable expression of acceptance or a written
confirmation" of an oral agreement between the parties, then 13 Pa. Cons.Stat. § 2207 (part of Pennsylvania's version of the UCC) would apply, and the terms on that invoice would become part of the agreement unless Uddeholm's original offer expressly limited acceptance to the terms of the offer, the invoice's terms materially altered the original terms, or Uddeholm objected to the
new terms within a reasonable time. See
13 Pa. Cons.Stat. § 2207(a) (b). Title 13 Pa. Cons.Stat. § 2207(a) (b) provides that (a) General rule. — A definite and seasonable expression of acceptance or a written confirmation
which is sent within a reasonable time operates as an acceptance even though it states terms additional to or different from those offered or agreed upon, unless acceptance is expressly made conditional on assent to the additional or different terms.
Your preview ends here
Eager to read complete document? Join bartleby learn and gain access to the full version
- Access to all documents
- Unlimited textbook solutions
- 24/7 expert homework help
(b) Effect on contract. — The additional terms are to be construed as proposals for addition to the contract. Between merchants such terms become part of the contract unless:
(1) the offer expressly limits acceptance to the terms of the offer;
(2) they materially alter it; or (3) notification of objection to them has already been given or is given within a reasonable time after notice of them is received.
However, there is not sufficient evidence in the District Court's Memorandum Order or in the record for us to review the District Court's determination on this issue — indeed, it is not even clear that the District Court considered the applicability of § 2207 at all. Furthermore, the District Court's conclusion that it would be "logical" for the parties to have worked out their own
deal separate from the terms on the invoice and that the 6% rate would be "fair" is insufficient to establish that there was such a deal. We therefore will vacate the District Court's order on this issue and remand so that the District Court can more specifically collect and cite evidence on the post-venture steel sales agreement between the parties in order to show either that the 18% interest rate included in the invoice's terms did not become part of this agreement, or that the 18% rate was part of the agreement. C. Evidentiary Challenges.
Ellwood also challenges two evidentiary rulings that the District Court made at trial. We review the District Court's evidentiary rulings for abuse of discretion. See Walden v. Georgia-Pacific Corp.,
126 F.3d 506, 517
(3d Cir. 1997). 1. The Jonsson affidavit The District Court admitted into evidence portions of an affidavit of Bo Jonsson, a former President of Uddeholm, under Federal Rule of Evidence 807
, the catchall exception to the hearsay rule. Jonsson attested to the affidavit in 1994 and died in 1996, before the trial. Uddeholm used the affidavit to counter assertions by Ellwood about what transpired at certain directors meetings that Jonsson attended in a representative capacity for Uddeholm. Rule 807 provides that [a] statement not specifically covered by Rule 803 or 804 but having equivalent circumstantial guarantees of trustworthiness, is not excluded by the hearsay rule, if the court determines that (A) the statement is offered as evidence of a material fact; (B) the statement is more probative on
the point for which it is offered than any other evidence which the proponent can procure through reasonable efforts; and (C) the general purposes of these rules and the interests of justice
will best be served by admission of the statement into evidence. However, a statement may not
Your preview ends here
Eager to read complete document? Join bartleby learn and gain access to the full version
- Access to all documents
- Unlimited textbook solutions
- 24/7 expert homework help
be admitted under this exception unless the proponent of it makes known to the adverse party sufficiently in advance of the trial or hearing to provide the adverse party with a fair opportunity to prepare to meet it, the proponent's intention to offer the statement and the particulars of it, including the name and address of the declarant.
Fed.R.Evid. 807
. Ellwood argues that the District Court's admission of the Jonsson affidavit under Rule 807 was error, because Rule 807 is meant to be used only in the rare case, which, it argues, this is not. See
United States v. Bailey,
581 F.2d 341, 347
(3d Cir. 1978) (stating that the residual hearsay exception is "to be used only rarely, and in exceptional circumstances," and is meant to "apply only when certain exceptional guarantees of trustworthiness exist and when high degrees of probativeness and necessity are present"). Specifically, Ellwood takes issue with the District Court's findings that the Jonsson affidavit was exceptionally trustworthy and that it was more probative than any other evidence that Uddeholm could present. Before 1997, the residual hearsay exceptions in the Federal Rules of Evidence were contained in Rules 803(24) and 804(b)(5). In 1997 the Rules were amended and these two residual exceptions
were combined and transferred to the new Rule 807. "This was done to facilitate additions to Rules 803 and 804. No change in meaning is intended." Fed.R.Evid. 807
advisory committee's note. Bailey
addressed the old residual hearsay exceptions contained in Rules 803(24) and 804(b)
(5), but because Rule 807 is simply the combination of these rules, Bailey
's holding applies to the
current Rule 807 as well. The same is true of other pre-1997 cases on the residual hearsay exceptions that are cited in this Section.
While Ellwood is correct that Rule 807 should only be used in rare situations, the District Court made careful and extensive findings in support of its conclusion that this was such a situation. See
Tr. of Jury Trial, March 24, 1999. First, the District Court ascertained that the requirements of Rule 807 were met. The court specifically found that • the affidavit was offered as evidence on a material fact, namely the parties' course of dealings, which bears upon the interpretation of the Agreement;
• the affidavit was more probative on the point for which it is offered than any other evidence which the proponent could procure through reasonable efforts: it was highly probative because Jonsson was the only representative of Uddeholm on the EUS board of directors at the time in question, and, as such, this evidence was the only evidence that Uddeholm could present to counter the Ellwood's allegation that Uddeholm understood the Agreement to permit sales to third parties and reimbursement for those sales;
• the general purpose of the rules, fairness and the administration of justice, would be served by admitting the affidavit, because it would assist the jury in determining the truth;
• there was sufficient notice to Ellwood that it would be used, as Uddeholm proffered the affidavit months prior to trial, and there was argument and briefs filed on the issue.
The District Court found that the following factors also militated in favor of admitting the Jonsson affidavit:
Your preview ends here
Eager to read complete document? Join bartleby learn and gain access to the full version
- Access to all documents
- Unlimited textbook solutions
- 24/7 expert homework help
• Ellwood had ways to rebut the affidavit: its witnesses were present at the meetings discussed therein, and these witnesses could present their testimony, while Uddeholm's only witness to these meetings (Jonsson) was dead;
• the affidavit was trustworthy because: (1) the declarant was known and named, (2) the statement was made under oath and penalty of perjury, (3) the declarant "was aware of the pending litigation at the time he made the declaration and thus knew that his assertions were subject to cross examination," (4) the statements were based on personal observation, (5) the declarant was not employed by the plaintiff at the time of the statements, and thus had no financial interest in the litigation's outcome, (6) the affidavit was corroborated, partially, by minutes of directors meetings (some statements Jonsson said were made match others' notations),
and (7) his position and background qualified him to make the assertions.
The District Court then acknowledged that Rule 807 should only be used sparingly, but opined that this affidavit presented "a rather unique combination of circumstances where a material fact can be proved only through one method, or, in this case, rebutted by only one method." The court
was also swayed by the fact that it was Ellwood that first argued that Uddeholm knew of Ellwood's interpretation of the Agreement because Jonsson must have gained this knowledge at the directors meetings; the only way Uddeholm could rebut this claim was via Jonsson's affidavit, given that he was not available to testify. These findings are sufficient for us to hold that the District Court did not abuse its discretion when it admitted the Jonsson affidavit under Rule 807. In Copperweld Steel Co. v. Demag-
Mannesmann-Bohler,
578 F.2d 953
(3d Cir. 1978), this Court upheld a district court's admission of a similar item — a memorandum prepared by a lawyer of an executive who was later killed —
on a weaker showing by the district court under the predecessor rule to Rule 807 (Rule 804(b)
(5)). See id.
at 964. We therefore hold that the admission of the Jonsson affidavit was not error. 2. The Rydstad redaction Ellwood also contends that the court erred in requiring the redaction of portions of a 1988 memorandum from Bertil Rydstad before admitting it into evidence, on the basis that the portions redacted were legal conclusions. Uddeholm appointed Rydstad in 1987 to work with Ellwood at EUS; in March 1988 Rydstad prepared a memo detailing his understanding of Uddeholm's and Ellwood's rights and obligations regarding EUS. The District Court admitted the
memo into evidence but first required Ellwood to redact the following passage from the memo: "Thus, under the contracts there are only two purchasers. Nothing, however, precluded [sic] them
from reselling to a third party." The District Court required this language to be redacted on the grounds that "it appears to be a legal interpretation by a non-legal person, and not even a person who was privy to the negotiations [on the Agreement], nor do we have any indication that that view was adopted or accepted by anybody else in the company in terms of their course of dealings." Tr. of Jury Trial, Apr. 1, 1999. The court also noted that the redacted statement did not express any point of view on whether Ellwood should be able to get rebates for ingots sold to third parties, which is really what the dispute over the interpretation of the Agreement was about.
Ellwood argues that the redacted language was essential to understanding Uddeholm's interpretation of the Agreement at the time, which would thereby affect the court's determination
Your preview ends here
Eager to read complete document? Join bartleby learn and gain access to the full version
- Access to all documents
- Unlimited textbook solutions
- 24/7 expert homework help
of whether the Agreement was ambiguous as well as the jury's interpretation of the Agreement. Under Pennsylvania law, a party's statements can be used to interpret a contract or to establish that party's understanding of the meaning of the contract. See City of Erie v. R.D. McAllister Son,
416 Pa. 54
, 204 A.2d 650, 660
(1964); Z L Lumber Co. of Atlasburg v. Nordquist,
348 Pa.Super. 580
, 502 A.2d 697, 701
(1985). In our view, however, the District Court did not abuse its discretion in requiring the redaction. It appears from the evidence in the record that Rydstad was not trained in the law, nor was he involved in the contract negotiations; thus, Rydstad did not seem to possess the requisite expertise or background to draw the conclusion contained in the redacted passage. Furthermore, despite his role as the point man at Uddeholm for the EUS project, there is no evidence that Rydstad's views reflected those of Uddeholm or that anyone else at Uddeholm adopted them. Finally, because the redacted language did not address whether Ellwood could receive rebates on its third-party sales, the language does not speak to Uddeholm's understanding of the Agreement as to this issue, although it seems reasonable that the jury could have become confused about that if it had been given the memo without the redaction. Thus, it was within the court's discretion to require the redaction. VIII. Conclusion For the foregoing reasons, the Judgment of the District Court will be affirmed in part and vacated
in part, and the case remanded to the District Court for proceedings consistent with this opinion. Parties to bear their own costs. Make your practice more effective and efficient with Casetext’s legal research suite.
Your preview ends here
Eager to read complete document? Join bartleby learn and gain access to the full version
- Access to all documents
- Unlimited textbook solutions
- 24/7 expert homework help