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Milgard Tempering, Inc. v. Selas Corporation of America
902 F.2d 703 (9th Cir. 1990)
Hall, Circuit Judge:
This appeal marks the end of nearly seven years of litigation over a
"sure fire" glass tempering furnace purchased over ten years ago. The seller,
Selas Corporation of America ("Selas") appeals the judgment of the district
court awarding the buyer, Milgard Tempering, Inc. ("Milgard"), damages resulting
from its failure to repair serious defects in the furnace. Milgard cross-appeals the
district court's denial of attorneys fees. We have jurisdiction under 28 U.S.C. § 1291
(1988) and affirm.
I
Milgard Manufacturing, Inc. ("Milgard Manufacturing") cuts
and installs glass for use in residential construction. On June 11, 1979, it entered
into a carefully-negotiated contract with appellant/cross-appellee Selas to purchase a
horizontal batch tempering furnace. With Selas' consent, Milgard Manufacturing assigned
the contract to appellee/cross-appellant, Milgard.
Under the contract, Selas agreed to design and manufacture the furnace
for $1.45 million. Its design was complex, and in Selas' eyes, experimental. However,
Selas marketed it as a working piece of equipment. The contract provided a $50,000 bonus
if Selas delivered all the major components before January 31, 1980. It also provided a penalty of $5,000 per week (not to exceed a total of $25,000)
for every week of late delivery after March 31, 1980. Selas failed to meet either
deadline, having completed delivery of major components in November, 1982.
Selas agreed to assemble the furnace at Milgard's plant and to assist
in a "debugging period" that both parties expected would end June or July 1980.
The contract also required Selas, in a series of preacceptance tests, to demonstrate that
the furnace was capable of achieving designated yield and cycle rates. Section 28.5
of the contract limited Selas' liability for breach of warranty to repair or replacement
of the furnace and barred liability for consequential damages. The parties modified the
contract and agreed to forego the preacceptance tests and instead place the furnace in
commercial production in July, 1980, thus making glass available for the
"debugging" process.
By January, 1982, Selas continued work on the furnace, but failed to
achieve yield and cycle rates that substantially conformed with the contract
specifications. Milgard then filed suit against Selas for breach of contract.
In March 1982, the parties, without counsel, attempted to enter into a
contractual agreement to settle the dispute. Under the proposed agreement, Selas would
take over the tempering operation for 60 days to demonstrate the furnace's ability to
achieve a 90% yield rate. It would also pay any operating losses Milgard incurred during
that period. Then, if Milgard operated the furnace for six months without incident, Selas
would "finetune" the furnace to achieve a 95% rate. Selas did the work and paid
Milgard's operating losses.
Milgard dismissed the suit without prejudice. However, during the
six-month period, the furnace failed to perform to the specifications of either the
contract or the attempted settlement agreement.
Milgard initiated a second lawsuit on March 4, 1983, alleging breach of
contract and breach of warranty. On June 29, 1984, Judge Tanner in the district court
granted summary judgment in favor of Selas. He found that the cap on consequential damages
was a conscionable allocation of risk between sophisticated parties and therefore
enforceable. He further held that the parties had reached an accord and satisfaction in
March, 1982. The court awarded Selas the balance of the purchase price minus the delivery
bonus. It also awarded Selas attorneys' fees under § 28.1(f) of the contract but denied
fees to Selas' in-house counsel for time devoted to the litigation.
This court, in Milgard Tempering, Inc. v. Selas Corp. of America, 761
F.2d 553 (9th Cir. 1985) [hereinafter Milgard I], reversed and remanded for trial. We held
that the enforceability of the consequential damages limitation not only depended upon the
conscionability of the provision when drafted, but upon the circumstances surrounding
Selas' breach and inability to repair. Because these circumstances were disputed, we found
summary judgment inappropriate. Id. at 556-57. We further noted that serious factual
disputes surrounding the alleged accord and satisfaction required trial of that issue as
well. We also vacated the award of attorneys' fees pending determination of the prevailing
party at trial.
On remand, after a five-week bench trial, Judge Bryan in the district
court found that the furnace had never lived up to the specifications in the contract. He
held that the limited repair remedy failed of its essential purpose and that Selas'
default was sufficiently severe to expunge the cap on consequential damages. He awarded
Milgard $1,076,268 in net damages. He also denied Milgard's claims for attorneys' fees.
. . .
Selas appeals the judgment and denial of its motion for new trial . . .
. Milgard cross-appeals the denial of attorneys' fees. We affirm.
II
Selas first argues that the district court erred in ruling that the
limited repair remedy failed of its "essential purpose" and that such failure
lifted the contractual cap on consequential damages.
A
Section 28.5 of the contract limited Milgard's remedies in the event of
breach of warranty to repair or replacement of the defective equipment. n4 Such limitations on a party's remedies are permitted by
Washington's version of the U.C.C., Wash.Rev.Code § 62A.2-719(1)(a)
(West Supp. 1989).
An exclusive or limited remedy, however, must be viewed against the
background of § 62A.2-719(2), which provides: "Where circumstances cause an
exclusive or limited remedy to fail of its essential purpose, remedy may be had as
provided in this Title." This section requires a court to examine the contract in
general and the remedy provision in particular to determine what the remedy's essential
purpose is and whether it has failed.
A limited repair remedy serves two main purposes. First, it serves to
shield the seller from liability during her attempt to make the goods conform. Second, it
ensures that the buyer will receive goods conforming to the contract specifications within
a reasonable period of time.
A contractual provision limiting the remedy to repair or replacement of
defective parts fails of its essential purpose within the meaning of § 62A.2-719(2) if
the breaching manufacturer or seller is unable to make the repairs within a reasonable
time period. Lidstrand v. Silvercrest Indus., 28 Wash. App. 359, 623 P.2d 710, 714 (1981).
Accord Milgard I, 761 F.2d at 556. It is not necessary to show negligence or bad faith on
the part of the seller, for the detriment to the buyer is the same whether the seller's
unsuccessful efforts were diligent, dilatory, or negligent. See Wilson, 587 F.2d at 1375.
The district court in this case found that the furnace had never lived
up to the specifications of the contract. Finding 23. Moreover, the court found that
the few successful improvements were not made within a reasonable period of time, taking
over two and one-half years. We agree that under these circumstances, the unreasonable
delay and ultimate failure in repair made the repair remedy ineffective; thus, the remedy
failed of its essential purpose.
B
Washington courts have not addressed the issue of whether failure of a
limited repair remedy may serve to invalidate a consequential damages exclusion.
Therefore, it is our responsibility to determine how the state's supreme court would
resolve it. In undertaking this task, we may draw upon recognized legal sources including
statutes, treatises, restatements, and published opinions. Molsbergen v. United States,
757 F.2d 1016, 1020 (9th Cir.), cert. denied, 473 U.S. 934, 87 L. Ed. 2d 706, 106 S. Ct.
30 (1985). We may also look to "well-reasoned decisions from other
jurisdictions." Takahashi v. Loomis Armored Car Serv., 625 F.2d 314, 316 (9th Cir.
1980). We review the district court's construction of Washington law de novo. See In re
McLinn, 739 F.2d 1395, 1400 (9th Cir. 1984) (en banc).
1
We begin our analysis with Fiorito Bros., Inc. v. Fruehauf Corp., 747
F.2d 1309, 1314-15 (9th Cir. 1984). In that case, we held that under Washington law, the
failure of a repair remedy does not automatically remove a cap on consequential damages.
We predicted that Washington courts would take a case-by-case approach and examine the
contract provisions to determine whether the exclusive remedy and damage exclusions are
either "separable elements of risk allocation" or "inseparable parts of a
unitary package of risk-allocation". Id. at 1315 (quoting district court).
If the exclusions are inseparable, we reasoned, a court's analysis
should track the Official Washington Comments to § 62A.2-719(2) [hereinafter Washington
Comments], which explain that the subsection "relates to contractual arrangements
which become oppressive by change of circumstances . . . ." 747 F.2d at 1315. We then
affirmed the district court's ruling that the seller's arbitrary and unreasonable refusal
to live up to the limited repair clause "rendered the damages limitation clause
oppressive and invalid." Id.
Fiorito relied heavily on this circuit's analysis of Cal.Com.Code §
2719(2) (West 1964) in Wilson, 587 F.2d 1363. Wilson involved a contract between
commercially sophisticated parties for a tunnel boring machine. The contract contained
both a limited repair clause and a cap on consequential damages. After concluding that the
repair remedy failed of its essential purpose within § 2719(2), this court held that the
bar to consequential damages remained enforceable. We explained:
Parties of relatively equal bargaining power negotiated an allocation of their risks of loss. Consequential damages were assigned to the buyer, Wilson. The machine was a complex piece of equipment designed for the buyer's purposes. The seller Smith did not ignore his obligation to repair; he simply was unable to perform it. This is not enough to require that the seller absorb losses the buyer plainly agreed to bear. Risk shifting is socially expensive and should not be undertaken in the absence of a good reason. An even better reason is required when to so shift is contrary to a contract freely negotiated. The default of the seller is not so total and fundamental as to require that its consequential damage limitation be expunged from the contract.
Id. at 1375. However this court in Wilson quickly pointed out that its holding was
limited to the facts and was in no way intended to state that consequential damages caps
always survive failure of limited repair remedies. Id. at 1375-76.
2
The district court in the instant case found Selas' default
"fundamental, but not total." Nonetheless, it found the breach sufficiently
fundamental to remove the cap on consequential damages. Selas claims that the court
misunderstood the legal standard and that consequential damages may be allowed only when
the seller's breach is both total and fundamental. n7
We agree that the district court's characterization of the case law was
flawed. n8 However, the analysis it employed was not. This
court has found nothing magical about the phrase "total and fundamental" default
in relation to U.C.C. 2-719(2). In Fiorito we eschewed such wooden analysis, leaving
"each case [to] stand on its own facts." Id., 747 F.2d at 1314 (quoting Wilson,
587 F.2d at 1376). We further expressed our distaste for talismanic analysis in Milgard I,
finding the "oppressive circumstances" analysis utilized by Fiorito and the
Washington Comments and the "total and fundamental" default analysis in Wilson
in accord with each other. 761 F.2d at 556.
The task before the district court was to examine the remedy provisions
and determine whether Seals' default caused a loss which was not part of the bargained-for
allocation of risk. This was the analysis that the district court actually employed.
We agree with the district court's decision to lift the cap on
consequential damages. Milgard did not agree to pay $1.45 million in order to participate
in a science experiment. It agreed to purchase what Selas represented as a cutting-edge
glass furnace that would accommodate its needs after two months of debugging. Selas'
inability to effect repair despite 2.5 years of intense, albeit injudicious, n9 effort caused Milgard losses not part of the bargained-for
allocation of risk. Therefore, the cap on consequential damages is unenforceable.
III
Next, Selas challenges the district court's determination of damages.
The court had found that for 21 months (April 1, 1980 to December 31, 1982), the furnace
was incapable of reaching any of the yield rates outlined in the contract. Thereafter, the
furnace could reach a few with some regularity. Accordingly, the district court calculated
damages for two time periods. First, it calculated Milgard's lost profits during the
21-month "damage" period. Second, it calculated losses Milgard did and would
incur after December 31, 1982.
In calculating the award for the damage period, the district court
noted that Milgard earned an actual profit of $591,537 during that time. To determine what
further profits Milgard lost during that period as a result of Selas' breach, the court
used Milgard's production from January 1, 1983 to September 30, 1984 as a
"benchmark" period. During that period, Milgard earned a net profit of $674,900.
The court multiplied the benchmark figure by a factor of 1.5 and reduced the product to
account for both depreciation of the furnace over its 11-year life span and losses caused
by Milgard's own inefficient operation during the damage period. The resulting award for
lost profits was $860,497.
In determining damages incurred after December 31, 1982, the court drew
upon testimony from Milgard's expert economist, Dr. Peter Finch. Dr. Finch estimated that
the furnace's continued inability even to approach the specified cycle and yield rates did
and would cause Milgard in excess of $300,000 in lost profits after that date. The court
discounted parts of Finch's testimony, including his assumption that the furnace's useful
life exceeded 11 years, and awarded Milgard an additional $252,608.
Selas challenges both awards as speculative and unsupported by the
evidence. Alternatively, it claims that the district court made a mathematical error in
computing the lost profits for the damage period.
A
The determination of damages is one of fact. Thus, in accordance
with Federal Rule of Civil Procedure 52(a), this court will not disturb an award of
damages unless it is "clearly unsupported by the evidence," Roberts v. College
of the Desert, 870 F.2d 1411, 1417 (9th Cir. 1988), or it "shocks the
conscience." Brady v. Gebbie, 859 F.2d 1543, 1558 (9th Cir. 1988), cert. denied, 489
U.S. 1100, 109 S. Ct. 1577, 103 L. Ed. 2d 943 (1989).
The basic test for recovery of lost profits was laid out in the seminal
Washington Supreme Court opinion, Larsen v. Walton Plywood Co., 65 Wash. 2d 1, 390 P.2d
677, modified, 65 Wash. 2d 21, 396 P.2d 879 (1964):
[Lost profits] are properly recoverable as damages where (1) they are within the contemplation of the parties at the time the contract was made, (2) they are the proximate cause of defendant's breach, and (3) they are proven with reasonable certainty.
390 P.2d at 686 (citation omitted). The third element, dealing with certainty, "is concerned more with the fact of damage than with the extent or amount of damage." Alpine Indus., Inc. v. Gohl, 30 Wash. App. 750, 637 P.2d 998, 1001 (1981), opinion changed, 645 P.2d 737 (Wash.App. 1982) (quoting Gaasland Co. v. Hyak Lumber & Millwork, Inc., 42 Wash. 2d 705, 257 P.2d 784, 788 (1953)) (emphasis in original). This comports with the long-held view that a defendant should not profit from the difficulty in proving exact damages, particularly if his breach contributes to that difficulty.
Until Larsen, Washington courts strictly applied the "new
business" corollary to the lost profits rule: if the complaining party does not have
a profit history prior to the period of damage, profits are denied as too
speculative. Concluding that strict adherence to this rule could produce unjust
results, the Larsen court adopted the rule that "'lost profits will not be denied
merely because a business is new if factual data is [sic] available to furnish a basis for
computation of probable losses.'" 390 P.2d at 687 (quoting Barbier v. Barry, 345
S.W.2d 557, 563 (Tex.Civ.App. 1961).
Expert testimony alone can provide a sufficient factual basis for an
award of loss of profits. Alpine, 637 P.2d at 1001; Butcher, 581 P.2d at 1362. If the
opinion of an expert provides a reasonable basis for inference, the court is freed from
"the realm of uncertainty and speculation." Larsen, 390 P.2d at 687. Expert
testimony must be based upon tangible evidence rather than mere speculation or hypotheses.
Id. at 688. The court then must exercise its sound discretion in determining the amount of
damages. Barnard v. Compugraphic Corporation, 35 Wash. App. 414, 667 P.2d 117 at 120
(1983). Cf. Long v. T-H Trucking Co., 4 Wash. App. 922, 486 P.2d 300, 303 (1971) (where
difficult to ascertain what amount of loss was caused by defendant, trier of fact
"must exercise a large measure of responsible and informed discretion"). Expert
testimony with partial deficiencies may nevertheless support a finding of lost profits;
the trier of fact is free to discount its weight accordingly, even if no evidence sustains
the exact amount it awards. Alpine, 637 P.2d at 1002.
All three tests for loss of profits have been met in this case. First,
the district judge made the factual finding that the parties contemplated the possibility
of lost profits. Because § 28.5 of the contract refers to such profits, this finding is
not clearly erroneous.
Second, the district court found that the failure of the machine to
conform to the contract specifications proximately caused Milgard to lose profits. Selas
does not challenge this finding and we do not disturb it.
Third, the district court had a sufficient factual basis upon which to
make its computation of lost profits. As forecast by Larsen and its progeny, Milgard's
sole source of evidence in this area was its expert witness, Dr. Finch. Although the
district judge found some of Dr. Finch's figures difficult to swallow, he pointed out that
that did not negate them. Transcript at 3438. Consistent with Alpine, 637 P.2d at 1002,
the court discounted the damage award in accordance with the weight of Finch's testimony.
Finding 114. Therefore, we find no error.
. . .
For these reasons, the judgment of the district court is AFFIRMED.