Kirk Brisbin, D/B/A Specialty Manufacturing v. Superior Valve Company Sherwood Harsco Corporation Taylor-Wharton Gas Equipment Division Harsco Corporation, Sherwood Taylor-Wharton Gas Equipment Division, Kirk Brisbin, D/B/A Specialty Manufacturing v. Superior Valve Company Sherwood Harsco Corporation Taylor-Wharton Gas Equipment Division
Docket: 03-1793
Court: Court of Appeals for the Third Circuit; February 13, 2005; Federal Appellate Court
Kirk Brisbin, operating as Specialty Manufacturing, is involved in a legal dispute with Superior Valve Company and its parent companies, Harsco Corporation and Taylor-Wharton Gas Equipment Division. Following a bench trial, Brisbin was awarded $746,675. The case, heard by the Third Circuit Court of Appeals, addresses issues of adequate assurance and damages stemming from a failed long-term supply relationship initiated in 1997, which resulted in two contracts for brass valves and brass shell castings.
The contracts included strict quality control standards requiring approval from Superior before full production could commence. The approval process involved a First Article Inspection (FAI) to test compliance with specifications, followed by a trial run of 100 pieces for further evaluation. Superior granted FAI approval for the 3" shells on January 25, 1999, and ordered a trial run; however, delivery delays and subsequent testing revealed issues with the bronze alloy used in production.
For the 1065 valves, FAI approval was allegedly granted by Superior's Quality Assurance Director, though Superior later contested this, claiming the samples did not meet requirements. Despite this, they instructed Specialty to proceed with a trial run, which Specialty could not complete due to the unavailability of key component parts. Brisbin formally requested these components from Superior, which had previously supplied them but ultimately decided not to assist with this trial production run, leading to further complications in the contractual relationship. The Court's ruling affirms some aspects of the lower court's findings while reversing others and calls for further proceedings.
Brisbin experienced increasing frustration with Superior from late June through July due to perceived delays and lack of management support regarding project developments. He noted significant issues with communication, particularly with Joe Kilmer, the Director of Purchasing, who, while responsive, failed to provide necessary feedback on the 1065 valves and 3" shells projects. By the end of July, after discussing the projects with Kenneth Miller of Harsco Corporation, Brisbin learned during an August 2 conference call that the First Article Inspection (FAI) approvals for both projects were reportedly missing, and additional testing would be required. A Superior engineer indicated that the 1065 valves project was a low priority. Brisbin expressed his concerns in an August 5 fax, highlighting discrepancies in documentation, insisting on the payment of three invoices totaling $112,868, and requesting a preliminary agreement outlining payment obligations. Superior responded on August 11 by rescinding the FAI approvals, citing unperformed tests and nonconformance with specifications. On August 12, Miller accused Brisbin of attempting to breach the contract and denied any obligation for payments, proposing another conference call to discuss the matter further.
On August 17, a conference call prompted Brisbin to express his interest in moving forward with specific programs but asserted that Specialty Manufacturing believed its products had already been thoroughly tested and approved. He requested written confirmation of any new testing and approval requirements from Superior Valve Company and indicated that Specialty should not bear the additional costs of compliance, suggesting that Superior should absorb startup costs due to delays. Miller responded with a fax disputing Brisbin's interpretation of their previous conversation. On September 1, Brisbin made a final effort to reconcile the situation, expressing willingness to consider any last-minute ideas from Superior but noted a lack of expressed interest from their management. The only reply from Superior was a letter from Irene Ratajczak indicating the matter would be referred to their legal department. Brisbin subsequently filed a breach of contract lawsuit in the Western District of Pennsylvania, seeking lost profits from both written and an alleged oral contract. The case was assigned to a magistrate judge, who awarded Specialty $746,675 in damages after determining that Specialty had reasonable grounds for insecurity under UCC § 2-609 and that Superior's failure to assure future performance constituted a material breach of contract. The damages calculation included lost profits from the 1065 valves and shells contracts based on specified production timelines and profit margins, while reliance damages were awarded for the in-line valves project due to insufficient evidence for lost profits. Superior's motion to amend findings and the damages award was largely denied, with the magistrate judge affirming the original conclusions but declining to grant prejudgment interest.
Both parties filed timely appeals, and jurisdiction is established under 28 U.S.C. § 1291. The standard of review dictates that findings of fact are assessed for clear error, while conclusions of law and their application to facts are reviewed de novo. A finding is clearly erroneous if the reviewing court is firmly convinced a mistake was made. The appellate court must not overturn the district court's plausible account of evidence simply because it would have weighed the evidence differently.
Superior contests the Magistrate Judge's determination regarding the reasonableness of Specialty's claims for insecurity and requests for adequate assurance, as well as the calculation of damages. In contrast, Specialty, on cross-appeal, argues for the recoverability of lost profits from an in-line valves project and seeks prejudgment interest on awarded damages.
The legal standards surrounding adequate assurance under 13 Pa. Cons. Stat. § 2609 (U.C.C. 2-609) are not definitively established in Pennsylvania case law, although generally, the determination of reasonable grounds for insecurity is a factual question. However, there are instances where this issue can be resolved as a matter of law. The district court acknowledged that determining adequate grounds for insecurity is generally factual, but extreme conduct may warrant legal conclusions.
The request for adequate assurances under the UCC is a factual question unsuitable for summary judgment. The appellate inquiry regarding whether conduct justifies a legal conclusion about adequate assurance aligns with the assessment of whether a district court's factual findings are clearly erroneous. Under Pennsylvania’s UCC, when reasonable grounds for insecurity arise, a party may demand adequate assurance of performance in writing, with non-compliance within 30 days constituting contract repudiation.
"Reasonable" grounds and "adequate" assurance are defined by commercial standards rather than legal standards. The U.C.C. clarifies that grounds for insecurity do not need to be directly related to the contract, and repeated failures by a party accumulate over time. Adequate assurance is determined by factual conditions, requiring good faith and adherence to commercial norms.
On appeal, Superior challenges the Magistrate Judge's findings regarding adequate assurance based on three arguments: 1) Specialty's project delays were self-inflicted, 2) Specialty's request for payment lacked contractual basis, and 3) the Magistrate Judge misinterpreted internal documents. The Magistrate Judge's findings are supported by the factual record.
The Magistrate Judge found that Specialty had reasonable grounds for insecurity about Superior's commitment, despite Superior's claims regarding Specialty's manufacturing capabilities. Evidence indicated that issues with the trial-production run were not addressed in a timely manner, and there was a lack of communication from Superior regarding approvals and testing. Specialty's delays were exacerbated by Superior's failure to provide necessary components and feedback, leading to a reasonable belief that Superior was not committed to the projects.
The Magistrate Judge reasonably found Specialty's requests for assurance of Superior's performance valid, despite the aggressive tone of Brisbin's August 5 fax and the lack of a contractual right to demand $112,868. Specialty's concerns arose from Superior's delays and changes in position, leaving Specialty vulnerable as it awaited necessary approvals to recover startup costs. Brisbin's subsequent communications indicated a willingness to discuss alternative assurances, yet Superior failed to propose any counteroffers or demonstrate good faith in fulfilling its contractual obligations, ultimately halting communications and involving its legal department.
Superior contested the Magistrate Judge's interpretation of internal documents from August 1999, which included notes suggesting a strategy to undermine the relationship with Specialty. Superior claimed these notes were ambiguous and misinterpreted, asserting that the Judge's reliance on them was improper as Specialty had no prior knowledge of these documents. The appeal standard requires a finding to be "clearly erroneous" to be overturned, and the presence of evidence supporting a contrary inference does not imply error. The evidence supported a conclusion of Superior's dilatory behavior, and thus the Magistrate Judge's interpretation of the notes as indicative of bad faith was not erroneous.
The Magistrate Judge properly relied on the facts known at the time when evaluating Specialty's requests for adequate assurance, determining that Specialty's concerns were reasonable based on the available information. The Judge did not depend on the contested documentary evidence to support this finding but referenced it to demonstrate Superior's breach of contract by failing to respond to Specialty’s requests and by terminating their relationship.
Regarding lost profits from the 1065 valves and shells contracts, the Magistrate Judge awarded damages, but Superior appealed, arguing errors in the Judge's conclusions. The appellate ruling agrees with Superior, remanding the case for further findings. Under Pennsylvania law, lost profits are recoverable only if they can be established with reasonable certainty and are a proximate result of the breach. The Judge initially calculated lost profits by projecting full-time production over the entire contract duration, despite Specialty not having started full-time production by the time of the breach. This approach was deemed erroneous, as it extended the contracts beyond their stipulated terms without a basis in the contract language, which did not allow for such extensions or guarantee minimum production periods. Courts cannot alter clear contractual terms to achieve a more favorable outcome for a party.
Brisbin faced the challenge of proving the start date for full-time production of valves and shells to recover lost profits, a task complicated by the lack of clear facts. The case is remanded for the Magistrate Judge to make findings based solely on evidence from the bench trial, as Brisbin cannot supplement the record post-trial. If the Judge establishes a production start date, lost profits can only be recovered for specified periods, ending on May 27, 2001, and May 27, 2003, respectively.
Specialty failed to demonstrate that its subcontractor was capable of manufacturing the 1065 valves, as evidenced by a contract requirement for "fully manufactured, assembled, and tested" valves, while the subcontractor could not source all necessary components. Although Specialty claims an agreement with Superior to supply components, this is supported only by Brisbin's uncorroborated statement, which would be unenforceable under the Statute of Frauds due to the absence of written documentation.
Quality control issues regarding the 1065 valves were not addressed by the Magistrate Judge in the lost profits determination. The approval of prototypes by Superior was questioned, and the Judge must assess if Specialty could establish when the valves would meet the necessary specifications to recover lost profits. Given that neither Specialty nor its subcontractor had relevant manufacturing experience, it must provide compelling evidence of compliance with contract standards. The Magistrate Judge is tasked with determining whether Specialty demonstrated when the valves could have met Superior's quality requirements, assuming good faith cooperation.
The Magistrate Judge incorrectly calculated damages for the 1065 valves by using an annual production figure of 25,000 valves, which is merely an estimate of Superior's anticipated requirements rather than a binding minimum obligation. According to Pennsylvania law, a requirements contract obligates the buyer to purchase actual quantities needed in good faith, without unreasonably disproportionate demands compared to estimates. Although Superior reduced its annual estimate for the 1065 valves from 25,000 to 8,000-10,000, the Magistrate Judge found bad faith in the cancellation of contracts but did not address the downward estimate. This issue requires further examination upon remand.
Regarding the shells contract, the Magistrate Judge erred by awarding lost profits for all shell sizes when only the 3" shells had received First Article Inspection (FAI) approval. Separate approvals were necessary for each shell size, and Specialty had not submitted approvals for sizes other than the 3" shells prior to August 1999. The record lacks clarity on the timeline for obtaining approvals and whether the shells met quality control standards, particularly due to issues with the brass alloy affecting all shell sizes. Although testimony indicated the 3" shells passed testing, the court concluded it could not determine the quality of the other sizes. The award of lost profits was further complicated by the material breach of contract by Superior Valve and its failure to provide adequate assurance of performance.
The Magistrate Judge did not make a factual finding regarding lost profits and applied an incorrect legal standard for proving damages, which Specialty must establish with reasonable certainty. Specialty failed to demonstrate that the prototype shells conformed to contract requirements, as they lacked manufacturing experience, and thus did not presume compliance. On remand, the Magistrate Judge is tasked with making appropriate findings regarding lost profits if reconsideration allows for such an award.
In the cross-appeal concerning the in-line valves project, Specialty asserts entitlement to lost profits based on an intended contract. The Magistrate Judge acknowledged intent to contract and that the Statute of Frauds was satisfied, but denied lost profits due to a lack of agreement on price, quantity, and duration, awarding only reliance damages instead. However, it was determined that the finding of no contract was clearly erroneous, as a written contract existed for related projects. Evidence indicated that the parties were in the final negotiation stages for the in-line valves, yet no firm agreement had been finalized. The conclusion that there was no agreement on key terms lacked factual support.
Ultimately, the court affirms the award of reliance damages but reverses the denial of lost profits for the in-line valves project, remanding the case for further proceedings to assess the extent of those damages.
Brisbin acknowledged during cross-examination that no draft agreement had been exchanged and that both parties were still negotiating terms for a final contract. Consequently, despite any intentions from Superior and Specialty, a legally binding contract was not formed due to a lack of agreement on essential terms such as price, quantity, and duration. The Magistrate Judge ruled that a "meeting of the minds" was absent, referencing Pennsylvania law which requires such an agreement for enforceability. Specialty argued that sufficient evidence, including price quotes and estimates, indicated these terms were ascertainable; however, the ongoing negotiations confirmed that no final agreement existed.
Regarding prejudgment interest, Specialty contested the Magistrate Judge's exclusion from the damages award. Under Pennsylvania law, a right to interest on contract-related debts arises when payment is due. The Magistrate Judge concluded there was inadequate evidence to determine when payment obligations began, leading to an inconsistency in the decision because it simultaneously recognized lost profits based on uncertain timelines. The case is remanded for further proceedings, specifically for the Magistrate Judge to ascertain when production would have started, allowing for potential calculation of lost profits and corresponding prejudgment interest. If no lost profits are awarded, Specialty would only be entitled to interest on reliance damages from the date of contract repudiation. The decision of the Magistrate Judge is affirmed in part and reversed in part.
Brisbin and Specialty are referenced interchangeably, with Specialty asserting a third contract for producing in-line valves, discussed separately. Specialty is not a manufacturing entity; its value stems from Brisbin's connections with South Korean manufacturers. With permission from Superior, Specialty subcontracted production for 1065 valves and shells, necessitating retesting of components due to supplier selection. The exact nature of "additional testing" remains ambiguous, but this ambiguity does not impact the case's outcome. Although the Cinicola case relates to a federal bankruptcy statute, it incorporates principles from U.C.C. 2-609. The August 2 conference call was prompted by Brisbin’s requests for project updates, raising questions about Superior's communication regarding issues. The contract included startup costs in the unit price, while Superior contends that Specialty sought payment without price concessions, a claim countered by Brisbin's expectation for payment details. Courts generally hesitate to award lost profits to untested businesses, but the nature of this case mitigates that concern despite Specialty's subcontractors lacking prior experience with the products. Brisbin noted difficulties faced by the South Korean manufacturer in sourcing some components, leading Superior to offer internal components. The Magistrate Judge ruled that, assuming no in-line valves contract exists, Specialty could recover reliance damages for its development expenses under a promissory estoppel theory, as it incurred costs based on Superior's promises.
