U&W Industrial Supply, Inc. v. Martin Marietta Alumina, Inc. , 30 V.I. 460 ( 1994 )

Opinions of the United
1994 Decisions States Court of Appeals
for the Third Circuit
9-8-1994
U&W Industrial Supply, Inc. v. Martin Marietta
Alumina, Inc.
Precedential or Non-Precedential:
Docket 93-7318
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UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
___________
No. 93-7318
___________
U&W INDUSTRIAL SUPPLY, INC.,
Appellant
v.
MARTIN MARIETTA ALUMINA, INC.
___________
No. 93-7350
___________
U&W INDUSTRIAL SUPPLY, INC.
v.
MARTIN MARIETTA ALUMINA, INC.
MARTIN MARIETTA ALUMINA PROPERTIES, INC.,
Appellant
___________
Appeal from the District Court of the Virgin Islands
(D.C. Civil Action No. 85-00195)
___________
Argued: December 2, 1993
PRESENT: MANSMANN, HUTCHINSON and LEWIS, Circuit Judges
(Filed September 8, 1994)
____________
Thomas Alkon, Esquire
Alkon, Rhea & Hart
2115 Queen Street
Christiansted, St. Croix, U.S.V.I. 00820
and
Arthur Newbold, Esquire (Argued)
Kathleen Milsark, Esquire
Dechert, Price & Rhoads
4000 Bell Atlantic Tower
1717 Arch Street
Philadelphia, PA 19103-2793
Attorneys for U&W Industrial Supply, Inc.
Diane Trace Warlick, Esquire
Warlick & Quigley, P.C.
P.O. Box 3209
Christiansted, St. Croix, U.S.V.I. 00822
and
R. Eric Moore, Esquire
Downtown Station
P.O. Box 3086
Christiansted, St. Croix, U.S.V.I. 00822
and
Henry L. Feuerzeig, Esquire (Argued)
Dudley, Topper and Feuerzeig
P.O. Box 756
St. Thomas, U.S.V.I. 00804
Attorneys for Martin Marietta Alumina, Inc.
____________
OPINION OF THE COURT
____________
HUTCHINSON, Circuit Judge.
In this appeal and cross-appeal, appellant U&W
Industrial Supply, Inc. ("U&W") contends that a judgment for
damages of $27,790.19 entered by the District Court of the Virgin
Islands on U&W's requirements contract claim is inadequate. U&W
argues that the district court erroneously held U&W had a duty to
mitigate damages arising from appellee and cross-appellant Martin
Marietta Alumina Properties, Inc.'s ("MMA's") breach of
contracts, styled by the parties "blanket order contracts," under
which U&W agreed to supply MMA's requirements of certain parts
and supplies.
MMA, in its cross-appeal, argues that the district
court should have entered judgment in its favor on U&W's breach
of contract claims. MMA contends that the district court erred
in awarding partial summary judgment to U&W on the theory that
MMA breached a duty of good faith which the law implies in all
commercial contracts. The district court implied a thirty day
notice provision into the blanket order contracts because it felt
MMA had breached this good faith duty when it failed to give U&W
thirty days notice before canceling individual purchase orders it
had the option of placing under its blanket order contracts with
U&W. The district court's holding had the effect of adding a
second thirty day notice provision to blanket order contracts
which had only expressly required MMA to give U&W thirty days
notice of a change in production levels at MMA's St. Croix
aluminum ore processing facility.
Because MMA's requirements did not end, and its
production levels did not vary substantially from those the
requirements contracts were based on, until it actually closed
its Virgin Island plant operations in May of 1985, we conclude
that the court erred in implying this second thirty day notice
provision into the contracts. Moreover, because uncontradicted
evidence in this record establishes that the production levels on
which U&W's obligation to maintain its own inventories was based
never decreased before the plant closed in May of 1985, we also
conclude that there is no disputed issue of material fact whose
resolution in U&W's favor would permit it to prevail under
applicable substantive law. Therefore, we will reverse the
district court's order entering partial judgment for U&W and its
order denying MMA's cross-motion for summary judgment and remand
with instructions to enter an order granting summary judgment to
MMA.
I. Statement of Facts
U&W is an industrial piping and valve supplier located
on the island of St. Croix in the United States Virgin Islands
("Virgin Islands"). MMA operated an aluminum processing plant on
St. Croix until May of 1985. From time to time, prior to 1983,
MMA purchased large quantities of industrial piping and valves
from U&W for use in MMA's aluminum processing operations under
individual purchase orders. MMA's orders constituted 90% of
U&W's business.
In 1982, MMA decided to implement a blanket order
system for the purchase of materials. In doing so it joined an
industry trend toward the use of blanket orders as a means of
better competing against the Japanese. Before adopting the
blanket order system, MMA had maintained a six month supply of
the materials U&W was supplying. It wanted to reduce its
inventory to a one week supply and rely on contractors to supply
those items and other materials as needed. As finally adopted,
MMA's blanket ordering system required suppliers who signed on to
maintain inventories adequate to meet MMA's usual production
levels but required MMA to place only one order within ninety
days of signing. MMA was then free to place, or not place,
orders as it saw fit.
U&W was one of the suppliers who signed on after
responding to MMA's invitations to bid on some of the blanket
order contracts. U&W submitted bids for valves, instrumentation,
gaskets, electrical supplies, fittings and piping. On these
items U&W's bid was the lowest and MMA awarded U&W requirements
contracts for these items under the terms of the blanket order
contracts. In its invitations to bid, MMA had included an
analysis of its inventory needs that gave part numbers and
descriptions of the items required, its levels of use or
consumption of each for the current and prior year and the
maximum quantity MMA had previously kept in inventory. These
blanket contracts were drafted by MMA and were offered to U&W on
a "take-it-or-leave-it basis." Brief for Appellee at 6. U&W
attempted to negotiate the terms of the blanket contracts but
MMA's purchasing manager informed U&W the agreement could not be
modified. U&W then accepted the blanket contracts as MMA had
presented them.
The parties executed four of the five blanket contracts
at issue on December 23, 1983 and these were designed to run from
January 1, 1984 to December 31, 1984. The fifth contract ran
from July 1, 1983 to June 30, 1984. Except for the description
of the products required, all five contained identical terms and
conditions. Under each, U&W was obligated to maintain an
inventory of each specific part adequate to supply MMA's needs at
its current level of production. U&W understood the agreement
obligated it to carry a ninety day supply of each part for MMA
until the term of that blanket contract expired or it was
otherwise terminated by one of the parties. Paragraph 19 of the
blanket contracts stated:
19. ESTIMATED QUANTITY OF PRODUCT
Estimated quantity of PRODUCT required
and release activity as defined in Exhibit A,
is based on current production levels at []
Tons. [MMA] reserves the right to change
production levels at its sole discretion. In
the event of any cahnges [sic] in production
levels, [MMA] will notify vendor of either a
reduction in PRODUCT quantities or increase
in PRODUCT quantities to the maximum level
set forth in Exhibit A. Any increase beyond
the maximum level set forth in Exhibit A will
require written agreement between [MMA] and
[U&W].
Joint Appendix ("Jt. App.") at 248. Each blanket contract
expressly obligated MMA to place only one order within the first
90 days, but each agreement also specifically stated MMA intended
to place follow-up orders with U&W, despite MMA's disclaimer of
any obligation to do so. Each blanket contract contained a
cancellation provision:
18. CANCELLATION
(a) [MMA] may cancel this agreement
upon thirty (30) days written notice, at its
sole discretion, provided however, that [MMA]
shall remain obligated to pay for any PRODUCT
order hereunder proir [sic] to the effective
date of any such cancellation. [MMA] may
cancel any individual Purchase Order or
release placed hereunder, subject to payment
for materials committed to the manufacture of
PRODUCT ordered hereunder prior to the time
of such cancellation. No other cancellation
charges shall apply.
Id. (emphasis in original).
In mid-1984 MMA sought purchasers for its St. Croix
plant. In order to maintain the plant as a going concern pending
its sale, MMA wanted to cut plant operating costs but still
maintain production at pre-existing levels. In July of 1984, to
help accomplish this, MMA decided to reduce all its inventories.
Accordingly, on July 20, 1984 MMA sent U&W reduction orders
canceling or reducing individual purchase orders it had already
placed under the blanket contracts. MMA informed U&W that MMA
was reducing its inventory without changing its production levels
but cautioned U&W against ordering certain items to replenish
stock until MMA advised it to. Nevertheless, U&W states it never
received any notice of decreased requirements from MMA.
In response to the July 20, 1984 reduction orders and
MMA's cautions, U&W decreased its own inventory of the items it
had agreed to supply MMA, even though MMA's production levels
remained the same. Glenn Knorr, a U&W officer, testified on
deposition:
A: [After receiving the reduction orders,
U&W] did not continue to order products
and material to reinforce [our]
inventories. [With respect to the
blanket contract for piping,] I spoke
specifically with [James Ross ("Ross"),
head of purchasing for MMA's St. Croix
plant] and asked him, look are we going
to have to order a fair amount of pipe
in order to adhere to this contract and
he advised me verbally again that I
should hold off on ordering any pipe
until he advised me again. So at that
time we [held off].
* * *
Q: . . . After June or July of 1984 [sic]
then you stopped ordering from your
suppliers to replenish your inventories?
A: That's correct.
Jt. App. at 319-20.
On October 16, 1984 MMA's parent corporation publicly
announced it was withdrawing from the aluminum business. The
announcement, as well as MMA's subsequent efforts to locate a
buyer for its St. Croix plant, were well publicized but efforts
to sell the plant failed. U&W conceded it knew of MMA's attempts
to sell the St. Croix plant as early as the spring of 1984 but
was continually reassured by MMA that it would be "business as
always," Jt. App. at 319, and MMA had assured U&W that if it
could sell the plant as a going concern, U&W's contracts would
pass to the new owner. Also, even though U&W knew MMA's St.
Croix plant was for sale, it believed MMA's reduction of its
parts inventory would somehow, in the end, increase U&W's sales
because MMA would have to rely even more heavily on U&W to make
timely delivery of parts MMA needed.
When the St. Croix plant closed, U&W unsuccessfully
attempted to dispose of its remaining supply of the parts that
were the subject of its requirements contracts with MMA. U&W
also offered MMA an exchange of those parts it could not sell on
the island for parts that could be sold there, dollar for dollar,
but MMA refused this exchange offer. U&W eventually sold some of
the parts to a salvage company.
II. Statement of Procedural History
On August 12, 1985 U&W filed this action against MMA.
The complaint sought damages for breach of contract, contending
U&W was entitled to actual, formal notice in July, 1984 of MMA's
decreased needs so that U&W could make appropriate adjustments in
its own inventory levels. U&W alleged MMA had failed to give
notice of a decrease in its production level and that this was a
breach of the governing agreements. Both parties filed motions
for summary judgment on liability. On April 24, 1987 the late
Chief Judge David V. O'Brien granted partial summary judgment in
favor of U&W after concluding MMA "constructively canceled" five
of the contracts when it implemented internal inventory
reductions in July of 1984 without advance notice to U&W and that
this breached an implied obligation of good faith and fair
dealing reciprocal to U&W's express contractual duty to maintain
an inventory "adequate" to meet MMA's requirements. The court
held U&W was entitled to thirty days' notice of MMA's changed
needs because MMA had an express contractual right to terminate
the blanket contracts on thirty days' written notice. Judge
O'Brien granted summary judgment to MMA on the remaining
liability issues and ordered a hearing at a later date to
determine damages.1 He issued two additional orders on July 16,
1987 and September 21, 1987 concerning the damages U&W would be
permitted to prove. Under these orders, U&W was limited to
damages resulting from its inability to dispose of inventory
acquired during the thirty days immediately prior to U&W's
receipt of MMA's reduction orders.2 If U&W had thirty days
advance notice of MMA's construction cancellation, the court
reasoned that U&W would not have purchased any additional
inventory during this thirty day period. The court did not
permit U&W to recover damages for the inventory it had on hand
but could not return prior to the date notice was required.
Judge O'Brien's unfortunate death and Hurricane Hugo
delayed final decision in the case for several years. In 1991,
it was assigned to a visiting judge, who had been temporarily
assigned to the District Court for the Virgin Islands. The
district court held a hearing to assess damages and on
December 27, 1991, appointed a Special Master to "prepare a
report with findings of fact and conclusions of law and [make] a
1
. U&W has not appealed the portion of Judge O'Brien's order
granting partial summary judgment to MMA.
2
. Neither the parties nor the district court tell us whether
those damages would be measured by the difference between the
salvage price U&W received for the items it purchased during that
thirty day period and its cost, or the prices it expected to
receive from MMA.
recommendation for total damages to be awarded to [U&W]." Jt.
App. at 10.
On August 20, 1992, the Special Master filed a report
recommending U&W receive damages of $27,790.19. The Special
Master concluded that the "thirty day window" for damages ran
from June 20, 1984 to July 20, 1984. The report stated that the
Special Master "view[ed] the scope of her review as being
strictly limited to the holdings of the late [Judge] O'Brien" and
therefore awarded damages only for inventory acquired during the
thirty-day window as the inventory U&W "could have . . .
returned"3 within the thirty day window but for lack of fair
notice from MMA. Jt. App. at 11-12, 17. In setting U&W's
damages at a net of $27,790.19, the Special Master decided U&W
had not fully mitigated the loss that resulted from MMA's
July 20, 1984 cancellation of the contracts because U&W should
have immediately made greater efforts to reduce its inventory
than it had.
The Special Master found that U&W did make some
reduction in its purchases after July 20, 1984, that U&W knew it
would not need to maintain as large an inventory as it had before
that date and that this triggered its immediate duty to mitigate.
Perhaps the Special Master's most pointed conclusion on
mitigation was that U&W should have reduced its inventory to the
3
. The fact that MMA continued to purchase parts from U&W after
July of 1984, and as late as May of 1985 when the plant closed,
seems arguably inconsistent with the conclusion that U&W would
have ceased purchasing inventory during the thirty days prior to
the reduction. See also infra note 12.
level it would have normally maintained absent its blanket
contracts to supply MMA's requirements. Finally, the Special
Master recommended that U&W receive prejudgment interest of 9% on
the damages awarded from the date of cancellation, July 20, 1984,
until payment.
Both U&W and MMA objected to the Special Master's
Report. On April 12, 1993 the district court adopted the Special
Master's Report and ordered MMA to pay damages to U&W in the
amount of $27,790.19, but only awarded interest of $3.98 per day
to U&W from July 20, 1992 to date.4 U&W appealed this order on
May 3, 1993. MMA filed its cross-appeal on May 11, 1993.
III. Statement of Jurisdiction and Standard of Review
The district court had subject matter jurisdiction over
this breach of contract action pursuant to V.I. Code Ann. tit. 4,
§ 32(a) (Supp. 1993). We have appellate jurisdiction pursuant to
28 U.S.C.A. § 1291 (West 1993). The construction of an
unambiguous contract is a matter of law for the court and
therefore is subject to plenary review. Contract interpretation,
as opposed to construction, involves mixed questions of law and
fact. We exercise plenary review over questions of law and
reverse findings of fact only if they are clearly erroneous. See
Coca-Cola Bottling Co. of Elizabeth, Inc. v. Coca-Cola Co., 988
F.2d 386, 401 (3d Cir.), cert. denied, 114 S. Ct. 289 (1993).
4
. The district court rejected the Special Master's prejudgment
interest recommendation because she felt both sides had
contributed to the long delay in this case.
When reviewing an order granting summary judgment, we view the
facts in the light most favorable to the nonmoving party and
decide whether any genuine issue of material fact exists and
whether the moving party is entitled to summary judgment as a
matter of law. Fed. R. Civ. P. 56(c); see Clark v. Modern Group
Ltd., 9 F.3d 321, 326 (3d Cir. 1993). An order granting summary
judgment will be reversed if there is sufficient evidence for a
jury to return a verdict in favor of the nonmoving party;
however, if the evidence is merely colorable or not significantly
probative, an order granting summary judgment should be affirmed.
A disputed fact is material if it would affect the outcome of the
lawsuit. Id.
IV. The District Court Erred When It Rewrote
the Parties' Contract in Favor of U&W
Under the UCC as adopted by the Virgin Islands, V.I.
Code Ann. tit. 11A, § 1-203 (1987), and the Restatement (Second)
of Contracts § 205 (1981),5 all contracts impose an obligation of
good faith and fair dealing in their performance and enforcement.
See also Action Eng'r v. Martin Marietta Aluminum, 670 F.2d 456,
460 n.8 (3d Cir. 1982). This obligation of good faith
5
. The blanket contracts do not provide what local law is to
govern their construction or interpretation. The parties assume
that the law of the Territory of the Virgin Islands applies.
Because the contract was entered into and performed in the Virgin
Islands by two corporations organized and existing under the laws
of the Virgin Islands, we agree and will apply Virgin Islands
law. The Virgin Islands look to the Restatement for their common
law. V.I. Code Ann. tit. 1, § 4 (1984); see also St. Surin v.
Virgin Islands Daily News, Inc., 21 F.3d 1309, 1315 n.5 (3d Cir.
1994).
incorporates honesty in fact as well as reasonable commercial
standards of fair dealing. See V.I. Code Ann. tit. 11A, § 1-201
(defining good faith); Restatement (Second) of Contracts § 205
cmt. a. We have held that UCC section 1-203 imposes a general
requirement of fundamental integrity in commercial transactions
falling under the UCC. Skeels v. Universal C.I.T. Credit Corp.,
335 F.2d 846, 851 (3d Cir. 1964). In this case, it is U&W's
burden to prove that MMA acted in bad faith. See Tigg Corp. v.
Dow Corning Corp., 962 F.3d 1119, 1123 (3d Cir.), cert.
dismissed, 113 S. Ct. 834 (1992); HML Corp. v. General Foods
Corp., 365 F.2d 77, 83 (3d Cir. 1966);6 see also V.I. Code Ann.
tit. 11A, § 2-306.
Because of the risk U&W agreed to expose itself to
under the blanket contracts by undertaking to maintain a parts
inventory adequate to meet MMA's usual production requirements,
the district court decided that the duty of good faith which
U.C.C. § 1-203 implies required it to add a notice term otherwise
"missing" from the contract. We disagree. The implied duty of
good faith and fair dealing in commercial contracts that section
1-203 imposes controls the manner in which the contracting
parties carry out the obligations they have undertaken in a
6
. In Tigg we noted two different theories by which a court may
decide who should bear the burden of proving bad faith: the case
law approach, implying the burden should be placed on seller, and
the commentator approach, favoring placing the burden on whoever
is to benefit from a showing of bad faith. Tigg Corp., 962 F.2d
at 1123-24. In HML Corp., we simply placed the burden on the
plaintiff. HML Corp., 365 F.2d at 83. Here, under either
theory, U&W is the appropriate party on which to place the
burden.
contract; it does not give a court the power to impose additional
obligations on one contracting party because a court concludes it
is unfair to have the other shoulder a market risk that the
former expressly bargained to avoid and the other expressly
agreed to assume.
The district court relied on Tymshare, Inc. v. Covell,
727 F.2d 1145 (D.C. Cir. 1984), and KLT Industries, Inc. v. Eaton
Corp., 505 F. Supp. 1072 (E.D. Mich. 1981) to reach its
conclusion that the duty to act in good faith necessitated MMA's
giving notice to U&W. Tymshare was a breach of contract action
brought by a salesman against his former employer. The salesman
alleged the employer breached the implied contractual duty of
acting in good faith when it altered sales quotas in such a way
as to deprive the plaintiff of previously earned commissions.
Then-Judge Scalia noted that "the doctrine of good faith
performance is a means of finding within a contract an implied
obligation not to engage in the particular form of conduct which
. . . constitutes 'bad faith.'" Tymshare, 727 F.3d at 1152. The
court then noted that "the object of our inquiry is whether it
was reasonably understood by the parties to this contract that
there were at least certain purposes for which the expressly
conferred power to adjust quotas could not be employed. If not,
then [the employer] is correct that no action in this regard
could constitute 'bad faith'--or, as we would put it, there is no
implicit contractual restriction." Id. at 1153. The court
stated that the implied covenant of good faith does not
countermand acts specifically authorized, id. (quoting VTR, Inc.
v. Goodyear Tire & Rubber Co., 303 F. Supp. 773, 778 (S.D.N.Y.
1969), nor should it be permitted to dictate an outcome contrary
to the intent of the parties. Id. (quoting MacDougald Constr.
Co. v. State Highway Dep't, 188 S.E.2d 405 (Ga. 1972)). But, as
the court in Tymshare noted, "the trick is to tell when a
contract has been so drawn." Id. (emphasis in original).
KLT Industries provides one example of how a duty to
notify may be included in the generalized obligation to act in
good faith. In that case, two parties entered into an agreement
where the plaintiff would design and fabricate six highly
specialized test stands to be used by the defendant in testing
and adjusting cruise control devices. Although the plaintiff did
not perform on time, the defendant did not object and plaintiff
continued on in the design and fabrication of the parts. Then
the defendant, without notice, canceled the contract without
giving the plaintiff an opportunity to demonstrate it could
complete the contract. The court held that termination without
notification violated the duty to act in good faith:
The good faith obligation imposed by the
UCC requires reasonable notification before
termination to avoid surprise, protect good
faith judgment and reduce uncertainty. Under
the circumstances here [defendant's] conduct
led [plaintiff] to reasonably believe it
would have the opportunity to perform under
the contract. At least [plaintiff] was
entitled to the opportunity to demonstrate to
[defendant] it could perform under the
contract within the time frame contemplated
. . . .
KLT Indus., 505 F. Supp. at 1079-80. Thus, where the defendant
permitted the plaintiff to continue a specialized contract and
failed to object to a performance that did not strictly conform
to the agreement, the defendant was required to give some notice
of its intention to cancel the contract.
Neither of these cases stands for the proposition that
a party invariably has a good faith obligation to notify a
supplier before reducing, altering or canceling an agreement.
Instead, they merely acknowledge certain circumstances in which a
general implied obligation to act in good faith will command or
prohibit acts not specifically delineated in the agreement. But,
as Tymshare recognized, the language of the agreement and
expressed intent of the parties always guide the application of
the implied duty of good faith.
Here, MMA did not act in bad faith when it reduced or
canceled some of the individual purchase orders issued under the
contracts. When MMA sent U&W the individual purchase order
reductions in July or August of 1984, it did so under section
18(a) of the contract. That section required no prior notice of
such reductions but made MMA liable to pay U&W only "for
materials committed to the manufacture of PRODUCT ordered
hereunder prior to the time of such cancellation." Jt. App. at
248.7 The district court incorrectly treated MMA's decision to
reduce its own inventory as a change in MMA's requirements.
7
. U&W does not contend that MMA owes it any money for materials
committed at the time of these cancellations and/or reductions.
Although MMA decided to reduce its individual purchase orders
because it wanted to reduce its own inventory and use up stocks
on hand, it continued to maintain normal production and
accordingly continued to place individual purchase orders with
U&W as necessary to meet its usual production requirements until
it closed its plant in May 1985. The blanket contracts were not
canceled by MMA's actions because MMA continued to order parts
from U&W and U&W continued to supply parts to MMA to meet MMA's
normal production levels, in accordance with the blanket
contracts. See infra note 12.
Despite MMA's additional reliance on U&W for parts that
resulted from MMA's decision to reduce its own inventory, MMA
told U&W not to order certain additional parts until MMA told U&W
it needed them and never objected to U&W's decision to reduce its
own inventory of some of the parts it had agreed to supply to
MMA. Indeed, with MMA's knowledge and implicit approval, U&W
thereafter curtailed its own orders from its suppliers and
delayed placing them until absolutely necessary to meet MMA's
continuing requirements. In fact, this caused U&W's inventory of
the parts it had agreed to supply to MMA to fall below that which
would have been required to meet the estimated production levels
MMA continued to maintain, thus putting U&W itself in technical
breach of its express obligation to maintain an inventory
adequate to meet MMA's unchanged production requirements.8 MMA
8
. This is consistent with Knorr's testimony that he understood
"if [U&W didn't] have the quantities on hand even up to the end
of the agreement[,] the agreement can be terminated." Jt. App.
at 311.
not only acquiesced in this, it told U&W not to order certain
additional parts unless advised otherwise.9 In order to help U&W
reduce its inventory, U&W's Knorr testified MMA also extended
delivery times on orders for items U&W still had on its shelves.
MMA's previously specified production levels were the
guide the blanket order agreement required U&W to use in deciding
how many parts it had to keep on hand to meet its obligations
under the blanket contracts. Paragraph 19 of the blanket
contract required MMA to give U&W notice of changes in its
production level because MMA's production level was the basis for
U&W's inventory levels. See Jt. Ap. at 248. Ross testified
MMA's production levels and its commensurate needs did not change
until shortly prior to the plant's closing on May 12, 1985, and
there is no other evidence in the record showing that MMA
decreased its production levels between July of 1984 and May of
1985.10
Under the blanket contracts, MMA was not obligated to
buy any product from U&W beyond placing one initial order within
ninety days of entering into each contract. U&W expressly agreed
to bear the market risk of disposing of unneeded inventory it had
9
. We note, however, that the court did correctly grant summary
judgment to MMA on the two blanket contracts under which MMA had
advised U&W not to order additional parts.
10
. Knorr did testify that he noticed a decrease in MMA's
production levels during the first quarter of 1984, (App. at 317)
but U&W does not claim any damages resulted from this reduction.
Although U&W alleges it was harmed by a decrease in MMA's
production levels in July of 1984, there is no evidence
supporting U&W's allegation that MMA's production decreased
between July 1984 and May 1985 when the plant closed.
purchased to meet MMA's normal requirements when its contract
with MMA was terminated. See Jt. App. at 248.
This unrebutted evidence contradicts any implicit
finding the district court may have made that MMA dealt unfairly,
dishonestly or unreasonably with U&W.11 Thus, U&W, the moving
party on its motion for partial summary judgment, has failed to
produce evidence from which it could be inferred that MMA acted
in bad faith. See HML Corp., 365 F.2d at 83.
U&W took a calculated business risk when it agreed to
supply MMA with parts as needed. It accepted the risk that it
would have to dispose of unused inventory if MMA canceled the
contract or went out of business. This risk is inherent in
requirements contracts. The contract did not oblige MMA to make
any more than one order, let alone notify U&W if it would not be
placing its usual amount of purchase orders.
It is indeed unfortunate that U&W was unable to return
the parts it had on hand when MMA terminated the contract in May
of 1985, but this is a risk it assumed when it agreed to supply
MMA's requirements on MMA's terms.12 In a requirements contract,
11
. The district court stated that "MMA's unbridled discretion
[to expose U&W to great risk in requiring it to keep the same
inventory even though MMA had decreased its own] requires a
corresponding duty to act in good faith." Jt. App. at 209.
Thus, it implied a notice provision because "a good faith
performance required advanced notice." Id. The court never
expressly found that MMA acted in bad faith but that finding is
implicit in its decision to add a second notice requirement into
the blanket order agreements.
12
. U&W co-owner John McCallum ("McCallum") testified he did not
try to return any of his stock when he received the reduction
and/or cancellation orders from MMA because he did not believe
the contracts were terminated by MMA's actions. He testified
"[t]he seller assumes the risk of all good faith variations in
the buyer's requirements, even to the extent of a determination
to discontinue the business." Welded Tube Co. of Am. v. Phoenix
Steel Corp., 377 F. Supp. 74, 79 (E.D. Pa. 1974), aff'd in
relevant part, 512 F.2d 342 (3d Cir. 1975); see also HML Corp.,
365 F.2d at 81. MMA did not breach its contract with U&W or
contravene its duty to act in good faith in May of 1985, when it
closed its Virgin Islands bauxite plant, or in July of 1984, when
it notified U&W it planned to reduce its own inventories while
maintaining pre-existing production levels. See Welded Tube Co.,
377 F. Supp. at 79.13
V. Conclusion
The order of the district court granting partial
summary judgment to U&W and its order denying MMA's motion for
summary judgment will be reversed and the case will be remanded
to it with instructions to enter judgment for MMA.
(..continued)
that had he attempted to return his stock at that time, his
suppliers would have accepted approximately 80-85% of it in
returns. When U&W attempted to return parts to its suppliers
after the plant closed in May of 1985, the suppliers refused to
accept U&W's returns. U&W believes they did so because they no
longer considered U&W a good customer based on U&W's lack of
recent orders and rumors concerning MMA's plant closing.
13
. Because of our disposition of the case, we do not reach
U&W's argument that the district court erred in reducing its
damages because it had not met its duty to mitigate.