A.P.M. Technology, Inc. v. Ohio Penal Industries

[Cite as A.P.M. Technology, Inc. v. Ohio Penal Industries, 2010-Ohio-6607.]
Court of Claims of Ohio
The Ohio Judicial Center
65 South Front Street, Third Floor
Columbus, OH 43215
614.387.9800 or 1.800.824.8263
www.cco.state.oh.us
A.P.M. TECHNOLOGY, INC.
Plaintiff/Counter Defendant
v.
OHIO PENAL INDUSTRIES
Defendant/Counter Plaintiff
Case No. 2007-08899
Judge Joseph T. Clark
Magistrate Anderson M. Renick
MAGISTRATE DECISION
{¶ 1} Pursuant to Civ.R. 53, Magistrate Anderson M. Renick was appointed to
conduct all proceedings necessary for decision in this matter.
{¶ 2} Plaintiff/counter defendant, A.P.M. Technology, Inc. (APM), brings this
action alleging breach of contract and unjust enrichment. Defendant/counter plaintiff,
Ohio Penal Industries (OPI), filed a counterclaim alleging the same two claims. The
case proceeded to trial on the issues of liability and damages.
{¶ 3} APM, is a New Jersey corporation licensed to conduct business in Ohio.
According to the testimony of its president, Joseph Sciaretta, APM designs and sells
processing equipment whereby it represents various manufacturers that create such
equipment based upon customers’ specifications.
{¶ 4} OPI is a division of the Ohio Department of Rehabilitation and Correction,
whose mission is to assist in the rehabilitation of inmates through work and training.
OPI produces and sells a variety of products to government entities, including furniture,
janitorial supplies, and inmate clothing.
Case No. 2007-08899 -2- MAGISTRATE DECISION
{¶ 5} In its plan to expand its production of a line of powder laundry detergent
which is packaged in four-ounce water soluble film, on August 19, 2002, OPI issued a
request for proposals (RFP) for the design, construction, and installation of a dry
chemical powder processing and packaging system for use in its facility located at the
Southeastern Correctional Institution in Lancaster, Ohio. OPI sought to replace
machinery that had been in service for over 20 years and had become difficult to repair.
According to the proposal, “OPI buys raw, bulk chemicals, blends the chemicals and
packages the chemicals for consumer use.” (Defendant’s Exhibit A, Page 1.)1
CONTRACT TERMS
{¶ 6} The RFP set forth the specifications for the machinery and the scope of
the project, including the process by which vendors could inspect the facilities and the
procedure to submit written requests for clarification. The scope of the project was
outlined in Part Four of the RFP which provides that the contractor shall be responsible
for administration and coordination of the project, all engineering and design services,
procurement of all new equipment and accessories, system installation, operational
testing, and training for OPI staff. (Defendant’s Exhibit A, Page 9.) Addendum No. 1 to
the RFP was issued on September 13, 2002, to clarify system specifications and
requirements, including production service hours (“between 6 1/2 to 8 hours, five days
per week”), a production rate (“60-80, four-ounce packages per minute into water-
soluble package”), and the requirement “that all chemical contact points be constructed
of 316-stainless steel.”
{¶ 7} In addition to system specifications, the RFP sets forth certain rights and
obligations of the parties, which are prefaced by the following: “By submitting a
proposal, the offeror acknowledges that it has read this RFP, understands it, and agrees
1
The RFP had been modified by five addenda which clarified and expanded upon OPI’s
requirements.
Case No. 2007-08899 -3- MAGISTRATE DECISION
to be bound by its requirements.” (Emphasis in original.) (Defendant’s Exhibit A, Page
2.) With regard to the contract between the parties, the RFP states on page 8: “The
purchase agreement between OPI and the offeror shall be a combination of the
specifications, terms and conditions of the RFP with any addenda, and the offer
contained in the proposal with any written clarification or changes made in accordance
with the provisions herein and accepted by OPI.”
{¶ 8} On or about December 2, 2003, APM responded to the RFP with a
proposal which was mailed to Vicki Cox, the business administrator for OPI and author
of the RFP. (Plaintiff’s Exhibit 1.)2 The proposal described the components of the dry
powder processing machine as follows:
{¶ 9} “The system starts with the manually charged pre-weighed ingredients into
a ribbon blender. After blending, the mix will be discharged into an inclined conveyor
which delivers the blended mix to an elevated surge hopper. A second blender
discharge is provided to allow for bulk packaging of the blended detergent. * * *
{¶ 10} “The surge hopper will be located directly over two (2) form/fill/seal
packaging machines. * * * The blended material will be metered though two (2) variable
opening knife gates to the packaging stations below.
{¶ 11} “Two form/fill and seal packaging machines will allow for packaging rates
of 60 to 80 four ounce packages per minute. After packaging is completed belt style
conveyors will transport the filled packets to a manual counting and boxing station.”
(Plaintiff’s Exhibit 1.)
{¶ 12} According to APM’s proposal, the packaging system would be installed
with an “auger filler, and mechanically agitated feed hopper” to ensure product flow.
The proposal also states that the packaging system must be “suitable for all heat
sealable laminations” and that the machinery must be “shipped ready to run.” (Plaintiff’s
2
Plaintiff’s Exhibit 1 is the fourth revision to the quotation.
Case No. 2007-08899 -4- MAGISTRATE DECISION
Exhibit 1, Page 4.) The proposal also includes a section entitled “Terms and Conditions
of Sale” that was drafted by Sciaretta.
{¶ 13} On January 27, 2004, OPI sent APM a purchase order and a set of
drawings for the project. (Defendant’s Exhibits C, I, J, K.) The purchase order
contained the notation “purchase is in accordance with quote #22-009-001-R3
submitted by APM.”3 The total price on the purchase order was $333,140.
{¶ 14} APM agreed to deliver the component parts within 12 to 14 weeks after it
received the approved drawing from OPI. (Defendant’s Exhibit E, Page 1.) Installation
was to commence one week after the receipt of the materials and all components were
to be installed within three to four weeks thereafter. (Defendant’s Exhibit C, Page 7.)
APM’s quotation also contained a payment schedule and a list of benchmarks to be
completed before payment would be tendered. (Plaintiff’s Exhibit 1, Page 7.)4 At some
time in early April 2004, Mike Eberhardt, OPI’s Chief Fiscal Officer sent Sciaretta a fax
of the proposed modified payment terms.5 (Plaintiff’s Exhibit 8.) (Defendant’s Exhibit
M, Page 3.)
3
In an email dated February 13, 2004, the parties acknowledge that the purchase order pertained
to the fourth revision of APM’s quote which was submitted on December 2, 2003. (Defendant’s Exhibit
E.)
4
The payment benchmarks included:
“* * *
“15% with the Completion of Engineering and Return of Approved Drawings
“15% Upon Completion of issuance of Purchase Orders for Major items
“15% Upon readiness of shipment for major items
“15% Upon the start of Installation
“25% Upon completion of Mechanical, Electrical installation at OPI
“10% upon completion of start-up and system testing (acceptance by OPI)
“5% upon completion of Staff Training and delivery of Manuals”
5
The new payment benchmarks per a fax dated April 9, 2004, from Mike Eberhardt to Sciaretta
states in pertinent part:
“15% - Upon Completion of Engineering and Return of Approved Drawings
“45% - Upon delivery of system to institution and start of installation
“25% - Upon completion of mechanical and electrical at OPI
“10% - Upon completion of start up and system testing — with OPI acceptance being required
Case No. 2007-08899 -5- MAGISTRATE DECISION
DELAY
{¶ 15} According to APM’s proposal, the project was to be completed within 19
weeks after receipt of the approved drawings. However, after the purchase order was
issued on January 27, 2004, Sciaretta notified OPI of various problems which delayed
delivery of the machinery. For example, in March 2004, Sciaretta sought to revise the
terms of payment and he advised OPI that purchases for the project were “on hold” until
OPI agreed to an accelerated payment schedule. APM advised OPI that “several
months” had been “lost” as a result of the payment “impasse.” (Plaintiff’s Exhibit 9.)
APM also notified OPI that an increase in the cost of stainless steel would impact
production. OPI subsequently agreed to accelerate the payment schedule to
accommodate APM.
{¶ 16} On June 11, 2004, Sciaretta informed Rick Stevens, OPI’s production
manager, that production was “slowly moving ahead after restarting the project” and that
“final purchases of equipment” were “in progress.” (Defendant’s Exhibit L.) In August
2004, Stevens implored APM to expedite delivery and installation of the processing
system and OPI requested weekly progress reports from Sciaretta. On August 16,
2004, Sciaretta replied that he planned to have the machinery installed in early October
and that production would begin thereafter. (Defendant’s Exhibit L, Page 1.) On
November 2, 2004, Stevens demanded “a detailed schedule of delivery and installation”
so that OPI could plan its production activities. (Defendant’s Exhibits M and N.)
{¶ 17} After months of delay, APM finally began installation work on January 19,
2005. On January 27, 2005, Stevens expressed his dissatisfaction with the delays and
he warned APM that if installation was not performed by March 31, 2005, he would
recommend that his supervisors “pursue any and all actions needed” to remedy the
situation. On the same date, Bill Mason, OPI’s product manager, notified APM of the
“5% - Upon completion of staff training and delivery of manuals.”
Case No. 2007-08899 -6- MAGISTRATE DECISION
“unacceptable” progress of the project, specifically stating his concerns with work that
had not been completed and the poor quality of workmanship exhibited by the
installation crew. (Defendant’s Exhibit T.)
{¶ 18} During the installation, APM had particular difficulty with the packaging
machines that were designed to dispense the processed detergent into sealed
packages. Mason testified that in July 2005, after several weeks of installation, testing,
and repair, Sciaretta requested assistance from Telsonics Packaging Corporation
(Telsonics), the manufacturer of the machines. In August 2005, Sciaretta was
continuing his attempts to repair the packaging machines when OPI informed APM that
it had issued a written vendor complaint regarding the delay to the Ohio Department of
Administration. According to Mason, the packaging machines were removed from
OPI’s facility on September 6, 2005, so that they could be repaired by Telsonics.
{¶ 19} After removing the packaging machines, Sciaretta urged OPI to share any
additional costs associated with the repairs. In his correspondence with OPI regarding
the progress of the repair, Sciaretta attributed the malfunction of the machines to the
“conditioned atmosphere” in OPI’s facility. (Defendant’s Exhibit JJ.) Specifically,
Sciaretta stated that the “knife mechanism” which was designed to cut the packaging
film did not function properly due to moisture resulting from unsuitable temperature and
humidity. Robert Starkey, OPI’s industrial manager, disputed Sciaretta’s assessment of
the malfunction and expressed displeasure with certain “unacceptable” modifications
that APM had used to “just get by.” Starkey advised Sciaretta that “it is very clear that
the machine was not designed to perform as to [OPI’s] request” and that “these types of
repairs or modifications are not acceptable and should not be considered to be
something that should be permanent.” (Defendant’s Exhibit JJ.) On October 28, 2005,
Sciaretta informed OPI that attempts to modify the packaging machines had failed and
that new machines utilizing a different type of cutting mechanism were being
Case No. 2007-08899 -7- MAGISTRATE DECISION
manufactured. Sciaretta estimated that manufacturing and shipping the new machines
would require up to seven weeks.
{¶ 20} On December 14, 2005, Sciaretta revised his estimated delivery date and
he advised OPI that the new machines would be delivered to Wilmington, Delaware
“some time late in January” for testing prior to the final shipment to OPI for installation.
According to Sciaretta, Telsonics would “guarantee the operation of the new units * * *
in the field.” (Defendant’s Exhibit MM.) The new packaging machines were installed on
February 22-23, 2006; however, after Sciaretta had performed many adjustments to
improve the performance of the machinery, Mason determined that the processing
system was unsatisfactory. Mason directed Starkey and Stevens to meet with Sciaretta
and “reiterate the fact that unless the machine performs as bided [sic] that [OPI] cannot
sign off on the final payment.” (Defendant’s Exhibit PP.) The evidence establishes that
the packaging machines were still not functioning properly on February 27, 2006.
{¶ 21} On February 28, 2006, Mason replied to Sciaretta’s request that he “sign
for acceptance of the 2 machines” by stating: “Needless to say neither Bob [Starkey]
nor I will be signing this paperwork due to the non-performance of these machines * * *
It is evident that these machines will not perform as you have stated they would when
you were awarded the bid. You have had both machines at this facility on two different
occasions and on both occasions they have failed to perform as promised.” Sciaretta
continued to work on the packaging machines and he requested assistance from
Telsonics in April 2006. On April 28, 2006, two representatives from Telsonics, Bernard
Katz and Xiao Feng Sheng, worked with Sciaretta to make the machines operational.
{¶ 22} Sciaretta sent OPI a detailed report of the repair work that was performed
which included a discussion of the problems with the packaging film that were
encountered. (Defendant’s Exhibit AAA.) In his report, Sciaretta acknowledged that
problems with the machines still existed after the repairs were attempted. According to
Sciaretta’s report, he had instructed an OPI worker to make further repairs and Sciaretta
Case No. 2007-08899 -8- MAGISTRATE DECISION
stated that OPI should take over responsibility for operating the machinery. Stevens
responded to Sciaretta’s report by stating that OPI had made “every attempt possible to
work with [APM]” and he related that OPI would not reassemble or perform further work
on the machines. (Defendant’s Exhibit AAA, Page 1.) Stevens advised Sciaretta that
his reply served “as notice of OPI seeking legal actions towards [APM’s] inability to
satisfy/complete the terms and conditions of the bid.”
{¶ 23} Nevertheless, OPI permitted Sciaretta and representatives of Telsonics at
least three additional opportunities to repair the packaging machines. On June 17,
2006, Sciaretta and Katz returned to OPI’s facility where their efforts to improve the
performance of the machinery was filmed by Dave Cordle, the superintendent of OPI’s
facility. (Defendant’s Exhibits ZZZ1-ZZZ12.) Cordle testified that Stevens directed him
to document any machinery malfunctions or production difficulties. According to Cordle,
Sciaretta was unable to operate the packaging machine in a manner that met the
contract specifications for either the production rate or the operating time. Cordle
recorded specific problems with the mechanism that was designed to cut and seal the
packets. Cordle testified that the finished packets were not sealed properly which
resulted in an unacceptable product that could not be sold to OPI’s customers. Cordle
also documented spilled soap and damaged film that could not be reused and he
testified that the resulting waste was costly.
{¶ 24} Sciaretta and Telsonics representatives returned on August 15-16, 2006;
however, the same equipment malfunctions remained unresolved after this visit.
Additionally, Sciaretta and Telsonics representatives had some difficulty in moving the
product from the “hoppers” through the packaging system. Although the contract
specified that an “agitator” would be installed to facilitate the product flow, the agitator
was not delivered with the machines and Sciaretta and Telsonics representatives
resorted to tapping on the hopper to maintain the flow of the product. The machines
continued to malfunction with regard to cutting and sealing the finished packages.
Case No. 2007-08899 -9- MAGISTRATE DECISION
{¶ 25} OPI’s employees expressed concerns that mechanical malfunctions also
presented safety hazards to the workers who were assigned to operate the machines.
Cordle testified that the cutting mechanism required frequent adjustments and that
Katz’s practice of manually separating the individual packages while the machine was
operating was dangerous. Cordle related that Xiao Feng Sheng had seriously injured
her finger making such adjustments. Tracy Congrove, a workshop specialist who
worked at the OPI facility, testified that Sciaretta fashioned a piece of cardboard to act
as a temporary chute to deflect packages onto the conveyor and that the device was
positioned such that it “bounced” and displaced adjacent electrical wires that were
connected to a heating element. (Defendant’s Exhibit ZZZ-1.) According to Congrove,
the cardboard chute created a safety hazard that could result in injury to inmate
workers.
{¶ 26} On October 19, 2006, Stevens notified APM that OPI was unable to
process APM’s request for final payment; that a staff meeting had been scheduled “to
review the performance of the equipment”; and that Stevens would then prepare a
report for his supervisors so that a “final decision” could be made “to reject or accept the
equipment.” (Plaintiff’s Exhibit 14.) Stevens testified that in early November 2006, he
told Sciaretta that OPI would not accept the machinery and that the matter had been
referred to OPI’s legal department. According to Stevens, OPI made some effort to
purchase parts for the machines, but OPI was unable to produce any product that was
suitable for sale. Stevens testified that he informed APM that the machines were
unacceptable and that he directed APM to remove the machines from OPI’s facility.
SALE OF GOODS
{¶ 27} APM asserts that it resolved any problems with the machines and that OPI
failed to pay the balance due under the contract after it had accepted the machinery.
APM further asserts that the contract involved primarily the sale of goods such that the
Case No. 2007-08899 - 10 - MAGISTRATE DECISION
transaction is governed by the Uniform Commercial Code (UCC) Article Two as codified
in R.C. 1302, et seq. OPI argues that the sales provisions of UCC Article Two and R.C.
Chapter 1302 are not applicable inasmuch as the contract involved “the design and
fabrication of goods and the use of field labor.”
{¶ 28} R.C. 1302.01 (A)(8) states, in part: “‘Goods’ means all things (including
specially manufactured goods) which are movable at the time of identification to the
contract for sale * * *.” “In general, ‘Ohio courts apply the predominant purpose test to
mixed contracts to determine whether the predominant purpose of the contract is for the
sale of goods.’” DeHoff v. Veterinary Hosp. Operations of Cent. Ohio, Inc., Franklin
App. No. 02AP-454, 2003-Ohio-3334, ¶73, quoting Ankle & Foot Care Centers v.
Infocure Systems, Inc. (N.D. Ohio 2001), 164 F.Supp. 2d 953. “[T]he issue is ‘whether
the predominant factor and purpose of the contract is the rendition of service, with
goods incidentally involved, or whether the contract is for the sale of goods with labor
incidentally involved.’” Allied Erecting & Dismantling Co. v. Auto Baling Co. (1990), 69
Ohio App.3d 502, 508, quoting Allied Indus. Serv. Corp. v. Kasle Iron & Metals (1977),
62 Ohio App.2d 144, 147.
{¶ 29} Sciaretta testified that he proposed suitable equipment for OPI’s project in
response to the specifications of the RFP. Although the RFP solicited bids for the
“design, construction, and installation” of the packaging machines, Sciaretta testified
that APM did not manufacture the processing machines and that he acted as a
representative for machinery manufacturers. According to the evidence, Sciaretta
arranged for the delivery and installation of the machines after the contract was
executed. The court finds that the predominant purpose of the contract was for the sale
of goods and that APM’s contractual obligation to deliver, install, and test the processing
machinery was incidental to the transaction. As such, the court concludes that the UCC
Article Two as codified in R.C. Chapter 1302 applies in the circumstances presented.
Case No. 2007-08899 - 11 - MAGISTRATE DECISION
ACCEPTANCE
{¶ 30} OPI contends that it allowed APM many opportunities to comply with the
terms of the contract and that it never accepted the machinery. Thus, the issue before
the court is whether APM delivered suitable goods such that OPI had a duty to accept
and pay in accordance with the contract. R.C. 1302.14.6 R.C. 1302.64(A) (UCC 2-606)
provides that:
{¶ 31} “Acceptance of goods occurs when the buyer:
{¶ 32} “(1) after a reasonable opportunity to inspect the goods signifies to the
seller that the goods are conforming or that he will take or retain them in spite of their
non-conformity; or
{¶ 33} “(2) fails to make an effective rejection as provided in division (A) of
section 1302.61 of the Revised Code, but such acceptance does not occur until the
buyer has had a reasonable opportunity to inspect them; or
{¶ 34} “(3) does any act inconsistent with the seller’s ownership; but if such act
is wrongful as against the seller it is an acceptance only if ratified by him.
{¶ 35} “(B) Acceptance of a part of any commercial unit is acceptance of that
entire unit.”
{¶ 36} APM asserts that OPI’s “acceptance” of the delivery of the machines and
its payment of 70 percent of the contract balance shows that OPI had accepted the
goods pursuant to R.C. 1302.64(A). However, “[a]cceptance of goods is only
tangentially related to possession and, normally, the buyer will have had possession of
the goods some time before he can accept them.” F. C. Mach. Tool & Design, Inc. v.
Custom Design Techs., Inc. (Dec. 27, 2001), Stark App. No. 2001CA00019; See R.C.
6
The court notes that the RFP provides that OPI had the right to terminate the purchase
agreement either with or without cause; cause being defined as “any time that the contractor fails to carry
out its provisions or make substantial progress toward improvement under the terms specified in [the
RFP] and resulting proposal. OPI shall provide the contractor with thirty (30) days’ written notice of
conditions endangering performance.” (Defendant’s Exhibit A, Page 5.) OPI complied with the notice
requirement through its numerous written communications with APM.
Case No. 2007-08899 - 12 - MAGISTRATE DECISION
1302.61(B)(2). Furthermore, “payment made after tender [pursuant to R.C.
1302.64(A)] is always one circumstance tending to signify acceptance of the goods but
in itself it can never be more than one circumstance and is not conclusive.” Comment 3
to R.C. 1302.64(A).
{¶ 37} As discussed above, the parties negotiated the payment terms and certain
“benchmarks” which were to occur before scheduled payments were due. According to
APM’s proposal that was submitted in response to the RFP, APM was entitled to a
payment equal to ten percent of the contract balance “upon completion of start-up and
system testing.” The payment however, was expressly conditioned upon “acceptance
by OPI.” (Plaintiff’s Exhibit 1.) Although the parties altered the amount that was due for
some of the payment benchmarks during the negotiations, the understanding that “OPI
acceptance” was “required” remained as a condition precedent before OPI was
obligated to pay another portion of the contract price “upon completion of start up and
system testing.” (Plaintiff’s Exhibit 8.)
{¶ 38} The evidence established that OPI made two partial payments according
to the terms of the contract, neither of which represented a payment upon completion of
start-up and system testing. On April 30, 2004, OPI made an initial payment in the
amount of $80,785 in response to APM’s April 16, 2004 invoice for 25 percent of the
contract amount that was due upon completion of engineering and approval of the
system drawings. (Defendant’s Exhibit GGG.) Although OPI took possession of the
original machines and APM began installation on January 19, 2005, OPI did not make
another payment until May 31, 2005, when it issued a warrant in the amount of
$145,413, representing 45 percent of the total amount of the contract. (Defendant’s
Exhibit HHH.) The remaining 30 percent of the contract price, $96,942, represented
payments due upon completion of mechanical and electrical installation, final start-up
system testing, and staff training and system manuals. (Plaintiff’s Exhibit 12.) APM
sent numerous communications to OPI seeking additional payment based upon
Case No. 2007-08899 - 13 - MAGISTRATE DECISION
Sciaretta’s representation that the processing machines met the performance criteria
specified in the contract; however, OPI’s employees repeatedly replied that the
machines were unacceptable with regard to both the production rate and the quality of
the finished product. Thus, OPI did not signify to APM that the goods were conforming.
Moreover, Stevens testified that it was OPI’s practice to issue a “receiving report” when
purchased items were accepted, that no equipment is accepted without such a report,
and that a receiving report was not issued for the processing machines. In addition to
OPI’s numerous communications stating that the processing system was unacceptable,
OPI’s refusal to pay the invoice that was submitted by APM for “completion of start-up
and system testing” shows that OPI effectively rejected the machines.
{¶ 39} R.C. 1302.60 provides in pertinent part:
{¶ 40} “[I]f the goods or the tender of delivery fail in any respect to conform to the
contract, the buyer may:
{¶ 41} “(A) reject the whole; or
{¶ 42} “(B) accept the whole; or
{¶ 43} “(C) accept any commercial unit or units and reject the rest.”
{¶ 44} The evidence established that the processing machines did not conform to
the contract specifications in several respects. Most notably, the machines were unable
to produce finished product either at the specified rate (60 to 80 packages per minute)
or for the duration of the specified production shift (between six and one-half and eight
hours, five days per week). The testimony also showed that the bulk processing
machine did not maintain an adequate product flow because it was not equipped with a
mechanical agitator or auger as required by the contract. Although APM contends that
the machines were capable of performing in accordance with the contract specifications,
the evidence clearly shows that even after Sciaretta had replaced the packaging
machines, neither he nor the manufacturer’s representatives were able to operate the
machines to achieve such performance. Accordingly, the court finds that the machines
Case No. 2007-08899 - 14 - MAGISTRATE DECISION
did not conform to the contract specifications and that OPI never accepted the
machines within the meaning of R.C. 1302.64(A), but instead rejected them as not
conforming to the contract.
{¶ 45} After OPI rejected the goods, APM had a “right to cure” pursuant to R.C.
1302.52 which states: “Cure by seller of improper tender or delivery; replacement
{¶ 46} “(A) Where any tender or delivery by the seller is rejected because non-
conforming and the time for performance has not yet expired, the seller may seasonably
notify the buyer of his intention to cure and may then within the contract time make a
conforming delivery.
{¶ 47} “(B) Where the buyer rejects a non-conforming tender which the seller
had reasonable ground to believe would be acceptable with or without money allowance
the seller may if he seasonably notifies the buyer, have a further reasonable time to
substitute a conforming tender.”
{¶ 48} The testimony and other evidence established that OPI provided APM with
timely notice of nonconformity and that APM was provided with a reasonable
opportunity to cure. As discussed above, OPI notified APM on many occasions that the
machines did not conform to the contract specifications and OPI allowed APM
numerous opportunities to cure, both by replacing the packaging machines and by
performing modifications and repairs of system components. Stevens orally notified
APM of OPI’s final decision to reject the goods for their nonconformance in November
2006. Ohio courts have held that oral notice of non-acceptance is adequate and that
such notice may be implied from conduct. Konicki v. Salvaco, Inc. (1984), 16 Ohio
App.3d 40, 43. Consequently, APM committed a breach of the contract and, pursuant
to R.C. 1302.60(A), OPI had the right to reject the goods in whole.
{¶ 49} R.C. 1302.61 sets forth “the manner and effect of rightful rejection” and
provides in part:
Case No. 2007-08899 - 15 - MAGISTRATE DECISION
{¶ 50} “(A) Rejection of goods must be within a reasonable time after their
delivery or tender. It is ineffective unless the buyer seasonably notifies the seller.
{¶ 51} “(B) * * *
{¶ 52} “(2) [I]f the buyer has before rejection taken physical possession of goods
* * * he is under a duty after rejection to hold them with reasonable care at the seller’s
disposition for a time sufficient to permit the seller to remove them; but
{¶ 53} “(3) the buyer has no further obligations with regard to goods rightfully
rejected.”
{¶ 54} As discussed above, OPI rejected the nonconforming goods in whole
within a reasonable time and Stevens testified that he directed APM to remove the
processing system from OPI’s facility. Stevens further testified that APM has not made
any attempt to remove the machines and that OPI still has possession of them.
UNJUST ENRICHMENT
{¶ 55} APM has also set forth a cause of action for unjust enrichment. However,
where damages are available for breach of a valid, enforceable contract, the equitable
remedy of unjust enrichment is not available to plaintiff. Aultman Hosp. Assn. v.
Community Mut. Ins. Co. (1989), 46 Ohio St.3d 51, 55.
DAMAGES
APM (Seller)
{¶ 56} Inasmuch as OPI did not accept the goods as conforming or commit a
breach of the contract, APM is not entitled to an award for either the balance of the
contract price or any incidental damages. See R.C. 1302.83, 1302.84.
OPI (Buyer)
Exclusion of Remedies
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{¶ 57} As an initial matter regarding OPI’s damages, the court notes that APM’s
proposal became a part of the contract and includes a provision for exclusion of
remedies which provides, in pertinent part, as follows: “The buyer agrees that except
where such limitations and exclusion are specifically prohibited by applicable law, the
BUYER’S SOLE AND EXCLUSIVE REMEDY AGAINST APM SHALL BE FOR THE
REPAIR OR REPLACEMENT OF DEFECTIVE PARTS AS PROVIDED IN SECTION 5
and 7, and that no other remedy (including but not limited to incidental, special, indirect,
or consequential damages for lost profits, lost sales, injury to persons or property, or
any other loss) shall be available to him, whether the remedy is based upon direct
action, suit for contribution or indemnity, or otherwise, whether arising out of contract,
tort, product liability, strict liability in tort, or otherwise. This exclusive remedy shall not
be deemed to have failed of its essential purpose as long as APM is willing and able to
repair or replace defective parts in the prescribed manner.” (Emphasis added.)
{¶ 58} R.C. 1302.93 provides, in pertinent part:
{¶ 59} “(A) Subject to the provisions of divisions (B) and (C) of this section * * *:
{¶ 60} “(1) the agreement * * * may limit or alter the measure of damages
recoverable * * * as by limiting the buyer’s remedies * * * to repair and replacement of
nonconforming goods or parts.
{¶ 61} “(2) Resort to a remedy as provided is optional unless the remedy is
expressly agreed to be exclusive, in which case it is the sole remedy.
{¶ 62} “(B) Where circumstances cause an exclusive or limited remedy to fail of
its essential purpose, remedy may be had as provided in Chapters 1301., 1302., 1303.,
1304., 1305., 1306., 1307., 1308., and 1309. of the Revised Code.
{¶ 63} “(C) Consequential damages may be limited or excluded unless the
limitation or exclusion is unconscionable. Limitation of consequential damages for injury
to the person in the case of consumer goods is prima facie unconscionable but
limitation of damages where the loss is commercial is not.” (Emphasis added.)
Case No. 2007-08899 - 17 - MAGISTRATE DECISION
{¶ 64} OPI has the burden of proving that APM’s failure to repair the processing
machines within a reasonable time caused the exclusive remedy to fail of its essential
purpose. “‘The determination of whether a warranty has failed to fulfill its essential
purpose is ordinarily a question of fact for the [trier of fact].’” Sutphen Towers, Inc. v.
PPG Indus., Inc., Franklin App. No. 05AP-109, 2005-Ohio-6207, ¶54, quoting Chemtrol
Adhesives, Inc. v. American Mfrs. Mut. Ins. Co. (1989), 42 Ohio St.3d 40, 56.
{¶ 65} “‘The purpose of an exclusive remedy of replacement or repair of defective
parts, whose presence constitute a breach of an express warranty, is to give the seller
an opportunity to make the goods conforming while limiting the risks to which he is
subject by excluding direct and consequential damages that might otherwise arise.
From the point of the view of the buyer the purpose of the exclusive remedy is to give
him goods that conform to the contract within a reasonable time after a defective part is
discovered. When the warrantor fails to correct the defect as promised within a
reasonable time he is liable for a breach of that warranty. * * * The limited, exclusive
remedy fails of its purpose and is thus avoided under Sec. 2-719(2) [R.C. 1302.93],
whenever the warrantor fails to correct the defect within a reasonable time.’” Slagle
Farms, Inc. v. Int’l Harvester Co. (May 10, 1979), Crawford App. No. 3-79-2, quoting
Beal v. General Motors Corp. (1973), 354 F.Supp. 423, 426.
{¶ 66} As discussed above, OPI allowed APM numerous opportunities both to
repair and to replace malfunctioning components in the processing system. After
substantial delays in delivering and installing the system, OPI advised APM of specific
problems with the production capacity of the machines and the quality of the finished
product. After many attempts to make repairs, APM essentially abandoned its work and
attempted to instruct OPI employees to reassemble the packaging machinery. The
court finds that the exclusive remedy of replacement or repair of defective parts under
the purchase agreement failed of its essential purpose in that APM did not correct the
defects in the machines within a reasonable time after such defects were discovered
Case No. 2007-08899 - 18 - MAGISTRATE DECISION
and brought to its attention. Accordingly, pursuant to R.C. 1302.93(B), the limited,
exclusive remedy was avoided and OPI is entitled to recover damages as provided in
Chapter 1302.
CONTRACT PAYMENTS
{¶ 67} In its counterclaim OPI seeks damages representing the amount of the
payments that were made to APM.
{¶ 68} Both R.C. 1302.85 and 1302.86 provide a buyer who has rightfully
rejected goods with certain remedies. Specifically, R.C. 1302.85, states, in pertinent
part:
{¶ 69} “(A) Where the seller fails to make delivery or repudiates or the buyer
rightfully rejects or justifiably revokes acceptance then with respect to any goods
involved, and with respect to the whole if the breach goes to the whole contract, as
provided in section 1302.70 of the Revised Code, the buyer may cancel and whether or
not he has done so may in addition to recovering so much of the price as has been
paid:
{¶ 70} “(1) ‘cover’ and have damages under section 1302.86 of the Revised
Code as to all the goods affected whether or not they have been identified to the
contract * * *
{¶ 71} “* * *
{¶ 72} “(C) On rightful rejection or justifiable revocation of acceptance a buyer
has a security interest in goods in his possession or control for any payments made on
their price and any expenses reasonably incurred in their inspection, receipt,
transportation, care, and custody and may hold such goods and resell them in like
manner as an aggrieved seller as provided in section 1302.80 of the Revised Code.”
{¶ 73} As concluded above, OPI rightfully rejected the machinery after paying 70
percent of the contract price, $226,198. Pursuant to R.C. 1302.85(A), OPI is entitled to
Case No. 2007-08899 - 19 - MAGISTRATE DECISION
cancel the contract and recover the partial payment of the purchase price. Inasmuch as
OPI still has rightful possession of the machines, it has a security interest in the goods
for the partial payment made on the purchase price. R.C. 1302.85(C). However, when
reimbursed for that partial payment, APM may remove the machines from OPI’s facility.
REPLACEMENT COSTS
{¶ 74} With regard to the packaging machines, pursuant to R.C. 1302.86, OPI
had the right to procure substitute goods, or cover.
{¶ 75} R.C. 1302.86 states:
{¶ 76} “(A) After a breach within the preceding section, 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.
{¶ 77} “* * *
{¶ 78} “(C) Failure of the buyer to effect cover within this section does not bar
him from any other remedy.”
{¶ 79} OPI did not cover by purchasing substitute goods; however, OPI asserts
that it is entitled to recover the cost of replacing the malfunctioning packaging machines
as damages. In support of its counterclaim, OPI presented two price quotes from John
R. Wald Company, Inc., in the amounts of $270,000 and $409,000, for the delivery and
installation of packaging machines which OPI contends are comparable to the
packaging machines that were provided by APM. (Defendant’s Exhibits CCCC and
DDDD.) Starkey testified that the quotes were submitted in response to OPI’s proposal
for replacement packaging machines which could be adapted to the processing system
that APM had installed.
{¶ 80} The official comment to R.C. 1302.86 (UCC 2-712) “expresses the policy
that cover is not a mandatory remedy for the buyer. The buyer is always free to choose
between cover and damages for non-delivery under the next section.” OPI is entitled
Case No. 2007-08899 - 20 - MAGISTRATE DECISION
either to damages for non-delivery of conforming goods or to cover, but not both
remedies. See R.C. 1302.87 and Official Comment 5 thereto. Inasmuch as OPI chose
not to purchase substitute goods, it is entitled only to damages for non-delivery.
{¶ 81} Pursuant to R.C. 1302.87, “the measure of damages for non-delivery * * *
by the seller is the difference between the market price at the time when the buyer
learned of the breach and the contract price together with any incidental and
consequential damages.” However, “[t]he injured party cannot recover damages for
breach of contract beyond the amount that is established by the evidence with
reasonable certainty, and generally courts have required greater certainty in the proof of
damages for breach of contract than for a tort.” Kinetico, Inc. v. Independent Ohio Nail
Co. (1984), 19 Ohio App.3d 26, 30, citing Restatement of the Law 2d, Contracts (1981)
144, Section 352.
{¶ 82} APM contends that the estimates obtained by OPI do not represent the
market price for a replacement packaging machine. Sciaretta testified that the cost of
the packaging machine represented only $32,000, approximately ten percent of the total
cost of the processing system. The court notes that lowest quote obtained by OPI
represents over 80 percent of the of the contract price for the entire system.
Furthermore, the quotes contain a notation which explains that the quotes are intended
“for budget purposes only, not a firm fixed quote.” Moreover, as stated above, OPI
rejected the nonconforming goods in whole and the quotes obtained by OPI were not
sufficient to establish damages for non-delivery in that they pertain only to the
packaging machines and do not reflect a market price for the entire processing system.
Based upon the evidence, the court finds that OPI has failed to prove with reasonable
certainty that the market value of the machinery is different from the contract price and,
consequently, it has failed to prove that there is any “difference between the market
price for the machines at the time when it learned of the breach and the contract price.”
Case No. 2007-08899 - 21 - MAGISTRATE DECISION
INCIDENTAL AND CONSEQUENTIAL DAMAGES
{¶ 83} R.C. 1302.86(B) provides that “[t]he buyer may recover from the seller as
damages the difference between the cost of cover and the contract price together with
any incidental or consequential damages as defined in section 1302.89 of the Revised
Code, but less expenses saved in consequence of the seller’s breach.”
{¶ 84} R.C. 1302.89 defines the consequential and incidental damages that are
recoverable as follows:
{¶ 85} “(A) Incidental damages resulting from the seller’s breach include
expenses reasonably incurred in inspection, receipt, transportation, and care and
custody of goods rightfully rejected, any commercially reasonable charges, expenses,
or commissions in connection with effecting cover and any other reasonable expense
incident to the delay or other breach.
{¶ 86} “(B) Consequential damages resulting from the seller’s breach include:
{¶ 87} “(1) any loss resulting from general or particular requirements and needs
of which the seller at the time of contracting had reason to know and which could not
reasonably be prevented by cover or otherwise * * *.”
{¶ 88} OPI seeks damages for overtime costs and lost profits associated with
APM’s failure to meet its contractual obligations.
{¶ 89} OPI presented Starkey’s testimony in order to establish incidental
damages regarding weekend overtime wages that were paid to employees during
APM’s attempts to repair the machines. However, Starkey testified that he did not know
“the exact figures” for the overtime costs and neither Starkey nor any other witness
testified regarding wage and time data which would allow the court to compute such
costs with reasonable certainty. Accordingly, OPI cannot prevail on its claim for
damages for overtime costs.
{¶ 90} With regard to damages for consequential damages or lost profits in a
breach of contract action, OPI must prove: “(1) profits were within the contemplation of
Case No. 2007-08899 - 22 - MAGISTRATE DECISION
the parties at the time the contract was made, (2)the loss of profits is the probable result
of the breach of the contract, and (3) the profits are not remote and speculative and may
be shown with reasonable certainty.” Combs Trucking, Inc. v. Internat’l. Harvester Co.
(1984), 12 Ohio St.3d 241, paragraph two of its syllabus. The requirement that
damages for breach of contract must be proved with reasonable certainty “is especially
rigid in cases where lost profits are sought; the plaintiff must substantiate any lost profit
figure by calculations based on facts. A mere assertion that he would have made a
particular amount in profits is not sufficient.” Sharp v. Clark (May 20, 1992), Darke App.
No. 1285, citing Battista v. Lebanon Trotting Ass’n (1976), 538 F.2d 111, 119; Gahanna
v. Eastgate Properties, Inc. (1988), 36 Ohio St.3d 65, 68.
{¶ 91} OPI’s claim for lost profits is problematic in that it presented no basis to
establish such damages other than Starkey’s testimony regarding the “average”
revenue that was generated using the old processing system and his estimate that OPI
could have “at least doubled” revenues had the new system functioned as expected.
Thus, OPI did not present sufficient information from which the court can calculate
damages for lost profits. Furthermore, Starkey’s estimate was apparently based upon
the assumption that OPI would have had a ready market for the planned increase in
production. Consequently, the court finds that OPI has failed to show with sufficient
certainty not only the amount of damages for lost profits, but also the fact that such
damages existed.
{¶ 92} Based upon the foregoing, the court finds that OPI is entitled to damages
in the amount of $226,198 on its counterclaim for recovery of the partial payment of the
contract price. Accordingly, judgment is recommended in favor of defendant/counter
plaintiff in the amount of $226,198.
A party may file written objections to the magistrate’s decision within 14 days of
the filing of the decision, whether or not the court has adopted the decision during that
14-day period as permitted by Civ.R. 53(D)(4)(e)(i). If any party timely files objections,
Case No. 2007-08899 - 23 - MAGISTRATE DECISION
any other party may also file objections not later than ten days after the first objections
are filed. A party shall not assign as error on appeal the court’s adoption of any factual
finding or legal conclusion, whether or not specifically designated as a finding of fact or
conclusion of law under Civ.R. 53(D)(3)(a)(ii), unless the party timely and specifically
objects to that factual finding or legal conclusion within 14 days of the filing of the
decision, as required by Civ.R. 53(D)(3)(b).
_____________________________________
ANDERSON M. RENICK
Magistrate
cc:
Christopher P. Conomy Linda R. Van Tine
Assistant Attorney General 1410 Central Avenue
150 East Gay Street, 18th Floor Sandusky, Ohio 44870
Columbus, Ohio 43215-3130
Mark A. Stuckey
607 Bimini Drive
Sandusky, Ohio 44870
AMR/cmd
Filed November 30, 2010
To S.C. reporter January 4, 2011