Opinion
No. CV05-4007636S
November 19, 2008
MEMORANDUM OF DECISION
A court trial was held on this matter in August 2007. The operative complaint is dated July 25, 2007. This amended complaint in the first count claims that the plaintiff Leshine Carton Company on August 29, 2002 entered into a written contract with Matik to buy a so-called Folder Gluer for $340,000. Paragraph 4 claims that in the contract "expressly warranted" this item would have a production speed of 15,000 units per hour. Paragraph 5 states the plaintiff relied on Matik's representations and the warranty regarding the machine's capabilities. It should be noted that the "units" referred to were cardboard beverage cartons used to package beer bottles. The machine was delivered to Leshine's North Branford business, was installed, and the full purchase price was paid.
Paragraph 7 states Leshine operated the machine in a proper way pursuant to Matik's instructions and its business requirements. It was discovered during operation of the machine that in breach of warranty the Folder Gluer had a production speed of 7,200 units per hour.
Paragraph 8 states Leshine notified Matik of this defect but despite many attempts to do so, Matik was unable "to fix, cure, or remedy" the defect. The defendant has stopped its efforts to fix the machine and admitted it "cannot correct/locate the problem." Paragraph 9. Paragraph 10 alleges that because of the foregoing "the defendant has breached the express warranty contained in the contract" causing Leshine damages.
The second count relies on the allegations of the first count and adds that Matik is in the business of selling and/or distributing machines and it specifically represented the Folder Gluer would produce 15,000 units per hour, was confident it would do so, and when repaired it would do so. Paragraph 13 states Leshine relied on those representations and bypassed chances to purchase other machinery.
All of this constituted unfair and deceptive acts or practices in the conduct of trade or commerce in violation of § 42-110a et seq. of the General Statutes — CUTPA. Therefore it is alleged Leshine suffered an ascertainable loss of $290,000.
Count three alleges that the value of this machine to the plaintiff was substantially impaired by its reduced production speed. Paragraph 11 states that after Matik stopped its efforts to repair the machine it wrote Matik that it was "revoking its conditional acceptance" of the Folder Gluer and demanded the defendant to remove same from plaintiff's factory and refund plaintiff's purchase price. Matik refused the demands and Leshine claims Matik's actions caused it damages.
The defendant Matik then filed an answer denying many of the allegations, leaving the plaintiff to its proof on some, and admitting others. Thirteen special defenses were filed. A counterclaim was also filed which was withdrawn during the trial.
I.
The court will first discuss two preliminary matters not going directly to the merits of the claims being made.
Standing
The defendant claims that the plaintiff lacks standing. As said in St. George v. Gordon, 264 Conn. 538, 544 (2003): "The issue of standing implicates subject matter jurisdiction and is therefore a basis for a motion to dismiss." Lack of subject matter jurisdiction can be raised at any time during the litigation, even on appeal and even sua sponte by a trial or appellate court. This is true because if there is no standing and thus subject matter jurisdiction, the court has no authority to hear and determine the case.
The defendant's argument is straightforward and relies on several documents.
In June 2002 the Bank, having loaned money to Leshine, the parties entered into a security agreement. In the agreement Leshine assigned, transferred, and granted to the Bank a continuing security interest in "all properties, assets, and rights of the debtor (i.e. Leshine) now owned or at any time hereafter acquired by Leshine . . ." (This was collectively called collateral) and collateral according to Section 1(a) says "without limitation of the foregoing included, among many other things "all contracts," "all commercial tort claims." Section 3 defines "commercial tort claims" and adopts the definition in Article 9 of the UCC (Uniform Commercial Code) including without limitation those more specifically described in a schedule 3(g) which does not appear to have been introduced into evidence.
The defendant then notes that in a September 2004 agreement titled rather lengthily:
Voluntary Surrender of Collateral; Authorization to Enter Premises to take Possession of and Remove Collateral; Authorization to Occupy Premises and Liquidate Collateral by Public or Private Sale(s) on the Premises; Waiver of Notice Regarding Disposition of Collateral
This "agreement" was entered into because of Leshine's default on the note evidencing the loan. It states that Leshine in June 2002 executed and delivered the previously mentioned security agreement "which grants to the Bank a security interest in the collateral described therein, then owned or afterward acquired." These statements are in the recital. The "agreement" section in Paragraph 1 speaks of the voluntary surrender of collateral and obviously is directed at the surrender of tangible items. Paragraph 2 authorizes the Bank to demand payment of accounts from account debtors or to demand payment of "payment intangibles" from obligors or to otherwise exercise rights against account debtors or payment obligors or other parties obligated on collateral. Until a "termination date" of November 1, 2004 the Bank was to act as the agent of the Bank to collect debts. If Leshine failed to account to the Bank for proceeds from accounts, the Bank was to undertake the collection of accounts. For the definition of "accounts" the "voluntary agreement" refers to the earlier security agreement which for the definition of "accounts" refers to Article 9 of the UCC. Section 42a-9-102 defines account as "a right of payment of a monetary obligation" generally for property or services rendered.
The defendant's argument is that the September 2004 "voluntary agreement" transferred all collateral mentioned in the June 2002 Security Agreement which included "all contract rights and other legal claims of the plaintiff" to the Bank. But in February 2005 Leshine brought suit on causes of action that were part of the collateral transferred to the Bank. However, as a result of the September 2004 agreement the contract or other legal claims asserted by Leshine in the 2005 suit "did not again become the property of Leshine (and then only partially) until August 13, 2007, the day before trial, when Exhibit 47 was executed." This exhibit is executed by a bank official and titled an "agreement" and states the Bank agrees that, to the extent it had or has any right to assert claims against Matik, N.A. for breach of contract, breach of warranty, or unfair trade practices regarding the sale of a certain Vesta Folder/Gluer machine to Leshine pursuant to a contract dated August 23, 2002, (the Bank) hereby assigns said rights to Leshine."
The document goes on to say nothing therein shall be taken to alter prior agreements between the Bank and Leshine concerning the distribution of proceeds from this current lawsuit.
Thus all of this establishes, according to the defendant, that from September 2004 (voluntary agreement) to August 13, 2007 Leshine had no interest in subject matter of this case, all of its rights had been transferred to the Bank. Bouchard v. People's Bank, 219 Conn. 465, 473 (1991), says "Succession by an assignee to exclusive ownership of all or part of the assignor's rights respecting the subject matter of the assignment and a corresponding extinguishment of those rights in the assignor is precisely the effect of a valid assignment." Thus Leshine had no right to commence this action when it was brought. The Bank could have brought it in its name or in Leshine's name but Leshine brought the action, not the Bank. Exhibit 47, referred to previously, proves both these assertions. The final lynchpin in the defendant's argument is the assertion that "where a plaintiff lacks standing to commence an action, it cannot subsequently (acquire) standing to correct that deficiency." America's Wholesale Lender v. Silberstein, 87 Conn.App. 485, 489 (2005), is cited for the general proposition that since Leshine "had no standing to bring an action, no action in this case ever was commenced, as it was void ab initio." Id. In that case an assignee of a note commenced an action in a trade name, but "a trade name is not an entity with the capacity to sue," said the court.
The court has difficulties with the defendant's argument especially in light of our court's admonition that "in determining whether a court has jurisdiction, every presumption favoring jurisdiction should be indulged," Fedus v. Planning and Zoning Commission, 278 Conn. 751, 778-79 (2006); Amodio v. Amodio, 274 Conn. 724, 728 (1999). The Security Agreement, the so-called Voluntary Surrender of Collateral Agreement, and August 13, 2007 agreement purporting to assigning claims to Leshine must be examined closely.
It can certainly be argued that the June 2002 Security Agreement gave the Bank a security interest as to contracts and claims arising therefrom and as to commercial torts which among several other things were defined as "collateral." The agreement assigned a security interest in the collateral. But under 4(m) of the agreement "the debtor (Leshine) shall continue to be the sole owner of the collateral" and clear of all liens except those given to the Bank by the agreement itself. Section 4(p) states that "each contract is in full force and effect and constitutes a valid and legally enforceable obligation of the parties thereto." Leshine and Matik were parties to a contract. The Bank was not and only has a security interest under the agreement, Section 5(f) says "Promptly advise secured party (i.e. the Bank) of the commencement or threat of litigation." This was directed, of course, at Leshine.
A security agreement does not deprive the owner or party in possession of the security from using the secured interest or advancing any claims it has garnered as a result of having acquired the secured property or intangible. The security agreement itself recognizes this common sense observation in Section 5(f) of the security agreement. That document would not have affected Leshine's right to commence this litigation.
The critical document is the "Voluntary Surrender of Collateral" agreement of September 4, 2004 which the defendant asserts transferred the collateral mentioned in the Security Agreement to the Bank. Leshine therefore had no enforceable interest in any of this collateral as defined in the Security Agreement which included contract and commercial tort claims from September 4, 2002 until the purported August 13, 2007 agreement which assigns any rights it had to commence action against Matik to Leshine.
The September 2004 Voluntary Surrender of Collateral Agreement, however, when it gets down to specifics, only appears to assign a portion of the "collateral" mentioned in the Security Agreement to the Bank. The actual "Agreement" portion of the September 2004 Agreement in Paragraph 1 as already noted, speaks only of "voluntary surrender" of what are obviously physical tangible assets — contract and commercial tort claims are not to be found on the premises of the Leshine operation, the Bank is authorized to enter the premises to move this "collateral" — the collateral can be liquidated by a public or private sale; that is hardly true of contract or commercial tort claims. Paragraph 2 talks of "accounts" and as previously discussed, the UCC definition of accounts which is referred to in the Security Agreement cannot conceivably be characterized as contract claims or commercial tort claims.
In fact, Paragraph 5 of the September 2004 agreement says it shall take effect on September 17, 2004 "at which time the Borrower shall physically surrender the collateral and grant use and occupancy of the Borrower's (Leshine's) business premises to the Bank . . ." That has meaning if physical objects such as machinery and company records listing account receivable etc. are what is involved but how does one "physically surrender" commercial tort and contract claims — one does not and that is why assignment of this type of collateral is not contemplated by the September 2004 agreement.
The August 13, 2007 agreement in light of all this is an "excess of caution" document that cannot be used, at least in the court's opinion, to explain away the obvious interpretations of the two earlier documents. Its language itself says "to the extent it had or has any right to assert claims against Matik" . . . it assigns them to Leshine. Odd language for an entity which earlier had unequivocally and exclusively been assigned the right to assert the breach of contract, warranty, and unfair practices claims against Matik.
Perhaps even more to the point, the last sentence reads "Nothing herein shall alter any prior agreements between UPS (the Bank) and Leshine concerning distribution of proceeds, if any, from the lawsuit entitled Leshine Packaging, Inc. vs. Matik, N.A., CV05-4007636S and pending in New Haven Superior Court."
This indicates the Bank recognized Leshine's right to initiate litigation in this case in 2005 which would indicate it did not recognize any prior agreement between the parties gave this exclusive right to the Bank. Or to put it another way, even if the agreements could be read to assign the claims in question to the Bank and the court's analysis of the "Voluntary Surrender of Collateral" agreement of September 2004 is incorrect, the Bank would have appeared to have ratified Leshine's commencement of litigation and the latter became the Bank's agent to do so — why not? — it had the protection of the security agreement as to any proceeds from litigation. And why on earth would a commercial bank, under the circumstances existing here, be anxious to prosecute on its own the claim of a manufacturing business?
Ratification seems to be a broad enough concept to support what in effect appears to be commercial common sense. In Community Collaborative of Bridgeport v. Ganim, 241 Conn. 546, 561 (1997), the court said that: "As a general rule, ratification is defined as the affirmance by a person of a prior act which did not bind him (sic) but which was done or professedly done on his (sic) account . . . Ratification requires acceptance of the results of the act with intent to ratify and with full knowledge of all the material circumstances."
In the section on Ratification in the article on Agency in 3 Am.Jur.2d at § 184 at page 576, it goes as far as to say:
One may ratify the acts of another purporting to be made on his or her behalf whether that other is an agent exceeding his or her authority, or no agent at all. However, in order that an act or contract may be the subject of ratification there must be some relationship, actual or assumed, of principal and agent. Accordingly, in order that an act or contract may be the subject of ratification, the one who performed the act or entered into the contract must have, at that time, professed, represented, purported, assumed, or undertaken to be acting as agent for, or on behalf of, the one subsequently ratifying the act or contract.
In any event, the court does not accept the defendant's standing argument.
STATUTE OF LIMITATIONS
The defendant claims that the plaintiff's claim of revocation of acceptance was not added to the complaint until the amended complaint of July 2007. This is outside the UCC limitation period of four years set forth in § 42a-2-725(1).
The argument is that the amendment was not asserted until more than four years after the Vesta's delivery and the amendment will not relate back — this only occurs when new allegations do not change the cause of action and a "new cause of action will not relate back . . . where the new claim depends on different facts."
The plaintiff argues that the relation back doctrine applies to save its third count from a statute of limitations defense. In 1980 our Supreme Court decided that case of Giglio v. CL P, 180 Conn. 230, 239, which dealt with the relation back of amendments to complaints. It quoted from an earlier case to the effect that "amendments relate back to the date of the complaint unless they allege a new cause of action." The court then said that "this doctrine is akin to rule 15 of the Federal Rules of Civil Procedure." In deciding the case before it the court then proceeded to cite a federal district court case and quote from Wright Law of Federal Courts (2d ed. 1970) which discussed the concept behind Rule 15c. Our appellate courts continue to refer to Giglio and Rule 15c as being akin to our relation back doctrine. Franc v. Bethel Holding Co., 73 Conn.App. 114, 136 (2002), see Sharp v. Mitchell, 209 Conn. 59, 72 (1988). Sharp also repeats the rubric that the key to the application of the doctrine is whether a new cause of action is being asserted. But then there is the broader language of a case like Barrett v. Danbury Hospital, 232 Conn. 242, 264 (1995), that is really "akin" to the federal courts' application of Rule 15c where the court says "our relation back doctrine provides that an amendment relates back when the original complaint has given the party fair notice that a claim is being asserted stemming from a particular transaction or occurrence . . ." But this is preceded by Barrett's quote from an earlier case to the effect that "it is proper to expand what has already been alleged in support of a cause of action provided the identity of the cause of action remains substantially the same." Id. 232 Conn. at page 264. The court finds difficulty in ascertaining the precise meaning of the underlined language especially when it is juxtaposed to the earlier "fair notice" language in Barrett.
Rule 15c and the application of the relation back doctrine in the federal courts is fully discussed in Federal Practice and Procedure, Wright, Miller, Kane, § 1497 at pages 70 to 103. Wright at pages 94-95 states that:
. . . the federal rules represent a shift away from the rigidified notions of "forms" and "causes of action" to more functional concepts phrased in terms of the underlying conduct, transaction, or occurrence that provides the background of the dispute.
He goes on to say that:
The fact that an amendment changes the legal theory on which the action initially was brought is of no consequence if the factual situation upon which the action depends remains the same and has been brought to defendant's attention by the original pleading.
In Jackson v. Airways Parking Co., 297 F.Sup. 1366, 1382 (D.C. Ga. 1909), the court said that:
The point of Rule 15c is that it is fair to have an amended complaint relate back if the initial complaint put the defendant on notice that a certain range of matters was in controversy and that the amended complaint falls within that range . . . notice not mechanical notions of cause of action for res judicata purposes is the key.
As an early case said, which Wright says reflects the liberal policy behind Rule 15c:
Limitation is suspended by the filing of a suit because the suit warns the defendant to collect and preserve his (sic) evidence in reference to it. When a suit is filed in a federal court under the Rules, the defendant knows that the whole transaction described in it will be fully sifted, by amendment if need be, and that the form of the action or the relief prayed or the law relied on will not be confined to their first statement . . .
Barthel v. Stanim, 145 F.2d 487, 491 (CA5, 1944).
If we examine count three which asserts the revocation claim, it incorporates the factual allegations of the first nine paragraphs of count one. Paragraph 10 alleges the value of Vesta to Leshine was impaired by its impaired production speed. This is not some new factual allegation outside of what the defendant could be expected to be aware of from the very act of filing the initial litigation. Paragraphs 11 and 12 reference notices to Matik from Leshine and alleged failure to act on those notices.
Wright discussing another aspect of fair notice and at pages 91-92 says in this regard:
It has been suggested that the requisite notice must be given by the content of the original pleadings. Other cases have taken a broader view and have held that it is sufficient if the opposing party was made aware of the matters to be raised by the amendment from sources other than the pleadings, a position that seems sound since it is unwise to place undue emphasis on the particular way in which notice is received.
Some of the matters required to be proved in a revocation of acceptance claim may not be relevant to a breach of warranty claim but they are part of the transaction or occurrence which forms the basis of this suit.
There is no claim here as in Sharp v. Mitchell, supra, or Patterson v. Szabo Food Services, 14 Conn.App. 178 (1988), that litigation of the revocation count would require the defendant to ferret out new witnesses or even conduct further discovery to fairly be able to contest the count's allegations.
But it is true that the measure of damages in a breach of warranty and a revocation claim are different. There are no Connecticut cases addressing this factor in deciding whether relation back should be allowed. But federal case law does not appear to find a problem with relation back when for example the claim for damages is increased or the form of relief requested is different from that originally claimed, Seifert v. Solem, 387 F.2d 925 (CA 7, 1967); Wirtz v. Atkins, 247 F.Sup. 503 (D.Va., 1965), see Wright at pp. 83-84, fn.12 and 13. The damages available in a revocable claim, if it were to be proven, can be ascertained by the evidence introduced.
In any event the court concludes the relation back doctrine should apply.
In the interest of clarity the court specifically does not base its ruling on an application of the continuing course of conduct doctrine which has been held to toll the statute of limitations. Speaking of the doctrine as it applies to § 52-577, the court said in Fichera v. Mine Hill Corp., 207 Conn. 204, 210 (1988): "Where we have upheld a finding that a duty continued to exist after the cessation of the act or omission relied upon, there has been evidence of either a special relationship between the parties giving rise to such a continuing duty or some later wrongful conduct of a defendant related to the prior act." In Witt v. St. Vincent's Medical Center, 252 Conn. 363, 370 (2000), the court enunciated a three-prong test to determine whether the doctrine applies: 1) commission of an initial wrong upon the plaintiff; 2) owed a continuing duty to the plaintiff that was related to the original wrong; and 3) continually breached the duty.
There is no "special relationship" here of the type relied upon for this doctrine; there was a mere contractual relationship, see Partitions, Inc. v. Blumberg Assoc., 2001 Ct.Sup. 1411 (Beach, J.). Also the court has difficulty with the third prong of the Witt test which is related to the latter portion of the Fichera test just quoted. The alleged wrong here was the sale of a machine to Leshine that did not operate at the allegedly-represented speed. True Matik tried to increase the machine's speed but how was that latter conduct wrongful or in what meaningful sense could it be said that Matik "continually" breached some duty? The duty measured took place ab initio when a machine that did not operate at the represented speed.
But for the reasons stated, the court will not dismiss the third count.
* * * * * * *
The court will now try to discuss the claims made by the plaintiff against Matik. The first claim lies in an alleged breach of an express warranty relying on an interpretation of the requirements of a section of the Uniform Commercial Code adopted in our statutory law at § 42a-2-213 of the General Statutes.
The second claim lies under § 42a-2-608 which provides that a buyer, here Leshine, may revoke acceptance of a "commercial unit" under certain circumstances and the consequences of such a revocation.
The final claim is made under the Connecticut Unfair Trade Practices Act.
Breach of Warranty (a)
The relevant portion of § 42a-2-313 which is the basis of the claim is set forth in subsection (1)(a) where it says:
(1) Express warranties by the seller are created as follows (a) any affirmation of fact or promise made by the seller to the buyer which relates to the goods and becomes part of the basis of the bargain creates an express warranty that the goods shall conform to the affirmation or promise.
The commentary to this subsection, which is appended to the statute says:
The present section deals with affirmations of fact by the seller . . . exactly as any other part of a negotiation which ends in a contract is dealt with. No specific intention to make a warranty is necessary if any of these factors is made part of the basis of the bargain. In actual practice affirmations of fact by the seller about the goods during a bargain are regarded as part of the description of those goods; hence no particular reliance on such statements need be shown in order to weave them into the fabric of the agreement. Rather, any fact which is to take such affirmations, once made, out of the agreement requires clear affirmative proof. The issue normally is one of fact.
The problem with the statutory language as White and Summers point out in Uniform Commercial Code, 4th ed. Vol. 1 at § 9-5, pp. 491 and which led to some of the evidentiary sparring in this case is what on earth does "basis of the bargain" mean? They argue that Comment 3 "arguably means that any affirmation is presumed to be part of the basis of the bargain and that the plaintiff need put in no evidence unless the defendant offers evidence of the buyer's non-reliance . . ." § 9-5 at page 493. The authors' chief concern appears to be not to transform the "basis of the bargain test" into some notion that the alleged warranty is "basic" to the bargain; the "buyer is entitled to legal protection for compliance of the goods with all of sellers' promises and representations on which buyer relies, even though some of may be of relatively small import." Id., p. 492.
In this case there is little need to get involved with extensive scholastic discussion about the meaning of "basis of the bargain." When two commercially sophisticated parties are involved in contract formation and because of their experience in a particular industry know of the performance requirements that might be demanded of a particular machine such as the Vesta folder/gluer, which was the subject of this transaction, whether a particular affirmation as to the machine by the seller falls within the "basis of the bargain" language of § 2-313 is a less complicated question as will be discussed.
Another problem involving interpretation of the language of the statute is whether a statement of a seller is an "affirmation" and thus creates an express warranty or is it mere "puffing." The plaintiff buyer bears the burden of proving an express warranty exists which is as question of fact, Superior Wire Paper Products v. Talcott Tool Machine, Inc., 184 Conn. 10, 17 (1981). Factors the courts consider in determining whether mere puffing is involved is the specificity of the representation and whether it was in writing. Vezina v. Nautilus Pools, 27 Conn.App. 810, 816 (1981).
Was an express warranty created here and where do we look to determine if that was done?
(ii)
Under early case law "to sustain a finding that there was a breach of a warranty, express or implied, there must have been evidence of a contract between the parties, for without a contract there could be no warranty." Welshausen v. Parker Co., 83 Conn. 231, 233 (1910). The U.C.C. did not change this general rule except that it extends warranty law beyond contracts for sale. Here the breach of warranty claim rests on the contract between the parties for the sale of the Vesta, a folder/gluer machine dated August 23, 2002. Leshine produced beverage containers, cartons, for beer manufacturers. Matik is a distributor of such machines; the manufacturer was a company named Intramik. The contract was drawn upon printed form by Matik.
The second paragraph of the document defines the Vesta and its prospective operation in the following way:
One (1) high speed, high productive folder-gluer including all items necessary to fold and glue beverage containers as per samples to be submitted by customer. Maximum width of open blanks: 3.12", production speed: 15000 units/hour.
The written contract language unqualifiedly affirms the production speed will be 15000 units per hour; there is no limiting language such as "up to" 15000 units, or even "maximum production speed" up to 15000 units per hour. The "per samples" phrase does not qualify the affirmation and only the generic wording "beverage container" is used without further description as to size, thickness, weight, surface treatment, etc.
The rest of the contract language does not purport to disclaim this express warranty even if that were to be permissible under the Code, see section 4 of commentary. However, as section 4 indicates parties can "make their own bargain as they wish." Despite the absence of a blanket disclaimer there is a portion of the contract in the "General Terms Conditions," section B entitled "Warranty-Exclusions." It states "correct performance of Vesta machine is guaranteed for twelve (12) months from the date of acceptance." Then it says "Matik declines all responsibility whatsoever for any defect due to unsuitable installation by the Buyer, incorrect use or negligent handling and to the natural wear of parts or components of the machine." That is it, there is no other qualification of the "affirmation of fact or promise made by the seller as to production speed of 15000 units per hour."
Interestingly despite the defendant's arguments that one of the problems in achieving the promised production speed was the staffing to run the machine and the environment in the plant — heat, humidity, etc. — these factors do not suggest themselves by use of the phrase "negligent handling" and query what was the staffing and environment at Keystone? As will be discussed a usable product at 15000 per hour was not achieved there either.
The court concludes that the representation as to production speed is an express warranty. It is specific and contained in a written contract prepared by the product's distributor, cf., Vezina v. Nautilus Pools, supra; "puffing" language is not used. Also the speed of operation factor appears to be the basis of the bargain between the parties and trial testimony presented by the plaintiff indicated this was an important factor in Leshine's decision to purchase the Vesta. Mr. DeCotret, Leshine's plant manager, testified that production speed of the folder/gluer was an important factor in Leshine's decision to acquire the Vesta. In the negotiation stages before signing of the contract Intramik representatives forecast production speeds even over the 15000 units per hour estimate. A "trip report" generated by Matik for internal purposes characterized the Vesta as a machine that "can fold and glue 15-20000 6-Pack carriers per hour." Both sides knew that representations as to production speed were important even central factors in the bargain. That this is so is underlined by exhibit 13, which is a "machine acceptance record" created after the Vesta was delivered to Vesta; Eric Leshine noted machine was accepted subject to an "action list" which said the machine would "not run at 15000 per hour the way the feeder is set up."
The question then becomes, given the fact that there was an express warranty, was there a breach of that warranty as claimed in Count One of the complaint?
First it should be noted that both sides seem to agree that the language in the contract referring to "production speed: 15000 units/hour" refers to "gross," not "net" speed of the machine — i.e., maximum running capacity as opposed to output over an extended period of time. That distinction is fine as far as it goes but does not go very far in resolving the problem before the court. The contract language says "production" speed which envisages and certainly affirms to a prospective buyer that a useable product at the rate of 15000 per hour will be produced by the machine. Of course variables such as the environment the machine runs in, staffing of the machine, hours of operation, skill of the operators will affect actual net production but the base line is a machine that is capable, at some point in its operation of producing 15000 beverage containers per hour — i.e., usable containers. Exhibit A which is an internal Matik memo itself speaks of: "Vesta's concept (being) a very simple designed machine that can fold and glue 15-20000 6-Pack carriers per hour.
Of course commercially sophisticated buyers should be held to be aware of the fact that the just mentioned variables would affect the net production speed but they should be able to rely on an express warranty that by adjusting for and countering negative variables the gross production speed could be reached.
There is no evidence that either at Leshine or Keystone, which acquired the Vesta from the bank, ever was able to run at a "production speed" of 15000 units per hour. Gino DiMaio ran the machine at Leshine and does so at Keystone. He testified that on the occasion when a Matik representative came to Keystone to videotape the operation of the Vesta when it ran at over 15000 units per hour he told the Matik representative "I can't run like this. These boxes are all no good."
It makes no commercial sense in the context of this case to say that merely because Matik people "turned up the machine" (in DiMaio's words) and it produced an unusable product that this equated with the "production speed: 15000 units per hour" language in the contract which the court has found to be an express warranty.
The court finds that there was a breach of the express warranty in this case but that does not end the discussion.
(b)
The defendant argues that the Vesta "is built to accommodate the particular blanks that are going to be used to produce the folded and glued beverage carriers that the folder gluer is to produce. As blanks vary in size or die cutting, the folder-gluer has to be designed and adapted to accommodate those blanks. For this reason samples are sent to the manufacturer by the intended user, so that the machine can be designed to work properly with the materials that will be used by its intended user." As defendant notes the contract itself states the product will be a high speed folder-gluer which will include all items "necessary to fold and glue beverage containers as per samples to be submitted by customer" (Leshine). The defendant is also correct in pointing out that the evidence indicates the plaintiff never sent the samples it requested for the 6 pak of 4 pak modification of Vesta's production line. Mr. Lieben, a Matik sales representative, in addition testified that LeShine was informed that "we wanted more time for testing. They (apparently Intramik, the manufacturer) wanted more time for testing." Mr. DeCotret stated he wanted the Vesta shipped right away, any adjustments could be made when the machine was delivered and installed at Leshine.
The foregoing leads to this argument by the defendant: "Whether termed a waiver, an estoppel or a failure to satisfy a condition (precedent) of a contract, the plaintiff's failure to full its contractual obligation to provide sufficient samples to enable Intramik to design the Vesta as contemplated under the contract excused Matik from the corresponding contractual obligation with respect to the production speed of the Vesta. The defendant cites LiVolsi Construction Co., Inc. v. Shepard, 133 Conn. 133, 136 (1946), and Lulu Godburn et al. v. Meserve, 130 Conn. 723, 725-26 (1944). But these cases are not helpful in that they concern the right of a party, whose performance under a contract has been prevented, to bring an action against the other party to the contract. We do not have that situation here. Here the failure to send the necessary samples and perhaps, to allow further testing can be considered a breach of Leshine's contractual obligations. The problem for the defendant is that despite the alleged failure of Leshine to live up to its contractual obligations, it delivered the machine. In other words, if in fact Leshine failed to comply with its contractual obligations in the manner claimed, Matik could have rescinded the contract and recovered the value of any performance on its part, or stand by the contract and sue for damages. Stone Forest Industries, Inc. v. U.S., 973 F.2d 1548, 1550 (1993), Plowden Roberts, Inc. v. Conway, 192 So.2d 528, 532-33 (Fla. 1966); Columbian Fuel Corp. v. Skidmore, 214 S.W.2d 761, 764 (Ky. 1948); "Contracts," 17 Am.Jur.2d § 708 page 666 (fn.1 and 2).
As the defendant correctly notes that although raised in addressing the breach of warranty claim, this argument can be applied to the claims made in the two other counts of the complaint.
In fact in this case, given delivery of the Vesta without any request to modify the contract as to production speed, the waiver, estoppel principle runs the other way and the general language in § 714 of the Am.Jur. Article, although not on point in all respects is instructive. There it says at page 671 of the Am.Jur. Article on contracts:
Generally one may waive a breach of contract by the other party by words or conduct. Statements or conduct indicating that the other party's performance is not required, or a willingness to continue honoring the contract, despite knowledge that the other party has failed to perform, may constitute a waiver. The continued recognition of the contract as binding after the other party's alleged breach acts as a waiver of that breach.
But despite the foregoing observations the defendant's argument as to waiver does not conclude with the foregoing claims and refers to various aspects of the evidence surrounding events immediately prior to delivery and thereafter which indicate the parties in effect modified their agreement insofar as it referred to gross production speed per hour. Again the failure to send samples is referred to and it is further noted that Leshine wanted delivery right away and that it, Leshine, would make any adjustments necessary; the transcript pages referred to by the defendant refer generally to adjustments generally or adjusting the machine to make it run without specifically referring to production speed. The defendant further points out that Leshine personnel indicated they would be happy to have the machine run at ten to twelve thousand units per hour and DeCotret indicated his overall satisfaction with the machine.
However, the Vesta never reliably ran at ten to twelve thousands units per hour. DeCotret did testify that the Vesta was a solid and well built machine but nothing in his testimony indicated that the 15,000 per unit production speed was still not a demand of Leshine. In fact as early as January 2003, shortly after the delivery of the machine Leshine still advised Matik in the "Machine Acceptance Record" that the Vesta was not running at the promised 15,000 per hour because of the feeder. The point is that Matik was explicitly informed by this correspondence that the 15,000 per unit provision of the contract was still demanded by Leshine.
The defendant points to § 42a-2-209 of the code entitled "Modification, Recession, and Waiver." This is a liberal departure from the common law as it is meant to be. See section 1 of the commentary. Contractual modifications do not require consideration, and under certain circumstances, need not even need to be in writing. But no modification can be found certainly prior to the "acceptance" document signed by Leshine in January 2003 and just referred to by the court. The evidence of modification by agreement under § 2-209 is equivocal and the defendant should have the burden of proving it and the court does not believe it has sustained that burden.
In any event the court concludes the breach of warranty claim has been proven by the plaintiff and it will discuss damages at the end of the opinion.
REVOCATION OF ACCEPTANCE A.
In count three the plaintiff advances a revocation of acceptance claim under § 42a-2-608 C.G.S.A. which states in relevant part:
(1) The buyer may revoke his acceptance of a lot or commercial unit whose nonconformity substantially impairs its value to him if he has accepted it (a) on the reasonable assumption that its non-conformity would be cured and it has not been seasonably cured . . .
(2) Revocation of acceptance must occur within a reasonable time after the buyer discovers or should have discovered the ground for it and before any substantial change in condition of the goods which is not caused by their own defects. It is not effective until the buyer notifies the seller of it;
(3) A buyer who so revokes has the same rights and duties with regard to the goods invoked as if he had rejected them.
The court will try to review the code commentary, Connecticut and out of state law and reference works to try to interpret the foregoing sometime deceptively straightforward language.
i.
First, what is "nonconformity" and a "nonconforming" good? Section 42c-2-106(2) of the code says that "(2) goods or conduct including any part of a performance are `conforming' or conform to the contract when they are in accordance with the obligations under the contract." By definition nonconformity includes breach of warranty which one court described as a "subset" of "nonconformity." Ford Motor Co. v. Harper, 671 F.2d 1117, 1122, 1124 (CA8, 1982). But actions for breach of warranty and revocation based on nonconformity provide for explicitly different remedies set forth in different sections of the code. As will be discussed, revocation under 2-608 has several requirements in addition to mere proof of breach of warranty. The court's previous holding that there was a breach of an express warranty establishes that there was a nonconforming good (the Vesta) which was the subject of a commercial sale. That, however, is only the beginning of the problem.
ii.
A sometimes confusing requirement is underlined by comments to the section that says: "Revocation of acceptance is possible only where the nonconformity substantially impairs the value of the goods to the buyer." That interpretation is mandated by the language of subsection (1) of § 2-608 which says the nonconformity must substantially impair "its value to him" — i.e., the particular buyer.
In Web Press Service Corp. v. New London Motors, 203 Conn. 342 (1987), the court said: "The test for substantial impairment is both subjective and objective; it focuses first on the needs and circumstances of the particular buyer seeking to revoke and then considers whether, from an objective standpoint, the value of the goods to the buyer has in fact been impaired." Id., pp. 346-47.
Conte v. Dwan Lincoln-Mercury, Inc., 172 Conn. 112 (1976), said substantial impairment is a question of fact subject to the trier of fact's determination. The reason substantial impairment of value "must exist before a buyer may justifiably revoke his acceptance is to preclude revocation for trivial defects or defects which may easily be connected." Id., page 121.
White and Summers, in their Uniform Commercial Code, 5th ed., vol. 1, however, have a disheartening observation for the poor jury or judge that has to decide this issue. At § 8-4, page 367, they say:
The cases seem to require both subjective and objective elements. The buyer must provide objective evidence that the value of the goods was substantially impaired, but this value is to be viewed through the unique needs and circumstances of that particular buyer and not those of the average buyer. However, we dress it, this concept looks goofy. How can something be objective and, at the same time, subjective? Perhaps the courts are asking us to listen to this buyer's complaint — but not too closely.
An added consideration in applying this substantial impairment test must be mentioned. Connecticut cases discussing this concept, Conte v. Dwan Lincoln-Mercury, supra, and Web Press Service Corp. v. New London Motors, supra, involved the sale of motor vehicles which are used by buyers and expected to be so used for business and nonbusiness personal and recreational purposes. Of course defective vehicles substantially impair the "value" of the vehicle to the user even if they are not used in a commercial context. But in the latter context impairment of value has to mean, if it means anything, that the defective product caused substantial financial loss to the buyer who planned to use the "nonconforming good" in its business. Thus in Ford Motor Company v. Harper, supra, a defective tractor was purchased by a farmer. In interpreting the Arkansas Code and its analogous provision to § 2-608, the court had to determine the issue of substantial impairment. It said the test was one of common sense but its discussion, in deciding this issue, focused on the farmer's decision to buy the tractor to cope with weather and soil conditions at a certain time of the year. He was deprived of use of the tractor during those critical periods. In buying the tractor he had traded away his farming equipment and he found himself at an enormous handicap in his farming operations, 671 Fed.2d at page 1124. Also see Allis-Chalmers v. Sygitowicz, 571 P.2d 224 (Wash.App. 1977), another tractor case. The court addressed the substantial impairment issue and said: " Sygitowicz asserts that the increased cost of operation due to excessive oil consumption substantially impaired the tractor's value. The court must, however, look to the effect of the impairment on the productivity of the use. Sygitowicz's (the buyer) extensive use of the tractor during the 13 months he retained it in his possession, absent a showing that such use was not normally productive negates a showing of substantial impairment." Id., Page 226, see also Fargo Machine Tool Co. v. Kearney Trecker Corp., 428 F.Sup. 364, 379, 380 (E.D.Mich. 1977).
Lastly there is an observation in 67A Am.Jur.2d "Sales," § 1063, pp 453-54 which should be noted. There it is said:
Observation: the fact that the buyer is able to use the product despite the nonconformity may show that the nonconformity did not substantially impair the value of the product. Generally, however, the continued use of goods whose acceptance has been revoked does not vitiate revocation if the use is reasonable and whether the buyer's continued use of the goods after defects appear is reasonable under the Uniform Commercial Code, as would permit revocation of acceptance, is a matter for the fact finder.
As will be discussed the substantial impairment issue is in some respects related to continued use of a product after revocation.
iii. (a)
In addition to the substantial impairment of value issue another factor that must be considered under § 2-608 is contained in subsection (2) which says that "(2) Revocation of acceptance must occur within a reasonable time after the buyer discovers or should have discovered the ground for it . . ."
But as to the requirement of revocation within a reasonable time there are conflicting considerations.
In City National Bank of Charleston v. Walls, 384 S.E.2d 374, 381 (1989), the West Virginia Supreme held and cited numerous cases from other jurisdictions to the effect that: "It is generally recognized, however, that where a delay in revoking acceptance is attributable to efforts or promises to correct the defect or nonconformity in the goods, revocation even after a relatively lengthy period of time may still be timely within the statute." Also see 67A Am.Jur.2d, "Sales"/ § 1073, pp. 464-65 for this proposition, White and Summers at § 8-4, page 569, Vol. 1, cf. Conte v. Dwan Lincoln Mercury, supra, which supports this proposition and quotes from an earlier edition of White and Summers to the effect that: "One policy of the code is to encourage the parties to work out their differences so as to minimize losses resulting from defective performance," 172 Conn. at page 123 (a statement which presumes, of course, the existence of losses).
But as is often true of the code, there are often countervailing considerations due to the fact that its sections including § 2-608 are to be imposed on very different commercial transactions and markets. Thus earlier in § 8-4 White and Summers make an observation that does not fit in neatly with the observations just made by the Wells and Conte courts. Speaking of the code they say:
Wisely the drafters believed that a buyer who has had goods for a long time should have to make a better case in order to throw the goods back on the seller. A variety of policies support the proposition that a buyer who has had possession for any considerable period of time or has otherwise accepted should only rarely have the right to return the goods to the seller. In the first place, the longer the buyer has the goods, the higher the probability that the alleged defect was caused by the buyer or aggravated by its failure properly to maintain the goods. Secondly, the longer the buyer holds the goods, the greater the benefit the buyer may have derived from their use. Finally, the longer the delay the greater the depreciation and the greater the loss to society. These factors support a rule that makes it more difficult for the buyer who has once accepted to cast the goods and attendant loss from depreciation and market factors back on the seller.
All of this is reflected in § 1074 of 67A Am.Jur.2d where at pp. 464-67 it notes numerous cases which have defined reasonable time to revoke as anywhere from four weeks to forty months. But "under the circumstances of other cases, the following delays were unreasonable" — two months to eighteen months.
b.
A related matter that must be discussed is the "reasonable use" of a commercial good after revocation of acceptance and the effect of use on the right to claim revocation. This issue is not explicitly suggested by the language of § 2-608 and is perhaps akin to an estoppel or waiver argument. It raises considerations similar to the ones just discussed in this section but at least factually can have a bearing on matters such as "substantial impairment" which the court has tried to address and even on "notice" of revocation which the court is about to address where the notice is equivocal. Where a "reasonable use" issue is presented White and Summers quote the test set forth in McCullough v. Bill Swad Chrysler-Plymouth, Inc., 449 N.E.2d 1289, 1293 (Ohio, 1983).
In ascertaining whether a buyer's continued use of an item after revocation of its acceptance was reasonable, the trier of fact should pose and divine the answers to the following queries: (1) Upon being apprised of the buyer's revocation of his acceptance, what instructions, if any, did the seller tender the buyer concerning return of the now-rejected goods? (2) Did the buyer's business needs or personal circumstances compel the continued use? (3) During the period of such use, did the seller persist in assuring the buyer that all nonconformities would be cured or that provisions would otherwise be made to recompense the latter for the dissatisfaction and inconvenience which the defects caused him? (4) Did the seller act in good faith? (5) Was the seller unduly prejudiced by the buyer's continued use? See Uganski, supra.
The court commented on the fact that often the buyer, after revocation, is constrained by circumstances "many of which the seller controls" to continue use of the product and "to penalize the buyer for a predicament not of his own making would be patently unjust." Id. In applying the above four-factor test in the case before it which involved purchase of a defective car, the court noted the plaintiff was a young secretary of limited financial resources and not in a position to return the vehicle and purchase a new one for her business and personal needs. The court will continue its legal analysis of his difficult issue later in the opinion.
iv.
A separate and final consideration under § 2-608 subsection (2) is the requirement that a buyer's revocation is not effective until the buyer "notifies the seller of it."
Comment 5 to this subsection states "5. The content of the notice under subsection (2) is to be determined in this case as in others by consideration of good faith, prevention of surprise, and reasonable adjustment." At § 8-4, page 572 of Volume 1, Uniform Commercial Code, 5th ed. White and Summers cite cases to the effect that: "One line of cases between merchants holds that the essential content of the notice of revocation must set forth `the nonconformity in the goods materially impairing their value to the buyer.' The notice must inform the seller that the buyer does not wish to keep the goods. If the buyer equivocates in word or in deed, his purported revocation may be invalid. While the buyer's notice of revocation needs to be unequivocal, it need not be formal." See HCI Chemicals, Inc. v. Henkel, 966 F.2d 1018, 1023 (CA5, 1992); Agarian Grain Co., Inc. v. Meeker, 526 N.E.2d 1189, 1191 (2nd App) (actual knowledge by seller is dissatisfied with goods does not unequivocally equate with revocation even where buyer stops payment). Another case cited in White and Summers says ". . . notice of breach of revocation of acceptance. While the latter need not be in any particular form, it must inform the seller that the buyer does not wish to keep the goods." Allis-Chalmers Corp. v. Sygitowicz, 571 P.2d 224, 226 (Ct. of App. Wash., 1977).
In this case the continued use issue presents itself for the time between delivery of the Vesta up to revocation, and from the time of any revocation up to the time the plant closed. But similar issues present themselves as to both time periods concerning the viability of the revocation claim.
B.
The court will try to apply the foregoing tests to the plaintiff's claim that there was a revocation of acceptance in this case under § 2-608 entitling it to the remedies provided for such a claim under the code. The plaintiff has the burden of proof on this issue.
(I)
The buyer, Leshine, must show that the nonconformity here, the breach of warranty, substantially impaired the value of the Vesta to its business.
In certain respects the evidence was confusing on this aspect of the claim. Mr. Leshine said he wanted the Vesta so he could go into the beverage carrier business or at least a particular niche of the type of business, micro breweries. Mr. Leshine said because the Vesta did not run at the guaranteed speed he had to turn down a lot of orders. On orders that were accepted problems with the Vesta required a lot of overtime and the need to have multiple shipments to the customer by way of delivery trucks and vans. Mr. DeCotret supervised the production of beverage carriers at Leshine for eight years. He also said a lot of orders were lost because of the Vesta's production speed problems; also he too said extra overtime and delivery expenses were caused by these problems. From January 2003 to September 2003 a million dollars' worth of business was lost.
The problem with much of this testimony, for the court at least, was its vagueness and generality. No specifics were given as to the orders that were turned down, when, what company, etc. and all of this was against a background of testimony that indicated that while Leshine was operating the Vesta, it produced millions of beverage carriers.
The only specific order mentioned which once accepted could not be met because of problems with the Vesta involved Red Stripe brewery, but even as to that, the monetary value of any loss incurred was not brought into evidence nor was there any evidence as to the percentage of total gross or net profits lost because of problems with that order.
One more general observation should be made. Mr. Leshine made broad statements about the existence of a lucrative market for producers of beverage carriers as regards micro breweries but he apparently based these projections on conversations with two unnamed salesmen whom he had known for years. Mr. Leshine and indeed Mr. DeCotret struck the court as honest witnesses and the court has no reason to doubt that Mr. Leshine had conversations with these salesmen. But that will not substitute for a market analysis which could be supported by expert testimony or hard facts. Where was this micro brewery business located, what about transportation costs, did Leshine have competitors in the market area, did these competitors use or have access to folder/gluers with production speeds of 10,000, 15,000, 20,000 per hour (Intramik was certainly interested in selling Vesta-type folders/gluers in this country), were other folder/gluer manufacturers exploiting or beginning to exploit this market?
There are other problems with the plaintiff's proof on this aspect of the claim underlined by some of the exhibits. A memo dated April 11, 2003 from Lieben to Gevalda says the Vesta was running 6 packs at 10 to 12,000 per hour consistently. DeCotret "is overall very happy with the machine and gives the Vesta a rating of 9 out of a scale of 1-10." DeCotret said the former folder/gluer they had ran 6 packs at the same speed "but the changeover time was 6-8 hours to go from 4 packs to 6 packs. The Vesta has a definite advantage in the marketplace. Leshine will be a great reference for Vesta." DeCotret never was asked to deny these statements and what possible motive would Matik and Intramik have to fabricate the contents of internal memos. DeCotret's statements were made, it must be remembered, in a context in which he said Leshine was in the process of turning down and losing hundreds of thousands of dollars of business because of the Vesta. In a memo of the same date from Gevalda to Lieben, Gevalda does talk of continued work on the Vesta that has to be done especially as regards the feeder but then says "Norman told Ramon (an Intramik employee apparently servicing the machine) that he is rather satisfied now with the performance of our machine and that Leshine may order another unit in the near future as they are having a lot of jobs to do."
It is true that an e-mail from Mr. Leshine to Mr. Gevalda strikes a different note. This was sent on June 13, 2003 and notes the Vesta is not running at 15,000/hour per the contract. He admits Intramik personnel have tried hard to correct the problem "but we are still waiting to get to the point that we can run steadily and consistently at even 10,000 per hour." Then in language corroborating his trial testimony Mr. Leshine says: "I have incurred a lot of overtime and a lot of extra freight bills to make deliveries for my customers as a direct result of the machine only producing 50,000 cartons per 10 hour day. These customers will not pay me for these extra changes because it is my obligation to honor my contract with my customer. I expect the same commitment from Vesta." It should be noted that there is a significant absence in this communication — there is no reference to lost business or failure to secure new orders that were lying out there if the Vesta could operate at the speed represented in the contract. There is no explicable reason why such a claim would not have been included in this communication if in fact it was supportable.
In any event, the court cannot find under § 2-608 that the nonconformity substantially impaired the Vesta's value to Leshine. The code uses the word "substantially" for a reason and the evidence presented by the plaintiff does not present the court with sufficient information to make a substantiality finding. In this regard, an instructive case is Fargo Machine Tool Co. v. Kearney Trecker Corp., supra, where at 428 F.Sup., page 379-80, the court said:
In regard to the impairment in value question, although it is a subjective issue aimed at determining impairment to this particular buyer, it is best resolved as a factual question by the trial court based on objective evidence rather than on the basis of the buyer's personal belief . . . the court notes that on the evidence before it there is not a substantial enough showing of damage to warrant the conclusion that the defects complained of substantially impaired the value of the machine to Fargo.
Oddly enough, although the court decided against Fargo, it did set forth the detailed evidence that would be required as to each of the claims made concerning impairment. Id., p. 380.
In a suit between commercially sophisticated parties, it seems to the court that readily available commercial proof of substantial impairment of value should be presented by the party relying on § 2-608 for revocation of acceptance who has the burden of proof on this score. In any event the court concludes the plaintiff has not met that burden.
(ii)
An important issue in this case is that of reasonable use of the Vesta and whether, assuming there was a revocation of acceptance, the continued use bars a revocation claim. It should be noted that "revocation of acceptance under the Uniform Commercial Code, does not impose an absolute bar to continued use of the goods, as did rescission since, under the circumstances, it may be the only reasonable way to mitigate damages," Fargo Machine Tool Co., 428 F.Sup. at page 278. It should also be noted that extensive continued use of a machine claimed to be nonconforming "absent a showing that such use was not normally productive negates a showing of substantial impairment." Allis-Chalmers Corp., 571 P.2d at page 226.
This reasonable use issue is a complicated one under the code and in the court's opinion is related in some respects to the substantial impairment of value issue. The substantial impairment of value question is related to whether it can be said that lengthy continued use is a code-sanctioned attempt to mitigate damages. If there is no proof of substantial impairment a mitigation of damages explanation for continued use does not make sense.
It is no doubt true that Mr. Leshine testified that the continued use of the Vesta from January 2003 to September 2004 was a necessity created by the fact that the company could not afford to obtain a replacement gluer machine and thus could not discontinue use of the Vesta as this would mean the company would have to go out of business. The plaintiff notes the case of Fablok v. Cocker Machine Foundry Co., 310 A.2d 491 (NJ, 1973), where the court said continued use after revocation will not bar such a claim as a matter of law. The court said in that case the buyer "was confronted with the grim choice of either continuing to use some of the machines or going out of business." Id., page 495. Mitigation of damages, a goal of the code, is appropriate "where the buyer is unable to purchase a suitable substitute for the goods." Id., p. 494.
The defendant, on the other hand, points to cases which have held that continued use for lengthy periods of time can be inconsistent with a revocation of acceptance claim. In Subiech v. International Staple, 867 F.2d 778 (CA2, 1989), the court said in a statement not analytically contrary to Fablok that continued use for a period of more than three years was far longer than reasonably necessary to acquire other machines. Id., page 781. In effect under certain circumstances continued use after revocation negates the revocation and may be considered a re-acceptance of the goods.
Perhaps to put the question more simply, the issue becomes, given the fact of revocation because of nonconformity, in the language of McCollough v. Bill Swad, supra, ". . . did the buyer's business needs or personal circumstances compel the continued use."
Each case appears to turn on its own facts and the test seems to be for the trier of fact to determine whether the fact of continued use under the circumstances in which it occurred was inconsistent with a prior revocation of acceptance, cf. Cardwell v. International Housing, 423 A.2d at page 364, or can truly be characterized as a justifiable attempt to mitigate damages. If the latter is not proven, it would be patently unjust to allow a revocation of remedy claim. The court will now discuss the facts in more detail.
In this case the non-conformity was noted in a letter of late January 2003 sent by Leshine to Matik yet Leshine used this Vesta from January 2003 when it was delivered to September 2004 when the plant closed, a period of approximately 20 months. From January 2003 until December 2003 Leshine never tried to revoke acceptance and Leshine admitted that "amazingly," despite the problems with the Vesta, he never lost any customers except for a contract with a company called Red Stripe. But lengthy use is not a reason to find that revocation is negated as a matter of law. As discussed, the parties' efforts to correct deficiencies and work out problems is an important policy of the code — it encourages minimizing loss from defective performance and avoids otherwise unnecessary and costly litigation.
But the circumstances of the continued use must be examined to determine whether the buyer was "compelled" to use the machine he bought under commercially unfair circumstances in light of the alleged nonconformity. Almost from the inception of contractual relations, one of the main problems with the efficient operation of the Vesta centered on the feeder which fed the so-called blanks into the Vesta whose end product was a beverage container. In April 2004 Matik sent a feeder which it believed might improve the operation of the machine. It was sent at no cost and Leshine would merely have to pay for the cost of installation. Leshine never contacted Matik about installation and the only reason offered was that he had lost confidence in Matik or nothing else worked so why should this. This would seem to contradict the previously referred to testimony from DeCotret extolling the Vesta. In any event this testimony, besides as an aside having an adverse impact on a substantial impairment of value argument, dispels any notion that the continued use of the Vesta was a matter of compulsion. In light of the evidence of no loss of customers, lack of identifiable evidence of inability to acquire new customers in a prospective profitable niche of the beverage carrier market, no detailed evidence of extra costs associated with the non-conformity and contradictory testimony from DeCotret that the Vesta was just fine, not only was substantial impairment of value not proven but for the court, at least, this establishes that a breach of warranty claim is being used — without more — to establish a revocation claim under the code. This cannot be done.
iii
The foregoing assumes there was an actual revocation of acceptance under the code. The court has already discussed the concept of the adequacy of notice under the code. Under subsection (2) of § 42a-2-608 there must be notice to the seller of revocation. The only evidence that can be offered to meet that test are exhibits 30, 31 and 34. These are letters from Leshine's counsel at the time to Matik and are dated December 12 and 29, 2003 and April 2, 2004. The December letters appear to be duplicates. It narrates Leshine's complaints about the Vesta and indicates the buyer would have rejected the Vesta "then and there" if it had known the 15,000/hr production speed could not be reached. It says the buyer reasonably believed the defects would be corrected. The letter goes on to say the buyer is entitled to revoke any acceptance and recover damages or is entitled to forego revocation to pursue a different damage theory. It concludes by saying if the machine is forever limited to 10,000 units/hr Leshine is due a substantial refund and Matik must immediately increase the machine's output to 10,000/hr. These letters are not revocations of anything and in fact offer a mechanism to avoid outright revocation.
The April 2, 2004 letter refers to the December 29th letter. The second-to-last paragraph reads in the language of revocation but the last paragraph retreats from it. It says if Matik fails to respond to the offer of revocation and the opportunity to resolve these matters — what does that mean, the offers in the December letters are renewed? — legal action will be taken. It then concludes "Leshine will among other things retain it right (without revoking acceptance or returning the machine to you to recover as damages all losses suffered by Leshine Packaging in the normal course of events from your brief."
Under the case law previously cited this is not adequate notice of revocation under subsection (2) of § 2-608, the letters appear to be an invitation to bargain which might contemplate Leshine's keeping the machine if the bargaining proves favorable.
CUTPA
The plaintiff has made a claim under CUTPA. The July 2007 amended complaint incorporates the factual allegations of the breach of warranty claim., set forth in count one into its CUTPA claim, paragraphs 1 through 12. Paragraph 13 merely restates that representations were specifically made as to the Vesta's operating speed but relies on representations made outside the context of the written context of the written contract. It states "(13) the defendant specifically represented that the subject machine would produce 15,000 units per hour, that it was confident that it could do so and that when repaired it would do so. The plaintiff relied on those representations and forewent opportunities to purchase other machinery." Paragraph 14 then describes "the aforesaid acts and conduct as unfair and/or deceptive acts or practices" in violation of the act.
Paragraph 13 is somewhat confusing, at least to the court, in the context of the whole count because it juxtaposes representations having to do with contract formation with representations that "when repaired," the machine would run at 15,000 units per hour, which does not appear to be an allegation raising questions about allegations that induced contract formation. And query, where does this fit in with the allegation that Leshine "forewent opportunities to purchase other machinery."
The defendant makes three arguments against the CUTPA claim. First it argues that the CUTPA claim is "predicated upon the alleged breach of warranty. To the extent that the plaintiff fails to prove its breach of warranty (claim) for any of the reasons set forth (by the defendant), then the CUTPA claim . . . must fail." The court held that the breach of warranty claim can be made but this does not mean that a CUTPA claim is thereby established.
Secondly the defendant argues that under Flagg Energy Development Corp. v. General Motors Corp., 244 Conn. 146, 151-56 (1998), a CUTPA claim cannot be made because of the "economic loss rule" set forth in that case — a CUTPA claim is not viable where commercial entities are involved and the only economic losses asserted result from an alleged product defect.
Thirdly the defendant argues that only a breach of contract (warranty) is alleged so CUTPA relief is not available; there must be aggravating circumstances alleged and proven and a simple breach of contract claim will not suffice for a CUTPA claim.
Fourth the defendant maintains in a related argument that under the so-called "cigarette rule" a CUTPA violation can only be established if it is proven "that the defendant's practice offends public policy as it has been established by statutes, the common law, or otherwise . . . or that it was immoral, unethical, oppressive or unscrupulous or that it caused substantial injury to consumers . . . or other business persons." Here the defendant argues "there were no aggravating factors — no misrepresentation and no bad faith . . ." Thus even if the breach of warranty claim could be proven, no CUTPA violation can be shown.
The court will first discuss the implications of Flagg. As the headnote in Flagg indicates the Supreme Court "properly determined that the plaintiff's complaint did not state valid causes of action for misrepresentation and breach of CUTPA; actions for commercial losses arising out of defective performance of contracts for the sale of goods cannot be combined with actions for negligent misrepresentation." Attempts to limit Flagg, at least where the dispute lies between two commercial parties, does not convince the court. The language of the case goes farther than the headnote. At page 155 the court says: "By implication the intent of § 42a-2-721 is to make actions for fraud or misrepresentation presumptively inconsistent with post acceptance claims for breach of warranty."
The relevant language of this code section says "Remedies for material misrepresentation or fraud include all remedies available under this article for non-fraudulent breach . . ."
In Flagg the court upheld the trial court's striking of a claim of misrepresentation regarding machinery and the sixth count alleging a violation of CUTPA based on fraudulent inducement. Whatever will or should be the result in a context where a commercial entity is dealing with an unsophisticated consumer the court based its reasoning on the language in Princess Cruises, Inc. v. G.E., 950 F.Sup. 151, 155 (E.D.Va; 1966), which it quoted:
The parties are sophisticated corporations familiar with the type of services rendered, and the consequences of a mechanical failure likely to result from a failure to perform the contract as promised. The parties were free to allocate risks, insure against potential losses, and adjust the contract price as they deemed most wise. The court sees "no reason to extricate the parties from their bargain."
It is the court's opinion that there is a basic contradiction in the policies expressed by the code and CUTPA. In other words, in the commentary to § 42a-2-271 it says the purpose of the statute was "to correct the situation by which remedies for fraud have been more circumscribed than the more modern and mercantile remedies for breach of warranty." That is all well and good if the whole universe consisted of common-law remedies for fraud and remedies under the code. But the universe is not so limited because the legislature passed CUTPA which gives expansive remedies not contemplated by the code. The problem for the court is that it cannot get beyond the first sentence of § 42a-2-271 and thus enforce a CUTPA remedy even if it were otherwise viable.
Apart from Flagg and more to the point, however, the court does not believe a CUTPA remedy should lie, given the facts of this case, apart from Flagg and its holding: the court simply cannot find the alleged misrepresentations in this case warrant a CUTPA remedy. It relies and will quote from a decision it wrote ten years ago, Designs on Stone v. Brennan Construction Co., 21 Conn. L. Rptr. 659. In that case a breach of contract claim was involved but for the purposes of analysis, its reasoning would apply to a breach of warranty claim. The court finds no reason to change its views and right or wrong there is a virtue in consistency. The court said:
"It has been held that a `misrepresentation' can constitute an aggravating circumstance that would allow a simple breach of contract claim to be treated as a CUTPA violation; it would in effect be a deceptive act, cf. CNF Constructors, Inc. v. Culligan Water Conditioning Co., supra, dicta in Production Equipment Co. v. Blakeslee Arpaia Chapman Inc. et al., supra.
In enforcing CUTPA our courts look to the actions of the Federal Trade Commission for guidance. Under federal precedents and CUTPA decisions, a CUTPA plaintiff is not bound by the limitations on the common-law action for misrepresentation when making that the basis of his or her claim. Such a plaintiff for example need not prove reliance on the misrepresentation or that the representation became part of the basis for the bargain, Web Press Services Corp. v. New London Motor, Inc., 203 Conn. 342, 363 (1987), and knowledge of falsity either constructive or actual need not be shown, Prishwalko v. Bob Thomas Ford, Inc., 33 Conn.App. 575, 583 (1994), cf. Bailey v. Employment System, Inc. v. Hahn, 545 F.Sup. 62, 67 (D.Conn. 1982), aff'd, 723 F.2d 895 (CA2, 1983). It would also follow that it is not necessary that the seller have an intent to deceiver under the FTIC and CUTPA, Cheshire Mortgage Services, Inc. v. Montes, 223 Conn. 80, 106 (1992), see generally Bailey v. Employment System, Inc. v. Hahn, supra.
However, this court has found no case that holds that a statement predictive of future conduct — here performance under a contract — somehow becomes a "misrepresentation" for CUTPA purposes simply when the party making the representation cannot deliver on the promise. This not to say that to be a misrepresentation the representation must relate to an existing or past fact. Even at common law, there were exceptions to such a requirement such as where the representation as to a future fact was coupled with a present intent not to fulfill the promise, Piava v. Vaneck Heights Construction Co, supra, or where there has been non-disclosure of facts by a party having a duty to disclose, Egan v. Hudson Nut Products, 142 Conn. 344, 347 (1955). But where these latter factors do not exist, CUTPA liability should not be imposed where the defendant merely has not delivered on a promise (necessarily relating to future performance when made) made at the time the contract was entered into. Otherwise every simple breach of contract claim would constitute a CUTPA violation since in every breach of contract claim the party who is accused of the breach has not performed on a prior representation (i.e. contract commitment) made at the time of contract formation. Connecticut case law implicitly though not explicitly seems to share this view, thus in CNF Constructors the representation found to be a misrepresentation "induced the contract," i.e. it must have been a misrepresentation at the time of contract formation, also see Lester misrepresentation made at time of contract formation to induce party to enter into contract.
The Court in effect adopts the reasoning of Judge Haynsworth in interpreting the North Carolina unfair trade practices act. In United Roasters, Inc. et al. v. Colgate-Palmolive Company, 649 F.2d 985, 992 (CA4, 1981), he said:
In a sense, unfairness inheres in every breach of contract when one of the contracting parties is denied the advantage for which he contracted, but this is why remedial damages are awarded on contract claims. If such an award is to be trebled, the North Carolina legislature must have intended that substantial aggravating circumstances be present. The statute outlaws unfair competition, and the unfair acts and practices made unlawful include acts or practices not apply described as deceptive. The North Carolina Supreme Court in J.C. Penney, in dicta, listed a number of acts or practices thought to be representative of those things proscribed by the statute. They are actually deceptive or approach deception. In each instance, the deception or unfairness was present at the time of contract formation. Those acts or practices were quoted by Judge McMillan in CF Industries, Inc. v. Continental Gas Pipe Line Corp., 948 F.Sup. 475 (W.D.N.C. 1978), when he adopted a limited construction of the North Carolina statute. He concluded that an intentional breach of a valid contract was not a violation of the statute. Under the jury's resolution of facts, Colgate violation of its contractual obligation was an intentional breach, but there was neither unfairness nor deception in formulation of the contract, and the jury found no deception in the circumstances of its breach. The contract here was carefully negotiated and drawn by sophisticated parties. There is no hint of any unfairness to either party before Colgate's cessation of performance. It then broke the contract, but we cannot conclude that unfairness inhered in the circumstances of the breach within the meaning of the statute simply because the breach was intentional and not promptly disclosed.
As noted in the commentary, § 42a-2-313 which discusses express warranties under the code, the section is limited to ". . . warranties made by the seller to the buyer as part of a contract for sale." A code breach of warranty for CUTPA purposes should be governed by the same principles that govern breach of contract claims under CUTPA. Every breach of warranty should not be held to be a CUTPA violation absent aggravating circumstances.
In this case the court finds no such circumstances. This position is confirmed partly by post-delivery common sense observations of the ongoing relationship between the parties. For several months the manufacturer and Matik tried to correct problems Leshine was having with the machine which involved sending employees from Europe. Even toward the end of the relationship Matik sent an automatic feeder at no cost, except for installation to Leshine. These hardly appear to be the actions of a seller operating on a "take the money and run" principle.
Various internal memos made by Matik employees internally and between Matik and Intramik, the manufacturer, indicate factual representations by Matik to Leshine about the Vesta's production speed were not fraudulently made or specifically made to induce contract formation. Steven Lieben of Matik visited the Leshine plant with Miguel Gavalda, Intramik's president. He wrote a "trip report" on Matik stationery in which he said "Vesta's concept is a very simple designed machine that can fold and glue 15-20,000 6-Pak carriers per hour." At trial Mr. Gavalda said he never mentioned 20,000 per hour, but did say the machine would be able to achieve a production speed of 15,000 per hour. What motive would Matik's Lieben have to fool himself by an internal memo especially in light of the fact that the contract prepared by Matik and signed by the parties said that: "Solid construction and correct performance of Vesta machines is guaranteed for twelve (12) months from the date of acceptance." On January 31, 2003 shortly after the delivery of the machine, the Matik sales manager sent a letter to Miguel Gavalta of the manufacturer, Intramik. In the letter he said: "I know this has not been an ideal sale but yet it is an important sale and the 6-pak machine does have much potential in the U.S." (Exhibit 15.) Is this the type of letter a distributor sends to a manufacturer if he knows he has foisted a machine on a customer that will not meet representations made about its performance?
At trial Mr. Lieben did say the production speed and the whole Vesta machine was an "estimate" but he said the "estimate" was "based on the trials we had run." He knew Leshine was relying on the production speed represented in the contract but the trial testimony just referred to does not indicate an intention to deceive. Lieben said he probably got the 15-20,000 figure from Gavalda but Gavalda only denied saying he told anyone a speed of 20,000 could be reached. He, as indicated, thought 15,000 could be reached. A CUTPA claim cannot be based on self-puffing (to coin a phrase) — the contract only called for a 15,000 per hour production speed.
Damages
The court has found in the plaintiff's favor on the breach of warranty claim only and will discuss damages for that claim.
Section 42a-2-714 states that "(2) the measure of damages for breach of warranty is the difference at the time and place of acceptance between the value of the goods accepted and the value they would have had if they had been as warranted, unless special circumstances show proximate damages of a different amount."
The Vesta was offered for sale originally at $400,000 but Leshine bought it for $340,000. After Leshine terminated its operations it was sold by the bank to Keystone, a company that manufactures beverage carriers for $100,000.
The excellent lawyers have presented complex arguments as to the damages that should be awarded under the code. The defendant claims no damages or minimal damages should be awarded. The plaintiff claims anywhere from $287,907.69 to $300,000 should be awarded.
The court believes the code language provides a simpler solution. Under § 42a-2-714 the focal point is "the time and place of acceptance" which indicates the relevant time for both value as accepted and value as warranted is the same. One end of the formula is easy. As White and Summers point out in § 10-2 of Vol. 1 on the Uniform Commercial Code, the value of the goods as warranted will seldom be in dispute, for the contract price will be a powerful measure of that and of the formula. As indicated the contract price was $340,000.
The value of the machine as accepted presents the problem for the court. The Bobst machine which had a production speed of 10,000/per hour sold for $440,000 according to Leshine. This was the value of such a machine at the time Leshine was inquiring about buying the Vesta. On this state of facts there would be no entitlement to damages. But this is not necessarily a valid statement of the relevant facts because much testimony was presented that the Vesta did not run consistently at 10,000/per hour.
Mr. Gevalda in January 2004 offered in effect to buy the machine back for $112,000. But again, this was akin to a "distress" offer since it followed the letters from Leshine's lawyers and may have represented an attempt to avoid a lawsuit. By way of an offer of proof, Mr. DeCotret said the value of the Vesta at the more relevant date of January 2003 when it was delivered to Leshine was $100,000 but he arrived at this figure by comparing the prices of used folder/gluers that he had priced, not new machines. The Vesta had a twenty to twenty-five period of use according to the testimony. DeCotret did give the Vesta a $40,000 value over and above the machines he had looked at due to its ease of operation. It was newer, some of its operations were easier. He factored in life span of the machine into value, but did not explain how he factored that in given the projected lengthy life span of the Vesta as compared to undated life spans of used machines he might have looked at in the marketplace. DeCotret had been in the business for decades but a problem with his testimony is that he had not bought similar machines although he said the Vesta was similar to others he had seen in the marketplace. But in fact there was evidence that the Vesta was a machine especially designed for Leshine and Mr. DeCotret based his valuation on a different type of machine, right angle machines. No evidence of price lists were offered for these types of machines, no expert testimony was offered or testimony from other manufacturers. Besides when DeCotret placed the value he did on the Vesta and valued other folder/gluers by way of a comparison base it is not clear to the court that he was giving a general marketplace value or giving a value based on the particular circumstances of Leshine or any company he was trying to purchase a machine for. The subjective circumstances of a particular manufacturer cannot establish value if the manufacturer had access to the general market for these machines. Finally, as to DeCotret's testimony, the court would say the cases hold that value of goods can be proven by the price of the same on similar goods. Goralnik Hat Co. v. Deloney Hat Co., 98 Conn. 560, 564; Stoll v. Judd, 106 Conn. 551, 561 (1927), but sufficient explanation of the similarity as it relates to value should be testified to in the court's opinion. That was not done here so the court unfortunately believes it is constrained to award nominal damages.