Berg Chilling Systems, Inc. v. Hull Corp.

• Decision Date: 25 May 2004
• Docket Number: No. 03-3020.,No. 03-2977.,03-2977.,03-3020.
• Citation: 369 F.3d 745
• Parties: BERG CHILLING SYSTEMS, INC.; Acceptance Insurance Company v. HULL CORPORATION; SP Industries, Inc., d/b/a Hull Company, Defendants/Third-Party Plaintiffs v. Vicarb, Inc., Alfa Laval, Inc. Alfa Laval Vicarb, John L. Hull, Lewis W. Hull, Third Party Defendants Berg Chilling Systems, Inc., Appellant Berg Chilling Systems, Inc.; Acceptance Insurance Company v. Hull Corporation; SP Industries, Inc., d/b/a Hull Company, Defendants/Third-Party Plaintiffs v. Vicarb, Inc., Alfa Laval, Inc. Alfa Laval Vicarb, John L. Hull, Lewis W. Hull, Third Party Defendants SP Industries, Inc., Appellant.
• Court: U.S. Court of Appeals — Third Circuit

369 F.3d 745

BERG CHILLING SYSTEMS, INC.; Acceptance Insurance Company v. HULL CORPORATION; SP Industries, Inc., d/b/a Hull Company, Defendants/Third-Party Plaintiffs v. Vicarb, Inc., Alfa Laval, Inc. Alfa Laval Vicarb, John L. Hull, Lewis W. Hull, Third Party Defendants Berg Chilling Systems, Inc., Appellant Berg Chilling Systems, Inc.; Acceptance Insurance Company v. Hull Corporation; SP Industries, Inc., d/b/a Hull Company, Defendants/Third-Party Plaintiffs v. Vicarb, Inc., Alfa Laval, Inc. Alfa Laval Vicarb, John L. Hull, Lewis W. Hull, Third Party Defendants

SP Industries, Inc., Appellant.

No. 03-2977.

No. 03-3020.

United States Court of Appeals, Third Circuit.

Argued April 21, 2004.

Decided May 25, 2004.

COPYRIGHT MATERIAL OMITTED

John J. Soroko (argued), Patrick J. Loftus, James H. Steigerwald, Duane Morris, Philadelphia, PA, for Appellant-Appellee Berg Chilling Systems, Inc.

Michael O. Adelman (argued), Rebecca S. Rimmer, Michael P. Daly, Drinker, Biddle & Reath, Philadelphia, PA, for Appellee-Appellant SP Industries, Inc.

Before: SCIRICA, Chief Judge, and ROSENN and GREENBERG, Circuit Judges.

OPINION OF THE COURT

GREENBERG, Circuit Judge.

I. FACTUAL AND PROCEDURAL HISTORY

This matter comes on before this court on appeals by Berg Chilling Systems, Inc. ("Berg") and SP Industries, Inc. ("SPI") from an order for judgment entered by the district court on June 11, 2003, following a four-day bench trial in this breach of contract action. The district court set forth its opinion in Berg Chilling Systems, Inc. v. Hull Corp., No. Civ. A. 00-5075, 2003 WL 21362805 (E.D.Pa. June 10, 2003) ("Berg"). The case, which has an unusual international character as it implicates entities from four countries on three continents, though not all as parties, arises from the failure of a freeze drying system to perform to specifications. Though there were many factual disputes at the trial, the basic circumstances of the case are clear and we set forth the facts in the light most supportive of the district court's result.¹

The origin of the case may be traced to March 30, 1995, when Berg, a Canadian Corporation,² entered into a contract with a Chinese Company named Huadu Meat Products Company ("Huadu")³ to supply the food freeze drying system ("Equipment Contract") at a cost of $2,800,000 in United States dollars. The freeze drying system contained several components which Berg intended to acquire from subcontractors and suppliers. Thus, prior to entering into the Equipment Contract, Berg ascertained which manufacturers would produce the system's various component parts.⁴

Berg approached the Hull Corporation ("Hull"), a Pennsylvania entity,⁵ and asked it to produce the freeze dryers, a critical component for the system. In the weeks prior to signing the Equipment Contract with Huadu, Berg was in constant contact with Hull regarding the freezer dryers' technical specifications.⁶ On April 20, 1995, Berg formally agreed to purchase two freeze dryers from Hull for the Huadu freeze drying system ("Purchase Order"). Under this Purchase Order, Hull assumed responsibility for the design, manufacture, start-up and testing of the freeze dryers.⁷ The freeze dryers were required to be able to process a specified volume of food at a high quality level within a 24-hour period or, in industry terms, to meet the "through-put" specifications.

After confirming the delivery date with Hull, Berg entered into an amended agreement with Huadu specifying a delivery date of June 15, 1996, for the freeze drying apparatus. Nevertheless, the freeze dryers were not shipped until October 1996 because one of their component parts was not available. Once Hull completed manufacturing the freeze dryers, their shipping to China was delayed further when the vessel on which they were to be shipped failed on the way to pick up the equipment at the port in Camden, New Jersey. Berg, who was responsible for shipping the freeze dryers, then made arrangements for their transportation on trucks across North America to Vancouver, British Columbia, for shipment by sea to China. Unfortunately, one of the trucks, while en route to Vancouver, was involved in an accident in which one of the freeze dryers was damaged.⁸ Berg did not repair the damaged freeze dryer prior to its shipment by sea to China. Rather, after the freeze dryers were shipped to China the damaged freeze dryer was repaired at Huadu's facility in Beijing. The equipment then was installed and prepared for trial runs.

In April 1997, at the direction of a Hull service technician, preliminary testing began on the freeze drying system. This testing revealed several deficiencies in the freeze drying equipment which led Huadu in early May 1997 to send a list of concerns regarding the functioning of the machinery to Berg which, in turn, forwarded the list to Hull. Hull then responded to those concerns. Nevertheless the Hull service technician returned to the United States prior to conducting performance tests on the machinery as required by the Equipment Contract, an action leading Huadu to refuse to accept the freeze drying system.

According to Berg, during the early summer of 1997 Hull refused to cooperate with Berg and Huadu in addressing the problems with the freeze dryers.⁹ Huadu obviously was dissatisfied and thus threatened to send the equipment back and cancel the contract. As a result of Hull's perceived lack of cooperation during that time period, Berg threatened to sue it. In late August, however, Berg and Hull began negotiating a compromise to solve the difficulties with the machinery. These negotiations culminated in the signing of a modified agreement on October 8, 1997, among Huadu, Berg and Hull designed to address the deficiencies in the Hull freeze dryers ("Modified Agreement").¹⁰ The Modified Agreement set forth performance-level goals for the freeze dryers and the required quality level of the product, providing that "through a cooperative effort, Hull and Berg will ensure" that these standards would be met. JA at 1074. It established the end of March 1998 as the date by which the modifications would be completed and final acceptance would take place. JA at 1074.

While Hull, Berg and Huadu were addressing the problems with the freeze dryers, Hull, on August 27, 1997, entered into an Asset Purchase Agreement with SP Industries, Inc. ("SPI"), a New Jersey Corporation,¹¹ providing for SPI to acquire Hull's Food, Drug & Chemical Division ("FDC division") which had designed and manufactured the freeze dryers for the Huadu project. Article 1.2 of the Asset Purchase Agreement between Hull and SPI listed the purchased assets, which included "all contracts and agreements, including, without limitation, sales orders and sales contracts."¹² JA at 1825-26. Under Section 7.8, entitled Product Warranties, the agreement provided that "[p]urchaser does not hereby assume any liability to any third party claimant."¹³ JA at 1849. Section 10.6 of the Asset Purchase Agreement stated, "[t]his agreement shall be governed and controlled as to validity, enforcement, interpretation, construction, effect and in all other respects by the internal laws of the State of New Jersey applicable to contracts made in that State." JA at 1857.

Hull and SPI closed on the sale provided for by the Asset Purchase Agreement on October 15, 1997, exactly one week after Huadu, Hull and Berg had signed the Modified Agreement. At the closing on the Asset Purchase Agreement, as a result of concerns that SPI raised about the costs of the remaining work on the Huadu freeze dryers, SPI and Hull entered into a side letter agreement relating to the Huadu project.¹⁴ The side letter agreement, which the parties signed on the same day as the closing on the Asset Purchase Agreement, provided that SPI would complete any needed design modifications and repairs to the freeze dryers. While SPI agreed to pay the out-of-pocket costs for the repairs, Hull agreed to reimburse SPI for a portion of its expenses.¹⁵ The side letter agreement provided that, "[e]xcept as amended hereby, the terms and provisions of the Asset Purchase Agreement shall remain in full force and effect." JA at 1890.

Hull and SPI made various public statements after signing the Asset Purchase Agreement to the end that the transaction constituted a merger of SPI and Hull's FDC division. Moreover, Lewis Hull, president of the Hull Corporation, sent a letter to Berg after the Asset Purchase Agreement was signed, but before the closing, stating that "[i]f Hull's freeze drying division should be transferred to another entity, Hull's responsibility will of course be assumed by the successor." JA at 1020.

After the closing, the FDC division of the Hull Corporation began operating as a wholly-owned subsidiary of SPI under the name Hull Company. Although SPI through the Hull Company made various modifications to the freeze dryers from late 1997 into early 1998, the dryers, at least during this period and at all times material to this litigation, did not meet the specifications contained in the Modified Agreement. Huadu, which seems to have been quite accommodating, agreed, however, to extend the date set forth in the Modified Agreement for acceptance of the freeze dryers until April 27, 1998. When it became clear that the freeze dryers would not satisfy the specifications by that date, SPI directly requested another extension from Huadu. Huadu granted the request, giving SPI until May 20, 1998, to complete modification and testing of the freeze dryers with the understanding that this would be the final extension.

On May 13, 1998, Huadu sent a facsimile to Berg with a carbon copy to the Hull Corporation listing the freeze dryers' remaining problems. The facsimile concluded that because the freeze dryers still had "fatal weakness[es]" that prevented them from meeting the through-put requirements for freeze drying food at the contracted quality level, they were "not acceptable."...