Eastern Air Lines, Inc. v. McDonnell Douglas Corp.

• Decision Date: 17 May 1976
• Docket Number: No. 74-2235,74-2235
• Parties: 19 UCC Rep.Serv. 353 EASTERN AIR LINES, INC., Plaintiff-Appellant-Cross Appellee, v. McDONNELL DOUGLAS CORPORATION, Defendant-Appellee-Cross Appellant.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 957

532 F.2d 957

19 UCC Rep.Serv. 353

EASTERN AIR LINES, INC., Plaintiff-Appellant-Cross Appellee, v. McDONNELL DOUGLAS CORPORATION, Defendant-Appellee-Cross Appellant.

No. 74-2235.

United States Court of Appeals,

Fifth Circuit.

May 17, 1976.

E. Smythe Gambrell, James H. Bratton, Jr., Atlanta, Ga., Charles A. Kimbrell, William G. Bell, Jr., Miami, Fla., for plaintiff-appellant-cross appellee.

Veryl L. Riddle, Thomas C. Walsh, St. Louis, Mo., William S. Frates, Larry S. Stewart, James D. Little, Miami, Fla., for defendant-appellee-cross appellant.

Appeals from the United States District Court for the Southern District of Florida.

Before JONES, WISDOM and AINSWORTH, Circuit Judges.

AINSWORTH, Circuit Judge:

This important Florida diversity case involves an appeal from a judgment for damages for breach of contract in favor of Eastern Air Lines against McDonnell Douglas Aircraft, Inc. based on a jury verdict in Eastern's favor for the sum of $24,552,659.11 plus costs of $241,149.02 one of the largest jury verdicts ever reviewed by this Court. Involved is a series of contracts covering the years 1965-1968 by which Douglas Aircraft, Inc. ¹ agreed to manufacture and sell to Eastern Air Lines nearly 100 jet planes for approximately a half billion dollars. Suit was filed by Eastern against Douglas on July 3, 1970, based on allegations that 90 of these planes were delivered a total of 7,426 days late. It was not until July 21, 1973, after almost three years of pretrial motions and discovery and four and one-half months of trial, that the jury's verdict was rendered in the District Court.

Our review of the case convinces us that the District Court made a diligent effort to resolve the many difficult matters before it. Nevertheless, we conclude that the trial judge committed substantial and prejudicial errors in a number of his rulings and instructions to the jury, which require reversal of the judgment and a new trial. Accordingly, we reverse and remand.

I. Background

Eastern Air Lines decided in 1964 to replace what remained of its outmoded propeller-driven fleet in an effort to reverse a serious five-year financial decline. Ever since the advent of the commercial jet age in 1959, Eastern had lagged behind its competitors in the purchase of jet-powered planes. Consequently, the company's decision to order 100 new planes made it the last major trunk carrier to purchase a large number of jet aircraft.

Although Eastern is one of the largest passenger carriers in the world, its route system has historically been composed of relatively short segments. In 1964, only Boeing and Douglas could offer a small, twin-engine, short-range jet suited to Eastern's needs. Eastern's decision to purchase the Douglas DC-9 rather than Boeing's 737 was based in part on Douglas' offer to lease it a number of DC-9-14's as an interim plane until the larger "stretched" DC-9-31's were available. ² Boeing had been unable to provide Eastern with an equivalent aircraft as a substitute for its short-haul, twin-engine 737 which was not due to be delivered until a year after Douglas was to begin producing the DC-9-31. For its longer range flights, Eastern also ordered a number of DC-8-61 jets which are Douglas' equivalent of the Boeing 707. ³

Letters of intent providing for Eastern's lease or purchase of DC-9-14's and for its purchase of the "stretched" DC-9-31 and the DC-8 planes were signed in February of 1965. The following July, Douglas and Eastern entered into the first three of what was to be a series of eight contracts providing for the delivery of a total of 99 planes. Five of the eight contracts were amended, some a number of times, between 1965 and 1968. ⁴ Although varying in details, all the agreements are basically similar; each required Douglas to manufacture a number of planes at a stipulated price per aircraft to be paid upon the delivery of each plane at Douglas' California plant. Each jet was designated for delivery during a particular calendar month. In addition, every contract contained two provisions which are of special importance to these appeals. One clause is a choice of law provision which requires that the contracts' construction and performance be determined under California law. ⁵ The other provision is an "excusable delay" clause which exempts Douglas from liability for delays beyond its control and not its fault. ⁶

Problems developed in the Douglas-Eastern relationship before even the first plane was scheduled to be delivered. In January 1966, it became evident to both parties that Douglas would be unable to complete its DC-9-14 jets in time to meet the contract delivery dates. In an early exchange of letters on the subject, Douglas attributed the delivery delays to "our nation's rapidly increasing commitments in Southeast Asia," and Eastern replied by expressing concern and noting that "(i)t appears to us that some of this slippage really should have been avoidable."

Subsequently it appeared that the delays could not be confined to the DC-9-14 deliveries. During 1966 and 1967, Douglas repeatedly revised its scheduled delivery of DC-8's and DC-9-31's. These further delays were viewed with "great concern" by Eastern executives who informed Douglas that the late deliveries were imposing a "substantial burden" on the airline.

Throughout this period, Douglas was confronted with a mounting financial crisis which, to some extent, was the result of the DC-8 and DC-9 delivery delays. In the summer of 1966, Douglas forecast a loss of almost $30 million in its operations for the year. By November, Douglas' cash shortage reached such catastrophic proportions that the company's creditors insisted that a solvent merger partner be found. The natural choice was the McDonnell Aircraft Company whose military and space activities effectively complemented Douglas' strength in the commercial aircraft field. After McDonnell infused into Douglas over $68 million in new funds, a merger was consummated on April 28, 1967. The new McDonnell Douglas Corporation assumed all the obligations and liabilities of the former Douglas Aircraft Company.

Delivery delays continued after the merger until the last of the planes was delivered in January 1969. On the average, each of the 90 late planes was delivered 80 days after the month specified in the contract date. Several months after performance had been completed under the last of the eight contracts, Eastern wrote McDonnell on May 29, 1969 presenting a claim for damages resulting from the late deliveries over the previous three years. The airline alleged that these delays could not be deemed excusable under the applicable clause in the agreements. McDonnell rejected the claim and suit was filed in the District Court for the Southern District of Florida.

On the order of the District Judge, the trial was bifurcated with the liability phase to be tried first; to be followed, if necessary, by a trial on damages before the same jury. The greater part of the three-month liability trial was devoted to McDonnell's efforts to prove that the delivery delays were the product of events covered by the excusable delay clause in each contract. Although McDonnell produced evidence that some of the deliveries were late because of strikes and labor shortages, the heart of its defense was that most of the delays were caused by the rapid military buildup occasioned by the war in Vietnam. During the 1966-1968 escalation of the war, the Government asked the aviation industry to accord specific military projects priority over civilian production. Although military priority, in some cases, was gained through written directives and ratings issued pursuant to the Defense Production Act of 1950 ("D.P.A."), the Government often effectively achieved the same result by more informal and less direct means. McDonnell endeavored to show that, because its subcontractors cooperated with this "jawboning" policy of the Government, there were serious delays in the delivery of parts vital to DC-8 and DC-9 production. Throughout the course of this phase of the trial, however, the District Judge took the position that the only excusable delays were those resulting from written government orders issued in strict compliance with procurement regulations. As a result, the trial judge refused to allow the jury to consider evidence of less formal efforts by the Government to expedite military production.

McDonnell Douglas also contended that Eastern had failed to give timely and reasonable notice of the breaches, that one of the contracts was no longer enforceable, and that Eastern should be estopped from pursuing any of its claims. The District Court, however, ruled against McDonnell on all these issues.

At the close of the liability trial, the jury was instructed that McDonnell bore the burden of proving that the delays were caused by events which were excused under the contracts. Furthermore, according to the court's instructions, no event could be an excuse unless it was not reasonably foreseeable at the time the particular contract was entered into. On May 16, 1973, the jury's verdict, in the form of answers to special interrogatories, found that none of the 7,426 days of delay was excusable.

During the six-week damages phase of the trial, each side presented testimony concerning the effect of the delivery delays on Eastern's operations during the 1966-1968 period. Eastern's expert estimated the airline's lost profits to be $23,400,000 while McDonnell's expert witness was of the opinion that no such damages resulted from the delays. The airline also presented evidence to support its claims for damages resulting from surplus pilot time expense, wasted pilot training and wasted schedule expense. In addition to these claims, the District Judge permitted the jury to consider Eastern's contention that, under Florida law, it was entitled to prejudgment interest from the time of the breach. On July 12, 1973, the jury...