669 F.2d 1106 (6th Cir. 1982), 79-3696, K & M Joint Venture v. Smith Intern., Inc.

Docket Nº:79-3696.
Citation:669 F.2d 1106
Party Name:K & M JOINT VENTURE, Plaintiff-Appellee, v. SMITH INTERNATIONAL, INC., Defendant-Appellant.
Case Date:February 03, 1982
Court:United States Courts of Appeals, Court of Appeals for the Sixth Circuit

Page 1106

669 F.2d 1106 (6th Cir. 1982)

K & M JOINT VENTURE, Plaintiff-Appellee,


SMITH INTERNATIONAL, INC., Defendant-Appellant.

No. 79-3696.

United States Court of Appeals, Sixth Circuit

February 3, 1982

Argued Oct. 12, 1981.

Page 1107

[Copyrighted Material Omitted]

Page 1108

Harry C. Nester, Fred Schwartz, Hahn, Loeser, Freedheim, Dean & Wellman, Neil K. Evans, Cleveland, Ohio, Richard F. Oetting, Gilbert D. Jensen, Los Angeles, Cal., for defendant-appellant.

Michael A. Cyphert, Thompson, Hine & Flory, William D. Ginn, Cleveland, Ohio, for plaintiff-appellee.

Before EDWARDS, Chief Judge, LIVELY, Circuit Judge, and HOLSCHUH, [*] District Judge.

LIVELY, Circuit Judge.

In this diversity action the district court awarded damages of $1,492,230 to an Ohio purchaser of equipment from a California seller for breach of an implied warranty of merchantability. The plaintiff-appellee is K & M Joint Venture (K&M) which was formed for the purpose of bidding on a sewer project of the City of Cleveland. After being awarded the contract for the project a principal of K&M contacted an officer of the Calweld Division of defendant-appellant Smith International, Inc. (Calweld) by telephone to learn if he knew of a 12-foot diameter tunnel boring machine (TBM) which K&M might buy for the Cleveland project. K&M eventually bought a 12-foot TBM from Calweld and this lawsuit resulted from that transaction.


The case was tried by the district court without a jury. The complaint sought damages for breach of contract and breach of both express and implied warranties. Calweld filed a motion for summary judgment supported by affidavits of several of its officers and by two documents which it claimed demonstrated that the TBM was sold in "as is" condition and without any warranties. The district court denied the motion for summary judgment, holding that the opposing affidavits of the parties showed the existence of genuine issues of material fact. Calweld then answered, denying generally the allegations of breach of contract and breach of warranty and pleading as affirmative defenses that the sale was made "as is" without warranties and that K&M had failed to notify Calweld promptly of K&M's claim of breach.

There were conflicts in the evidence with respect to the terms under which the TBM was sold. During a series of telephone calls on November 9, 1973, Calweld offered to sell K&M a 12-foot TBM for $90,000.00. The district court found that Richard Wallers, an officer of Calweld, told Ed Kassouf and Emil Dodero, representatives of K&M, that the TBM which it offered for sale was new and fully warranted, but that some of the accessories were used and not warranted. The district court found that these representations were made to Kassouf in one of the telephone calls on November 9, 1973 and were repeated to him and Dodero when they visited the California plant of Calweld on November 28, 1973. The district court further found that an oral contract for sale of the TBM to K&M for $75,000 was made when Kassouf was again in California to view a test of the TBM with its power hooked up about December 17th. The district court found that there was no discussion of warranties during Kassouf's second trip to Calweld's plant, but that there was a meeting of the minds on the basis of the representations made by Wallers during the first visit.

Between Kassouf's two visits to California, Calweld sent a "quotation" to K& M which Kassouf saw. This document listed Item 1, priced at $75,000, "One (1) Calweld 12'0 Diameter Tunnel Boring Machine and

Page 1109

Accessories including (listed accessories). All Equipment is on Calweld stock and is offered in the 'as is' condition." This quotation was dated November 30, 1973. After the second visit to Kassouf, at about the time the TBM was shipped to Cleveland, Calweld sent K&M an invoice which described Item 1 as one used 12-foot TBM and contained the same statement that all equipment was offered in the "as is" condition. K&M did not question the language in either document and it paid for Item 1 without protest.

The TBM was delivered disassembled to K&M, F.O.B. Santa Fe Springs, California on January 18, 1974 and reached K&M in Cleveland on about January 30th. The TBM is a large machine, weighing approximately 30 tons. Upon being lowered into an excavation, it is positioned by means of its six legs against a wall of earth. The TBM then rotates "cutters" against the face of the wall and bores out a tunnel the size of the cutters. It was undisputed that Kassouf told Wallers that the TBM would be used to bore through shale of a kind Wallers was familiar with from an earlier Cleveland project where a Calweld TBM had been used. The 12-foot TBM was lowered into the shaft by K&M on June 25, 1974. The district court found that the TBM "malfunctioned repeatedly" from that date until it was removed for extensive repairs on January 8, 1975. On January 23, 1975 K&M advised Calweld that it was required to rebuild the TBM completely and requested a full set of drawings for the machine. There were a number of discrepancies between the drawings and the TBM as actually constructed. Based on a series of conversations between representatives of K&M and Calweld after problems with the TBM began to appear the district court found that K&M had discharged its burden of proving that adequate notice of Calweld's alleged breach was given within a reasonable time.



The TBM transaction was a sale of goods within the meaning of Article 2 of the Uniform Commercial Code (UCC) which was in effect in both Ohio and California. The district court found that the contract was made in California. It was performed there also since delivery was made to K&M F.O.B. Calweld's plant. Further a document styled "Conditions and Terms of Sale" which accompanied the invoice provided, "this order is made and entered into in Los Angeles, California, and shall be construed in accordance with the laws of the State of California."


On appeal Calweld argues that the finding of the district court that the TBM was sold subject to an implied warranty of merchantability is clearly erroneous. It contends there is no support in the evidence for the district court's finding that the parties intended "as is" merely to mean that Calweld was unwilling to incur further selling expenses by cleaning up some of the accessories and including additional parts requested by K&M. Calweld relies on a provision of UCC § 2-316 which states that use of expressions such as "as is" excludes all implied warranties. It maintains that even if Wallers and another Calweld representative, Uski, stated at the November 28th meeting that the TBM carried the full warranty of new equipment, this was modified by the quotation of November 30, 1973 and the invoice of January 1974. Since there was no discussion of terms of sale other than price at the December 17th meeting, the agreement made at that time was necessarily based on the "offer" contained in the November 30th document, according to Calweld. Calweld further contends that the invoice was not an attempt to change the previous agreement of the parties, as found by the district court. Rather, it was a confirmation of the fact that the TBM was sold in "as is" condition.

K&M responds that the district court merely resolved conflicts in the evidence and its finding that the TBM was sold with an implied warranty of merchantability is not clearly erroneous. Its representatives'

Page 1110

understanding that "as is" referred only to the used equipment and not to the new TBM was "entirely credible" and supported by the evidence, K&M asserts. Further, neither the quotation nor the invoice was effective as a disclaimer of the implied warranty. The finding that in this transaction the expression "as is" had a special meaning different from its use as a disclaimer of warranty was also supported by the evidence in the view of K&M. Thus, it contends, the quotation was not an offer which changed the terms of the previous discussions between the parties, but a mere confirmation of those terms. Finally, K&M agrees with the district court that even if the "as is" language in the invoice was intended to disclaim implied warranties it was ineffective for this purpose since it was written after the parties had agreed.


Calweld also contends that K&M is barred from recovery by reason of its failure to give adequate and timely notice of Calweld's alleged breach. Calweld argues that, as a matter of law, the communications from K&M concerning the malfunctioning of the TBM did not constitute notice of a breach. It points out that Kassouf called Wallers a number of times to report breakdowns of the TBM and to request advice, but that no demands were made that Calweld repair the machine at its expense or that it furnish replacement parts to K&M free of charge. Calweld further asserts that K&M's conduct was inconsistent with its present claim of a breach of warranty of merchantability. Between June 1974 and January 1975, the period when K&M experienced many difficulties with the TBM, K&M purchased approximately $20,000 worth of repair and replacement parts for the TBM from Calweld. These parts were paid for without any protest. Many of the parts were the products of other manufacturers and could have been purchased directly from them rather than from Calweld. Calweld finds this continuation of the business relationship during this period, and particularly payment for the parts without protest or claim of set-off, inconsistent with the claim of breach of warranty.

K&M responds to this argument by asserting that it did everything possible to notify Calweld except to "mouth the magic words." It relies on the language of an official comment to the UCC that notice to a seller that...

To continue reading