705 F.2d 134 (6th Cir. 1983), 80-3702, Roth Steel Products v. Sharon Steel Corp.

Docket Nº:80-3702, 80-3748.
Citation:705 F.2d 134
Party Name:ROTH STEEL PRODUCTS, and Toledo Steel Tube Company, Plaintiffs-Appellees, Cross-Appellants, v. SHARON STEEL CORPORATION, Defendant-Appellant, Cross-Appellee.
Case Date:April 08, 1983
Court:United States Courts of Appeals, Court of Appeals for the Sixth Circuit
 
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705 F.2d 134 (6th Cir. 1983)

ROTH STEEL PRODUCTS, and Toledo Steel Tube Company,

Plaintiffs-Appellees, Cross-Appellants,

v.

SHARON STEEL CORPORATION, Defendant-Appellant, Cross-Appellee.

Nos. 80-3702, 80-3748.

United States Court of Appeals, Sixth Circuit

April 8, 1983

Argued Oct. 5, 1982.

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[Copyrighted Material Omitted]

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B. Casey Yim/L.E. Oliphant, Jr., Squire, Sanders & Dempsey, James M. Porter (argued), Jones, Day, Reavis & Pogue, Joseph G. Berick, R. Jeffery Pollock, Burke, Haber & Berick, Cleveland, Ohio, for defendant-appellant, cross-appellee.

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Sheldon Berns (argued), Michael H. Diamant, Kahn, Kleinman, Yanowitz & Arnson, Cleveland, Ohio, for plaintiffs-appellees, cross-appellants.

Before MERRITT and KEITH, Circuit Judges, and CELEBREZZE, Senior Circuit Judge.

CELEBREZZE, Senior Circuit Judge.

This diversity action for breach of contract involves issues which require us to explore some relatively uncharted areas of Article Two of the Uniform Commercial Code, Ohio Rev.Code Sec. 1302.01 et seq. We vacate the district court's judgment, however, to the extent that it concludes that adequate notice of breach was given in 1974 and remand this question for more comprehensive findings of fact.

I.

The plaintiffs-appellees (cross-appellants), Roth Steel Products Company and Toledo Steel Tube Company, are subsidiaries of Roth Industries, Inc. Roth Steel produces welded straight tubing for a variety of uses; Toledo Steel Tube produces fabricated steel tubing for use in automobile exhaust systems. Mr. Howard Guerin, vice-president for purchasing, Roth Industries, served as the purchasing agent for both corporations until April, 1973, when he was replaced by Mr. Richard Mecaskey.

Sharon Steel Corporation, defendant-appellant (cross-appellee), is a subsidiary of NVF Corporation. In 1973, Sharon was an integrated steel producer which accounted for approximately one percent of the steel produced in this country. It produced hot rolled and cold rolled sheet steel in carbon and alloy grades, as well as pickled and oiled sheet steel. The plaintiffs used sheet steel to produce tubing. Mr. Frank Metzger, Sharon's Northern Ohio Sales Manager, was responsible for all sales to the plaintiffs.

A. In 1972, the steel industry operated at approximately 70% of its capacity. Steel prices were highly competitive and discounts from published prices were given customers in an effort to increase the productive use of steel making capacity. On November 14, 1972, Metzger, Sharon's representative, met with Guerin 1 and offered to sell the plaintiffs specific quantities of hot rolled, cold rolled and pickled steel at prices substantially lower than Sharon's "book price". 2 Testimony indicated that these prices and quantities were to be effective from January 1 until December 31, 1973.

On November 17, 1972, Metzger forwarded a communication in the form of a letter to Guerin confirming the discussions of November 14. 3 The letter indicated that Sharon

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would sell the plaintiffs 200 tons of hot rolled pickled steel each month for $148.00 per ton and that it would sell plaintiffs hot rolled black steel on a open schedule basis for $140.00 per ton. The letter also discussed "the probability" that Sharon could sell 500 tons of cold rolled to both Roth Steel and Toledo at varying prices depending on the type of cold rolled steel ordered. Metzger testified that a few days after the letter was sent, the plaintiffs agreed to purchase 1,000 tons of cold rolled steel (500 tons each) at the prices indicated in the letter.

On February 15, 1973, Metzger and Guerin met to discuss the tonnages of hot rolled steel mentioned in the November 17 letter. During the meeting, Metzger and Guerin agreed to increase the monthly tonnage of hot rolled pickled steel that Sharon would sell to the plaintiffs from 200 tons to 300 tons each month. Metzger also agreed, on behalf of Sharon, to sell the plaintiffs 300 tons of hot rolled black steel until May, 1973, when the monthly tonnage would be increased to 400 tons per month for the remainder of 1973. To confirm the agreement, Metzger noted these increased tonnages on Guerin's copy of the November 17 letter.

In early 1973, several factors influenced the market for steel. Federal price controls 4 discouraged foreign producers from importing steel; conversely, domestic producers exported a substantial portion of the steel produced domestically, in an effort to avoid federal price controls. Thus, the domestic steel supply was sharply reduced. In addition, the industry experienced substantial increases in demand as well as increases in labor, raw material, and energy costs. These increased labor, raw material, and energy costs compelled steel producers to increase prices. The increased demand and the attractive export market caused the entire industry to operate at full capacity in 1973 and 1974. Consequently, nearly every domestic producer experienced substantial delays in delivery.

As a result of the changed market conditions, Sharon decided to withdraw all price concessions, including those it had given the plaintiffs. The plaintiffs were notified of this decision on March 23, 1973 and they immediately protested, asserting that the price increase was a breach of the November, 1972 agreement, as modified in February. As a result of this protest, discussions ensued and Sharon agreed to continue to sell steel to the plaintiffs at the discount prices of November, 1972 until June 30, 1973. For the remainder of 1973, Sharon proposed to sell rolled steel to plaintiffs at modified prices; these prices were higher than the prices set forth in the November 17 letter, but were lower than the published prices which Sharon charged its other customers. Sharon clearly indicated to plaintiffs that Sharon would sell no steel to plaintiffs after June 30, 1973 except at modified prices. Although plaintiffs initially were reluctant to accept Sharon's compromise, they finally agreed to Sharon's compromise proposal primarily because they were unable to purchase sufficient steel elsewhere to meet their production requirements. 5

In the second half of 1973, Sharon also experienced difficulties in filling orders in a timely fashion. In most of 1973 and 1974, Sharon's mill was operating at full capacity; because it could not produce any more steel, Sharon implemented a "blanking" policy in an effort to reduce the backlog of orders. Pursuant to the blanking policy, Sharon would refuse to accept purchase orders that requested delivery for a particular "blanked" month and all the steel produced that month was used to fill overdue orders. Because of this policy Sharon refused several

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purchase orders issued by plaintiffs: it refused to book Roth's orders of 300 tons of hot rolled pickled steel and 400 tons of hot rolled black steel for delivery in October, 1973 and Toledo's order of 425 tons of cold rolled steel for delivery in December, 1973. Both October and December were "blanked" months.

B. Sharon and the plaintiffs conducted business differently in 1974. In 1974, contracts were formed separately on an order-by-order basis. Normally, the plaintiffs issued a purchase order which indicated the type and amount of steel sought, and the requested delivery date; the purchase orders were offers to purchase steel and were not effective until accepted by Sharon. Sharon accepted an offer by issuing an acknowledgment form; in this form, Sharon agreed to ship a quantity of steel by a specific date, usually the date requested by the purchaser. The acknowledgment form indicated that the price for the shipment would be the "[s]eller's prices prevailing at the time of shipment."

In 1974, the steel market became even less predictable than in 1973: overall demand increased, deliveries of steel became more erratic, and acknowledged delivery dates were rarely observed. Sharon's actual delivery dates were three to five months after the promised delivery dates. Throughout 1974, the price of steel steadily rose; as a consequence, Sharon's late deliveries had the effect of increasing the price of the goods.

Although Sharon's shipments to the plaintiffs were consistently delinquent throughout 1974, the plaintiffs continued to accept the late shipments and to place new orders with Sharon. The plaintiffs apparently acquiesced in this pattern of late shipments and higher prices for two reasons: they had no practical alternative source of steel and they believed Sharon's assurances that the late deliveries resulted from the general shortage of raw materials and the need to equitably allocate its limited production among all of its customers.

In May, 1974, the plaintiffs discovered facts that caused them to believe that the delays in shipment were not entirely the result of raw material shortages and Sharon's allocation system. Specifically, the plaintiffs learned on May 9, 1974, that Sharon was selling substantial amounts of rolled steel to its subsidiary Ohio Metal Processing Company. Ohio Metal Processing was operating as a warehouse 6 and selling steel at premium prices. By selling through its warehouse-subsidiary, Sharon was able to obtain higher prices than federal price controls otherwise permitted. In 1974, approximately fifteen percent (20,000 tons per month) of Sharon's monthly steel production was sold to Ohio Metal Processing. Thus, the plaintiffs assert that they first learned that Sharon's late deliveries were not entirely the result of raw material shortages and an allocation system when they learned that steel was being sold to Ohio Metal Processing.

The plaintiffs did not immediately act upon this information. Instead, they allowed the remaining unfilled orders to pend during the summer. In September, 1974, Roth's orders were placed on "hold" due to the labor dispute. Most of plaintiffs' orders were cancelled October, 1974. One...

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