AGF, Inc. v. Great Lakes Heat Treating Co.

• Decision Date: 06 June 1990
• Docket Number: No. 89-685,89-685
• Citation: 51 Ohio St.3d 177,555 N.E.2d 634
• Parties: , 11 UCC Rep.Serv.2d 859 AGF, INC., Appellee, v. GREAT LAKES HEAT TREATING COMPANY, Appellant.
• Court: Ohio Supreme Court

Page 177

51 Ohio St.3d 177

555 N.E.2d 634, 11 UCC Rep.Serv.2d 859

AGF, INC., Appellee, v. GREAT LAKES HEAT TREATING COMPANY, Appellant.

No. 89-685.

Supreme Court of Ohio.

Submitted April 3, 1990.

Decided June 6, 1990.

Syllabus by the Court

1. No specific form or words are required in the notice of breach of contract under R.C. 1302.65(C)(1).

2. In Ohio a new business may recover lost profits in a breach of contract action but such lost profits must be established with reasonable certainty.

3. A new business may establish lost profits with reasonable certainty through the use of such evidence as expert testimony, economic and financial data, market surveys and analyses, business records of similar enterprises, and any other relevant facts.

Plaintiff-appellee, AGF, Inc., brought an action against appellant, Great Lakes Heat Treating Company, to recover $29,718.17 it claimed was due on the sale of a Shaker Hearth Furnace. Appellant answered, and filed a counterclaim for breach of contract and breach of warranty. Specifically, appellant's counterclaim contained four counts: (1) breach of contract, (2) breach of express warranty, (3) breach of implied warranty, and (4) negligence.

The parties apparently stipulated that the amount claimed in appellee's complaint had not been paid. Therefore, the matter proceeded to trial on the issues raised by appellant's counterclaim. At the close of appellant's case in chief, appellee moved for a directed verdict on the express warranty and implied warranty claims. The trial court found that appellant had not provided appellee with adequate notice of breach of the express warranty, and granted appellee's motion for a directed verdict on that claim. However, the court denied the motion as to the implied warranty claim. The jury returned a verdict in the amount of $9,718.17 on appellee's original complaint. As to appellant's counterclaim, the jury found in favor of appellant and awarded the amount of $30,000.

Appellant filed a timely notice of appeal, asserting the trial court erred in directing a verdict on the breach of express warranty claim and in excluding proffered evidence relating to lost profits. The court of appeals affirmed, finding that "[a]bsent evidence of actual notice of breach of the expressed warranty * * * the trial court did not err in granting appellee's-A.G.F.'s motion for a directed verdict." The court of appeals also affirmed the trial court's exclusion of evidence concerning lost profits, finding that such evidence was speculative and could not be established with reasonable certainty under long-standing Ohio precedent that a new business cannot recover lost profits.

This cause is now before this court pursuant to the allowance of a motion to certify the record.

Thompson, Hine & Flory, Leslie W. Jacobs, Stephen H. Daniels and Virginia S. Brown, Cleveland, for appellee.

Mansour, Gavin, Gerlack & Manos Co., L.P.A., Jeffrey M. Embleton, Eli Manos and Dan A. Morell, Jr., Cleveland, for appellant.

ALICE ROBIE RESNICK, Justice.

This case presents two issues for our determination: (1) whether appellant (buyer) provided appellee (seller) with adequate notice required by R.C. 1302.65(C)(1) so as to preserve a claim for breach of express warranty; and (2) whether appellant, a new business, may recover lost profits. An overview of the contractual relationship between the parties is beneficial to our determination of these issues.

Norman R. Fisher, Jr. gained experience in the field of heat treating by working with his father, who owned a heat treating company. In 1979, Fisher developed a plan to establish his own business--Great Lakes Heat Treating Company, appellant herein. He entered into negotiations with a sales representative from appellee AGF for the purchase of an automated heat treating furnace capable of processing five hundred to five hundred twenty pounds of parts per hour. By letter dated August 3, 1979, Fisher accepted a proposal on behalf of Great Lakes, purchasing a "284 Shaker Hearth Furnace." The furnace was delivered on January 31, 1980. The furnace, however, could not be assembled due to improperly fitting parts. AGF was informed of the problem, and a technician was dispatched to Great Lakes. After additional complaints by Great Lakes and several adjustments, the furnace was finally assembled.

The furnace continued to fail to operate in spite of the assembly by AGF's technician. As the court of appeals succinctly stated, "[t]his failure of operation was only the beginning of a continuous failure of the furnace to operate and/or process 500 pounds of parts per hour. Numerous complaints were lodged by appellant-G.L. [Great Lakes] with regard to the improper operation of the furnace and appellee-A.G.F. attempted to rectify the operating problems on at least six occasions. At one point, appellant-G.L.'s furnace was closed down for a period of two weeks in order to completely rebuild the furnace. Even this attempt at repair, however, failed to allow the furnace to function as originally designed at the rate of 500 pounds of parts per hour."

I

The first issue we must decide is whether appellant provided adequate notice to appellee so as to preserve its claim for breach of an express warranty. The applicable statute is R.C. 1302.65, wherein it is stated:

"(C) Where a tender has been accepted:

"(1) the buyer must within a reasonable time after he discovers or should have discovered any breach notify the seller of the breach or be barred from any remedy[.]"

R.C. 1302.65 is a codification of UCC 2-607. Official Comment 4 to UCC 2-607 provides: "The content of the notification need merely be sufficient to let the seller know that the transaction is troublesome and must be watched. There is no reason to require that the notification which saves the buyer's rights under this section must include a clear statement of all the objections that will be relied on by the buyer, as under the section covering statements of defects upon rejection (Section 2-605 [R.C. 1302.63] ). Nor is there reason for requiring the notification to be a claim for damages or of any threatened litigation or other resort to a remedy. The notification which saves the buyer's rights under this Article [R.C. Chapter 1302] need only be such as informs the seller that the transaction is claimed to involve a breach, and thus opens the way for normal settlement through negotiation."

While the Official Comments to UCC 2-607 supply courts with interpretative assistance, we have recently noted that "[t]he Official Comment following R.C. 1302.65 [UCC 2-607] provides somewhat contradictory guidance as to how the notice requirement is to be construed." Chemtrol Adhesives, Inc. v. American Mfrs. Mut. Ins. Co. (1989), 42 Ohio St. 3d 40, 52, 537 N.E.2d 624, 636. The debate as to whether a strict or liberal approach should be applied to UCC 2-607 persists. See Reitz, Against Notice: A Proposal to Restrict the Notice of Claims Rule in U.C.C. § 2-607(3)(a) (1988), 73 Cornell L. Rev. 534; Note, Effective Notification of Breach Under Uniform Commercial Code (1983), 44 U.Pitt.L.Rev. 733; Clark, First Line of Defense in Warranty Suits: Failure to Give Notice of Breach (1982), 15 U.C.C.L.J. 105; Dillsaver, Notice of Breach After Acceptance of Tender (1985), 17 U.C.C.L.J. 220; and Note, Notification of Breach Under Uniform Commercial Code Section 2-607(3)(a): A Conflict, A Resolution (1985), 70 Cornell L.Rev. 525.

This issue, however, has been decided by Chemtrol, supra, wherein we stated: "We reject the strict reading of R.C. 1302.65(C)(1) [and UCC 2-607] * * * as we believe that notice may be sufficient under the statute despite the fact that the notice does not specifically allege a breach of the contract. Moreover, in our view, the statute was not meant to exclude the possibility that notice may be inferred. See, e.g., Crest Container Corp. v. R.H. Bishop Co. (1982), 111 Ill.App.3d 1068, 1077, 445 N.E.2d 19, 26 (visits by employee of defendant manufacturer during which he observed product's failure to operate, combined with prior requests for service by the buyer, constituted notice to manufacturer)." Id. 42 Ohio St.3d at 54, 537 N.E.2d at 638. Therefore, no specific form or words are required in the notice of breach of contract under R.C. 1302.65(C)(1).

The record in this case clearly demonstrates that appellant was in constant and continual communication with appellee regarding the ability of the furnace to perform properly. Moreover, the record contains at least eight letters sent by appellant to appellee concerning the failure of the furnace to operate properly or to operate at all. The first in this series of correspondences is dated March 20, 1980, wherein Fisher set forth a detailed list of fifteen problems appellant was experiencing with the furnace. This letter was updated and followed by letters dated March 24, 25, 26, and 31, 1980. Each of these communications either delineated a new problem with the furnace or expressed concern over a continuing problem. There came a time when Fisher indicated that Great Lakes would reject the furnace, but was asked not to do so by the AGF salesman. The president of AGF, Frank Korzeb, flew from the corporate headquarters in New Jersey to Cleveland to inspect the furnace. As a result, the contract for sale was modified so that Great Lakes would be credited with $20,000 for the problems it was experiencing with the furnace, provided Great Lakes paid $100,000 on the account. This agreement was memorialized in a letter written by Fisher and dated April 2, 1980. The furnace still continued to experience problems. In a letter dated August 11, 1980, Fisher once again informed Korzeb that the furnace was not operating properly even after various repairs performed by appellee's technicians. Subsequent letters were sent by Fisher, all relaying the same basic message that the furnace was simply not functioning properly. As a result, appellant...