Cole Energy Development Co. v. Ingersoll-Rand Co., INGERSOLL-RAND

• Decision Date: 13 September 1990
• Docket Number: No. 89-1475,INGERSOLL-RAND,89-1475
• Citation: Cole Energy Development Co. v. Ingersoll-Rand Co., 913 F.2d 1194 (7th Cir. 1990)
• Parties: 12 UCC Rep.Serv.2d 1075 COLE ENERGY DEVELOPMENT COMPANY, a corporation, Plaintiff-Appellant, v.COMPANY, a corporation, Defendant-Appellee.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 1194

913 F.2d 1194

12 UCC Rep.Serv.2d 1075

COLE ENERGY DEVELOPMENT COMPANY, a corporation, Plaintiff-Appellant, v. INGERSOLL-RAND COMPANY, a corporation, Defendant-Appellee.

No. 89-1475.

United States Court of Appeals Seventh Circuit.

Argued May 16, 1990.

Decided Sept. 13, 1990.

Harold M. Olsen, Nils A. Olsen, Olsen & Olsen, Springfield, Ill., for plaintiff-appellant.

Patrick V. Reilly, Sorling, Northrup, Hanna, Cullen & Cochran, Springfield, Ill., Michael J. Roberts, Grand Rapids, Mich., for defendant-appellee.

Before WOOD, Jr., and FLAUM, Circuit Judges, and CRABB, Chief District Judge. ¹

CRABB, Chief District Judge.

This is an appeal in a diversity case arising out of a dispute about the effectiveness of gas compressors leased by defendant-appellee Ingersoll-Rand Company to plaintiff-appellant Cole Energy Development Company. Ingersoll is a manufacturer, seller and lessor of compressor equipment. It leased two gas compressors to Cole for the purpose of increasing production in a natural gas production facility which Cole operated and which is known as the Fishhook Field. The compressors failed to work as Cole thought they should. Cole sued for breach of contract, breach of express and implied warranty and fraud. The court found for Cole on the breach of express warranty claim after a bench trial and later determined the damages on the basis of affidavits submitted by the parties. We conclude that the district court erred in denying the parties a trial on damages and in calculating the amount of the damages to be awarded to Cole.

FACTUAL BACKGROUND

Cole initiated the suit with allegations that it had entered into purchase option lease agreements with Ingersoll in December 1983 and August 1984 in reliance on Ingersoll's engineering expertise, Ingersoll's familiarity with Cole's requirements in the Fishhook Field, and Ingersoll's express representations that the leased compressors were new and would provide the capacity to pump a minimum of 1,700,000 cubic feet of gas a day. Cole alleged that the equipment Ingersoll provided was not new; that it was subject to failure and to breakdowns; that it never performed as promised; and that Ingersoll took a long time to provide repair parts and was willfully negligent in failing to provide the equipment and service specified in the leases. Cole asked for damages for its rental and transportation costs, wages for workmen left idle while repairs to the equipment were being made, for overtime wages, for the costs of labor and parts in attempting to keep the equipment operating, and loss of profits occasioned by Cole's inability to deliver gas it had contracted to sell.

Ingersoll denied that it had made any misrepresentations or breached any warranties. It alleged that it had performed repairs whenever they were needed, but that many of the repairs had been necessitated by Cole's poor maintenance and ineffective attempts to do its own work. Ingersoll contended that Cole was limited in its recovery to $64,200, the total of its lease payments, because the lease agreement specifically excluded consequential damages. In addition, Ingersoll counterclaimed against Cole for cancellation charges under the lease agreements.

Ingersoll filed a motion for partial summary judgment, contending that its contractual disclaimers of consequential damages and implied warranties were enforceable as a matter of law. The district court agreed and granted the motion, holding that even if Cole could prove a failure of a limited warranty to repair or replace defective parts, Ingersoll would not be liable for consequential damages because its leases expressly excluded such damages and allowing the exclusion was not unfair. 678 F.Supp. 208 (1988). The court found that the two parties were both sophisticated commercial enterprises of substantially equal bargaining strength; Cole had not alleged that Ingersoll was willful or dilatory in failing to meet its warranty obligations (assuming they were breached); and allowing the exclusion would not leave Cole without a remedy because it had its backup remedy of return of the payments made under the lease. The court ruled that defendant's damages were limited to the payments under the agreement, and dismissed plaintiff's claims for consequential damages. It also dismissed plaintiff's claim for breach of implied warranty on the ground that defendant had disclaimed such warranty conspicuously and with mention of merchantability, as required under Illinois law. The court then bifurcated the trial on the remaining claims and held a nine-day bench trial on the liability issues.

At the end of the trial the court made certain statements from the bench from which the following findings of fact can be distilled.

1. In the industry, a "new" compressor means a compressor that has never been used before, regardless of its age or the length of time it has been stored outdoors.

2. Cole is not a sophisticated enterprise.

3. No one from Cole ever realized that a "new" compressor meant one that was being put to use for the first time.

4. Ingersoll sold Cole a compressor that was five years old.

5. Ingersoll is a sophisticated enterprise.

6. Ingersoll's first proposal to Cole was a three unit package to increase production; the expense of this package was "too high," so Ingersoll proposed a booster to work with the equipment Cole already owned.

7. Ingersoll provides a single source warranty behind a whole package unit. It provided a single source warranty for the booster compressor.

8. Ingersoll made many attempts to get the leased machinery operating.

9. Ingersoll waived its requirement that warranty claims be in writing.

10. There is no evidence that the leased machines were not adequate as designed.

11. The machines did not work and when they did work they did not produce what Ingersoll said they would produce.

12. Ingersoll waived any right it had under the contract or otherwise to rely on the specifications and production surveys as designed.

13. Cole relied too heavily on self-help.

14. Ingersoll breached its express warranty.

In a written order issued the day after the trial, the court ruled that Cole had failed to prove fraud. It set aside its earlier ruling that the lease agreement excluded consequential damages, basing the reversal on its oral finding that Ingersoll had breached its express warranty and on the additional findings that Cole was not a sophisticated commercial enterprise as the court had found earlier, but rather occupied a bargaining position substantially unequal to Ingersoll's, and that Ingersoll was "at least partially willful and dilatory in meeting its warranty obligations." Cole Energy Development Co. v. Ingersoll-Rand Co., No. 86-3003, slip op. at 1 (C.D.Ill. June 9, 1988). Therefore, Cole was entitled to "actual and partial" consequential damages for Ingersoll's breach of the express warranty. Id.

The court put off the damage phase of the trial, and gave the parties a period of time in which to reach a settlement on damages and directed them to submit proof of damages through affidavits and damage summaries if they failed to settle. The court urged the parties strongly to settle:

Because neither one of you are pristine glories here and clean as hounds teeth. There is contributory negligence against and there is certainly on your part a failure to comply, I think, with the standard requirement, the industry standard requirements once you waive that strict express warranty defense that you had by your actions.

Now, if there is ever a time that you should get together--now Cole Energy is not going to get [its] difference between no production and two million a day. They are not going to get it. You never produced that before and just because the proposal comes from Ingersoll-Rand that we can do this up to two million, there's no performance at all yet. We don't know whether anything designed will bring the two million. And they are certainly not going to be paying two mill, up to two, whatever it is per day on that score. And we are going to have to do some balancing of the equities involved here.

They on the other hand you have under the contract, number one we are talking about cancellation costs. Number two, we are talking about non-payment of lease payments, and this type of thing. So there's got to be accounted in whatever we do finally.

So you've got both some pluses and you've got some minuses. And this is the time when you ought to resolve this. And you can do, you can do it much more easily and better than I....

Trial transcript, June 8, 1988, at pp. 17-18.

The court did not give the parties an opportunity to object to having plaintiff's damages decided by affidavit. Neither party did so, then or at any later time.

In a subsequent written order in response to a motion by defendant for clarification, the court ruled that Ingersoll was entitled to cancellation charges and that Cole's entitlement to consequential damages did not mean it could recover "all consequential damages," or that it "was not required to mitigate those damages in some way." Cole Energy Development Co. v. Ingersoll-Rand Company, No. 86-3003, slip op. at 2 (C.D.Ill. July 8, 1988).

The parties were unable to settle the damage claims and proceeded to submit extensive materials bearing on those claims. The court did not require them to negotiate the precise issues on which they disagreed or to prepare proposed findings of fact and objections to focus their disputes, and the parties did neither of these things.

Despite the court's admonition that Cole was "not going to get [its] difference between no production and two million a day," Cole continued to maintain that it was entitled not only to the additional expenses it had incurred as a consequence of the defective machines, but to the profits it had lost in not achieving the production Ingersoll had warranted, in a total amount in excess of two million dollars. To...