Delchi Carrier SpA v. Rotorex Corp.

• Decision Date: 06 December 1995
• Docket Number: 717,Nos. 185,D,s. 185
• Parties: DELCHI CARRIER SpA, Plaintiff-Appellee-Cross-Appellant, v. ROTOREX CORPORATION, Defendant-Appellant-Cross-Appellee. ockets 95-7182, 95-7186.
• Court: U.S. Court of Appeals — Second Circuit

Page 1024

71 F.3d 1024

DELCHI CARRIER SpA, Plaintiff-Appellee-Cross-Appellant, v. ROTOREX CORPORATION, Defendant-Appellant-Cross-Appellee.

Nos. 185, 717, Dockets 95-7182, 95-7186.

United States Court of Appeals Second Circuit.

Argued Oct. 2, 1995.

Decided Dec. 6, 1995.

Thomas E. Myers, Bond, Schoeneck & King, Syracuse, NY (John J. Dee, of counsel), for Plaintiff-Appellee-Cross-Appellant.

Richard D. Rochford, Jr., Nixon, Hargrave, Devans & Doyle, Rochester, NY (Harry P. Trueheart, III, Lisa A. Dolak, Sarah D. Beisheim, of counsel), for Defendant-Appellant-Cross-Appellee.

Before: WINTER, JACOBS, and LEVAL, Circuit Judges.

WINTER, Circuit Judge:

Rotorex Corporation, a New York corporation, appeals from a judgment of $1,785,772.44 in damages for lost profits and other consequential damages awarded to Delchi Carrier SpA following a bench trial before Judge Munson. The basis for the award was Rotorex's delivery of nonconforming compressors to Delchi, an Italian manufacturer of air conditioners. Delchi cross-appeals from the denial of certain incidental and consequential damages. We affirm the award of damages; we reverse in part on Delchi's cross-appeal and remand for further proceedings.

BACKGROUND

In January 1988, Rotorex agreed to sell 10,800 compressors to Delchi for use in Delchi's "Ariele" line of portable room air conditioners. The air conditioners were scheduled to go on sale in the spring and summer of 1988. Prior to executing the contract, Rotorex sent Delchi a sample compressor and accompanying written performance specifications. The compressors were scheduled to be delivered in three shipments before May 15, 1988.

Rotorex sent the first shipment by sea on March 26. Delchi paid for this shipment, which arrived at its Italian factory on April 20, by letter of credit. Rotorex sent a second shipment of compressors on or about May 9. Delchi also remitted payment for this shipment by letter of credit. While the second shipment was en route, Delchi discovered that the first lot of compressors did not conform to the sample model and accompanying specifications. On May 13, after a Rotorex representative visited the Delchi factory in Italy, Delchi informed Rotorex that 93 percent of the compressors were rejected in quality control checks because they had lower cooling capacity and consumed more power than the sample model and specifications. After several unsuccessful attempts to cure the defects in the compressors, Delchi asked Rotorex to supply new compressors conforming to the original sample and specifications. Rotorex refused, claiming that the performance specifications were "inadvertently communicated" to Delchi.

In a faxed letter dated May 23, 1988, Delchi cancelled the contract. Although it was able to expedite a previously planned order of suitable compressors from Sanyo, another supplier, Delchi was unable to obtain in a timely fashion substitute compressors from other sources and thus suffered a loss in its sales volume of Arieles during the 1988 selling season. Delchi filed the instant action under the United Nations Convention on Contracts for the International Sale of Goods ("CISG" or "the Convention") for breach of contract and failure to deliver conforming goods. On January 10, 1991, Judge Cholakis granted Delchi's motion for partial summary judgment, holding Rotorex liable for breach of contract.

After three years of discovery and a bench trial on the issue of damages, Judge Munson, to whom the case had been transferred, held Rotorex liable to Delchi for $1,248,331.87. This amount included consequential damages for: (i) lost profits resulting from a diminished sales level of Ariele units, (ii) expenses that Delchi incurred in attempting to remedy the nonconformity of the compressors, (iii) the cost of expediting shipment of previously ordered Sanyo compressors after Delchi rejected the Rotorex compressors, and (iv) costs of handling and storing the rejected compressors. The district court also awarded prejudgment interest under CISG art. 78.

The court denied Delchi's claim for damages based on other expenses, including: (i) shipping, customs, and incidentals relating to the two shipments of Rotorex compressors; (ii) the cost of obsolete insulation and tubing that Delchi purchased only for use with Rotorex compressors; (iii) the cost of obsolete tooling purchased only for production of units with Rotorex compressors; and (iv) labor costs for four days when Delchi's production line was idle because it had no compressors to install in the air conditioning units. The court denied an award for these items on the ground that it would lead to a double recovery because "those costs are accounted for in Delchi's recovery on its lost profits claim." It also denied an award for the cost of modification of electrical panels for use with substitute Sanyo compressors on the ground that the cost was not attributable to the breach. Finally, the court denied recovery on Delchi's claim of 4000 additional lost sales in Italy.

On appeal, Rotorex argues that it did not breach the agreement, that Delchi is not entitled to lost profits because it maintained inventory levels in excess of the maximum number of possible lost sales, that the calculation of the number of lost sales was improper, and that the district court improperly excluded fixed costs and depreciation from the manufacturing cost in calculating lost profits. Delchi cross-appeals, claiming that it is entitled to the additional out-of-pocket expenses and the lost profits on additional sales denied by Judge Munson.

DISCUSSION

The district court held, and the parties agree, that the instant matter is governed by the CISG, reprinted at 15 U.S.C.A. Appendix (West Supp.1995), a self-executing agreement between the United States and other signatories, including Italy. ¹ Because there is virtually no caselaw under the Convention, we look to its language and to "the general principles" upon which it is based. See CISG art. 7(2). The Convention directs that its interpretation be informed by its "international character and ... the need to promote uniformity in its application and the observance of good faith in international trade." See CISG art. 7(1); see generally John Honnold, Uniform Law for International Sales Under the 1980 United Nations Convention 60-62 (2d ed. 1991) (addressing principles for interpretation of CISG). Caselaw interpreting analogous provisions of Article 2 of the Uniform Commercial Code ("UCC"), may also inform a court where the language of the relevant CISG provisions tracks that of the UCC. However, UCC caselaw "is not per se applicable." Orbisphere Corp. v. United States, 726 F.Supp. 1344, 1355 (Ct.Int'l Trade 1989).

We first address the liability issue. We review a grant of summary judgment de novo. Burgos v. Hopkins, 14 F.3d 787, 789 (2d Cir.1994). Summary judgment is appropriate if "there is no genuine issue as to any material fact" regarding Rotorex's liability for breach of contract. See Fed.R.Civ.P. 56(c).

Under the CISG, "[t]he seller must deliver goods which are of the quantity, quality and description required by the contract," and "the goods do not conform with the contract unless they ... [p]ossess the qualities of goods which the seller has held out to the buyer as a sample or model." CISG art. 35. The CISG further states that "[t]he seller is liable in accordance with the contract and this Convention for any lack of conformity." CISG art. 36.

Judge Cholakis held that "there is no question that [Rotorex's] compressors did not conform to the terms of the contract between the parties" and noted that "[t]here are ample admissions [by Rotorex] to that effect." We agree. The agreement between Delchi and Rotorex was based upon a sample compressor supplied by Rotorex and upon written specifications regarding cooling capacity and power consumption. After the problems were discovered, Rotorex's engineering representative, Ernest Gamache, admitted in a May 13, 1988 letter that the specification sheet was "in error" and that the compressors would actually generate less cooling power and consume more energy than the specifications indicated. Gamache also testified in a deposition that at least some of the compressors were nonconforming. The president of Rotorex, John McFee, conceded in a May 17, 1988 letter to Delchi that the compressors supplied were less efficient than the sample and did not meet the specifications provided by Rotorex. Finally, in its answer to Delchi's complaint, Rotorex admitted "that some of the compressors ... did not conform to the nominal performance information." There was thus no genuine issue of material fact regarding liability, and summary judgment was proper. See Perma Research & Dev. Co. v. Singer Co., 410 F.2d 572, 577-78 (2d Cir.1969) (affirming grant of summary judgment based upon admissions and deposition testimony by nonmoving party).

Under the CISG, if the breach is "fundamental" the buyer may either require delivery of substitute goods, CISG art. 46, or declare the contract void, CISG art. 49, and seek damages. With regard to what kind of breach is fundamental, Article 25 provides:

A breach of contract committed by one of the parties is fundamental if it results in such detriment to the other party as substantially to deprive him of what he is entitled to expect under the contract, unless the party in breach did not foresee and a reasonable person of the same kind in the same circumstances would not have foreseen such a result.

CISG art. 25. In granting summary judgment, the district court held that "[t]here appears to be no question that [Delchi] did not substantially receive that which [it] was entitled to expect" and that "any reasonable person could foresee that shipping non-conforming goods to a buyer would result in the buyer not receiving that which he expected and was entitled to receive." Because the cooling power and energy consumption of an air conditioner...