Lectro-Tek Services, Inc. v. Exeter Packers, Inc.

• Decision Date: 17 June 2010
• Docket Number: 28088-8-III
• Court: Washington Court of Appeals
• Parties: LECTRO-TEK SERVICES, INC., A Washington Corporation, Appellant, v. EXETER PACKERS, INC., A California Corporation, Respondent and Cross-Appellant, JAMES TARRANT and JANE DOE TARRANT, husband and wife, and the marital community composed thereof, and LTS AUTO SALES, INC. DBA LTS AUTOMATION, a Washington Corporation, Defendants.

LECTRO-TEK SERVICES, INC., A Washington Corporation, Appellant, v. EXETER PACKERS, INC., A California Corporation, Respondent and Cross-Appellant, JAMES TARRANT and JANE DOE TARRANT, husband and wife, and the marital community composed thereof, and LTS AUTO SALES, INC. DBA LTS AUTOMATION, a Washington Corporation, Defendants.

No. 28088-8-III

Court of Appeals of Washington, Division 3

June 17, 2010

UNPUBLISHED OPINION

Kulik C.J.

Lectro-Tek Services, Inc. sued Exeter Packers, Inc., which does business as Sun Pacific Shippers, ^[1] for breaching contracts to purchase two computerized citrus grading machines. Sun Pacific counterclaimed seeking a refund of all sums paid to Lectro-Tek, alleging Lectro-Tek made material misrepresentations upon which Sun Pacific relied. After a bench trial, the court ruled that Lectro-Tek was not entitled to damages under RCW 62A.2-709 (price of goods) or RCW 62A.2-708(2) (lost profits). It also denied Sun Pacific's counterclaims. Lectro-Tek appeals, contending the trial court should have awarded it the balance of the contract price or lost profits. Sun Pacific cross-appeals, challenging the trial court's rejection of its counterclaims. We affirm the trial court in all respects.

FACTS

Lectro-Tek is a Washington business that builds machines for the electronic grading and packing of fruits and vegetables. In January 1999, Ralph Hackett, a manager at Sun Pacific, a company that sorts and ships oranges in California, contacted James Tarrant, the chief executive officer of Lectro-Tek about purchasing a machine that detects freeze damage in oranges. In late December 1998, a severe freeze damaged the California orange crop. Sun Pacific hoped that Lectro-Tek could develop a machine to salvage some of the crop. At that time, Lectro-Tek did not sell a machine that could perform this function.

On January 15, the parties met to discuss Sun Pacific's needs. Mr. Hackett told Mr. Tarrant that the maximum amount of incoming bad fruit was 38 percent, and the machine would have to sort that amount to 15 percent before the fruit could be packed and shipped. Mr. Tarrant stated he would contact a software company to inquire whether these specifications could be met. Mr. Tarrant told Mr. Hackett that Lectro-Tek could not commit to any project without getting assurances that the technology could be developed.

While negotiating with Sun Pacific, Mr. Tarrant consulted Stuart Wyatt, a software engineer at AgriSys Corporation, a software development company, about developing x-ray technology to detect freeze damage in oranges. Mr. Tarrant advised Mr Wyatt of Sun Pacific's time frame and the permitted tolerances of bad fruit. Mr. Wyatt believed the software could be developed to meet Sun Pacific's specifications and told Mr. Tarrant that AgriSys would prioritize the project. Mr. Tarrant relayed this information to Mr. Hackett. Mr. Tarrant did not enter into any written agreement with AgriSys.

On January 26, the parties entered into contracts for the purchase of two freeze damage detecting machines. The purchase price of each machine was $293, 500. One machine was to be delivered to Woodlake, California, "on or about" March 1, 1999, and the second machine was to be delivered to Bakersfield, California, by March 21. Ex. 7; Clerk's Papers (CP) at 15, 17. The contracts did not provide a delivery date for the software. The contracts also included a $50, 000 "[e]quipment expedite and research and development offset" for software development. Ex. 7.

Lectro-Tek proceeded to build one of the machines in Wenatchee Washington, and Mr. Wyatt worked on the software. On February 24 and 25, Mr. Hackett traveled to Wenatchee to observe the Woodlake machine's progress. Mr. Tarrant observed the machine was sorting, and he was "encouraged by what it was doing, in the shop." I Report of Proceedings (RP) at 94. However, Mr. Hackett thought the results of the test run appeared "random" and doubted Lectro-Tek's ability to meet the deadlines. CP at 295 296. Mr. Tarrant told Mr. Hackett that the software people were continuing to work on the software and that it would have to be perfected on site. Mr. Hackett did not voice any objections.

During this visit, Mr. Tarrant asked Mr. Hackett if he wished to discontinue the project or reject the contract. Mr. Hackett did not indicate that he wished to do so. In fact, Mr. Hackett stated that he would arrange shipping of the machine from Wenatchee to Woodlake. The parties did not discuss how long it would take to adjust the machine once it was shipped to California. Mr. Tarrant later testified, "[there was] no firm way that I could have told [Mr. Hackett] exactly how long it was going to take" and that Mr. Hackett never suggested a deadline for perfecting the software after delivery. I RP at 98.

On February 26, Mr. Hackett wrote to Mr. Tarrant, noting the assembled machine was "operating mechanically" but that the software portion was "incomplete and not fit for the purpose of sorting oranges." CP at 422. He stated that he understood "that your software engineers are still working on the computer instructions necessary to separate freeze damage oranges." Id.

On March 3, Mr. Hackett sent a letter to Mr. Tarrant stating that Sun Pacific's decision to invest in Lectro-Tek was "predicated upon a specific time line . . . . It is in both of our interests to successfully complete the installation and operation of the new Lectro-Tek system. Please advise a revised delivery schedule." Ex. 28.

Mr. Tarrant immediately responded: "Your visit on the 25th of February was to determine if you thought it was worth continuing with the project. As you know [Lectro-Tek] is in possession of new software to run as soon as you get the power to the system at your site. . . . We must let the guys do their jobs. It still looks good from here." Ex. 27.

In another letter sent on March 3, Mr. Tarrant informed Mr. Hackett that all the equipment was ready to run except for the waterline, which was being installed. He stated that one of the software programs was ready for installation that day and wrote, "I will say that all energy has been, and will continue to be put into getting you running as soon as possible unless you direct us to do otherwise." Ex. 29. Mr. Hackett testified that he did not direct Mr. Tarrant to do otherwise.

The Woodlake machine was installed on March 5. Mr. Hackett wrote to Lectro-Tek, alleging the machine had "quite a way to go." CP at 431. He also stated that he expected the machine to "[e]liminate all 40%+ damaged fruit from the packable bin" and "[l]imit the over 20% damage fruit to 12% . . . of the packable bin." Id.

On March 5, Sun Pacific also stopped payment on a February installment check for $77, 500. Mr. Hackett testified that he stopped payment because the machine could not limit the amount of good fruit being rejected to less than 10 percent and could not handle greater than 50 percent incoming bad fruit.

On March 8, Mr. Hackett notified Mr. Tarrant of the stop payment, claiming the machine was not commercially functional and suggested a meeting to discuss the issue of monetary advances. Mr. Hackett wrote: "Since we advanced the expediting fee and have yet to accept the equipment as seen in Wenatchee and as installed at Woodlake, we are compelled to stop payment on our check dated 2/25/99." Ex. 36; CP at 433. Mr. Tarrant replied that he could meet on March 10.

On March 9, Mr. Tarrant sent a letter to Mr. Hackett stating:

As of twenty minutes ago, with an incoming product approaching 90% overall damage (much higher than your claimed 30% to 40% damage we were to deal with) the machine was picking at the rate of 20% in the good with a 3% false alarm rate.

....

I am absolutely shocked that you would let us work 7 days a week to improve the machine when you obviously have made a decision to go another direction.

....

I will of course have to stop work on the project and bring all my people home.

Ex. 38; CP at 439.

Mr. Tarrant observed the operation of the machine in Woodlake on March 10 and noted it was running "quite well." I RP at 135. A state fruit inspector observed that the machine was operating within state tolerances. However, Mr. Tarrant was unable to engage Mr. Hackett in discussions regarding payments or the state's inspection.

Lectro-Tek removed its employees from the Woodlake plant after March 12, 1999, and filed a lawsuit on October 29, 2002 for breach of contract by the buyer. Sun Pacific counterclaimed, alleging Lectro-Tek materially breached its obligations under the contract and made material misrepresentations upon which Sun Pacific relied.

The testimony at trial showed that when Sun Pacific stopped payment on its installment check on March 5, 1999, it knew the orange crop was much more damaged than originally anticipated. Robert Reniers, the chief financial officer of Sun Pacific and a partner in the business, testified that in late December 1998 a severe freeze damaged the California orange crops. He stated that Sun Pacific engaged in discussions with Lectro-Tek in early 1999 hoping Lectro-Tek could develop machinery to salvage the maximum amount of fruit after the freeze. Mr. Reniers conceded that it took about six to eight weeks after the freeze, about mid-February, to determine the extent of the damage to the orange crops.

Mr. Reniers testified that the crop damage in 1998/1999 was extensive. Sun Pacific was able to ship only 1, 852 cars^[2] of fresh oranges out of 7, 000. By comparison, the year before, Sun Pacific shipped 5, 597 cars out of 6, 600. The year after the freeze, Sun Pacific shipped 6, 666 cars out of 7, 500. Thus, in 1998/1999 Sun Pacific packed 26 percent of its fruit compared with 85 percent the year before.

Mr Reniers...