Oliver B. Cannon and Son, Inc. v. Dorr-Oliver, Inc.
| Decision Date | 01 November 1978 |
| Docket Number | DORR-OLIVE,INCORPORATED |
| Citation | 394 A.2d 1160 |
| Parties | OLIVER B. CANNON AND SON, INC., a Pennsylvania Corporation, Plaintiff Below, Appellant, Cross-Appellee, v., a Delaware Corporation, Barcroft Company, a DelawareCorporation, and William H. Rorer, Inc., a Pennsylvania Corporation, DefendantsBelow, Appellees, Cross-Appellants. |
| Court | United States State Supreme Court of Delaware |
Courtney H. Cummings, Jr., Wilmington, and Richard S. Gebelein of Wilson & Whittington, P. A., Wilmington, for Oliver B. Cannon and Son, Inc.
Douglas E. Whitney and George L. Pazuniak of Morris, Nichols, Arsht & Tunnell, Wilmington, for Dorr-Oliver, Inc.
James T. McKinstry of Richards, Layton & Finger, Wilmington, and David L. Grove of Montgomery, McCracken, Walker & Rhoads, Philadelphia, Pa., for Barcroft Co. and William H. Rorer, Inc.
Before DUFFY and McNEILLY, JJ., and BROWN, Vice Chancellor.
This is an appeal and cross-appeal from a judgment entered after a bench trial on damages in the Superior Court.
Briefly, the controversy involves a dispute between Oliver B. Cannon and Son, Inc. (Cannon), plaintiff, a painting subcontractor employed by the general contractor, Dorr-Oliver, Incorporated (Dorr-Oliver), defendant, to perform work on large tanks owned and used by Barcroft Company (Barcroft) in the making of Maalox.
After a separate trial on liability, the Superior Court concluded that Cannon was liable to both Barcroft and Dorr-Oliver and, on appeal, the judgment was affirmed. Oliver B. Cannon, Inc. v. Dorr-Oliver, Inc., Del.Supr., 336 A.2d 211 (1975). Complete statements of the pertinent facts relating to liability appear in the prior opinions of the Superior Court and of this Court, to which reference is made.
After remand, the Superior Court held an evidentiary hearing on the issue of damages. Upon completion thereof, the Court entered judgments in favor of Barcroft and Dorr-Oliver against Cannon in the amounts of $712,441.48 and $48,324.06, respectively with interest at 6% Per annum from October 19, 1976, and denied Barcroft-Dorr-Oliver's claim for litigation expenses. Both Cannon and Dorr-Oliver then docketed appeals in this Court.
We first consider the appeal by Cannon. It makes nine separate and detailed arguments in an effort to overturn the judgment of the Trial Court. In one form or another, the major part of these contentions attempts to reargue the liability issue. We regard that question as settled by the Superior Court order which was affirmed by this Court more than three years ago. We decline to reexamine the judgment establishing liability and, to the extent that Cannon seeks to argue that issue again, its contentions are without merit.
The Trial Court found that Cannon is responsible for all tank lining repairs and all lining replacements which were made. Implicitly, that finding defines the scope of the work necessary under the warranty, which was an issue reserved in our prior opinion. See 336 A.2d at 215. Since there is evidence to support such finding, (See, for example, evidence produced by Cannon recommending that total relining of the tanks was the cheapest way to correct the defects) we affirm it. Fairfield Builders, Inc. v. Vattilana, Del.Supr., 304 A.2d 58 (1973).
Turning now to the judgment in favor of Barcroft, it appears that the amount awarded by the Trial Court was computed as follows:
A. Inducement money and expenses (so-called)
-----------------------------------------
(1) Allowance for this Item $94,306.34
(2) Interest on Item (1) 34,518.26
(3) Reimbursement of amount
paid to U. S. Testing
Co. 1,842.50
(4) Interest on Item (3) 677.84
-----------
(5) Total $131,344.94
B. Loss of Profits
---------------
(1) Allowance of this Item 455,463.58
(including depreciation
in the amount of
$106,483.13)
(2) Interest on Item (1) 125,632.96
-----------
(3) Total 581,096.54
-----------
C. Amount of the Judgment $712,441.48
----------------------
Three items included in the computations are disputed in this appeal, and we consider them, Seriatim.
The Trial Judge held that, without prejudice and with a full reservation of rights, Barcroft paid Cannon $94,306.34 to induce it to repair and replace defective and negligently installed linings in the tanks.
On appeal, Cannon argues that it did not induce Barcroft to pay this sum for repair work but, rather, that it was money owed to Cannon for work done in June, July and August of 1970.
We note first that the amount of this item is not in dispute. The parties disagree as to whether any money is owed but, if there is liability, the amount thereof is not contested.
As we read the record, this so-called "inducement money" paid to Cannon really amounts to the cost of repairs made during the plant shutdown. Since Cannon's responsibility for such cost has been established, its argument on this aspect of the appeal is therefore without merit. Thus, the Trial Court properly concluded that Cannon owes Barcroft the money paid by it for corrective work, including interest and expenses, totalling $131,344.94.
In computing loss of profits, the Trial Court allowed Barcroft $106,483.13 for depreciation of its buildings and equipment. The amount was based upon expert testimony in which the straight-line method of depreciation was offered as the appropriate measure of loss.
Cannon contends that depreciation is not a proper element of damages in this case because it is a bookkeeping charge which does not reflect actual expenditure.
Depreciation is usually regarded as a decline in value of an asset, resulting from wear and tear, action of the elements or obsolescence. Webster's New International Dictionary (2 ed.). Cf. Graham County Electric Coop. v. Town of Safford, Ariz.Supr., 84 Ariz. 15, 322 P.2d 1078 (1958). Some or all of the factors causing depreciation usually continue during a period when a plant is inoperative. Cf. United States Steel Corporation v. United States, S.D.N.Y., 316 F.Supp. 990 (1970).
In this loss-of-profits case, we conclude that Barcroft is entitled to recover for any actual loss caused by Cannon's breach, including any actual decline in value or "depreciation" of the plant while it was out of production. But Barcroft's obligation is to establish that loss by showing what, in fact, the decline was. In our judgment, decline (measured by before and after values) cannot be established entirely by reference to an accounting technique, no matter how reliable it may be for other purposes.
The straight-line method of depreciation is a technical accounting procedure for allocating an item's cost over its useful life. 26 A C.J.S. Depreciation, p. 493, and cases cited therein. But it does not necessarily represent the actual loss in value of an item. See Cassady v. McKinney, Fla.App., 296 So.2d 94 (1974); Steeve v. Yaeger, Cal.App., 145 Cal.App.2d 455, 302 P.2d 704 (1954). And it has been said that "the straight-line-method is defensible if the use obtained from the asset is roughly equal in each year over its useful life." McGraw-Hill, Handbook of Modern Accounting, § 18-10 (1970).
We recognize that the straight-line method is commonly used in financial statements, tax returns and other similar documents, but it is an improper basis for computing damages in this case, which is not concerned with recovery of costs over useful life, nor with an equitable allocation of "use" costs over the shutdown period. In short, proof by reference to an arbitrary accounting rule is not an acceptable way of establishing actual loss resulting from depreciation in this litigation which seeks compensation for loss of profits.
It follows that so much of the judgment for Barcroft which is based on depreciation computed by the straight-line method must be reversed, and the case remanded for specific findings as to the actual depreciation to Barcroft's buildings and equipment during the four months in which the plant was shutdown. Any allowance to Barcroft for such depreciation must also take into consideration any increase in expected life resulting from the repair work which Cannon is ordered to provide and pay for in this litigation.
The Trial Court awarded Barcroft the sum of $581,096.54 in lost profits, including an allowance for depreciation (which we have just reviewed).
It appears that the Barcroft plant had been in operation for about 5 months prior to the 1970 shutdown; during that period it produced the following quantities (in pounds) of magnesium hydroxide paste and aluminum hydroxide gel:
Magnesia Alumina
-------- -------
January 174400 185200
February -0- 101600
March 352000 408800
April 296400 571200
May 328800 777200
Averaging the monthly production of each material over the 3 month period immediately prior to shutdown (that is, March, April and May), and then multiplying each such figure (325,733 magnesia; 585,733, alumina) by 4 (the number of months the plant was shutdown), the Trial Court arrived at a theoretical production for each chemical, had the plant been in operation. The Court then multiplied each total by the selling price of each chemical 1 to compute Barcroft's estimated total income from sales during the shutdown. Finally, subtracting Barcroft's avoidable cost of production from total income, the Trial Court arrived at a net of $455,463.58 as Barcroft's lost profit, exclusive of interest in the amount of $125,632.96.
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