Power Systems & Controls, Inc. v. Keith's Elec. Const. Co., 880029-CA

• Decision Date: 01 December 1988
• Docket Number: No. 880029-CA,880029-CA
• Citation: 765 P.2d 5
• Court: Utah Court of Appeals
• Parties: 8 UCC Rep.Serv.2d 34 POWER SYSTEMS & CONTROLS, INC., Plaintiff and Respondent, v. KEITH'S ELECTRICAL CONSTRUCTION COMPANY, dba K.E. Systems, Inc., Defendant and Appellant.

Page 5

765 P.2d 5

8 UCC Rep.Serv.2d 34

POWER SYSTEMS & CONTROLS, INC., Plaintiff and Respondent, v. KEITH'S ELECTRICAL CONSTRUCTION COMPANY, dba K.E. Systems Inc., Defendant and Appellant.

No. 880029-CA.

Court of Appeals of Utah.

Dec. 1, 1988.

Jimi Mitsunaga (argued), Salt Lake City, for defendant and appellant.

Eric Olson (argued), Van Cott, Bagley, Cornwall & McCarthy, Salt Lake City, for plaintiff and respondent.

Before GARFF, DAVIDSON and JACKSON, JJ.

OPINION

GARFF, Judge:

Defendant/appellant, Keith's Electrical Construction Co. dba K.E. Systems (K.E. Systems), seeks reversal of the trial court's finding that it breached a contract with plaintiff/respondent, Power Systems & Controls, Inc. (PSC). We affirm.

K.E. Systems is a Utah contractor specializing in installation of computer power conditioning equipment. Keith G. Sakai is president of K.E. Systems. PSC is a Virginia-based manufacturer of computer power conditioning equipment with substantial government contracting experience. At the relevant times, Edward J. Gorman was PSC's regional manager for Utah and Tom Glandon was PSC's local representative. Emergency Power Equipment Co. (EPE) is a competitor of PSC.

K.E. Systems contracted with Hill Air Force Base (HAFB) in Utah to install a 500 kilowatt power conditioning unit and accessories, the purpose of which was to eliminate sudden drops or surges in electrical power supplied to computer equipment. ¹

On August 6, 1984, Sakai, on behalf of K.E. Systems, and Gorman, on behalf of PSC, signed a purchase order for the required equipment which stated, in part, that: "c.... This warranty and conditions will be part of acceptance package for governmental approval. d. This purchase order is contingent on Hill AFB acceptance of the equiptment [sic] approval and conditions." This purchase order required PSC to deliver the equipment within twenty-two weeks. It did not contain any limitations on the number of submittals PSC could make nor did it specify a time limit for HAFB approval.

On August 14, Glandon advised K.E. Systems that PSC would immediately begin manufacture of the equipment in order to meet the tight twenty-two week delivery deadline. Sakai advised Glandon that PSC should not commence manufacture of the equipment until its submittal had been approved by HAFB officials. Nevertheless, on September 3, PSC began to manufacture the equipment.

On September 11, PSC advised K.E. Systems by letter that it had established a rigid manufacturing schedule to meet the delivery requirements and expected no unreasonable delay in acceptance by HAFB.

After receiving a copy of the government's solicitation, Gorman prepared a submittal on behalf of PSC, dated September 11, 1984, and forwarded it to K.E. Systems. This submittal included PSC's standard warranty. Sakai prepared the cover sheet and forwarded the package to HAFB on September 13.

HAFB rejected PSC's submittal, setting forth its reasons. Glandon received the rejection on September 20 or 21, and immediately forwarded it to PSC. Sakai, at this time, indicated to PSC that it should contact HAFB directly regarding the rejection.

On September 22, Sakai became aware of potential warranty problems with PSC's proposal in that PSC's warranty, contrary to government specifications, required the government to pay overtime and travel expenses for on-site repair of the equipment. In an attempt to absolve K.E. Systems from potential liability on the warranty if the government accepted it unchanged, Sakai informed the government contracting officer at HAFB that the warranty should be reviewed. At this time, because he had done considerable business with EPE before, Sakai began to explore the possibility of using EPE equipment instead of PSC's.

On September 25, Gorman called HAFB to discuss the rejection of PSC's submittal. He discussed with HAFB officials each particular item and agreed to the government's terms, indicating that he would turn in a second submittal in conformity with the conversation.

Gorman supervised preparation of PSC's second submittal and mailed it on September 27. PSC began assembly of the 500 kilowatt unit at this time.

Glandon received the second submittal on September 28, and hand carried it to K.E. Systems. The same day, Sakai prepared two letters criticizing PSC's warranty, specifically targeting two provisions, paragraphs F and G, which related to equipment repair. On September 29, Sakai discussed PSC's second submittal by phone with HAFB. He sent one letter to Glandon and, on October 1, sent the other to HAFB, attaching PSC's second submittal. The letter to HAFB indicated that K.E. Systems would be "following up on a different proposal package," while the letter to Glandon did not mention the different proposal package.

HAFB rejected PSC's second submittal on the basis of the warranty provisions. The project manager informed Glandon on October 16, both by telephone and by letter, of the reasons for the rejection.

Gorman supposedly resolved these problems in PSC's third submittal, dated October 17. However, he did not alter paragraph F of the warranty. Instead, he addressed the concerns regarding paragraph F by stating that paragraph F was "standard," but if there was any concern regarding it, K.E. Systems should call PSC.

Also on October 17, K.E. Systems forwarded a second proposal package for the equipment, submitted by EPE, to HAFB. This package included drawings prepared by Sakai. K.E. Systems's cover letter for this package stated that "[w]e have been notified by Power Systems and Controls that they will be resubmitting their package which we will forward upon receipt. If you have any questions regarding the alternate vendor package or require further information concerning either package, please contact me immediately." On October 19, Sakai forwarded PSC's clarifications to HAFB as a third submittal.

On October 24, HAFB informed K.E. Systems that it had rejected PSC's third submittal and set forth five items as bases for disapproval: the presence of paragraph F in the submittal warranty, three deficiencies which were the sole responsibility of K.E. Systems, and one item that had not been raised in any previous disapproval. HAFB requested resubmittal within ten days.

On October 25, HAFB approved EPE's submittal and so advised K.E. Systems. Sakai called the HAFB contracting officer, who confirmed that the EPE submittal was approved and PSC's rejected, and advised Sakai to place an order for the EPE equipment.

On October 26, Sakai ordered the equipment from EPE. On the same day, Sakai called Glandon and informed him that HAFB had rejected the third PSC submittal because of the presence of paragraph F in the warranty. He did not inform Glandon that HAFB had requested resubmittal within ten days or that it had approved an alternate vendor's submittal. Glandon advised Sakai that paragraph F would be deleted. Sakai told Glandon that the deletion of paragraph F needed to be put in writing. At this time, PSC had no reason to believe that there were any other problems and expected HAFB's immediate approval.

Pursuant to the telephone conversation, Gorman wrote a letter to Sakai, also dated October 26, advising him that "PSC is deleting clause 'f' of our warranty agreement for Hill Air Force Base." Sakai received this letter about November 2. He did not, however, convey the information in the letter to HAFB.

The same day, Sakai wrote a letter to Glandon advising him that due to the prior rejections, K.E. Systems had submitted an alternate vendor's proposal to HAFB. He did not indicate, however, that he had already placed an order with EPE. This letter arrived in Glandon's office on November 1. Sakai was aware that Glandon would be out of his office at this time because of his marriage and honeymoon.

Glandon did not become aware that EPE was being considered as an alternate vendor until November 7, when he returned from his honeymoon and read Sakai's October 26 letter. Upset, he called Sakai and found out that Sakai had already ordered equipment from EPE. He immediately notified Gorman, reading him Sakai's letter over the telephone.

On November 8, Gorman flew to Utah. He and Glandon met with HAFB personnel but not with Sakai because of Sakai's unwillingness to meet with them. The HAFB personnel advised Gorman and Glandon that they would consider a new PSC submittal if tendered by K.E. Systems.

On November 14, Gorman informed Sakai that a new submittal was on the way. On November 15, Sakai sought unsuccessfully to rescind the EPE contract. On November 16, Gorman sent a fourth submittal to K.E. Systems which addressed each basis for disapproval of the third submittal and deleted paragraph F of the warranty. He also sent a copy directly to HAFB because K.E. Systems had indicated that it would not forward a copy of PSC's fourth submittal to HAFB.

On November 19, K.E. Systems instructed HAFB to disregard any PSC submittal forwarded directly to HAFB. Consequently, HAFB never reviewed PSC's fourth submittal and did not grant an extension of time to resubmit it.

Prior to November 7, PSC was unaware that: (1) any reason existed for disapproval of its third submittal other than paragraph F, (2) disapproval of the third submittal required resubmittal within ten days, or (3) there was any limitation on its ability to make further resubmittals.

By November 17, PSC's 500 kilowatt unit was 90% complete. PSC completed it and attempted to resell it. However, its efforts at resale were not successful because of the unit's large size and specialized construction.

The original purchase price for the 500 kilowatt unit was $152,200, with an anticipated profit of $51,145. K.E. Systems did not pay PSC anything on the contract, but, instead, paid EPE $173,000 for its system and incurred an additional installation charge of $17,144.

On November 21, PSC brought an action against K.E. Systems for breach of contract claiming damages to the...