Sonic Mfg. Techs., Inc. v. AAE Sys., Inc.

• Decision Date: 09 June 2011
• Docket Number: No. H034953.,H034953.
• Citation: 196 Cal.App.4th 456,126 Cal.Rptr.3d 301,11 Cal. Daily Op. Serv. 7106,2011 Daily Journal D.A.R. 8446
• Court: California Court of Appeals Court of Appeals
• Parties: SONIC MANUFACTURING TECHNOLOGIES, INC., Plaintiff, Cross–Defendant and Appellant, v. AAE SYSTEMS, INC., Defendant, Cross–Complainant and Appellant.

196 Cal.App.4th 456

126 Cal.Rptr.3d 301

11 Cal. Daily Op. Serv. 7106

2011 Daily Journal D.A.R. 8446

SONIC MANUFACTURING TECHNOLOGIES, INC., Plaintiff, Cross–Defendant and Appellant,

v.AAE SYSTEMS, INC., Defendant, Cross–Complainant and Appellant.

No. H034953.

Court of Appeal, Sixth District, California.

June 9, 2011.

Pahl & McCay, Servando R. Sandoval, San Jose, Payal D. Mehta, for Plaintiff, Cross–Defendant and Appellant Sonic Manufacturing Technologies.

Law Office of Mary K. Simpson, Mary K. Simpson, Campbell, for Defendant, Cross–Complainant and Appellant AAE Systems, Inc.

PREMO, J.

Plaintiff Sonic Manufacturing Technologies, Inc., sued defendant AAE Systems, Inc., for breach of contract, and defendant cross-complained against plaintiff for breach of the same contract. After a court trial, the trial court found in favor of plaintiff on the complaint and cross-complaint. It entered judgment for $94,269.70. Defendant appeals from the judgment and contends that there is no substantial evidence in support of the trial court's finding that it breached the contract. Plaintiff appeals from the judgment and contends that the trial court erred by finding that defendant did not breach the contract in another respect. We agree with defendant's contention and reject plaintiff's contention. We therefore reverse the judgment with directions to enter judgment for defendant on the complaint.¹

BACKGROUND

Plaintiff agreed to manufacture for and sell to defendant 500 Modem Cards. The contract, in the form of purchase order No. 0026667, dated April 3, 2006, provided that plaintiff would initially manufacture a First Article (five Modem Cards), “Submit First Article for approval,” and then “Receive release for production.” It then detailed: “After the First Article boards have been accepted, [defendant] will provide written approval and [plaintiff] may proceed with the manufacture of 100 boards. [¶] Subsequent lots will be authorized in writing in lot sizes to be specified. [Defendant] will provide as much advance notice as possible for commencement of subsequent lots.” It also stated: “Factory Acceptance Test Reports are required to be approved in writing prior to shipping products.” The price for the cards was specified as $431.67 each and $215,835 for the total order of 500. The contract required plaintiff to deliver the Modem Cards to defendant's place of business. Payment terms were “Net due 30 days.” ² The contract contemplated that defendant would supply plaintiff with some of the manufacturing materials and plaintiff would directly purchase some of the manufacturing materials. After entering the contract, certain materials that plaintiff was obligated to purchase were unavailable or had increased in price. The parties therefore agreed to increase the total purchase price for the 500 Modem Cards by $7,213.90 (approximately $14.43 each). On June 27, defendant issued purchase order No. 0026764 referencing one miscellaneous item at a cost of $7,213.90 stating: “This is the final PPV increase for PO# 26667.” The stated payment term was “Net due 30 days.” On June 27, plaintiff issued defendant a $7,213.90 invoice (No. 61650) for the purchase price variance (PPV). Plaintiff manufactured the First Article by September 19, 2006. The parties had agreed that defendant would set up a test station and perform testing of the First Article on plaintiff's premises. Defendant's engineers tested the First Article on September 22. On September 27, defendant notified plaintiff of certain problems and advised that when the “problem has been corrected and the boards updated, [defendant] will retest the boards to verify performance and the test fixture.” On October 11, plaintiff returned one Modem Card to defendant because it proved to be defective. The First Article thus consisted of four Modem Cards.³ On October 19, plaintiff advised defendant that plaintiff was “looking to invoice for the materials we have bought and had here in stock for months now.” It gave defendant a summary of the materials and advised that it “would like to invoice the $153,834.65 that we have spent on the materials for these 500 boards. We would also like to be payed [ sic ] for the PPV charge of $7213.90, which was invoiced in May [ sic ] but has not been paid.”

Defendant approved the First Article on October 27 by advising plaintiff to “Please proceed with production of the first 100 boards.” Plaintiff completed manufacturing the remaining 96 Modem Cards by November 7. But the cards were defective because of a component supplied by defendant. Plaintiff so notified defendant. On November 14, plaintiff issued defendant a $14,880.15 materials invoice (No. 65469) for 45 Modem Cards regarding defendant's purchase order No. 26667 and a $149,132.17 materials invoice (No. 64716) for 451 Modem Cards regarding defendant's purchase order No. 26667. On December 8, defendant shipped to plaintiff 19 replacement components. On December 14, plaintiff advised defendant that the first five Modem Cards with the new component would be tested the next day and “Due to the no response from [defendant] on payment status our president has placed [defendant] on shipping hold.” On December 18, defendant shipped to plaintiff 77 replacement components and inquired why plaintiff invoiced it via No. 64716 for 451 Modem Cards when it was only shipping the initial 100 Modem Cards.

On January 30, 2007, defendant notified plaintiff that plaintiff was “in breach of contract by failing to provide the product described in purchase order number 0026667.” Defendant pointed out that it was not obligated to pay plaintiff until 30 days after delivery of the product. On January 31, plaintiff replied as follows: “Your assertion that [plaintiff] is in breach for failure to adhere to Net 30 terms is interesting given that [defendant] is on credit hold for failure to pay invoices within these terms (please refer to invoice 61650 for $7213.90 against your PO 0026764 that has remained unpaid since the invoice date of June 27, 2006). Repeated efforts to collect this debt have been ignored by [defendant]. Like every business entity, [plaintiff] reserves the right to grant and maintain credit terms based on customer ability to maintain their account in good standing. [Defendant] has not done this and has not been responsive to corrective action. [¶] We wish to further advise that the failure to deliver product against PO 0026667 is responsive to matters other than [defendant's] accounting performance. PO 0026667 required [defendant] to deliver components (consigned parts) and subsequent test equipment and procedures in support of the production schedule. The product in question cannot be built or tested without critical items of [defendant's] responsibility. [Plaintiff] has performed its required material procurement months ago and has been awaiting [defendant's] materials which to date are still incomplete. [Defendant] has been grossly negligent and unreasonably delayed [plaintiff] in the performance of this PO, and it has not been for the ‘past month and a half or so.’ [Plaintiff] communicated in good faith on this situation since fall of 2006, and finally issued a material billing on November 14, 2006 when it became apparent that [defendant] was not clearing the credit hold or communicating toward any form of resolution.” On February 9, defendant cancelled the contract after acknowledging that plaintiff was “unwilling to deliver the product without our meeting payment demands which far exceed what is required of us under the terms of the contract.”

Plaintiff's complaint alleges that, after receiving defendant's purchase order in April 2006, it “immediately acted to procure the necessary equipment needed to assemble the units ordered under the Purchase Order and to assemble and manufacture the first 5 units.” It references the PPV purchase order and that “By October 2006, [plaintiff] had waited several months for [defendant] to deliver parts needed by [plaintiff] to assemble [the cards] and was sitting on a substantial amount of parts and equipment while waiting for [defendant] to perform.” It continues that plaintiff “was not agreeable to waiting for payment on the parts and equipment it purchased and therefore demanded payment on its material expenditures and on the PPV invoice, the latter of which was then four months outstanding.” It reiterates that “Given the significant and unreasonable delay by [defendant] in procuring necessary parts, [plaintiff] continued to demand payment for the part expenditures it incurred.” It concludes by alleging that defendant “breached the terms of the agreement because [defendant] has never agreed to pay the amounts owed under the Purchase Orders and because it has failed to perform its obligations under the Purchase Orders.”

Plaintiff argued the case in accordance with its allegations. Its theory was that the delays in the manufacturing process justified its invoices for the PPV and materials: “And that it's—the expert also testified that it is within the custom and meaning—excuse me—custom and practice in the industry for a contract manufacturer to bill for those materials if there's a delay of more than 60 to 90 days. [¶] In this case, there was a 7–month delay between the time that the purchase order was issued and when they placed—and when they billed for the materials in this case. And there was an 8–month delay before [plaintiff] eventually placed [defendant] on a credit hold or shipping hold. [¶] So the only expert testimony in this case on that area testified that [plaintiff] was justified in billing for the material and then placing [defendant] on a shipping hold on December 14th, 2006.” It pinpointed the theory as follows: “The evidence here is that [plaintiff] was only asking to be reimbursed for the costs that they had, in fact, actually incurred on behalf of [defendant] for the materials, plus the PPV, which is also materials. And they were...