Taylor and Gaskin, Inc. v. Chris-Craft Industries
| Decision Date | 12 April 1984 |
| Docket Number | CHRIS-CRAFT,No. 80-1387,80-1387 |
| Citation | 732 F.2d 1273 |
| Parties | 38 UCC Rep.Serv. 858 TAYLOR AND GASKIN, INC., Plaintiff-Appellee, v.INDUSTRIES, Defendant-Appellant. |
| Court | U.S. Court of Appeals — Sixth Circuit |
Timothy D. Wittlinger, Detroit, Mich., Nancy L. Hutcheson argued, Detroit, Mich., for defendant-appellant.
Robert W. Appleford, argued, Dahlberg, Mallender & Gawne, David M. Gaskin, Detroit, Mich., for plaintiff-appellee.
Before JONES and KRUPANSKY, Circuit Judges, and NEESE, Senior District Judge. *
In this appeal from the Eastern District of Michigan, Southern Division, defendant-appellant Chris-Craft Industries (Chris-Craft) has challenged the district court's refusal to award Chris-Craft consequential damages which assertedly resulted from plaintiff-appellee's negligence and breach of express and implied warranties of merchantability. The plaintiff-appellee, Taylor & Gaskin, Incorporated (Taylor & Gaskin), has not questioned the lower court's judgment, entered pursuant to a three-day bench trial, that Taylor & Gaskin breached its express and implied warranties of merchantability and was also negligent in the manufacture and sale of painted marine gasoline tanks to Chris-Craft.
The pertinent factual findings of the trial court are as follows. Sometime in mid-1970, Chris-Craft decided to produce a pleasure boat called MXA-25. As conceived, the MXA-25 design departed from predecessor boats in, among other things, the location of the fuel tank at the stern of the craft and attached to the lining of the vessel. In January 1972, Chris-Craft began production of a prototype MXA-25.
Chris-Craft had submitted a blueprint design for the MXA-25 fuel tank to Taylor & Gaskin. Because the MXA-25 was designed to meet existing competitive prices, Chris-Craft, through its buyer Robert B. Densmore (Densmore), discussed with Taylor & Gaskin the feasibility of utilizing a less expensive "slush compound tank" on the MXA-25. Previously, Chris-Craft had employed only "hot dipped galvanized" fuel tanks on its gasoline-powered motor-craft the slush compound tank was a painted-exterior unit. Although Chris-Craft had used painted tanks on its diesel boats, it had never used them on gasoline engine powered boats such as the MXA-25. Further, Taylor & Gaskin had no previous experience with the then-new slush compound method of construction. Accordingly, the trial court found that Chris-Craft and Taylor & Gaskin had equal degrees of expertise with respect to the design and manufacture of slush compound fuel tanks.
Densmore's contact at Taylor & Gaskin was Earl Wilkins (Wilkins), the manager of Taylor & Gaskin's Tank Division. Densmore told Wilkins that Chris-Craft was desirous of obtaining a tank more economical than the traditional hot dipped galvanized tank. From his prior dealings with the company, Wilkins was aware that Chris-Craft required that all equipment installed on its crafts be approved by the Boating Industry Association (B.I.A.). After discussing the slush compound method with Densmore, Wilkins told him that he would develop a price quotation and that he would also make the necessary inquiries to the B.I.A. regarding approval of the new tanks.
Subsequently, Taylor & Gaskin offered to produce the slush compound unit at a cost which was approximately ten dollars per unit less than the hot dipped galvanized tank. Taylor & Gaskin had also obtained B.I.A. approval of the slush compound tank, which was predicated upon assurances that the tanks would be covered with 1.5 mils of paint; the B.I.A. did not, however, perform any tests to determine the corrosion resistance of painted tanks. Taylor & Gaskin covered the tanks with one coat of red enamel paint, which did provide at least a 1.5 mil thickness.
Wilkins knew that these fuel tanks would be exposed to the marine environment and, although he was unaware of Chris-Craft's intentions relative to the unique placement on the MXA-25 of the tanks, he was found to have known--prior to production--that the tanks would be unable to resist corrosion in the marine environment and were therefore not suited for marine use. Wilkins' own estimate was that the tanks would last one year, two at the most. Nevertheless, Wilkins did not communicate this knowledge to Chris-Craft. Two prototype tanks were subsequently produced, one was given to Chris-Craft and one was retained by Taylor & Gaskin. Neither company conducted corrosion tests on the tanks, but Chris-Craft did conduct pressure tests.
Chris-Craft remained unaware of the tank's inability to withstand the marine environment when, between September 1972 and June 1973, it purchased 550 tanks from Taylor & Gaskin. Sometime in July 1973, Chris-Craft learned that the B.I.A. intended to delete the Taylor & Gaskin tank from its approved equipment list as of August 1st of that year. Upon learning of the impending change, Chris-Craft began ordering hot dipped galvanized tanks for the MXA-25. Prior notice of this change notwithstanding, Chris-Craft installed another 100 slush compound units before the B.I.A. acted to officially withdraw its approval. The trial court found that as of August 1, 1973, Chris-Craft returned to installing the traditional tank into the MXA-25.
In April 1974, Chris-Craft received the first of numerous customer complaints regarding corrosion of the slush compound fuel tanks on the MXA-25. At least two of the failures were attributable to factors other than the painted exterior, i.e., weld leaks and faulty installation. By May 1974, Chris-Craft began to suspect that the Taylor & Gaskin fuel tanks were "built in failures". Later that month, Chris-Craft notified Taylor & Gaskin of the complaints and suggested that the two companies effect a joint recall of the slush compound tanks. Taylor & Gaskin responded that the responsibility for tank problems was on Chris-Craft and that Taylor & Gaskin would not participate in a recall effort.
In December 1974, David F. Butler (Butler), Chris-Craft's Chief Mechanical Engineer, conducted an investigation of the fuel tank complaints. Butler's March 17, 1975 report concluded that the rusting was caused by the breakdown of the exterior paint. Butler further concluded that the B.I.A. testing was inadequate, but that the tanks were constructed pursuant to Chris-Craft specifications. At about the same time, the Chris-Craft service department contacted several Chris-Craft dealers, who immediately inspected sixty-six tanks. Forty-three of those tanks demonstrated rusting. On March 18 and 19, 1975, Chris-Craft alerted all of its dealers to the rust problems.
On March 28, 1975, Chris-Craft initiated a voluntary recall campaign to replace the painted tanks with hot dipped galvanized units. Taylor & Gaskin responded to the recall by threatening Chris-Craft with a trade libel suit.
On June 3, 1975, Taylor & Gaskin initiated this diversity action to obtain $10,681.39 due and owing as payment for the slush compound tanks. Chris-Craft admitted the amount was unpaid and counterclaimed alleging negligence and breach of warranties. A three-day bench trial ensued.
Pursuant to trial, the district court found that Taylor & Gaskin had provided Chris-Craft with express and implied warranties of merchantability. However, because Chris-Craft did not rely on Taylor & Gaskin's "expertise", and because the two companies were found to have equal levels of expertise, the district court concluded that no warranty of fitness for a particular purpose had been made by Taylor & Gaskin.
The district court also held that Chris-Craft had conducted a reasonable inspection of the tanks and that its failure to test for corrosion resistance was not unreasonable (the court further found that there was at the time no reliable corrosion test available). The trial court determined that, although Chris-Craft designed the tank and elected the painted external process for competitive reasons, Chris-Craft's design specifications did not exclude the use of two coats of paint--the selection of the number of coats utilized was specifically held to have been a manufacturing decision and not a design element. The court further held that the tank's defect was "attributable to a manufacturing process, the use of one coat of paint" and further:
[T]he failure to apply two coats of paint was a uniform defect in the manufacturing process permitting the conclusion that the tanks were not merchantable at the time of sale.
* * *
* * *
[The credited] testimony of Chris-Craft's expert Arthur Claess established that the tank would begin rusting at one to two months and would rust through at two years. Such evidence is sufficient to prove that the tanks were not merchantable at the time they left the control of the manufacturer, that is that they were not fit for the ordinary purpose of holding fuel in a marine environment, U.C.C. 2-314. 1
The court then surmised that "some portion" of the damages was attributable to Chris-Craft's selection of the painted exterior, its installation design, and the location of the tank on the MXA-25 boats. (However, no attempt at damage apportionment was made by the trial court.)
In arriving at its damage award, the trial court found that the value of the tanks at the time they left the manufacturer was zero; accordingly, Chris-Craft was awarded the contract price of the tanks, $25,114.58, offset by the stipulated unpaid amount, $10,683.19, for an ultimate award of $14,431.39 on the breach of warranties claim. Taylor & Gaskin has not appealed this judgment.
Chris-Craft's counterclaim had included a claim for consequential damages which represented the costs of the campaign to recall and replace the defective fuel tanks. The trial court held that this was not the proper case for the award of consequential damages because, (1) "Chris-Craft has failed to present any evidence that the costs of recall were within the reasonable...
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