W.A. Wright, Inc. v. KDI Sylvan Pools, Inc., 83-5648

• Citation: 746 F.2d 215
• Decision Date: 23 October 1984
• Docket Number: No. 83-5648,83-5648
• Parties: W.A. WRIGHT, INC. and A.C. Excavating, Inc., Appellees, v. KDI SYLVAN POOLS, INC., Appellant.
• Court: United States Courts of Appeals. United States Court of Appeals (3rd Circuit)

Page 215

746 F.2d 215

W.A. WRIGHT, INC. and A.C. Excavating, Inc., Appellees, v. KDI SYLVAN POOLS, INC., Appellant.

No. 83-5648.

United States Court of Appeals Third Circuit.

Argued June 15, 1984.

Decided Oct. 23, 1984.

Clarkson S. Fisher, Jr. (argued), Evans, Koelzer, Osborne, Kreizman & Bassi, Red Bank, N.J., for appellant.

John A. Yacovelle (argued), Somerdale, N.J., for appellees.

Before SEITZ, Circuit Judge, STEWART, Associate Justice (Retired), ^* and ADAMS, Circuit Judge.

OPINION OF THE COURT

SEITZ, Circuit Judge.

KDI Sylvan Pools, Inc., ("Sylvan") appeals from a final order of the district court entering judgment in favor of plaintiffs W.A. Wright, Inc. ("Wright Inc.") and A.C. Excavating, Inc. ("A.C. Excavating") after a jury trial. Sylvan further appeals an order of the district court denying Sylvan's motion for a new trial and granting plaintiffs' motion for an assessment of prejudgment interest. This court has jurisdiction under 28 U.S.C. Sec. 1291.

I.

Defendant Sylvan is engaged in the business of selling and constructing residential inground swimming pools. Plaintiffs Wright Inc. and A.C. Excavating, both controlled by William and Patricia Wright, perform construction tasks related to the installation of such pools.

On February 14, 1980, Sylvan entered into separate subcontracting agreements with Wright Inc. and A.C. Excavating. ¹ In the first of these agreements, Sylvan agreed to recommend Wright Inc. for all deck and terrace work on pools sold in Sylvan's Cherry Hill office during the 1980 season. The second agreement provided that A.C. Excavating would perform all excavation work on those pools. The latter contract estimated that "between 85 to 100 digs" would be commenced in 1980. Both agreements stipulated that either party could terminate the contracts for good cause.

Relations between the parties deteriorated, and Sylvan terminated the contracts in May of 1980, several months prior to the end of the season. Plaintiffs then filed suit in state court alleging breach of contract. The case was removed to federal court under the court's diversity jurisdiction. A jury trial was held in which the district court required the jury to respond to special interrogatories relating to the issues of liability, compensatory damages and punitive damages. The jury found that Sylvan had terminated the two subcontracting agreements without good cause. Wright Inc. received compensatory damages in the amount of $86,768.00, while A.C. Excavating received $28,396.00. Punitive damages of $7,500.00 were awarded to each of the plaintiff companies.

Prior to the district court's entry of judgment, plaintiffs moved for an assessment of prejudgment interest on the awards of compensatory damages. Also before the court was Sylvan's motion for a new trial. Applying New Jersey state law, the court held that equitable considerations supported an award of prejudgment interest. Interest was awarded for the period between November 30, 1980, the close of the 1980 season, and May 23, 1983, the date of entry of judgment. The motion for a new trial was denied. W.A. Wright, Inc. v. KDI Sylvan Pools, Inc., 569 F.Supp. 589 (D.N.J.1983).

The arguments raised by Sylvan in its motion for a new trial are revived in this appeal. Sylvan asserts that the district court improperly granted plaintiffs leave to amend their complaint after the close of their case at trial. The amendment, which was added solely to assert a basis for the imposition of punitive damages, alleged that Sylvan had entered into the subcontracting agreements with knowledge that they violated an earlier consent decree. This decree had been entered into in an unrelated action brought against Sylvan by a competitor, Anthony Industries, Inc. ("Anthony"). Under the terms of the decree, Sylvan and Anthony were prohibited from interfering with each other's business relationships with any contractors or subcontractors.

Sylvan argues that New Jersey law ² prohibits an award of punitive damages in this case and therefore that the jury should not have been instructed on the issue of such damages. The erroneous instruction, Sylvan further maintains, tainted the compensatory damage awards. Finally, Sylvan alleges that the district court abused its discretion in awarding prejudgment interest.

II.

A. Punitive Damages

Sylvan argues that, in the absence of a fiduciary relationship between the parties, New Jersey law prohibits an award of punitive damages in breach of contract actions. There are apparently no state supreme court decisions addressing this question. Thus, the task of the district court under Erie Railroad Co. v. Tompkins, 304 U.S. 64, 58 S.Ct. 817, 82 L.Ed. 1188 (1938), was to make an informed prediction as to how the New Jersey Supreme Court would rule on this issue if this case were before it. Pennsylvania Glass Sand Corp. v. Caterpillar Tractor Co., 652 F.2d 1165, 1167 (3d Cir.1981). This court conducts a plenary review of the district court's prediction. Compagnie des Bauxites de Guinee v. Insurance Corp. of North America, 724 F.2d 369 (3d Cir.1983).

Punitive damages have traditionally been reserved as punishment for wrongdoers who commit tortious acts. As the Restatement of Contracts states:

Punitive damages are not recoverable for a breach of contract unless the conduct constituting the breach is also a tort for which punitive damages are recoverable.

Restatement (Second) of Contracts Sec. 355 (1979).

Although several exceptions have been carved out of the general rule that punitive damages are unavailable in breach of contract actions, see e.g., Coryell v. Colbaugh, 1 N.J.L. 90 (N.J.Sup.Ct.1791) (punitive damages allowed for breach of promise to marry); Security Corp. v. Lehman Associates, Inc., 108 N.J.Super. 137, 260 A.2d 248 (App.Div.1970) (breach of fiduciary relationship between a seller and real estate broker), these exceptions have been premised upon the finding of a special relationship between the parties. These special relationships impose a duty of trust upon the contracting entities. It is the breach of this trust, rather than the breach of the contract, which gives rise to an award of punitive damages.

There is no such special relationship in this case. Nevertheless, an intermediate appellate court in New Jersey has suggested that a set of facts might be so egregious as to allow the jury to go beyond the recognized exceptions in awarding punitive damages. Sandler v. Lawn-A-Mat Chemical and Equipment Corp., 141 N.J.Super. 437, 358 A.2d 805 (App.Div.1976). Even assuming that Sylvan's conduct in this case was egregious, we do not believe that an award of punitive damages is appropriate. There is no indication in any New Jersey Supreme Court opinion that it would create an additional exception for egregious contract breaches.

Even where a fiduciary relationship may be presumed to exist, such as in the case of the relationship between an insured and its insurance carrier, the intermediate appellate courts of New Jersey have refused to authorize punitive damage awards, stating that "[w]e see no clear indication in our current jurisprudence that our Supreme Court would sanction such a cause of action." Garden States Community Hospital v. Watson, 191 N.J.Super. 225, 227, 465 A.2d 1225, 1226 (App.Div.1982). Moreover, until the decision in this case, no federal district court, construing New Jersey law, had assessed punitive damages in contract actions where no special relationship existed between the parties. See e.g., First National State Bank v. Commonwealth Federal Savings and Loan Assn., 455 F.Supp. 464 (D.N.J.1978), affd. 610 F.2d 164 (3d Cir.1980).

Recently, courts in other jurisdictions have created a new exception allowing for punitive damages in cases brought by consumers for breach of a construction contract. Morrow v. L.A. Goldschmidt Associates, Inc., 126 Ill.App.3d 1089, 82 Ill.Dec. 152, 468 N.E.2d 414 (1984). The courts in these cases appear to be influenced by the unequal bargaining position of the parties and by the need to insure public safety in building construction. No such policy considerations are present in this case. At issue here are two purely commercial contracts negotiated between parties at arm's length with one another.

Plaintiffs characterize Sylvan's conduct as constituting a breach of the covenant of good faith and fair dealing. Such a covenant may be implied in all contractual arrangements. Bak-A-Lum Corp. of America v. Alcoa Building Products, Inc., 69 N.J. 123, 351 A.2d 349 (1976). But to sanction punitive damages on such a "bad faith" theory would, it seems, allow for punitive damages whenever the contract breach was intentional. Thus, the exception urged by plaintiffs would effectively swallow the rule.

It is certainly true that a federal court sitting in diversity may diverge from existing precedent when there is sufficient evidence that the highest state court would be willing to entertain a change in its common law. But the federal court should proceed with great caution when the effect of its ruling would be to broaden the law beyond the point where any other court has yet ventured. While much has been written about the presumed trend toward "making punitive damages more easily obtainable in contract litigation," Kocse v. Liberty Mutual Ins. Co., 152 N.J.Super. 371, 378, 377 A.2d 1234, 1237 (Law Div.1977), we cannot assume, on such scant evidence, that the New Jersey Supreme Court would adopt such a rule with its sweeping implications. Rather, the case law suggests that the New Jersey courts have been cautious in...