663 F.2d 189, 30 UCC 949 (D.C.Cir. 1980)
In the late 1960s the A.C. Neilson Company began replacing written diaries with electronic equipment attached to television sets that fed audience data directly into computers via telephone lines.1 In early 1973 ARB (American Research Bureau), Inc., Neilson's leading competitor in television and radio audience research, concluded it had to adopt the same technology and circulated a request for proposals among electronics manufacturers.2 E-Systems, Inc. (Melpar Division), a designer and manufacturer of defense and communications electronics, responded along with three other companies.3
On the basis of E-Systems's representations the parties signed a fifty-three-page contract in October 1973 after lengthy negotiations by experienced counsel.4 The contract set a seven-stage work schedule tied to payments and deliverables, including Deliverable 1 (detailed electrical design) due in mid-November 1973, Deliverable 4 (fully operational pre-production models) due from late December 1973 through early February 1974, and Deliverable 7 (production equipment shipments) due in spring and summer 1974.5
The first pre-production model arrived on December 21, 1973, but testing disclosed performance defects.6 E-Systems assured ARB the problems would be cured at the production stage, so work continued through the summer of 1974 with deliveries of equipment that ARB installed in sample households.7 Those installations proved largely unsuccessful.8 In October 1974 ARB filed suit in the District Court for the District of Columbia.9 In its complaint ARB alleged that the equipment designed and produced by E-Systems did not conform to the specifications of the contract, and that E-Systems had breached express and implied warranties of merchantability and fitness.10 E-Systems answered that the equipment it produced did, in fact, work properly, and counterclaimed for the money owed under the contract.11 ARB then added a count of misrepresentation, contending that E-Systems negligently misrepresented the results of a pre-contract feasibility test run on the equipment, and E-Systems added a count seeking reformation of the contract, alleging that between negotiation and formal presentation ARB had altered agreed-upon contract terms.12
On September 19, 1977, by consent of the parties and upon order of the district court, a special master was appointed to conduct the trial.13 A five-week trial followed with extensive pre- and post-trial briefing.14 In his Memorandum Opinion of November 15, 1978, the master held that the equipment supplied by E-Systems had substantial defects and that E-Systems had breached the contract and warranties thereunder.15 On March 2, 1979, after considering written and oral objections of both parties to the master's Memorandum Opinion, the district court issued a Memorandum and Order, adopting the opinion of the master in full and ordering judgment for plaintiff.16 Both parties appealed to the United States Court of Appeals for the District of Columbia Circuit.17
Whether the district court's finding that the equipment failed to meet contract specifications was clearly erroneous?18
The master's finding that the equipment did not conform to contract specifications, and that E-Systems breached express warranties and the implied warranties of fitness and merchantability, was clearly erroneous.19
No. The master found that the equipment supplied by E-Systems had substantial design and component defects amounting to material breaches of the contract after considering contemporary field reports from both parties' employees and post-litigation expert testing. The district court adopted these findings in full.20 E-Systems's challenge to the master's discounting of its expert's tests and reliance on ARB's experts fails because the record shows the tested equipment had been altered and the test conditions did not simulate actual performance requirements.21 Contemporary evidence of non-E-Systems components does not undermine the conclusion that E-Systems equipment failed to meet specifications.22
The district court's finding that the equipment failed to meet contract specifications was not clearly erroneous.23
Whether the district court erred in holding that ARB's cessation of payments did not breach the contract?24
No. The contract tied payments to deliverables but expressly made payment conditional on final inspection and approval and construed warranties as conditions as well as warranties.27 When pre-production models proved defective, ARB demanded assurances and received promises that problems would be cured at production, yet the delivered equipment remained nonconforming.28 ARB therefore acted in a commercially reasonable manner by suspending payments under section 2-609.29 The master and district court correctly held that no contractual obligation required payment for nonconforming goods.30
The district court did not err in holding that ARB's cessation of payments did not breach the contract.31
Whether the district court erred in holding that ARB's filing of suit did not breach the contract?32
Contract provisions addressing remedies for failed individual installations apply only under an otherwise unimpaired contract and do not limit remedies for a generic breach of design and component specifications.33
No. The contract clause granting E-Systems the right to replace or modify equipment in failed homes applies only to isolated installation failures under a contract otherwise being performed.34 ARB's suit alleged a generic breach arising from fundamental design and component defects that affected the entire system.35 The filing of suit therefore did not breach the contract and did not limit ARB's remedies for the material breaches found by the master and adopted by the district court.36
The district court did not err in holding that ARB's filing of suit did not breach the contract.37
Whether the district court erred in holding that ARB did not accept the goods or, alternatively, made a timely revocation of acceptance?38
Under Md.Com.Law Code Ann. § 2-602 rejection must occur within a reasonable time after delivery with seasonable notification to the seller.39 Under Md.Com.Law Code Ann. § 2-608 revocation of acceptance is permitted when nonconformity substantially impairs value and occurs within a reasonable time before substantial change not caused by the goods' own defects.40
No. ARB repeatedly notified E-Systems beginning in January 1974 that the equipment was unacceptable and authorized continued production only on the basis of assurances that defects would be cured.41 The master found these notifications seasonable under sections 2-602 and 1-201(26).42 Even if acceptance occurred, revocation was timely because ARB acted before any substantial change not caused by the equipment's own defects.43 Ordinary use in good-faith attempts to make the equipment work does not constitute inconsistent acts or substantial change under section 2-608.44
The district court correctly adopted these findings.45
The district court did not err in holding that ARB did not accept the goods or, alternatively, made a timely revocation of acceptance.46
Whether the district court properly calculated incidental and consequential damages?47
ARB is entitled to recover full and fair compensation for the damages proximately resulting from these breaches.48
Yes. After finding material breaches, the master determined that ARB had incurred $1.95 million in incidental and consequential damages. These damages covered the costs of terminating the relationship with E-Systems, maintaining the sample households and a basic cadre of staff, enumerating a new parent sample, recruiting and installing new meters, and verifying reports.49 The expenses flowed directly from E-Systems's failure to deliver conforming equipment.50
The district court reviewed and adopted the award after rejecting E-Systems's claim that the amounts overlapped with any cover damages.51 The calculation rested on a proper record and was affirmed.52
The district court properly calculated incidental and consequential damages.53
Whether the district court erred in denying ARB damages for cover?54
Under Md.Com.Law Code Ann. § 2-202, a writing intended by the parties as a complete and exclusive statement of their agreement may not be contradicted by evidence of prior agreements.55 Such a writing also may not be supplemented by evidence of consistent additional terms if the court finds that the additional terms would have been included in the document.56 Integration clauses are generally to be given effect under section 2-202.57
Yes. The fifty-three-page contract contained an integration clause stating it constituted the entire agreement, together with clauses preserving all other remedies provided in law or equity.58 The master nevertheless considered the deletion of a reprocurement sentence from an earlier draft as evidence that ARB bargained away its cover remedy.59 That evidence contradicts the integration clause and is not a consistent additional term under the reasonable-harmony test of Snyder v. Herbert Greenbaum & Associates.60
A limitation on the central cover remedy would certainly have appeared in the final document.61 The district court therefore erred in denying cover damages.62
The district court erred in denying ARB damages for cover.63
Whether the district court erred in declining to rule on ARB's misrepresentation claim?64
In addition, the master declined to decide the misrepresentation claim, finding it unnecessary to do so in light of his holding that E-Systems was in breach.65
No. The master found that E-Systems had committed material breaches of the contract and the warranties by supplying equipment with substantial design and component defects.66 He awarded ARB the return of its payments plus $1.95 million in incidental and consequential damages.67 The district court adopted the master's opinion in full.68 ARB's misrepresentation claim sought the same compensatory relief already granted on the breach claims.69
The master therefore properly declined to decide the alternative misrepresentation claim, and the district court correctly adopted that decision.70
The district court did not err in declining to rule on ARB's misrepresentation claim.71
Whether the district court erred in refusing to award damages under Fed.R.Civ.P. 37(c)?72
Fed.R.Civ.P. 37(c) excuses a party's failure to admit when the party had reasonable grounds to believe it might prevail on the matter.73
No. E-Systems refused to admit matters concerning the conformity of the equipment and related contractual issues. The master found that E-Systems had reasonable grounds to believe it might prevail on the matter given the complexity of the technical and contractual issues and the existence of conflicting expert evidence.74 The district court adopted this determination after review.75 The refusal to award Rule 37(c) costs was therefore proper.76
The district court did not err in refusing to award damages under Fed.R.Civ.P. 37(c).77