Of the Northern District of Illinois, sitting by designation. †

In the

United States Court of Appeals

For the Seventh Circuit

No. 09-2406

SUPERL SEQUOIA LIMITED,

Plaintiff-Appellant,

v.

THE CARLSON COMPANY, INC.,

Defendant-Appellee.

 

Appeal from the United States District Court

for the Western District of Wisconsin.

No. 07-cv-640-bbc—Barbara B. Crabb, Judge.

 

ARGUED JANUARY 11, 2010—DECIDED AUGUST 11, 2010

Before EASTERBROOK, Chief Judge, KANNE, Circuit

Judge, and KENNELLY, District Judge.

†

EASTERBROOK, Chief Judge. During the first half of

2007, Macy’s, Inc., planned for an extensive promotion

of goods under the Martha Stewart label. (At the time,

Macy’s was known as Federated Department Stores; we

use its current corporate name.) The department-store
2 No. 09-2406

chain invited bids for equipment and services needed

to turn portions of 226 stores into settings for the promotion. Carlson Company, a furniture manufacturer based

in Madison, Wisconsin, proposed to supply 4,000 “fixtures” for this project. We put the word in quotation

marks because the beds, armoires, tables, and other

items that Macy’s wanted are not “fixtures” as the law

of real property uses that term. They are pieces of

furniture rather than doors, swimming pools, or durable

goods expected to remain in place for years to come.

We call the items furniture rather than fixtures.

Carlson did not have the capacity to make all of the

furniture in time for Macy’s deadline. Before placing a

bid, it asked Superl Sequoia Limited, a manufacturer

based in Hong Kong, whether it could meet most of

Macy’s requirements. Superl Sequoia said that it could,

and that it would participate if Carlson was willing to

split any profits 50/50. Carlson agreed. Its role would be

to install the furniture so that the displays met Macy’s

specifications, and to fix or replace any furniture that

arrived in substandard condition (or, worse, did not

arrive at all). In February 2007 Superl Sequoia gave

Carlson a quote of approximately $3.4 million, including

shipping, for the items Macy’s wanted. Carlson accepted

the quote, applied a markup of 22% (on which Superl

Sequoia and Carlson had agreed) to that quote plus

Carlson’s estimate of its own costs, and bid approximately $5 million to Macy’s, which accepted on March 1,

2007.

The displays were installed on time (July 16, 2007).

Macy’s was satisfied with their quality and paid
No. 09-2406 3

Carlson’s invoice. But the project required more work

than Carlson had expected. Some of the furniture

arrived from China late or not at all; Carlson had to

make or buy replacements. Some of the furniture

was damaged in transit, and some did not meet Macy’s

specifications. Again Carlson had to manufacture replacements or fix the damage. Superl Sequoia concedes

that some of the 4,000 items needed to be fixed or

replaced, though it thinks that Carlson did not need to

spend as much as it did on replacements or fix as many

pieces as it did. Carlson eventually paid Superl Sequoia

about $2 million, as opposed to $3.4 million plus 50%

of any profits. Superl Sequoia sued for the balance

under the international-diversity jurisdiction. 28 U.S.C.

§1332(a)(2). Carlson is a Wisconsin corporation with

its principal place of business in Wisconsin. Superl

Sequoia is a Hong Kong business organization “limited

by shares,” a status in the Commonwealth of Nations

that we have held is equivalent to a corporation in the

United States. See Lear Corp. v. Johnson Electric Holdings

Ltd., 353 F.3d 580, 582–83 (7th Cir. 2003).

The district court concluded that Superl Sequoia

breached its contract by furnishing some defective

goods and not delivering others and that Carlson could

charge against the joint venture the costs of replacing or

repairing the items. Superl Sequoia does not contest

these conclusions. Because the parties could not agree

on how many items were defective, or what Carlson’s

reasonable costs were, the court held a bench trial. Before

trial, however, the judge concluded that Superl Sequoia’s

$3.4 million quote must be disregarded. Only its out-of-
4 No. 09-2406

pocket costs could be charged to the joint venture, the

judge held. The $3.4 million bid included a markup,

which must be removed. 2008 U.S. Dist. LEXIS 56167

(W.D. Wis. July 23, 2008).

At the trial, both sides provided evidence of their

actual costs of performance (manufacturing and shipping

on Superl Sequoia’s side; delivering and assembling

the displays on Carlson’s). The judge then used these

costs to determine how much profit the joint venture

had made and divided that profit 50/50 between Superl

Sequoia and Carlson. The judge concluded that Superl

Sequoia’s chargeable costs were $2.2 million, that

Carlson’s chargeable costs were $400,000, and that each

side is entitled to $1.15 million as its share of profits. (We

disregard some other sums that the judge deducted from

the $5 million.) The judge then concluded that Carlson

is entitled to about $1.16 million to cover the expense

of repairing or replacing furniture. Since Carlson had

already paid Superl Sequoia about $2 million, the bottom line was a net judgment of $9,550 in Carlson’s favor.

2009 U.S. Dist. LEXIS 37492 (W.D. Wis. May 1, 2009).

Superl Sequoia takes issue with many of these calculations, but its arguments can’t get past the standard

of appellate review: a district judge’s findings after a

bench trial may be upset only if clearly erroneous. See

Fed. R. Civ. P. 52(a)(6); Anderson v. Bessemer City, 470 U.S.

564 (1985). The judge did not commit any clear error

in toting up costs. Many of the decisions are debatable,

but it is the trier of fact, rather than an appellate court,

that resolves debatable factual issues. Costs of manufac-
No. 09-2406 5

turing are notoriously hard to calculate, because many

of a business’s costs are fixed in the short run. Tools

and machines can be used for many projects, and the

allocation of these expenses to any one project depends

on the elasticity of demand for the different outputs,

which can be hard to determine. It is enough to say that

the district judge’s handling of the disputes about the

amount and allocation of costs is thoughtful and reasonable.

By contrast, appellate review of legal issues, including

the meaning of contractual language that need not be

disambiguated by parol evidence, is plenary. See PSI

Energy, Inc. v. Exxon Coal USA, Inc., 17 F.3d 969, 971

(7th Cir. 1994). The district judge made two legal

decisions that had a significant effect on the calculations. One, which we have mentioned already, is that

Superl Sequoia cannot treat its quotation as the cost

of making and shipping the furniture but is limited to outof-pocket expenses, free of any markup for overhead,

the cost of capital, or a reserve for risk. (The judge

made this decision as a matter of law before trial;

neither side has suggested that the judge should have

kept the issue open until trial and received extrinsic

evidence on the subject. Neither side had any to present.)

The second decision is that, when calculating the cost

of replacement and repair, Carlson is entitled to a

markup to reflect overhead and the cost of capital. The

district court treated Carlson’s cost of making repairs

as the fee that it would charge to strangers for

equivalent work—a price that includes overhead and
6 No. 09-2406

profit. Unsurprisingly, Superl Sequoia sees these decisions as inconsistent and contends that one or the other

must be wrong. Actually, Superl Sequoia contends that

both are wrong. Recovery of its own overhead and

reserve for risk is justified, Superl Sequoia insists, because

Carlson accepted the $3.4 million quote. Carlson did not

quote repair prices to Superl Sequoia and therefore is

limited to out-of-pocket outlays under a cost-sharing

arrangement, the argument concludes.

Evaluating these arguments is complicated by the fact

that the parties operated on the basis of email exchanges,

each of which contains only a few potential contractual

terms, and did not memorialize their arrangement until

May 7, 2007, after Macy’s had accepted the $5 million

bid and much of the furniture was on its way from

China to the United States. Superl Sequoia made its

$3.4 million quotation, which Carlson accepted, more

than two months earlier, and Superl Sequoia says that

this became an inviolate part of the parties’ deal. Carlson

contends, and the district court found, that this quotation

was superseded by an email that Carlson sent to Superl

Sequoia on May 7, an email to which it replied with

general agreement and some emendations on May 8.

The judge found that the May 8 email must be ignored

because Carlson did not unequivocally agree—though

this reasoning may call into question the status of the

May 7 email as well, because the May 8 email may

amount to a counterproposal rather than an acceptance

plus a new proposal for changes. This is not a subject

we need to run to ground, however.
No. 09-2406 7

The first two paragraphs of the May 7 email serve as

the foundation for the district judge’s decision to

disregard the $3.4 million quotation:

1. The over riding theory and agreement is CC

(Carlson Company) and SS (Superl Sequoia) share

quoted costs (not sell price, but costs) of manufacturing 50/50 so that if there is any financial

risk of non-payment, both CC and SS share that

risk equally. By “sharing,” we define CC pays 1/2

of SS’s manufacturing costs if SS is the primary

manufacturer, and vice versa if [CC] is the primary manufacturer.

2. There are many different scenarios that can be

addressed, but neither CC or SS believe in an

overly complicated agreement. The overriding

principle is that both CC and SS share equally in

JOINT manufacturing costs to date so we always

have, within reason, the same financial exposure

for costs to date. This excludes any overhead

either party might have or indirect costs.

When calculating Carlson’s costs, the district judge

did not mention these paragraphs, which undercut the

decision to permit Carlson to charge against the joint

venture its “sell price” of replacements and repairs. Under

these paragraphs, only Carlson’s out-of-pocket costs are

chargeable. The district judge must recalculate the $1.16

million figure for Carlson’s repair and replacement costs.

That leaves the status of the $3.4 million quote, which is

not as easy to resolve on the basis of the email’s language.
8 No. 09-2406

Paragraph 1 shows that, if Macy’s did not pay, then Superl

Sequoia would get no more than $1.7 million (half of the

manufacturing costs, to be paid by Carlson), and would

have to compensate Carlson for half of Carlson’s costs.

But Macy’s did pay. The question then becomes whether

the $3.4 million should be treated as Superl Sequoia’s

costs, given that both ¶1 and ¶2 of the email say that

overhead and other indirect costs are excluded.

Carlson sees the answer as easy. The quotation

included overhead and a reserve for risk; these are incompatible with the May 7 email and must be removed.

That was the district judge’s view too. But there are two

problems. First, Carlson had accepted the $3.4 million

quotation more than two months before sending the

May 7 email. It cannot retroactively revoke an acceptance on which Superl Sequoia relied when joining

the business venture and manufacturing the furniture,

much of which was already in transit when Carlson sent

the May 7 email. Second, the quotation served two functions: as a floor, and as a ceiling. Superl Sequoia had

agreed that if manufacturing and shipping the furniture

turned out to cost more than $3.4 million, it would

swallow the loss rather than charge the excess expenses

to the joint venture. Carlson enjoyed that price protection but now wants to take away the compensation that

Superl Sequoia was to receive for providing it.

We asked Carlson’s lawyer at oral argument what

would have happened if Superl Sequoia’s costs had

exceeded $3.4 million, perhaps because it had to ship

more furniture by air than it had anticipated. (Which it
No. 09-2406 9

did. Superl Sequoia’s final invoice to Carlson was for a

little more than $3.4 million.) Counsel replied that all

extra costs were Superl Sequoia’s responsibility, that it

could not have claimed more than $3.4 million for its

role in the venture. Yet that position is incompatible

with Carlson’s contention that the May 7 email superseded the February price quotation. Carlson can’t have

things both ways. If the $3.4 million quotation survived

as a cap on the expenses that Superl Sequoia could

charge to the venture, it also survived as a floor. That’s

the nature of a firm price quotation. A cost-plus contract,

which is how the district judge understood the deal,

allows variation up as well as down. One can imagine

a deal such as “we will make 4,000 pieces of furniture

in exchange for out-of-pocket costs plus 50% of profits,

but if our costs exceed $x we will bear the excess ourselves.” The potential for profit might compensate for

the risk of cost overruns. But that is not the nature of

the February offer, which Carlson accepted, and it is

hard to understand the May 7 email as retroactively

changing the fundamental economic structure of Superl

Sequoia’s participation in the Martha Stewart project.

Paragraphs 3 and 4 of the May 7 email support this

understanding. Here they are:

3. Using the Martha Stewart project as a guide,

where SS is the primary manufacturer, SS and [CC]

will agree on a manufacturing cost, order quantity and shipping/production schedule at the beginning of the project. SS will request a start up

deposit and subsequently invoice [CC] for 50% of
10 No. 09-2406

the manufacturing cost at the time of each shipment, to be paid within 3 days by [wire].

4. CC and SS will mutually trust one another with

the factual accuracy of “draws” and or expenses

to date, but either party may request satisfactory

documentation from the other if requested, and

do so in a timely fashion, and neither CC or SS

will imply or infer any offense or mistrust from

the other by that request. Wherever/whenever

possible, CC & SS will have pre-agreed manufacturing cost that will dictate payment amount(s).

Paragraph 3 implies that the May 7 email provides a

framework for future ventures between Carlson and

Superl Sequoia, rather than documenting the terms for

the Martha Stewart project as a one-off deal. This may

explain why the email never mentions any terms of the

Martha Stewart project. Paragraph 3 also implies that the

Martha Stewart project’s contract is already set (otherwise how could it serve “as a guide”?), which would

mean that it is not modified by the May 7 email. Paragraphs 3 and 4 indicate that, although ¶2 requires

splitting out-of-pocket costs as a default rule, Carlson

and Superl Sequoia will try to set a “manufacturing cost . . .

at the beginning” of any project and that “pre-agreed

manufacturing cost . . . will dictate payment amount(s).” So

the May 7 email approves using price quotes, and the

February quote of $3.4 million fits comfortably as a “preagreed manufacturing cost” for this purpose.

Paragraph 1 of the May 7 email means that Superl

Sequoia would have to accept less than $3.4 million, and
No. 09-2406 11

would have to underwrite half of Carlson’s expenses, if

Macy’s did not pay (or did not pay enough). But ¶2 is

best read as limited to the participants’ incremental

costs—that is, the expenses of furniture and services

not already provided for in the $3.4 million. That reading

avoids undercutting Superl Sequoia’s legitimate reliance

on Carlson’s acceptance of the $3.4 million quotation and

avoids turning a firm price quotation into an asymmetric

deal (in which Superl Sequoia had placed a cap on its

expenses, without a floor under them). The entirety of

the May 7 email shows that the parties were to be treated

alike; using the $3.4 million bid as a cap but not a floor

would violate that symmetry. Judges endeavor to read

contracts to make economic sense, see Beanstalk Group,

Inc. v. AM General Corp., 283 F.3d 856, 860 (7th Cir. 2002);

Gottsacker v. Monnier, 281 Wis. 2d 361, 375, 697 N.W.2d

436, 442 (2005), and it would undermine the economic

structure and function of this transaction to treat the

$3.4 million as a cap on Superl Sequoia’s expenses,

while depriving it of any floor.

The judgment of the district court is vacated, and the

case is remanded with instructions to recalculate the

net judgment consistently with this opinion.

8-11-10