Court Opinion

ID: 814198
Source: CourtListenerOpinion
Date Created: 2012-12-21 20:44:13+00
Date Added: 2024-06-11T18:00:51.252495
License: Public Domain

NOT PRECEDENTIAL

                      UNITED STATES COURT OF APPEALS
                           FOR THE THIRD CIRCUIT
                                ___________

                                     No. 11-3827
                                     ___________

                                MACK TRUCKS INC.,
                                           Appellant

                                           v.

                      BORGWARNER TURBO SYSTEMS, INC.
                          _______________________

                    On Appeal from the United States District Court
                       for the Eastern District of Pennsylvania
                         D.C. Civil Action No. 08-cv-02621
                            (Honorable Harvey Bartle III)
                                  ______________

                   Submitted Pursuant to Third Circuit LAR 34.1(a)
                                September 10, 2012

                Before: SCIRICA, ROTH and BARRY, Circuit Judges.

                              (Filed: December 21, 2012)
                                 _________________

                             OPINION OF THE COURT
                                _________________

SCIRICA, Circuit Judge.

      Plaintiff Mack Truck, Inc. (“Mack”) appeals the District Court‟s grant of summary

judgment in favor of Defendant BorgWarner Turbo Systems, Inc. (“BorgWarner”) on

Mack‟s breach of express warranty and breach of contract claims due to alleged design

defects. We will affirm.

                                           1
                                             I.

       Mack and BorgWarner entered into a “Supply Agreement,” dated December 6,

2002, in which BorgWarner agreed to manufacture and supply turbochargers for use in

Mack‟s truck engines. Section 9(b) of the Supply Agreement provides:

       BorgWarner‟s warranties to Mack regarding the Products are set forth in
       Annex V, attached hereto and incorporated herein. Notwithstanding
       anything else in this Agreement or the Annexes to the contrary,
       BorgWarner warrants that the Products shall, for the period of time defined
       in Annex V from the date placed in to service, be of good material and
       workmanship and shall conform to the specifications agreed upon by the
       parties . . . .

J.A. vol. II, A78-79.1

       On July 8, 2003, the parties added Annex V to the Supply Agreement. Annex V is

titled the “Product Warranty Terms and Conditions.” Id. at A103. Paragraph F of Annex

V states, “BorgWarner shall only warrant products that have a signed application sheet

and that do not exceed their limits while in operation in the field.” Id. The parties agree

the “signed application sheet” refers to a document also called the “Product Application

Agreement” (“PAA”).

1
  Annex V, paragraph A repeats these warranties, stating “Borg Warner warrants to Mack
(with the exceptions noted in Annex VII [sic], that the Products will conform to the
specifications provided to Borg Warner by Mack, and to any other technical requirements
agreed upon by the parties. Borg Warner also warrants to Mack that the Products will be
free of defects in material and workmanship in normal use and service.” J.A. vol. II,
A103. It conspicuously disclaims all other warranties, including the implied warranties
of merchantability and fitness for a particular purpose. Id.
                                             2
       The parties had already entered into a “Conditionally Approved” PAA, dated

October 31, 2002, memorializing the specifications for a “pilot” line of turbochargers.2

Id. at A172-78. After executing the Supply Agreement, the parties attempted to negotiate

a second non-conditional PAA that would establish specifications for turbochargers under

the Supply Agreement. Negotiations lasted into 2004, but the parties never reached an

agreement.

       During and after these negotiations, BorgWarner continued to provide Mack with

turbochargers for its truck engines pursuant to the Supply Agreement. But BorgWarner

expressed to Mack its position that unless they both agreed on and signed a second PAA,

Mack would have no design warranty coverage on the turbochargers. BorgWarner made

clear Mack would still have warranty coverage for material and workmanship. Mack did

not expressly assent to this understanding of the warranties, but Mack‟s internal emails

demonstrate Mack was aware BorgWarner did not intend to provide warranty coverage

unless a second PAA was signed.

       Once the turbochargers reached Mack‟s consumers, they began to fail at high

rates. Mack ultimately paid over $45 million to its customers from warranty claims

brought through August of 2008. BorgWarner reviewed the customer claims, provided

Mack with monthly summaries documenting the “condition codes” under which

2
 Because Mack was designing the engines in which BorgWarner‟s turbochargers were a
component, Mack and BorgWarner had to agree to certain “specifications,” such as the
maximum oil supply temperature and the maximum allowable shaft speed, which
describe the environmental limitations within which the turbochargers would operate.
                                            3
BorgWarner categorized each claim, and ultimately reimbursed Mack for nearly $4.5

million of these claims.3

       Mack brought suit against BorgWarner for breach of contract and breach of

warranty for failing to reimburse the remaining portion of claim payments allegedly due

to BorgWarner‟s design defects. The District Court found BorgWarner had made two

express warranties to Mack. First, a specifications warranty covering the design of the

turbochargers. Second, a material and workmanship warranty covering “deficiencies in

the execution of the design.” Mack Trucks, Inc. v. BorgWarner Turbo Sys., Inc., No. 08-

2621, 2011 U.S. Dist. LEXIS 29680, at *12 (E.D. Pa. Mar. 22, 2011). The District Court

held the signed application sheet, or PAA, was an unambiguous condition precedent to

warranty coverage by BorgWarner. The court found BorgWarner waived the condition

precedent with respect to material and workmanship claims, but not with respect to

design claims. Since Mack and BorgWarner never agreed on a second PAA, the design

warranty never became effective. Therefore, the District Court granted summary

judgment for BorgWarner with respect to Mack‟s breach of express warranty and breach

of contract claims for alleged design defects.

       The District Court also denied Mack‟s motion for reconsideration. Mack asserted

the District Court had failed to consider the Lewis declaration as evidence BorgWarner

intentionally hindered negotiations of the second PAA to avoid warranty liability. The

District Court rejected this argument, stating the Lewis declaration did not show

3
  Mack has added additional claims from September of 2008 through February of 2010 as
a supplement.
                                             4
“BorgWarner abused a power to specify terms or negotiated with Mack in bad faith.”

Mack Trucks, Inc. v. BorgWarner Turbo Sys., Inc., No. 08-2621, 2011 U.S. Dist. LEXIS

49132, at *3 (E.D. Pa. May 6, 2011).

                                            II.4

         For purposes of this appeal, we assume the turbochargers supplied by

BorgWarner failed because of design defects. Mack asserts the District Court erred in

granting summary judgment to BorgWarner because the material and workmanship

warranty—for which BorgWarner has agreed to reimburse claims—includes design

defects, or, in the alternative, because the contract is ambiguous and should be interpreted

with the benefit of a complete record. In addition, Mack contends BorgWarner waived

any purported condition precedent of a signed PAA by paying on customers‟ warranty

claims and by negotiating the second PAA in a bad faith attempt to avoid warranty

liability.

                                            A.

        Whether a contract is ambiguous is a question of law to be decided by the court.

Allegheny Int’l, Inc. v. Allegheny Ludlum Steel Corp., 40 F.3d 1416, 1424 (3d Cir. 1994)

4
  The District Court had diversity jurisdiction under 28 U.S.C. § 1332. We have
jurisdiction under 28 U.S.C. § 1291, as this is an appeal from final judgment. “[O]ur
review of a grant of summary judgment is plenary.” Koshatka v. Philadelphia
Newspapers, Inc., 762 F.2d 329, 333 (3d Cir. 1985). We must determine if the movant
has shown “there is no genuine dispute as to any material fact and the movant is entitled
to judgment as a matter of law.” Fed. R. Civ. P. 56(a). It should be noted that although
the language of Rule 56 was amended after the filing of this case, “[t]he standard for
granting summary judgment remains unchanged.” Fed. R. Civ. P. 56(a) advisory
committee notes. The parties agree Pennsylvania law governs the interpretation of this
contract.
                                             5
(applying Pennsylvania law). “To decide whether a contract is ambiguous, . . . we „hear

the proffer of the parties and determine if there [are] objective indicia that, from the

linguistic reference point of the parties, the terms of the contract are susceptible of

different meanings.‟” Teamsters Indus. Emps. Welfare Fund v. Rolls-Royce Motor Cars,

Inc., 989 F.2d 132, 135 (3d Cir. 1993) (alteration in original) (quoting Sheet Metal

Workers, Local 19 v. 2300 Group, Inc., 949 F.2d 1274, 1284 (3d Cir. 1991)). We look to

“the contract language, the meanings suggested by counsel, and the extrinsic evidence

offered in support of each interpretation. Extrinsic evidence may include the structure of

the contract, the bargaining history, and the conduct of the parties that reflects their

understanding of the contract‟s meaning.” Id. (citations omitted). An unambiguous

contract may be construed by the court as a matter of law, including on motion for

summary judgment, whereas an ambiguous contract must be interpreted by the factfinder.

Allegheny, 40 F.3d at 1424.

       Certain rules of construction guide our analysis of the contract. The Supreme

Court of Pennsylvania has defined a condition precedent in a contract as “an event, not

certain to occur, which must occur, unless its non-occurrence is excused, before

performance under a contract becomes due.” Shovel Transfer & Storage, Inc. v. Pa.

Liquor Control Bd., 739 A.2d 133, 139 (Pa. 1999) (quoting Restatement (Second) of

Contracts § 224). We may not construe a contract provision as a condition precedent to

performance “unless that clearly appears to be the intention of the parties.” Id. In

addition, with respect to warranty language in particular, the UCC provides, “[w]ords or

conduct relevant to the creation of an express warranty and words or conduct tending to

                                              6
negate or limit warranty shall be construed wherever reasonable as consistent with each

other . . . .” 13 Pa. Cons. Stat. § 2316(a).

       Applying these principles to the present case, we agree with the District Court that

the Supply Agreement is unambiguous and that paragraph F of Annex V is a condition

precedent to BorgWarner‟s warranties. Section 9(b) of the Supply Agreement first

directs the reader to Annex V for an explanation of BorgWarner‟s warranties, which

clearly states BorgWarner will “only” warrant turbochargers “that have a signed

application sheet and that do not exceed their limits while in operation in the field.” J.A.

vol. II, A103. Section 9(b) then goes on to provide that “[n]otwithstanding” anything in

the contract and Annexes to the contrary, BorgWarner will offer two warranties—the

turbochargers will (1) be of good material and workmanship, and (2) conform to the

specifications agreed upon by the parties. Id. at A78. In context, the “notwithstanding”

clause merely promises two kinds of warranty protection, subject to the earlier-

incorporated condition precedent requiring the turbochargers to have a signed application

sheet (PAA). Importantly, this reading of the contract harmonizes paragraph F of Annex

V with the “notwithstanding” clause of Section 9(b), ensuring neither is rendered

superfluous.

                                               B.

       It is not disputed that BorgWarner waived the PAA condition with respect to its

material and workmanship warranty, explaining to Mack on several occasions that even

without a signed PAA, BorgWarner would warrant its turbochargers for defects in

material and workmanship. Mack contends BorgWarner should reimburse claims

                                               7
allegedly caused by design defects because these claims fall within the scope of the

material and workmanship warranty.

       We may not rewrite the parties‟ contract for them or “give it a construction in

conflict with . . . the accepted and plain meaning of the language used.” Amoco Oil Co.

v. Snyder, 478 A.2d 795, 798 (Pa. 1984) (quoting Hagarty v. William Akers, Jr. Co., 20

A.2d 317, 319 (Pa. 1941)). BorgWarner promised its products would “be of good

material and workmanship.” J.A. vol. II, A78. The parties did not define “material” or

“workmanship” in their contract. Nor has the Supreme Court of Pennsylvania construed

these terms in the context of warranties. Mack does not offer any Pennsylvania case law

or evidence of the parties‟ intent to support the proposition that a material and

workmanship warranty includes a warranty for the product‟s design. And Mack stretches

the ordinary definition of “workmanship” by trying to fit “design” within it. Webster‟s

Dictionary defines “workmanship” as “the art or skill of a workman,” or “the execution

or manner of making or doing something.” Webster’s Third New International

Dictionary Unabridged 2635 (1961). A “workman,” or “workingman,” is defined as

“one who works for wages usually at manual labor.” Id. As made clear by its focus on

the “manual” “execution” of a product, the definition of “workmanship” presupposes that

the product being made or assembled has already been designed. Design is an earlier and

distinct phase of product production not captured by the workmanship warranty.

       Moreover, the parties‟ course of performance makes clear the specifications

warranty—not the material and workmanship warranty—was intended to cover design

defects. In Pennsylvania, “course of performance is always relevant in interpreting a

                                              8
writing.” Atl. Richfield Co. v. Razumic, 390 A.2d 736, 741 n.6 (Pa. 1978). “A course of

performance . . . between the parties . . . is relevant in ascertaining the meaning of the

parties‟ agreement, may give particular meaning to specific terms of the agreement and

may supplement or qualify the terms of the agreement.” 13 Pa. Cons. Stat. § 1303(d).

And “the express terms of an agreement and any applicable course of performance . . .

must be construed whenever reasonable as consistent with each other.” Id. § 1303(e).

       BorgWarner made clear to Mack representatives the material and workmanship

warranty did not cover design defects. See J.A. vol. II, A192 (“Per our supply agreement,

we do not grant design warranty on the 5176M series until the PAA is signed. However,

I would like to make it clear that regardless of a supply agreement, all of our products are

always warrantied for quality of manufacture, i.e. defects in materials and/or assembly.”).

And Mack repeatedly acknowledged internally it would not receive warranty coverage

until a PAA was signed, belying its assertion now that design defects are covered by the

material and workmanship warranty that BorgWarner repeatedly assured Mack applied

regardless of a signed PAA.

       The plain meaning of the “material and workmanship” warranty, in conjunction

with the parties‟ course of performance, make clear the design warranty was captured by

BorgWarner‟s promise the turbochargers would “conform to the specifications agreed

upon by the parties” and not by its promise the turbochargers would “be of good material

and workmanship.” Since the parties never agreed on the specifications for turbochargers

under the Supply Agreement, the specifications or design warranty never became

effective.

                                              9
                                            C.

       Mack contends BorgWarner waived the PAA condition precedent to the design

warranty by paying on some warranty claims. “To constitute a waiver of legal right,

there must be a clear, unequivocal and decisive act of the party with knowledge of such

right and an evident purpose to surrender it . . . . It may be expressed or implied.” Brown

v. City of Pittsburgh, 409 Pa. 357, 360 (1962) (citations omitted); see also Paramount

Aviation Corp. v. Agusta, 178 F.3d 132, 148 (3d Cir. 1999). “[A] course of performance

is relevant to show a waiver or modification of any term inconsistent with the course of

performance.” 13 Pa. Cons. Stat. § 1303(f).

       BorgWarner‟s payment on some warranty claims does not prove waiver of the

PAA condition precedent to the design warranty because Mack failed to show

BorgWarner‟s payments were made on design claims and not on the material and

workmanship claims that BorgWarner had indisputably agreed to pay. Additionally,

BorgWarner never wavered in its communications with Mack—BorgWarner consistently

stated it would not provide design warranty coverage until a PAA between the parties

was signed. Since there was no evidence of a clear and unequivocal act of waiver, Mack

did not raise a genuine issue of material fact that BorgWarner waived the PAA condition

precedent to the design warranty.

                                            D.

       Mack also contends BorgWarner waived the PAA condition precedent to the

design warranty by failing to negotiate the terms of the second PAA in good faith and by

failing to offer commercially reasonable terms. Mack contends the specifications agreed

                                            10
to by the parties in the conditional PAA were fixed and BorgWarner acted in bad faith by

deviating from those specifications and adding warranty language in its proposals for a

second PAA.

       Every contract in Pennsylvania includes an implied covenant of good faith and fair

dealing. Benchmark Gr., Inc. v. Penn Tank Lines, Inc., 612 F. Supp. 2d 562, 583 (E.D.

Pa. 2009). Pursuant to this principle, “a party to a contract cannot escape liability under

his obligation on the ground that the other party has failed to perform a condition

precedent to the establishment of such liability or to the maintenance of an action upon

the contract, where he himself has caused that failure.” Shovel Transfer & Storage, Inc.,

739 A.2d at 140 (quoting Commonwealth v. Transam. Ins. Co., 341 A.2d 74, 77 (Pa.

1975)). Similarly, the UCC states a party with the power to specify the particulars of

performance must do so “in good faith and within limits set by commercial

reasonableness.” 13 Pa. Cons. Stat. § 2311(a). “[E]xamples of „bad faith‟ conduct

include: „evasion of the spirit of the bargain, lack of diligence and slacking off, willful

rendering of imperfect performance, abuse of a power to specify terms, and interference

with or failure to cooperate in the other party‟s performance.‟” Kaplan v. Cablevision of

PA, Inc., 671 A.2d 716, 722 (Pa. Super. Ct. 1996) (quoting Somers v. Somers, 613 A.2d

1211, 1213 (Pa. Super. Ct. 1992)).

       The evidence put forth by Mack, including the Lewis declaration, did not raise a

genuine dispute that BorgWarner acted in bad faith during negotiations for the second

PAA. We agree with the District Court that the evidence “shows only that BorgWarner

offered to warranty turbochargers with operating limits that Mack considered

                                              11
unacceptable in light of the investment it had already made in its engine design.” Mack

Trucks, Inc., 2011 U.S. Dist. LEXIS 49132, at *3.

       Mack offers no evidence to suggest the parties agreed to fix the specifications in

the conditional PAA for the duration of the Supply Agreement. Evidence in the record

actually suggests the contrary—that because of time constraints imposed by Mack,

various warranty and specification provisions were unsettled at the time the parties signed

the conditional PAA. Mack‟s evidence—including the Lewis declaration and the July 22,

2004 Roth email—showed only that BorgWarner was willing to sign a PAA with

specification and warranty provisions Mack found unfavorable. This evidence supports

an inference of poor planning and coordination between the parties but does not support

an inference that BorgWarner acted in bad faith or in a commercially unreasonable

manner. Mack did not raise a genuine issue of material fact that BorgWarner acted in

bad faith or in a commercially unreasonable manner.

                                            III.

       We will affirm the District Court‟s grant of summary judgment in favor of

BorgWarner on Mack‟s breach of contract and breach of warranty claims for alleged

design defects.

                                            12