Court Opinion

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Opinions of the United
1996 Decisions                                                                                                             States Court of Appeals
                                                                                                                              for the Third Circuit

12-24-1996

InfoComp Inc v. Electra Prod Inc
Precedential or Non-Precedential:

Docket 96-3039

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Recommended Citation
"InfoComp Inc v. Electra Prod Inc" (1996). 1996 Decisions. Paper 16.
http://digitalcommons.law.villanova.edu/thirdcircuit_1996/16

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                    UNITED STATES COURT OF APPEALS
                        FOR THE THIRD CIRCUIT

                             No. 96-3039

                           INFOCOMP, INC.,

                                       Appellant

                                  v.

     ELECTRA PRODUCTS, INC.; ELECTRA FONT TECHNOLOGIES, INC.;
          CHELGRAPH PRODUCTS LIMITED; CHELGRAPH LIMITED;
      EDWARD (TED) BARTON; DAVID LEE KING; KEVIN P. MAHONY;
                  DEREK J. KYTE; ROBERT B. SMITH

         On Appeal from the United States District Court
             for the Western District of Pennsylvania
                      (D.C. No. 91-cv-02162)

                       Argued October 30, 1996

          BEFORE:   SCIRICA and COWEN, Circuit Judges and
                      POLLAK, District Judge*

                     (Filed December 24, 1996)

Ronald L. Hicks, Jr., Esq.
Frederick J. Francis, Esq. (argued)
Joseph E. Linehan, Esq.
Meyer, Unkovic & Scott
1300 Oliver Building
Pittsburgh, PA 15222

          COUNSEL FOR APPELLANT

G. Daniel Carney, Esq. (argued)
Thorp, Reed & Armstrong
One Riverfront Center
Pittsburgh, PA 15222

          COUNSEL FOR APPELLEES
*Honorable Louis H. Pollak, United States District Judge for the
 Eastern District of Pennsylvania, sitting by designation.

                             OPINION

COWEN, Circuit Judge.
          This appeal requires us to determine whether a
limitation of damages provision, contained in a proposed, but
never accepted, written agreement between a purchaser and a
distributor, will preclude the purchaser from seeking damages
against the manufacturer of a product sold to the purchaser by
the distributor. We conclude that because the proposed agreement
between the distributor and the purchaser was never accepted by
the distributor, and, therefore, never went into force, the
manufacturer is not protected by the limitation of damages
provisions. We further hold that since the written agreement
never went into effect, the jury's award of damages should not
have been based on or limited to the terms contained in the
written agreement. Accordingly, we will vacate the judgment of
the district court and remand for a new trial on liability and
damages.
                               I.
                               A.
          Appellant, InfoComp ("InfoComp" or "the purchaser"),
seeks damages arising from its purchase of an allegedly defective
computer imagesetting system manufactured by Appellee, Chelgraph
Ltd. ("Chelgraph" or "the manufacturer"). InfoComp purchased the
product from a Chelgraph distributor, Electra Products, Inc.
("Electra" or "the distributor"). Chelgraph manufactures various
types of advanced printing and compugrahphic equipment. Electra
was an independent distributor of Chelgraph products. InfoComp
provided graphic design and printing services to clients.
          InfoComp periodically purchased equipment to enable the
company to take advantage of technological advances in its
industry. After considerable research, InfoComp's president and
owner, Timothy P. Hornish, informed Kevin P. Mahony, national
sales manager for Electra, that InfoComp would purchase the
Chelgraph IBX-2000 imagesetting system. Thereafter, Mahony faxed
InfoComp pre-printed forms and two letters, which set forth
prices, payment schedules and delivery terms. Electra's name,
address, and logo appeared on the front of the forms, and the
first numbered paragraph defined the term "Electra" as referring
only to Electra. Nowhere in the forms was Chelgraph mentioned or
even identified. The reverse side of the forms contained the
following language:
          This Purchase Agreement shall not be deemed accepted by
          Electra unless and until an authorized officer or
          manager of Electra has signed the Purchase Agreement.
          No other act or writing by an agent, officer, or
          manager of Electra shall cause this Purchase Agreement
          to be a valid, effective or binding contract on
          Electra.
App. at 1836. Under the heading "Installation and Service," the
following limitation of damages provision was also contained in
the forms:
           Electra shall not be liable for any special,
           incidental, resulting, or consequential damages
           (whether caused by or resulting from Electra's
           negligence or breach) directly or indirectly arising
           from the use, inability to use, attempted use, failure
           to deliver or delay in delivery of, or from a defect
           in, or a breach by or failure to conform of the
           Equipment, or any repair or replacement parts thereof,
           ordered from Electra for use in conjunction therewith,
           or from any other cause whatsoever.

Id.   The forms also contained an integration clause stating that
the proposed written agreement constituted the complete
understanding between the parties and that no representations or
warranties made elsewhere were of any effect. Id.
          InfoComp signed and returned the forms along with a
check for the appropriate down payment in late December of 1989.
Electra cashed the check and two other checks sent in accordance
with the faxed letters. But Electra failed to meet the
requirement of the proposed agreement that one of its authorized
officers or managers sign the pre-printed form agreements at its
home office in order for the agreement to be considered accepted
by Electra.
          InfoComp contended that the machinery sold to it by
Electra failed to perform in all material respects. Electra made
several attempts to repair the equipment after receiving
complaints from InfoComp. InfoComp continued to assert that the
machine was not satisfactory. In the winter of 1990-91 InfoComp
advised both Electra and Chelgraph that it was rejecting the
machine and requested a full refund. Both Electra and Chelgraph
refused to refund the purchase price. Chelgraph maintained that
it was not responsible for InfoComp's numerous problems because
of the limitation of damages clause contained in InfoComp's
proposed agreement with Electra. In addition, Chelgraph
maintained that the limitation of damages clause in its own
distributor's contract with Electra was enforceable by Chelgraph
against InfoComp even though: 1) InfoComp had no knowledge of the
Chelgraph-Electra distributor's contract; 2) the Chelgraph-
Electra distributor's contract was concluded months after
InfoComp signed its agreement with Electra; 3) the proposed
InfoComp-Electra agreement made no reference to Chelgraph; and 4)
InfoComp had no notice that Chelgraph sought to limit its
liability against ultimate purchasers such as InfoComp.

                               B.
          The district court denied InfoComp's motion to preclude
evidence concerning the exculpatory and limitation of damages
provisions contained in the proposed InfoComp-Electra purchase
agreements, which were prepared by Electra. InfoComp's motion
was based on the principle that the damages provisions——which
prohibited recovery for consequential and incidental
damages——never came into effect under Pennsylvania law because
the agreement expressly stated that it was not to be deemed
accepted by Electra unless signed by an official at Electra's
home office. The agreement presented to the district court was
unsigned, and Chelgraph was unable to prove that the agreement
was signed by an official at the home office of Electra.
          The district court found that the limitation of damages
provision in the proposed agreement between Electra and InfoComp
was not only effective but was also binding on InfoComp in its
claims against Chelgraph. Since many of the claims of InfoComp
were within the sweep of the limitation of damages provision, the
district court granted Chelgraph's motion for judgment as a
matter of law on InfoComp's claims of breach of contract, breach
of implied warranties, fraud, and misrepresentation. The sole
claim on which InfoComp was permitted to go forward against
Chelgraph was for breach of the written agreement's 90-day
warranty provision against defective material, poor workmanship,
and nonconformity with the system's written specifications as to
functions and processes. On that claim, the jury returned a
verdict in favor of InfoComp.
II.
                                      The district court exercised
jurisdiction pursuant to
28 U.S.C. § 1332, diversity of citizenship. We have appellate
jurisdiction under 28 U.S.C. § 1291. Our review of the district
court's interpretation and application of state law is plenary.
Coleman v. Kaye, 87 F.3d 1491, 1496 (3d Cir. 1996) (citing Hofkin
v. Provident Life & Accident Ins. Co., 81 F.3d 365, 369 (3d Cir.
1996)). All parties agree that their dispute is governed by
Pennsylvania law.
                              III.
          We first address the effect of the InfoComp-Electra
purchase agreement. In Franklin Interiors v. Wall of Fame
Management Company, 510 Pa. 597, 601, 511 A.2d 761, 763 (1986),
the parties' agreement stated that "[t]he document does not
become a contract until approved by an officer of Franklin
Interiors." The Pennsylvania Supreme Court held that this
sentence, "inserted in this document by the Appellee, clearly and
unambiguously required [the Appellee] to execute the document,"
and noted that "it is hornbook law" that a written agreement will
have no effect "until accepted in the mode and manner expressly
provided by the terms of the offer." Id. at 600-601, 511 A.2d at
762-763. The court explained that this holds true "even though
the subsequent performance by the parties may give rise to a
binding contract between them." Id. at 600, 511 A.2d at 762.
          In his multi-volume treatise on the Uniform Commercial
Code (UCC), Ronald Anderson explains that "[a] seller can validly
specify that no contract arises until the acceptance made by the
seller is approved by the seller's home office." 2 Ronald A.
Anderson, Anderson on the Uniform Commercial Code § 2-206:27 (3d
ed. 1982) (citing West Penn Power Co. v. Bethlehem Steel Corp.,
236 Pa. Super. 413, 348 A.2d 144 (1975)). Such is precisely the
fact pattern before us. As Franklin Interiors indicates, when an
offeror fails to comply with its own conditions precedent to
contract formation, that party may not claim the benefits of the
proposed contract (including any limitations on damages and
remedies).
           This principle, which remains the unchallenged law of
Pennsylvania, was first developed in West Penn Power and Franklin
Interiors and later strictly applied in Cucchi v. Rollins
Protective Services Company, 377 Pa. Super. 9, 546 A.2d 1131
(1988). In Cucchi, a lessor was barred from asserting a
limitation on liability provision in a contract because that
contract had not been signed by a representative of its home
office. Although the contract in Cucchi had been signed by a
branch office representative, the court construed the agreement
strictly and found the lack of a home office signature to be
dispositive. Id. at 13, 18-19. Here, the proposed contract also
recited that a home office signature was essential to contract
formation. There is no evidence that any Electra employee ever
signed the written agreement, let alone an employee at the home
office. The law of Pennsylvania firmly establishes that the
absence of the required signature is prima facie proof that the
contract is not effective:
           The Appellee, through its officers, never entered its
           signature on the document to evidence approval as
           required by its terms. This is clearly a facial
           defect. . . . [T]here is no evidence in this record to
           sustain the facially defective contract, and Superior
           Court clearly erred in considering any information
           [outside] the record to correct that defect.

Franklin Interiors, 510 Pa. at 600-601, 511 A.2d at 762-763.
          The court in Cucchi explained that "a written
instrument must be strictly construed against its maker. . . .
Since the [lessor] had failed to follow its own conditions of
acceptance, [it] could not rely on the [limitation on liability
provision]." 377 Pa. Super. at 18, 546 A.2d at 1135 (citation
omitted). That court noted, as do we, that
          although it ha[s] always been the law that only the
          party against whom a warrant is intended to bind must
          sign it because the law assumes assent of the person in
          whose favor it is drawn, the law [i]s of no avail to
          the appellee. No assumption [can] be made that the
          appellee assented to the warrant because it expressly
          conditioned acceptance of all the contract terms upon
          its execution of the document.

Id. at 18-19, 546 A.2d at 1136 (citing Franklin Interiors). This
principle is so firmly embedded in Pennsylvania jurisprudence
that the Cucchi court stated, "the fact that both parties may
have initially believed the written contract to be binding upon
themselves did not make it so [because its express terms were not
met]." Id. at 17, 546 A.2d at 1135.
          In the matter now before us, because the written
agreement was never in effect between Electra and InfoComp, a
fortiori Chelgraph (a non-party to the proposed agreement) cannot
find protection in the limitation of damages provision contained
in that proposed agreement. A contract has been formed between
InfoComp and Electra in this case by reason of their performance.
The terms of that contract, however, are governed by the
provisions of the UCC as adopted in Pennsylvania, not the
proposed written agreement that was never accepted by Electra.
The UCC explicitly provides that incidental and consequential
damages are available to purchasers in appropriate cases. 13 Pa.
C.S.A. §§ 2714, 2715.

                              IV.
          The contract that exists between the parties arises
from the UCC and Pennsylvania general contracts law, not the
terms of the proposed written agreement. It follows that just as
the proposed agreement does not provide Chelgraph and Electra
with protection against the measure or amount of damages, it
cannot determine the legal grounds and terms of liability upon
which InfoComp may recover against Electra and Chelgraph. For
this reason, the following passage in the written agreement, as
well as all other terms, is of no effect:
          This Agreement embodies the full and complete
          understanding between the parties, and no modification
          or waiver of any terms or conditions hereof, nor any
          representations or warranties shall be of any force or
          effect unless in writing and signed by an authorized
          officer or manager of Electra.

App. at 1836. Erroneously believing the proposed written
agreement to be in effect, the district court instructed the jury
that
          you may only look to the written purchase agreement to
          determine whether a warranty existed, whether the
          Chelgraph defendants breached the warranty, and whether
          the breach of warranty was a substantial factor in
          causing the harm to the plaintiff.

App. at 1642. The district court explained to jurors that
although InfoComp allegedly received "certain oral
representations [and] representations in written advertisements,
promotional materials, and samples issued by Electra and
Chelgraph that the IBX-2000 had certain characteristics," the
jury could not consider any of the evidence external to the
agreement in assessing liability. Id.
          Since the proposed written agreement is not in force,
the jury should have been advised that it was free to consider
all representations that were made to InfoComp by Electra and
Chelgraph, not merely those contained in the written agreement.
While the proposed written agreement may be evidence of the
parties' intent and actions, it never went into effect as a
binding contract. Accordingly, it cannot be the sole legal basis
for InfoComp's recovery against Chelgraph.
          InfoComp has appealed for a new trial solely on the
issue of damages. A retrial limited to damages would be
inappropriate under the facts of this case. See, e.g., Williams
v. Rene, 72 F.3d 1096 (3d Cir. 1995)(intertwined nature of
liability and damages requires new trial on all issues); Kirk v.
Raymark Industries, Inc., 61 F.3d 147 (3d Cir. 1995)(magnitude of
trial error demands new trial on liability and damages); Advanced
Medical, Inc., v. Arden Medical Systems, Inc., 955 F.2d 188 (3d
Cir. 1992)(erroneous interpretation as to admissibility of
evidence necessitates retrial on both liability and damages).
          The district court inaccurately instructed the jury
that the liability of Chelgraph should be determined under the
written contract. The jury instructions improperly constrained
not only the type of damages awarded, but the range of evidence
the jury could consider in determining what representations had
been made to InfoComp. For this reason, when the case returns to
the district court, the jury must be free to consider the matter
of both liability and damages, without any limitation on either
party by reason of the proposed written agreement.
                               V.
          Chelgraph has argued that the proposed InfoComp-Electra
limitation of damages provisions should inure to the benefit of
Chelgraph. In King v. Hilton-Davis, 855 F.2d 1047, 1053 (3d Cir.
1988), we explained that under Pennsylvania law the liability of
manufacturers will not be waived by remote purchasers unless the
disclaimer is "clearly communicated to the remote [purchaser]
prior to his or her purchase." Communication of the limitation
clause from the manufacturer to the remote purchaser is vital;
without more, a limitation clause addressing only the distributor
and the purchaser has no effect on the manufacturer. See id.King offers
two examples of methods manufacturers may employ to
notify remote purchasers of their desire to limit liability: (1)
displaying a conspicuous provision in the literature included
with the product, and (2) contracting with the distributor to
expressly reference manufacturer's limitation of liability in the
distributor's contracts with its customers. Id. at 1054
(citations omitted). King is the most recent statement of
Pennsylvania law in this area, and Chelgraph failed to employ any
method to satisfy King's holding that remote purchasers must be
specifically notified of a manufacturer's intent to limit damages
if that limitation is to be effective.
          The facts of the present case represent an a fortiorimatter from
King: Even if Chelgraph had endeavored to limit its
liability by or through the proposed agreement between Electra
and InfoComp, that written contract never came into existence.
The proposed written agreement was never accepted according to
its own explicit terms. As a result, the sale that went forward
between Electra and InfoComp was the product of an unwritten
agreement subject to the full range of provisions contained in
the UCC.
                              VI.
          For the reasons set forth above, the judgment of
December 21, 1995, will be vacated. We will remand this matter
to the district court for trial on both liability and damages
consistent with this opinion. Such trial shall be without
limitation on damages by reason of the proposed written agreement
between Electra and InfoComp.
          Costs taxed against Appellee.