APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF PENNSYLVANIA (D.C. Civil No. 76-0395)
Before Seitz, Chief Judge and Adams and Weis, Circuit Judges.
In this diversity case, the district court concluded that under the Uniform Commercial Code the buyer has the burden of establishing that the seller agreed to pay consequential damages when goods proved defective. We hold that to avoid such liability the seller must prove an agreement that limits damages, and, in this instance, the course of dealing between the parties was not adequate to demonstrate such an understanding. Accordingly, we modify a judgment in favor of the plaintiff-seller for goods sold to allow credits for losses on resale incurred by the defendant-buyer.
The plaintiff brought suit in the United States District Court for the Eastern District of Pennsylvania to recover the cost of nylon industrial belting it sold to the defendant. Counterclaims asserted that some of the belting had been defective. After a bench trial, the district court entered judgment for the plaintiff, deducting from the requested damages portions of the amounts sought by two of the defendant's counterclaims.
The defendant, R. J. Dick, Inc., distributes nylon cord belting throughout the United States. Its principal place of business is in Iowa, and it maintains a warehouse in King of Prussia, Pennsylvania. The plaintiff is a sole proprietorship that manufactures nylon cord belting in Offenburg, West Germany under the trade name "Vis."
In September 1967 plaintiff's export manager, Alfred Ziegler, sent a letter to the defendant's president, quoting prices on belting and enclosing terms for delivery and payment. Included in the correspondence was a form entitled "General Terms of Sales II." One paragraph in the form limited the plaintiff's liability for defective merchandise to replacement or price reduction and excluded damages of any kind.*fn1
In the following month, Ziegler and Vis's owner, Alfred Huber, visited King of Prussia and arranged for sale of their product to the Dick Company. At no time were the Vis general terms of sale discussed, and Dick did not agree to be bound by the provisions of the form, including the limitation on damages recoverable for defective merchandise.
During the period from 1967 to 1974 there were occasions when the plaintiff's product did not meet the defendant's standards, either on initial inspection or after a period of use by defendant's customers. When the defendant issued a credit to a customer for belting that had manufacturing defects, a claim was made to the plaintiff for replacement or credit. If a difference arose between the parties over whether the defect was attributable to the manufacturer, the claim would be compromised.
In late 1973, Dick's problems with the belting increased, the most frequent being delamination, which made the product unusable. Beginning at that time and continuing through 1974, Ziegler complained about Dick's delay in payments. This suit followed the parties' inability to resolve these difficulties.
At trial, the plaintiff asserted that after making allowances for various credits to which it was agreeable, the defendant owed $30,910.29. Against this figure, however, the defendant asserted four counterclaims.
The largest counterclaim was for an equitable setoff of future profits alleged to have been lost because of customer dissatisfaction with Vis's product. The court found the supporting testimony "not worthy of belief" and therefore held that the defendant failed to meet its burden of proof.
The second claim was in the amount of $17,621.51 for eight defective rolls of Vis belting delivered during 1974 and 1975 for which only partial credit had been given. The court noted that the defendant was unable to locate the material or account for its disposition and said, "In effect the (defendant's principal witness) testified that nearly 2500 lbs. of belting had vanished from Dick's custody. On the basis of that record I cannot find that Dick has met its burden of proving it is entitled to credit for this belting."
The court did allow partial recovery on the third and fourth counterclaims. The defendant contended in the third claim that it was entitled to $7,300.69, the amount it had credited its customers for defective material supplied by the plaintiff in 1974. The court, however, awarded $3,398.25, a sum representing the price the defendant paid plaintiff. From this the court deducted $1,473.10, because of a credit that had been extended by the plaintiff in 1974.*fn2 The fourth claim was for defective belting that one of Dick's distributors sold to a company called Wesco. Dick issued a credit of $7,092.80 on that transaction, but again the court allowed only the amount the defendant had paid plaintiff for the ...