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Chatlos Systems Inc. v. National Cash Register Corp.

decided: January 15, 1982.

CHATLOS SYSTEMS, INC., A NEW JERSEY CORPORATION
v.
NATIONAL CASH REGISTER CORPORATION NCR CORPORATION, APPELLANT



APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF NEW JERSEY

Before Aldisert, Rosenn and Weis, Circuit Judges. Before Seitz, Chief Judge, and Aldisert, Adams, Hunter, Weis, Garth, Higginbotham, Sloviter, Becker and Rosenn, Circuit Judges.*fn*

Author: Per Curiam

Opinion OF THE COURT

This appeal from a district court's award of damages for breach of warranty in a diversity case tried under New Jersey law presents two questions: whether the district court's computation of damages under N.J.Stat.Ann. § 12A:2-714(2) was clearly erroneous, and whether the district court abused its discretion in supplementing the damage award with pre-judgment interest. We answer both questions in the negative and, therefore, we will affirm.

Plaintiff-appellee Chatlos Systems, Inc., initiated this action in the Superior Court of New Jersey, alleging, inter alia, breach of warranty regarding an NCR 399/656 computer system it had acquired from defendant National Cash Register Corp. The case was removed under 28 U.S.C. § 1441(a) to the United States District Court for the District of New Jersey. Following a non-jury trial, the district court determined that defendant was liable for breach of warranty and awarded $57,152.76 damages for breach of warranty and consequential damages in the amount of $63,558.16. Chatlos Systems, Inc. v. National Cash Register Corp., 479 F. Supp. 738 (D.N.J.1979), aff'd in part, remanded in part, 635 F.2d 1081 (3d Cir. 1980). Defendant appealed and this court affirmed the district court's findings of liability, set aside the award of consequential damages, and remanded for a recalculation of damages for breach of warranty. Chatlos Systems, Inc. v. National Cash Register Corp., 635 F.2d 1081 (3d Cir. 1980). On remand, applying the "benefit of the bargain" formula of N.J.Stat.Ann. § 12A:2-714(2) (Uniform Commercial Code § 2-714(2)),*fn1 the district court determined the damages to be $201,826.50,*fn2 to which it added an award of prejudgment interest. Defendant now appeals from these damage determinations, contending that the district court erred in failing to recognize the $46,020 contract price of the delivered NCR computer system as the fair market value of the goods as warranted, and that the award of damages is without support in the evidence presented. Appellant also contests the award of prejudgment interest.

Waiving the opportunity to submit additional evidence as to value on the remand which we directed, appellant chose to rely on the record of the original trial and submitted no expert testimony on the market value of a computer which would have performed the functions NCR had warranted. Notwithstanding our previous holding that contract price was not necessarily the same as market value, 635 F.2d at 1088, appellant faults the district judge for rejecting its contention that the contract price for the NCR 399/656 was the only competent record evidence of the value of the system as warranted. The district court relied instead on the testimony of plaintiff-appellee's expert, Dick Brandon, who, without estimating the value of an NCR model 399/656, presented his estimate of the value of a computer system that would perform all of the functions that the NCR 399/656 had been warranted to perform. Brandon did not limit his estimate to equipment of any one manufacturer; he testified regarding manufacturers who could have made systems that would perform the functions that appellant had warranted the NCR 399/656 could perform. He acknowledged that the systems about which he testified were not in the same price range as the NCR 399/656. Appellant likens this testimony to substituting a Rolls Royce for a Ford, and concludes that the district court's recomputed damage award was therefore clearly contrary to the evidence of fair market value-which in NCR's view is the contract price itself.

Appellee did not order, nor was it promised, merely a specific NCR computer model, but an NCR computer system with specified capabilities. The correct measure of damages, under N.J.Stat.Ann. § 12A:2-714(2), is the difference between the fair market value of the goods accepted and the value they would have had if they had been as warranted. Award of that sum is not confined to instances where there has been an increase in value between date of ordering and date of delivery. It may also include the benefit of a contract price which, for whatever reason quoted, was particularly favorable for the customer. Evidence of the contract price may be relevant to the issue of fair market value, but it is not controlling. Mulvaney v. Tri State Truck & Auto Body, Inc., 70 Wis.2d 760, 767, 235 N.W.2d 460, 465 (1975). Appellant limited its fair market value analysis to the contract price of the computer model it actually delivered.*fn3 Appellee developed evidence of the worth of a computer with the capabilities promised by NCR, and the trial court properly credited the evidence.*fn4

Appellee was aided, moreover, by the testimony of Frank Hicks, NCR's programmer, who said that he told his company's officials that the "current software was not sufficient in order to deliver the program that the customer (Chatlos) required. They would have to be rewritten or a different system would have to be given to the customer." Appendix to Brief for Appellee at 2.68. Hicks recommended that Chatlos be given an NCR 8200 but was told, "that will not be done." Id. at 2.69. Gerald Greenstein, another NCR witness, admitted that the 8200 series was two levels above the 399 in sophistication and price. Id. at 14.30. This testimony supported Brandon's statement that the price of the hardware needed to perform Chatlos' requirements would be in the $100,000 to $150,000 range.

Essentially, then, the trial judge was confronted with the conflicting value estimates submitted by the parties. Chatlos' expert's estimates were corroborated to some extent by NCR's supporters. NCR, on the other hand, chose to rely on contract price. Credibility determinations had to be made by the district judge. Although we might have come to a different conclusion on the value of the equipment as warranted had we been sitting as trial judges, we are not free to make our own credibility and factual findings. We may reverse the district court only if its factual determinations were clearly erroneous. Krasnov v. Dinan, 465 F.2d 1298 (3d Cir. 1972).*fn5

Upon reviewing the evidence of record, therefore, we conclude that the computation of damages for breach of warranty was not clearly erroneous. We hold also that the district court acted within its discretion in awarding pre-judgment interest, Chatlos Systems, Inc. v. National Cash Register Corp., 635 F.2d at 1088.

The judgment of the district court will be affirmed.

The petition for rehearing filed by appellant in the above entitled case having been submitted to the judges who participated in the decision of this court and to all the other available circuit judges of the circuit in regular active service, and no judge who concurred in the decision having asked for rehearing, and a majority of the circuit judges of the circuit in regular active service not having voted for rehearing by the court in banc, the petition for rehearing is denied. Judges Adams, Hunter and Garth would grant the petition for rehearing.

ROSENN, Circuit Judge, dissenting.

The primary question in this appeal involves the application of Article 2 of the Uniform Commercial Code as adopted by New Jersey in N.J.S.A. 12A:2-101 et seq. (1962) to the measure of damages for breach of warranty in the sale of a computer system. I respectfully dissent because I believe there is no probative evidence to support the district court's award of damages for the breach of warranty in a sum amounting to almost five times the purchase price of the goods. The measure of damages also has been misapplied and this could have a significant effect in the marketplace, especially for the unique and burgeoning computer industry.*fn1

In July 1974, National Cash Register Corporation (NCR) sold Chatlos Systems, Inc. (Chatlos), a NCR 399/656 disc computer system (NCR 399) for $46,020 (exclusive of 5 percent sales tax of $1,987.50). The price and system included:

The computer (hardware) $40,165.00

Software (consisting of 6 computer

programs)*fn2 5,855.00

46,020.00

NCR delivered the disc computer to Chatlos in December 1974 and in March 1975 the payroll program became operational. By March of the following year, however, NCR was still unsuccessful in installing an operational order entry program and inventory deletion program. Moreover, on August 31, 1976, Chatlos experienced problems with the payroll program. On that same day and the day following NCR installed an operational state income tax program, but on September 1, 1976, Chatlos demanded termination of the lease*fn3 and removal of the computer.

When this case was previously before us, we upheld the district court's liability decision but remanded for a reassessment of damages, instructing the court that under the purchase contract and the law consequential damages could not be awarded. ...


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