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Magnet Resources, Inc. v. Summit MRI

December 16, 1998


On appeal from the Superior Court of New Jersey, Law Division, Essex County

Before Judges Pressler, Brochin and Kleiner

The opinion of the court was delivered by: Brochin, J.A.D.


Submitted September 29, 1998

This appeal arises from a breach of contract action. The two legal issues of particular importance with which we deal are: (1) the right of a contracting party that reasonably deems itself insecure because of the other contracting party's threatened material breach to demand concrete assurances of performance and to suspend its own performance pending their receipt; and (2) the extent, if any, to which a contracting party injured by the other party's material breach is entitled to include overhead and other fixed costs as part of its recovery of lost profits.

Plaintiff Magnet Resources, Inc. ("Magnet Resources") and defendant Summit MRI, Inc. ("Summit") each charged the other with a material breach of contract and sued for damages. Magnet Resources also sought damages from two officers of Summit, defendants Magdy Elamir, M.D., and Mohammed Hanafy, on the ground that they had induced Magnet Resources to continue performance of its agreements by fraudulent promises of payment. On pretrial motions for summary judgment, the claims against the individual defendants were dismissed and a partial summary judgment was entered in favor of Magnet Resources for $6,800. The parties' other breach of contract claims were tried to a jury. The jury found that both parties had breached, and it awarded $492,320 to Magnet Resources and $18,470 to Summit. Summit has appealed and Magnet Resources has cross-appealed.

Summit did not object to the trial court's jury instructions. However, it argues to us that the instructions were incomplete and misleading because the jury was not told that one party's material breach relieves the other party of its duty to perform. It also contends that the charge was erroneous because the jury was not instructed that, in determining damages, it should consider that the parties might have agreed to terminate their contracts before the expiration of their terms, and that Magnet Resources had the burden of proving that its overhead was fixed. In addition, Summit asserts that the court unduly limited Magnet Resources' duty to mitigate. Summit also argues that the court should have granted its motion for judgment notwithstanding the verdict because Magnet Resources failed to sustain its burden of proving that its overhead was fixed, that the trial court abused its discretion by permitting Magnet Resources to reopen its case to provide additional testimony of its accountant to show that its overhead was fixed, and that the accountant should not have been permitted to offer that testimony because it was beyond the scope of his report.

Magnet Resources contests the entry of summary judgment dismissing its fraud claims against Dr. Elamir and Mr. Hanafy. Without having moved for judgment notwithstanding the verdict or for a new trial on damages, Magnet Resources also argues that "as a matter of law, [its] damages should be increased from $492,370 to $611,863," the full amount of its damage claim.

Magnetic resonance imagers ("MRIs") are devices used by physicians and hospitals for diagnostic purposes. Magnet Resources sells and services new and used MRIs. Summit operated MRI installations in Jersey City, Paterson and Irvington, New Jersey. *fn1 Magnet Resources contracted with Summit to provide preventive maintenance and emergency repair services for the MRIs at Summit's Paterson and Irvington installations. Magnet Resources also supplied cryogens *fn2 for all of Summit's installations, including its Jersey City installation.

The charge for the services to be provided for the Irvington installation was $120,000 for the first year and $150,000 annually for subsequent years of the contract. Payments were to be made monthly in advance beginning with the fourth month of the contract. The testimony of both parties implies that there was a separate service agreement for the Paterson installation with terms similar to those of the Irvington contract, but the Paterson contract was not offered into evidence. *fn3 However, neither party attaches any significance to this omission. For purposes of the case, both parties treated the service agreements for the two sites as a single contract, and we will do the same.

Summit's monthly payments were habitually late. On May 10, 1994, Magnet Resources faxed a memorandum to Summit complaining that seven of its checks had been dishonored. *fn4 The memorandum declared that thereafter payments more than ten days late would have to be made by certified check, the provision of the service contracts imposing a surcharge for late payment would be enforced, and neither essential supplies nor emergency service would be provided except under special arrangements if an invoice was late by thirty days or more. On June 7, 1994, Magnet Resources faxed a memorandum to Summit complaining that it had still not received a $13,250 payment due for April.

On December 20, 1994, Summit requested repair service for its Jersey City installation. Magnet Resources had no contract for emergency service or preventive maintenance for that site. It declined to provide the service because Summit then owed it $35,000. Summit promised that if the necessary work was done, Magnet Resources would get "most of the money by the end of the week." In reliance on that promise, Magnet Resources installed a necessary piece of equipment from its inventory for a total charge of $8,750.

Neither that charge nor the other unpaid bills had yet been paid when Summit called a Magnet Resources service person at his home on Saturday, December 24, requesting immediate emergency service for its Paterson installation. Under its service contract, however, Summit was entitled to service only from Monday through Friday. Magnet Resource did not make the emergency repair.

On Tuesday, December 27, Summit still had not paid its outstanding bills to Magnet Resources. That day, the person in charge of Summit's Paterson facility telephoned Magnet Resources and urgently requested service for that site. The caller was informed that Magnet Resources would not respond because of Summit's continuing failure to pay overdue bills.

The director of Summit's centers called Ronald Hynes, Magnet Resources' president. The amount due and unpaid was then more than $40,000. Summit offered $10,000 if the emergency service problem was taken care of. Hynes refused; he decided to suspend service until "things were improved, or somebody talked to us [Magnet Resources] and made some arrangements." He faxed a memorandum to Summit which referred to the previous week's payment promise and declared, "[W]e have suspended service to each site where payment is overdue." The suspension was effective December 27.

Some time after the suspension of service, Hynes spoke with Hanafy and complained that Summit had ordered cryogens from Magnet Resources' supplier on Magnet Resources' credit. Summit responded that it had made arrangements to have another company provide service for its sites. Summit changed the locks on its MRI installations to bar access by Magnet Resources' service ...

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