On appeal from the Superior Court of New Jersey, Chancery Division, Cumberland County, C-35-96.
Before Judges Skillman, Lefelt and Winkelstein.
The opinion of the court was delivered by: Winkelstein, J.A.D.
NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION
Plaintiff Cumberland County Improvement Authority had an agreement with defendant GSP Recycling Co., a newspaper recycler, to supply GSP with newspapers plaintiff collected from the municipalities within the County. The materials plaintiff supplied to defendant failed to meet the agreement's quality specifications and defendant stopped paying plaintiff for the deliveries. Each party claimed the other breached the agreement. Following a bench trial, the trial judge dismissed plaintiff's claim against defendant, found that plaintiff breached the agreement, and awarded defendant $256,319.42 in damages. Plaintiff appeals. In applying the facts to the applicable provisions of the Uniform Commercial Code (U.C.C.), we affirm that portion of the judgment dismissing plaintiff's claim against defendant, but because defendant failed to establish that it sustained damages as a result of plaintiff's actions, we reverse the judgment in favor of defendant.
Due to the unique nature of the parties' agreement, a detailed recitation of the facts is necessary to place the issues in context. Plaintiff is an independent county authority responsible for recycling the newspaper generated by businesses and residences in Cumberland County. Defendant is engaged in the business of recycling old newsprint (ONP) to supply fiber to the Garden State Paper Mill, which produces recycled newsprint that is sold to major newspapers.
Because the recycled paper market is extremely volatile, long term contracts are not atypical. They generally allow governmental entities to receive revenue for their recycled newspaper, rather than having to pay for its disposal, or look for a buyer on the spot market, while providing the purchasers with a stable source of paper.
In December 1991, the parties entered into a five-year contract (the agreement). Under its terms, plaintiff agreed to deliver to defendant a minimum of ten tons of ONP per month, and defendant agreed to purchase all of the newspaper plaintiff made available up to a maximum of fifty tons per month. At the beginning of each calendar year the parties could,"if mutually agreeable... increase or decrease the contractual tonnage obligation."
Defendant would pay $20 per ton for the ONP, with the proviso that the price would be increased to $25 if plaintiff consistently delivered over 100 tons for a minimum of four months. The price would be adjusted at the end of each calendar year based on the Consumer Price Index.
The agreement addressed the quality of the newspaper:
6. All ONP shall be unbaled special news deink quality.... ONP shall contain no prohibitive materials and not more than one Percent (1.0%) outthrows. Failure to conform shall result in punitive deductions or total load rejections. In the event of a total load rejection, the county shall pay to GSP a charge of not more than thirty dollars ($30.00) per ton for the rejected load, and GSP shall dispose of the load.
Special news deink quality ONP is known as"#8" or"grade 8" ONP."Prohibitives" include aluminum cans, cardboard, garbage, glass, phone books, plastic bags and other non-newsprint materials."Outthrows" include newspapers bundled with brown paper, or plastic straps, junk mail, magazines, and grocery bags. According to John Stanton, defendant's production manager, all of defendant's contracts gave defendant the right to take punitive deductions and collect payment for load rejections. The punitive deduction compensated defendant for its additional sorting and transportation costs when it received lower quality material, while the $30 total load rejection charge covered the cost to dump it in a landfill if the load was completely unusable. Stanton testified, however, that defendant never directly assessed these charges. Instead, when the quality of the materials became"too dirty," defendant"[tried] to work with the community to get their quality up" because defendant wanted to encourage recycling programs. When the quality did not improve,"at worst case" defendant did not"pay for the fiber and... absorb[ed] any additional cost in sorting until it [became] so contaminated" that it was cost prohibitive. In other words, when the quality of ONP was below that which was called for in the agreement, instead of charging the supplier the $30 load rejection charge, or assessing a specific punitive deduction, defendant simply did not pay for the materials.
Under the Cumberland County recycling program, plaintiff lacked authority to refuse materials that were delivered by the municipalities C it merely acted as a transfer station. Once the municipalities delivered the materials to plaintiff's facility, they were immediately loaded onto trucks and removed. Plaintiff had no sorting facility or storage capability.
From the outset, plaintiff failed to meet the agreement's restrictions on prohibitives and outthrows. The percentage of prohibitives and outthrows delivered to plaintiff by the municipalities, and then delivered to defendant, was consistently higher than permitted under the agreement.
To help address plaintiff's problem meeting quality standards, the parties executed an addendum to the agreement on July 6, 1993, (the addendum). In the addendum, paragraph 6 of the agreement was replaced by Items 6A and 6B, which read as follows:
All ONP delivered to our Garfield mill shall be unbaled Special News Deink Quality.... ONP shall contain no prohibitive materials and not more than one percent (1.0%) outthrows. Failure to conform shall result in punitive deductions or total load rejections. In the event of a total load rejection, the county shall pay to GSP a charge of not more than ...