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Western Industries Inc. v. Newcor Canada Limited

July 11, 1984


Appeals from the United States District Court for the Eastern District of Wisconsin. No. 81 C 340 -- Robert W. Warren, Judge.

Pell, Cudahy, and Posner, Circuit Judges.

Author: Posner

Posner, Circuit Judge.

Western Industries purchased several custom-built welding machines from Newcor Canada for use in manufacturing microwave oven cavities. The machines did not work right and Western brought this breach of contract action against Newcor, basing federal jurisdiction on diversity of citizenship. Newcor counterclaimed for the unpaid portion of the purchase price of the machines. The jury awarded Western damages of $1.3 million dollars and Newcor about half that (the full unpaid balance of the purchase price of the machines) on its counterclaim. Separate judgments were entered on the two claims and both parties have appealed. The appeals raise a variety of interesting substantive and procedural issues, the former being controlled (the parties agree) by the law of Wisconsin, including the Uniform Commercial Code, which Wisconsin has adopted. See Wis. Stat. §§ 401 et seq.

The contract between Western and Newcor grew out of Western's contract with a Japanese manufacturer of microwave ovens, Sharp, to supply Sharp with cavities for microwave ovens. Sharp wanted Western to weld the cavities by a process known as projection welding, because that is how microwave oven cavities are made in Japan; and Western agreed. The projection method is not used in the United States to weld thin metal, such as the cavities of microwave ovens are made of; spot welding is the method used here. So when Western went to Newcor, a leading manufacturer of specialty welding machines, to explore the psossibility of buying machines for use in fulfilling its contract with Sharp, it had to ask Newcor to design and build a type of welding machine that Newcor was unfamiliar with. Newcor agreed to do this, however, and after further discussions Western's director of engineering placed a purchase order by phone for eight machines with Newcor's sales engineer on May 17, 1979. According to the memoranda that both men made of the conversation, no specific terms other than the date of delivery were discussed; price was not discussed, for example. On May 23 Newcor delivered to Western a formal written quotation of terms for the sale. On the back of one page a number of standard contract terms were printed, including one disclaiming all liability for consequential damages. Western did not reply immediately, but in mid-July it sent Newcor a formal purchase order, mysteriously pre-dated to May 15, that included on the back a set of printed terms one of which stated that the buyer (Western) was entitled to general as well as special damages in the event of a breach of the seller's warranties. On July 20 Newcor sent Western an acknowledgement form stating, "In conformity with our conditions of sale appearing in [the written quotation of May 17] furnished to you by us, this approves and accepts your order." Western did not respond. The parties never discussed any of the printed terms contained in the contract forms that they had exchanged. Three machines were bought later through a similar exchange of forms.The parties treat the sale of all 11 machines as one contract, as shall we.

The machines were built and delivered but turned out to be unusable for making microwave oven cavities. Newcor took the machines back and rebuilt them as spot welding machines, redelivering them to Western a year after the delivery date called for in the contract. As a result of the delay in getting machines that it could use, Western incurred unforeseen expenses in fulfilling its commitment to Sharp; for example, it had to manufacture cavities manually at much higher cost than it would have incurred if it had had proper machines. These expenses are the basis of its damage claim against Newcor.

Newcor's first ground of appeal is that the district judge improperly excluded evidence that the custom of the specialty welding machine trade is not to give a disappointed buyer his consequential damages but just to allow him either to return the machines and get his money back or (for example if the breach consists in delivering them late) keep the machines and get the purchase price reduced to compensate for the costs of delay. Whether every penny of the damages that Western is claiming comes within a strict definition of "consequential" damages is a question at once difficult, see, e.g., Mead Corp. v. McNally-Pittsburgh Mfg. Corp., 654 F.2d 1197, 1207-11 (6th Cir. 1981), and inconsequential. Newcor contends that it is not liable for any damages above the purchase price, however those damages are described; and if this is right, then even if Newcor had a contract with Western that it broke it is not liable for any of the damages that Western was awarded.

Although trade custom or usage is a question of fact, see UCC § 1-205(2) and Official Comments 4 and 9; 7 Wigmore, Evidence in Trials at Common Law § 1954, at pp. 107-08 (Chadbourn ed. 1978), the district judge refused to allow Newcor's three principal witnesses on the existence of the alleged trade custom to testify, on the ground that they were incompetent to give such testimony; and having done this the judge later instructed the jury that there was no issue of trade custom in the case. Two of the three witnesses whom Newcor wanted to call were experienced executives of companies that manufacture specialty welding machines (one of them was also the president of those manufacturers' trade association), and between them the two had almost 75 years of experience in selling such machines. The third witness was a former executive of Western and had long experience in buying such machines. These witnesses were prepared to testify that consequential damages were unheard of in their trade. When a machine did not work the manufacturer would spend his own money to fix it or would take it back and refund the purchase price to the buyer, but he would not compensate the buyer for the disruption to the buyer's business caused by the defect.

The district judge barred this testimony on a variety of grounds. He thought the testimony of one of the witnesses "had to be to some degree discounted" because he was an executive of Newcor.Another he thought was not competent to testify that the alleged trade custom was "pervasive" throughout the industry.The judge also indicated that he did not think testimony by either sellers or buyers very probative; he wanted testimony about both sides of the transaction at once -- for example, such testimony as a broker might give. And he thought that the fact that the sellers had gotten together in their trade association and adopted a form contract disclaiming liability for consequential damages was evidence of merely a "unilateral" custom; there could be no custom of the trade unless buyers knew about the form and accepted it.

There are three ways of taking these comments. The first is that the district judge thought that even if the jury believed everything the witnesses said, Newcor would have failed to establish the existence of a trade custom because the witnesses were not prepared to testify to the existence of a custom known to and accepted by all sellers and all buyers. But this would be too stringent a test of trade custom. It is not the law, for example, that the buyer must know of the custom; if he should have known, he is bound. See UCC § 1-205(3); Farnsworth, Contracts 511 (1982); and (for a defense of this principle on economic grounds) Warren, Trade Usage and Parties in the Trade: An Economic Rationale for an Inflexible Rule, 42 Pitt. L. Rev. 515, 581 (1981). Thus, what the judge called a "unilateral" custom could exonerate Newcor.

Another way to take the judge's comments, however, is that he thought the evidence these witnesses would have given lacked persuasive force. But so viewed his comments went to the weight rather than admissibility of Newcor's evidence of trade custom, aznd a judge in our system does not have the right to prevent evidence from getting to the jury merely because he does not think it deserves to be given much weight. See, e.g., Joy Mfg. Co. v. Sola Basic Industries, Inc., 697 F.2d 104, 101-12 (3d Cir. 1982). He may comment to the jury on the weight of the evidence (though few federal judges do that nowadays), and he may have to balance weight against prejudice in ruling on objections under Fed. R. Evid . 403, but he may not screen witnesses simply to decide whether their testimony is persuasive. The criticisms that the judge made of Newcor's trade-custom witnesses could have been put before the jury by Western in cross-examination if the witnesses had been allowed to testify. But a judge may not (with immaterial exceptions), by listening to cross-examination before the witnesses go before the jury, decide that the witnesses are unworthy of belief, and forbid them to testify.

Of course testimony of trade custom is testimony to a conclusion; and though all evidence, even eyewitness testimony, is inferential to a degree (see Hoffman, The Intepretation of Visual Illusions, Scientific American, Dec. 1983, at p. 154), the chain of inference is longer when the fact testified to is the existence of a trade custom than when it is the color of the defendant's hair. If the members of this court had been called as witnesses in this case and asked whether it was the custom of the specialty welding machine trade not to give disappointed buyers consequential damages, we would not have been competent to answer. But Newcor's witnesses were experienced executives in the trade, and the existence of the alleged custom was a matter they could infer from their own observations and experience, since each had negotiated many sale contracts such as the one in issue in this case. Any doubt about the admissibility of their testimony is dispelled by section 701 of the Federal Rules of Evidence, which makes lay opinion evidence of the kind involved here admissible, see Bohannon v. Pegelow, 652 F.2d 729, 731-32 (7th Cir. 1981), and by the fact that under the liberal definition of "expert witness" in Rule 702 all of these witnesses could readily have been qualified as expert witnesses on the question of trade custom. The Advisory Committee's Notes on Proposed Rule 702 state that "within the scope of the rule are . . . the large group sometimes called 'skilled' witnesses, such as bankers or landowners testifying to land values."

Finally, the judge may have had in the back of his mind a line of Wisconsin cases, long predating the Uniform Commercial Code, which require that proof of trade usage be "'clear and explicit.'" E.g., Knobel v. J. Bartel Co., 176 Wis. 393, 398, 187 N.W. 188, 190 (1922) (quoting an 1856 case, Power v. Kane, 5 Wis. 265, 268). We can assume, without having to decide, that this standard expresses a substantive principle that, if it were still in force, would bind a federal court in a diversity suit. Cf. Breeland v. Hide-A-Way Lake, Inc., 585 F.2d 716, 721 (5th Cir. 1978); Hardware Mutual Ins. Co. v. Jacob Hieb, Inc., 146 F.2d 447, 452 (8th Cir. 1945). But it cannot be considered authoritative any longer, in view of the hospitable approach that the Code (enacted into Wisconsin law) takes to evidence of trade custom. See White & Summers, Handbook of the Law Under the Uniform Commercial Code 103 (1980) ("Code requirements for proof of trade usage are far less stringent" than common law requirements).

Although we are in no position to determine whether the custom alleged by Newcor actually exists, we think it relevant to note that the hypothesis that it exists is certainly not so incredible that testimony on the subject could be excluded by analogy to the principle that excludes testimony in contradiction of the laws of nature. The relevant trade is the manufacture of a particular kind of custom-built machinery. A custom-built machine is quite likely either not to be delivered on time or not to work (not at first, anyway) when it is delivered; anyone who has ever had a house built for him knows the perils of custom design. If a custom-built machine is delivered late, or does not work as the buyer had hoped and expected it would, the buyer's business is quite likely to suffer, and may even be ...

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