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Kritikos v. Palmer Johnson Inc.

decided: June 9, 1987.


Appeal from the United States District Court for the Eastern District of Wisconsin, No. 85 C 78, Terence T. Evans, Judge.

Author: Coffey

Before COFFEY, EASTERBROOK, Circuit Judges, and CAMPBELL, Senior District Judge.*fn*

COFFEY, Circuit Judge. Christos N. Kritikos brought this contract action against Palmer Johnson for specific performance and damages arising from the delay in Palmer Johnsons' construction of his yacht. Palmer Johnson counterclaimed for amounts due under the contract and for damages incurred resulting from Kritikos' refusal to accept the yacht. The district court found that Kritikos breached the contract and awarded Palmer Johnson damages on its counterclaim. Kritikos appeals. We affirm in part, reverse in part, and remand.


Palmer Johnson, Inc., defendant-appellee, a ship building corporation located in Sturgeon Bay, Wisconsin, builds sailing vessels. The plaintiff-appellant, Christos Kritikos, of Chicago, Illinois, contracted January 10, 1984, with Palmer Johnson to have his one of a kind sailing yacht (the "Karyatis") constructed in accordance with plans supplied by his architects, Sparkman and Stephens of New York.*fn1

The contract provided that Palmer Johnson was to construct the Karyatis in approximately nine months and deliver it, on or before October 15, 1984, to Mackinac Island, Michigan. the contract further provided that if the delivery of the boat was delayed past the date of October 15, 1984 a liquidated damages provision would be triggered.

The business relationship between the parties can best be described as stormy.*fn2 The boat was not delivered on the agreed date (October 15, 1984) to Kritikos. On December 15, of that same year, Palmer Johnson attempted to tender delivery of the Karyatis to the plaintiff. Kritikos refused delivery asserting that the boat was not completed according to specifications. At this point, Palmer Johnson sought assurances from the plaintiff that he would make the final payment due, otherwise, it would proceed to sell the boat and obtain whatever it could from the sale Shortly thereafter, the plaintiff filed a diversity suit in the United States District Court for the Eastern District of Wisconsin seeking liquidated damages for late delivery of the yacht, specific performance, and a preliminary injunction to prevent the sale of the yacht pending disposition of the action on the merits. Palmer Johnson counterclaimed for amounts due under the contract and for damages for storage and maintenance items additional man hours, and extended insurance coverage.*fn3

The district court denied the plaintiff's request for a preliminary injunction. In his suit before the district court, Kritikos sought to have the liquidated damages penalty enforced alleging the at the problems were a result of Palmer Johnson underestimating the amount of time required to build a sailing ship of this type and that Palmer Johnson was solely responsible for non-delivery of the boat on or before the agreed date. Palmer Johnson argued that it was not liable for the liquidated damages since the cause of the delays were a combination of (1) late delivery of plans from the plaintiff's New York architects, (2) Kritikos' unavailability to make decisions and provide information, and (3) change orders which by their terms added several days to the delivery of the vessel. the district court found that the plaintiff Kritikos in refusing to accept delivery of the Karyatis on December 15, 1984, had breached the contract. As for the delays and any possible liquidated damage, the district court stated there was "some fault on both sides" regarding the delays, but "the vast majority of the lack of good faith and reasonableness regarding the condition of the yacht on December 15 belongs to the plaintiffs' side of the suit."

The trial court awarded the defendant $215,407.05 on its counterclaim based on unpaid contract installments, storage, extended insurance, and additional man-hours less a $22,000 credit to the plaintiff for work not completed on the yacht. The judgment was subsequently amended by order of the court to provide that payment of the judgment and acceptance of the yacht did not waive Kritikos' right to appellate review. Kritikos paid the judgment and accepted delivery of the yacht.

Within a few weeks after delivery of the yacht, the propeller and central shaft fell off the yacht at sea while it was under power. The plaintiff returned to court and filed a post-trial motion requesting the trial court to amend its findings and requested that the court's original decision be supplemented to order Palmer Johnson to honor the warranty provisions of the contract regarding the problems with the propeller and central shaft.*fn4

The district court denied the motions, including the plaintiff's request to supplement its decision regarding the warranty since the warranty issue was not raised at trial and because the plaintiff had breached the contract thus, Palmer Johnson as the injured party, was discharged from the contract.

Plaintiff on appeal raises three issues: (1) Did the District Court improperly rely upon the contents of two letters (Exhibits 90 and 93) dealing with the causes of the delays in violation of rule 408 of the Federal Rules of Evidence which prohibits the use of evidence arising from compromise negotiations and offers to compromise; (2) Did the district court err in his finding that the plaintiff breached the contract and furthermore was responsible for all relevant delays; and (3) Were the applicable warranties still enforceable after the plaintiff was adjudged to have breached the contract.


Where jurisdiction is premised upon diversity of citizenship, 28 U.S.C. ยง 1332, this Court must apply the substantive law of the forum state including the conflict of law rules. Erie Railroad Co. v. Tompkins, 304 U.S. 64, 82 L. Ed. 1188, 58 S. Ct. 817 (1938); Klaxon v. Stentor Electric Manufacturing Co., 313 U.S. 487, 85 L. Ed. 1477, 61 S. Ct. 1020 (1941). From the record we are led to believe that both parties have agreed that Wisconsin law governs. "When the parties fail to consider the choice of law in a diversity case, the substantive law of the forum is presumed to control." Baltimore Orioles v. Major League Baseball Players, 805 F.2d 663, 681 n.33 (7th Cir. 1986); see also National Ass'n of Sporting Goods Wholesalers, Inc. v. F.T.L. Marketing Corp., 779 F.2d 1281, 1285 (7th Cir. 1985). Because the parties failed to raise the choice-of-law issue on appeal we deem the question to be waived.

Kritikos argues that the trial court violated Rule 408 of the Federal Rules of Evidence by improperly relying on statement sin two letters as the primary support for its decision finding him in breach of the contract when in fact the letters were written for settlement purposes only. Rule 408 of the Federal Rules of Evidence (regarding "Compromise and offers to compromise") provides that:

"Evidence of (1) furnishing or offering or promising to furnish, or (2) accepting or offering or promising to accept, a valuable consideration in compromising or attempting to compromise a claim which was disputed as to either validity or amount is not admissible to prove liability for or in validity of the claim or its amount. evidence of conduct or statements made in compromise negotiations is likewise not admissible. This rule does not require the exclusion of any evidence otherwise discoverable merely because it is presented in the course of compromise negotiations. This rule also does not require exclusion when the evidence is offered for another purpose, such as proving bias or prejudice of a witness, negativing a contention of undue delay, or proving an effort to obstruct a criminal investigation or prosecution."

The letters, dated January 5*fn5 and 12,*fn6 1985 (defendant's Exhibits 90, 93), were written by Nigel Ingram, Kritikos' "owners representative" at the Palmer Johnson yard, shortly after Kritikos refused to accept delivery of the yacht. The letters summarized the discussion between Ingram, three representatives of the architect (Bill Langan, Bill Lind and Rod Stephens) and Evan Burkholder, the plaintiff's attorney. The plaintiff's brief characterizes the letters "as part of an attempt to work out a settlement and compromise of Kritikos' and Palmer Johnson's differences without a lawsuit."

At trial, the letters were introduced in an attempt to impeach the testimony of Bill Langan, one of the plaintiff's architects, and later to refresh Langan's recollection as to the opinions he expressed at the time in question. Later in the trial, the letters were used to impeach the plaintiff's testimony when he denied being advised that his claim lacked merit. The letters were also ...

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