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Diskmakers, Inc. v. Dewitt Equipment Corporation, Jack Rosenfeld, Counterclaimant, 555 F.2d 1177, 3rd Cir. (1977)
Diskmakers, Inc. v. Dewitt Equipment Corporation, Jack Rosenfeld, Counterclaimant, 555 F.2d 1177, 3rd Cir. (1977)
2d 1177
21 UCC Rep.Serv. 1016
4
"(N)ot
later than the end of the fifth business day following delivery to Buyer of this
contract fully executed, Buyer shall deposit with Seller a letter of credit drawn by a
reputable commercial United States bank for $760,000.00 in such form as will
secure the purchase price to Seller."
Paragraph Five of the contract read:
5 Buyer shall fail to comply with the terms of Paragraph 4 (describing the letter of
"If
credit), it shall pay Seller $10,000.00 as liquidated damages for such failure in lieu
of any and all other damages . . . ."
6
At the time the brokers sent the contract to plaintiff, it had not yet learned the
identity of the seller, DeWitt Equipment Corporation. Only after the agreement
was returned did plaintiff speak directly to Burt DeWitt, defendant's president.
In this initial conversation, some doubt arose as to whether the material would
satisfy the contract's specifications.
During the ensuing five days, several developments both complicated the
contract and cast a cloud over its performance. DeWitt and representatives of
Diskmakers had several telephone conversations concerning the quality and
quantity of the material being furnished, as well as the economies of shipping in
truckload lots. Although the exact content of these conversations is in dispute,
DeWitt apparently agreed to make inquiries of his supplier (who in turn acted
as a broker for another) and "get back" to the buyer. In the buyer's version,
these conversations did little to allay its doubts and much to increase them since
DeWitt asked to be released from his obligations under the contract.
The letter was apparently issued on March 7, 1974 and transmitted to DeWitt
within a few days. Upon receipt of the document, DeWitt declared that the
plaintiffs had breached the contract and demanded payment of the liquidated
damages. It then brought suit in state court.
10
The buyer filed a complaint in the United States District Court for New Jersey
alleging breach of contract. The defendant counterclaimed for the lost profits
occasioned by the plaintiff's breach and for liquidated damages. After a period
of initial skirmishing, defendant moved for summary judgment. The district
court, relying on the Uniform Commercial Code, interpreted the contract as
requiring an irrevocable letter of credit, in view of the absence of any contrary
indication. Since the plaintiff had failed to comply with that condition, the court
entered judgment for the defendant on the plaintiff's complaint and for the
defendant on its counterclaim for $10,000.
11
We agree with the district judge's conclusion that when the contract spoke of a
"letter of credit" without designating it as revocable, the language must be
construed as requiring an irrevocable instrument. The parties do not dispute the
applicability of the Uniform Commercial Code which has been enacted in New
Jersey.2 N.J.S.A. 12A:2-325(3) states: "Unless otherwise agreed the term 'letter
of credit' . . . in a contract for sale means an irrevocable credit issued by a
financing agency of good repute . . .." According to the comment to this
subsection, the buyer obligated to provide a letter of credit must procure an
irrevocable letter of credit unless the contract specifies otherwise. 3
12
Plaintiff does not seriously question this position but argues that its serious
doubts about whether the defendant could or would perform prompted the
decision to deliver a revocable letter of credit. The district court treated the
delivery of an irrevocable letter of credit as a "condition precedent" to the
defendant's compliance with the contract, and, thus, it concluded DeWitt had a
clear right to terminate the agreement. The court recognized that the disputes
over the conversations could not properly be resolved on motion, but believed
they did not include material facts which would influence the result. We think
that this analysis fails to give due consideration to the doctrines of anticipatory
breach and the right to adequate assurance of performance. The district court
did not give the plaintiff the benefit of all favorable factual inferences which
would have invoked these defenses and, therefore, judgment was premature.
13
The plaintiff contends that its conversation with the defendant reasonably led it
to doubt that the specified material could be provided in the required quantities.
It therefore invokes Uniform Commercial Code Sections 2-609 and 610 as
justification for its apparent breach.
N.J.S.A. 12A:2-609(1) reads:
14 contract for sale imposes an obligation on each party that the other's expectation
"A
of receiving due performance will not be impaired. When reasonable grounds for
insecurity arise with respect to the performance of either party the other may in
writing demand adequate assurance of due performance and until he receives such
assurance may if commercially reasonable suspend any performance . . .."
15
16
17 between merchants, the test for determining when reasonable grounds for
"As
insecurity arise and what will constitute an adequate assurance of future performance
is a commercial criterion. Any facts which should indicate to a reasonable merchant
that the promised performance might not be forthcoming when due should be
considered reasonable grounds for insecurity . . .."
18
19
The New Jersey Study Comment notes that the demand "must apparently be
made in writing." Our research and that of counsel has unearthed no New
Jersey cases discussing this requirement. However, the Court of Appeals for the
Seventh Circuit determined that actual notice, coupled with a promise to correct
the deficiency, excused the failure to submit a written demand. AMF, Inc. v.
McDonald's Corp., 536 F.2d 1167 (7th Cir. 1976). See also Kunian v.
Development Corporation of America, 165 Conn. 300, 334 A.2d 427 (1973).
Moreover, it is arguable that the condition set out in the revocable letter of
credit, i. e., the opportunity to inspect the goods before delivery satisfied the
requirement of a written demand for reassurance. Pittsburgh-Des Moines Steel
Co. v. Brookhaven Manor Water Co., 532 F.2d 572 (7th Cir. 1976). The district
court may find it necessary to address this issue after a full development of the
facts and we do not pass upon it on the incomplete record before us.
20
21
"When
either party repudiates the contract with respect to a performance not yet due
the loss of which will substantially impair the value of the contract to the other, the
aggrieved party may
(a) for a commercially reasonable time await performance by the repudiating party;
22
(c) . . . suspend his own performance . . .."
23
24
27
The facts which may be drawn from the limited record here do not establish
that the failure of the plaintiff to furnish an irrevocable letter of credit was a
The judgment of the district court will be vacated and the case will be
remanded for further proceedings consistent with this opinion.
The parties have not extensively argued the issue of choice of law and the
district court assumed that New Jersey law applied. The defendant is a New
York corporation with offices in Florida and the plaintiff is a Pennsylvania
corporation. The contract was apparently entered in New York City, but was to
be performed in New Jersey. The federal court in New Jersey was obligated to
use New Jersey's choice of law rule which is apparently that contracts are
governed by the law of the place of performance in case of breach. See Packard
Englewood Motors, Inc. v. Packard Motor Car Co., 215 F.2d 503 (3d Cir.,
1954). Moreover, both Florida and New York have adopted the U.C.C
New Jersey law governing letters of credit was explored in National Surety
Corporation v. The Midland Bank, 551 F.2d 21 (3d Cir., 1977). In Chase
Manhattan Bank v. Equibank, 550 F.2d 882 (3d Cir., 1977), this court quoted a
characterization of such documents: "The engagement is that if certain things
are done, either by way of presentation of pieces of paper or simply by the
making of a demand for payment of a draft or acceptance, payment or
acceptance will take place." 550 F.2d at 885