Southwestern Industrial Products Company, Appellant, v. Chippewa Molding, Inc., Appellee, 263 F.2d 402 (5th Cir. 1959)

Involved here are questions under Texas law relating to delivery of defective goods by a seller, the use thereof by the buyer after knowledge of possible defective characteristics, payment, complete or partial, by the buyer and the significance, whether as a matter of fact or law, of such circumstances as constituting waiver of the breach by the buyer. The District Court, without opinion, entered an order which is selfdescribed as a judgment "notwithstanding such verdict" allowing recovery in full to the Seller (Chippewa) for the outstanding unpaid balance of the open account. It also denied any recovery to Buyer (Southwestern Industrial Products Company) on its cross claim for the damages the jury found had been sustained by it flowing from the return or replacement of the damaged goods which Buyer had sold to its farmer customers. Presumably the Court concluded that Buyer had, as a matter of law, waived the defective performance by Seller. The Buyer appeals.

The product involved is polyethylene layflat tubing of 4 to 16 inches width in a flat shape, which expands when filled with fluid to form a thin-walled flexible tubing of 3 to 10 inches in diameter. Leaverton, the moving figure of Buyer, was experienced in plastics. In early 1955 he conceived the idea that polyethylene 20-gauge tubing (walls of 20/1000 of an inch thickness) would be an economical substitute for the more expensive aluminum pipes or canvas tubes currently being used in the new postwar irrigation areas of West Texas. He sought out Seller, a manufacturing processor of commercial standard plastic extrusions. Seller knew that Buyer intended to, would, and did sell the tubing to farmers so, absent some limitation in the sales contract, Seller would be liable for special damages.

It was Seller's theory that it had never represented that this fragile material would be able to withstand the stresses incident to its use in transporting large columns of water (4 to 10 inches in diameter) under volumes as high as 1200 gallons per minute. All it had done, it claimed, was to sell the tubing with the hope so optimistically reflected in many ways by the Buyer, that experimentation would prove this to be feasible and hence an outlet for substantial sales profits for both. The Buyer, on the other hand, took the position, at least on the trial, that with knowledge of its intended use, Seller in effect represented that it was fit for this work. But the Buyer's theory was not restricted to the sufficiency of the tubing generally to do the job. The Buyer contended that the tubing in controversy was not sound plastic extrusions of the grade purchased, but was defective in its manufacture. The defects were of two principal kinds, (1) pinholes and (2) slits or tears in the layflat seams or folds formed as it was wrapped into rolls.

The jury, on a special issue verdict, F.R.Civ.P. 49, 28 U.S.C.A. held for both. Issue No. 1 determined in effect that Buyer had undertaken all risk for the use of such delicate tubing in such irrigation operations insofar as it concerned the inherent capacity of the tubing to withstand the pressures and stresses of such use. The key, however, was that the tubing was to be free of intrinsic defects of manufacture. By Issue No. 2 it was determined that the tubing was not of merchantable quality.¹  Seller does not, indeed cannot, contend that its "merchantable quality" was not warranted.²  Issue No. 4 determined that "some of the lay-flat tubing" failed in normal expected irrigation usage³  from defects in material and workmanship in its manufacture. On the basis of that answer it was successively found⁴  that the Buyer justifiably had to (a) replace such defective tubing to its customers and make (b) credits and (c) cash refunds to customers, and (d) incur certain out-of-pocket expenses of $866.61. Each and all of such findings expressly excluded any amounts "for tubing which you may find was damaged by outside forces."

We think there was sufficient evidence to sustain such findings. This includes the amount and quantities of tubing replaced or on which credit or cash refunds were given.⁵  But for reasons later discussed (see V. infra), we do not approve the amounts in money as fixed by the jury in answer to Issues 6, 7 and 8, note 4, supra.

The Buyer acknowledged categorically that no guaranty as such was ever made, and from the correspondence the jury could conclude that the normal risk of usage of this untried material was to be on the Buyer. That eliminated the warranty which the law would normally imply as to the fitness of goods to do a known job. 37a Tex. Jurisprudence, Sales, § 163 (1957). But from the invoice form, note 2, supra, and from other evidence, written and oral, the jury could just as well conclude that Seller, as a responsible manufacturer, was representing that its goods were free from defects in material and manufacture.

On defects in the tubing furnished by Seller to Buyer and in turn sold to Buyer's customers there was an abundance of evidence from nearly a dozen disinterested witnesses. All of them — farmers who had purchased the layflat tubing of various dimensions — testified in detail as to the manner in which the breaks would occur when water pressure was put on. From this source there was express testimony that the slits or tears occurred where the seams were flattened out in the lay-flat process or where folds had been formed as the lay-flat tubing was rolled up in manufacture. In addition there were specific instances of tears or slits or leaks in areas where the tubing had small pin-holes. Each of these witnesses was cross-examined carefully, but unsuccessfully, in the effort to demonstrate that these breaks were due to external causes such as nettles, stalks, uneven ground, change in elevation from connection at the pump to the discharge end of the tubing, and the like. Taken in connection with evidence showing purchases of nearly $50,000 of such tubing, none of which, except for that involved in the replacement, credits, or cash refunds, see note 4, supra, was shown to have failed in use, the jury could well credit the testimony of these farmers and conclude that the breaks in the tubing came from intrinsic defects⁶  in the material and its manufacture and not from outside agencies or the expected normal weakness of such a product.

Despite the findings which we hold were significant and supported, the Court granted judgment to the Seller and denied the cross claim of Buyer for damages from the breach. Presumably this was on the ground that the Buyer had waived the breaches.

Both theoretically, and in this case actually, such a contention presupposes that the Seller's performance was substantially deficient. Instead of denying or minimizing a breach, the effort is to magnify it to proportions demonstrating that the Buyer knew of the non-performance but nevertheless accepted it as compliance with the Seller's obligation. It presupposes that at least at one stage the Buyer had a legal right and remedy because of the breach. The idea of this so-called waiver is that between contractual equals, an obligee has the privilege of excusing performance of any particular obligation by the obligor. It has been likened to a gift release, or satisfaction and, as such, requires no consideration as would be the case of an accord and satisfaction or a compromise settlement, to which it is frequently so nearly akin, as it sometimes is to mitigation of damages, avoidable consequences and true estoppel from detrimental reliance on a change of position. See 5 Corbin, Contracts, §§ 1244 and 1245, and 1040 (1951).

On this approach the question then is whether the obligee, as a volitional matter assented to the nonperformance. That, of course, is a question of fact and one normally for the variable inferences of the fact finder unless the evidence would permit of but a single conclusion in which case it would be one finally of law. It is the latter, so the Seller contends, which is here compelled.

The conduct relied upon is the retention of the goods, the re-sale of them to Buyer's customers in the course of his retail trade, and the payment thereafter, either complete or substantial,⁷  of the original sales price to Seller for goods of which the defective ones were a part.

In some jurisdictions, e. g., Georgia, Roanoke City Mills, Inc. v. Whelchel, 5 Cir., 1953, 208 F.2d 66, and in Texas under some circumstances⁸  retention of the goods and payment therefor after the purchaser is aware of the defects would amount to a waiver as a matter of law. But the Texas law reflected by an abundance of cases⁹  as plainly holds that the presence of a warranty, express or implied, alters this rule. The warranty is a distinct undertaking and itself creates liabilities and rights. Ft. Worth Grain & Elevator Co. v. Walker Grain Co., Tex.Civ.App., 1914, 168 S.W. 470, error dismissed w. o. j. (Tex.Civ.App. jgmt. final), Tex.Com. App., 209 S.W. 398. If the warranty is one which by nature survives¹⁰  acceptance, then retention of the goods and payment therefor, while constituting evidence, indeed strong evidence, permitting an inference of a purpose to waive, i. e., assent to substantial nonperformance, does not compel it as a matter of law.¹¹ 

Without a doubt a waiver could have been found. But the jury did not so find. On the contrary, by an issue to which no exception was taken as to its sufficiency to submit the matter, the jury found that Buyer had not intentionally waived the breaches. As persuasive as are the circumstances to show waiver, the evidence was nevertheless sufficiently equivocal to permit contrary inferences.

As early as April 1955, Buyer returned samples of defective tubing.¹²  He did it many times thereafter. This occasioned one or more inspection trips in the Lubbock area of responsible representatives of the Seller. Letters from the Buyer, containing statements such as the following, are strong indeed: "We are not asking for anything but felt you should know about this and perhaps you can come up with a solution" (April 12, 1955); "We are not complaining only trying to find out why all of our trouble is confined to 8" size" (May 5, 1955); "I am not asking for anything, Don [Seller's president] as we did not ask you to guarantee the end use of this tubing" (June 1, 1955). To this may be added correspondence in 1956 when strenuous efforts were being made to effect collection of the entire account in which Buyer gave assurances that it intended to pay "everything we owe." This included the trial admission of the Buyer's president that the purpose to sue for damages was precipitated by Seller putting Buyer on a C.O.D. basis in July 1956.

But strong as are these circumstances, the jury was entitled to consider other factors. The complaints were not that the tubing was inherently unsuited, but that specific rolls, and particularly some sizes, had the described intrinsic defects in material and workmanship. There was testimony that after these complaints the Seller then assured Buyer that the defects would be remedied. And with full knowledge by Seller of these claims of defects sufficient to substantially comply with Buyer's duty to give notice under Seller's invoice terms (note 2, supra), the Buyer by letter of September 17, 1955, asserted, and Seller by its conduct thereafter entertained and acted upon, a specific request for an adjustment because of the defective tubing. As a result of these negotiations, an adjustment was actually made.¹³  Whatever might have been the intrinsic deficiencies of this episode in constituting a legally valid compromise or an accord and satisfaction, it was the strongest possible evidence that Buyer was still contending that Seller had failed to perform and should make an adjustment. Perhaps both parties were more amicable than the law would require them to have been, but it was at least evidence that Buyer was not giving an assent to Seller's nonperformance.

Subsequent payments as well as the theoretical reconstituted zero balance of March 26, 1956, were likewise open to variable inferences. Both Seller and Buyer had what they thought was a profitable operation if the kinks could be worked out. A substantial portion of the tubing was satisfactory and payment was rightfully due for it. In addition other plastic products were being delivered for which payments were properly due. Seller treated it all as one account without ever exercising any right to distinguish between products, good or defective, or to reconstruct¹⁴  the account as the law might have permitted.

Viewed in the light of Texas law, this was for the jury and its finding of non-waiver is supported and binding.

While we thus hold that Buyer is entitled to a substantial setoff against the Seller's claim, we do not think that the amounts as fixed, note 4, supra, can be approved. The credits and the cash refunds include, as special damages, the retail profit which Buyer would have made. The replacements were stated (Issue No. 4) to be the manufacturer's sales price plus freight. But the amount was arrived at by the jury not on the basis of the Seller's sales price as such, but upon one arbitrary percentage factors representing operating or net profit after deduction of Buyer's overhead and the like.

Here the Seller's contract, see note 2, supra, restricts liability for breach of warranty to the "seller's price list." Since the warranty is as to a condition which survives receipt and acceptance by the buyer, and there would be no opportunity for determining whether the goods complied until after receipt, the limitation of the "seller's price list" would not exclude the freight charges whether billed separately or not. The contract limitation is for "use" of the products and "use" does not commence until after receipt. A damage, e. g., freight payments, sustained prior to such time would be recoverable as in the ordinary course. Such a clause and construction is valid. For in Texas the parties to a contract may agree as to the remedy to be applied in case of breach, and it will be enforced by the Court so long as it is adequate and neither illegal nor in violation of public policy. Tennant v. Fawcett, 1900, 94 Tex. 111, 58 S.W. 824; Grindstaff v. Mather, Tex. Civ.App., 1945, 186 S.W.2d 364, 367, error refused w. o. m.; Frick-Reid Supply Corp. v. Meers, Tex.Civ.App., 1932, 52 S.W.2d 115, 119, no writ history; Magnolia Provision Co. v. Coleman, Tex. Com.App., 1928, 3 S.W.2d 412, 414; 37A Tex.Jur., Sales, § 303 (1957).

We find no error in the Court's dismissing that part of the Buyer's cross claim which sought damages for malicious prosecution from the use of an allegedly false affidavit in the attachment proceedings.

The result is that the judgment notwithstanding the verdict for Seller for the full unpaid balance as well as the denial of all recovery or offsets to Buyer on its cross claim must be set aside and the cause remanded for further consistent but limited proceedings. Open for determination as a credit against the admitted balance due the Seller is the amount, in money, representing Seller's list price (plus freight) for the quantities and amounts of tubing which the jury found in issues Nos. 6, 7 and 8 to have been replaced, or for which cash refunds or credits were made by Buyer to its customers.¹⁵  The Buyer shall be given full credit for such amount as an offset against Seller's unpaid balance or as an affirmative recovery on the cross-claim if in excess thereof.

Reversed and remanded in part.

HUTCHESON, Chief Judge (dissenting).

If I could agree that the answer of the jury to Special Issue No. 4 was authorized by the unconditional submission of that issue to it and was supported by evidence, I would certainly agree that, in setting the pattern for, and thereby strictly limiting, defendant's recovery by way of offset or counter claim, the majority has made a wise and just disposition of the cause and has given good and satisfactory reasons therefor.

Because, however, I am of the clear opinion that the district judge was right in entering judgment for plaintiff and against defendant, I respectfully dissent from the reversal of his judgment.

I base this opinion primarily on the jury's answer to Special Issue No. 1 and the undisputed evidence as a whole set out in part in the opinion of the majority which irrefutability establishes that defendant was not entitled to recover of plaintiff in offset or otherwise.

I base it, too, on the ground that in fact and in law the answers of the jury to Special Issues Nos. 4, 5, 6, 7, 8 and 9, on which the majority bases its opinion, were not responsive to, but were made in violation of, the court's instructions in this, that, in the submission of the case to the jury, Issues Nos. 1, 2, and 3 were unconditionally submitted for answer, while the remaining issues were submitted only upon this condition: "If you have answered the above special issues Nos. 1, 2, and 3, `No', but not otherwise, then answer the next question", and the condition was not fulfilled because the answer to Special Issue No. 1 was "Yes".