Webco Industries, Inc. v. Thermatool Corp.

F I L E D
United States Court of Appeals
Tenth Circuit

JAN 18 2002

PUBLISH PATRICK FISHER
Clerk
UNITED STATES COURT OF APPEALS
TENTH CIRCUIT

WEBCO INDUSTRIES, INC., Sued
as: Webco Industries, Inc.,

Plaintiff-Appellant/
Cross-Appellee,

v. Nos. 99-5136, 99-5148

THERMATOOL CORP.; ALPHA
INDUSTRIES INC.,

Defendants-Appellees/
Cross-Appellants.

Appeal from the United States District Court
for the Northern District of Oklahoma
(D.C. No. 97-CV-708-H)

Frederick J. Hegenbart of Rosenstein, Fist & Ringold, Tulsa, Oklahoma, (Mark
Grossman of Grossman & Grossman, Ltd., Chicago, Illinois, with him on the
briefs), for Plaintiff-Appellant/Cross-Appellee.

Joseph R. Farris (Jody R. Nathan with him on the briefs), of Feldman, Franden,
Woodard & Farris, Tulsa, Oklahoma, for the Defendants-Appellees/Cross-
Appellants.
Before SEYMOUR, Circuit Judge, MCWILLIAMS, Senior Circuit Judge and
BELOT *, District Judge.

SEYMOUR, Circuit Judge.

Webco Industries, a manufacturer of custom tube, bought a machine for

cutting tube from Thermatool Corporation and Alpha Industries (Thermatool),

manufacturers of cutting, heating, and welding machines for the pipe and tube

industry. 1 When the machine did not perform as anticipated, Webco brought this

diversity action against Thermatool alleging, inter alia, breach of contract, breach

of express and implied warranties under the Uniform Commercial Code (UCC),

and breach of a performance guarantee.

In a pretrial order, the district court ruled that limiting language in

Thermatool’s order acknowledgment precluded Webco’s contract and UCC claims

and, alternatively, that these claims were barred by the applicable statute of

limitations. The claim for breach of the performance guarantee was tried to a

jury, which returned a verdict in favor of Webco for $1,115,500, an amount that

exceeded the $735,000 purchase price of the machine by $380,500. In post-trial

*
The Honorable Monti L. Belot, District Judge, United States District Court
for the District of Kansas, sitting by designation.
1
Inductotherm, a privately held corporation, is the parent of both
Thermatool and Alpha Industries. The defendants were treated as one entity
throughout the proceedings below and we will continue to do so on appeal.

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rulings, the district court denied Webco’s request for prejudgment interest and for

attorneys’ fees.

Webco appeals, contending the court erred in ruling that the contract and

UCC claims were barred, and in failing to award prejudgment interest and

attorney’s fees. Thermatool cross-appeals, asserting that it was entitled to

judgment as a matter of law on Webco’s claim to enforce the performance

guarantee and, alternatively, that Webco’s damages on that claim should have

been limited to the purchase price of the machine. We affirm in part, reverse in

part, and remand for further proceedings.

I

BACKGROUND

The background facts set out here are relevant to Thermatool’s argument on

appeal that it was entitled to judgment as a matter of law on Webco’s claim under

the performance guarantee. See Part III.A., infra. Accordingly, we view the

record in the light most favorable to the prevailing party and give that party the

benefit of all reasonable inferences to be drawn from the evidence. See James v.

Sears, Roebuck & Co., 21 F.3d 989, 992 (10th Cir. 1994).

Prior to the events giving rise to this lawsuit, Webco had purchased several

pieces of equipment from Thermatool. In 1989, Webco was at full capacity and

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wanted a new mill to broaden its production line and customer base. Accordingly,

the parties began discussions concerning the purchase and sale of an induction

parting machine (IPM) to be put into operation in the new mill. The IPM cut tube

by heating it and pulling it apart rather than by cutting it with a saw. Bill

Obermark, who was vice president for technical services with Webco at the time,

had seen an IPM at a plant in Germany and had been favorably impressed with its

fast, clean and quiet operation. Although Thermatool had never built an IPM, its

regional sales manager, Gary Doyon, told Mr. Obermark that Thermatool was

interested and anxious to build the machine and that the Thermatool engineering

department was “extremely confident in the machine’s capabilities.” Aplt. App.

vol. III at 773.

Thermatool submitted a proposal to Webco to build an IPM. On July 10,

1989, in response to conversations with Webco personnel, Mr. Doyon sent a letter

to Webco clarifying the performance guarantee it had made with respect to the

IPM. The letter stated:

The specification parameters for performance will be set by [Webco]
and accepted by Thermatool. After startup, if the cutoff system fails
to meet these specifications, Thermatool will make every effort to
rectify the problems or take back the cutoff and remit monies paid to
Thermatool to that point.

We offer this comprehensive performance guarantee as a direct result
of our confidence in the proposed system.

Id. at 785.

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 In August, Webco sent a purchase order for the IPM to Thermatool which

stated that its acceptance was limited to the terms on the reverse side, and that

any additional or different terms in the acceptance would be void unless Webco

agreed to them. The reverse side of the purchase order stated that “Buyer

[Webco] shall be entitled to all rights and remedies as set forth in the Oklahoma

version of the Uniform Commercial Code.” Id. at 790. After a meeting between

Webco and Thermatool personnel, Thermatool sent Webco an invoice and an

acknowledgment. The acknowledgment recognized that, pursuant to Webco’s

specifications, the machine could not mark tube with more than a 0.003 inch

indentation, and further provided that Thermatool would provide startup

assistance “for the purpose of inspecting the installation, performing in the field

adjustments and instructing customer’s personnel in the proper use of the

equipment,” id. at 812. The acknowledgment also stated that the terms and

conditions on the back were the only ones applicable to the order. The back of

the page stated that Thermatool’s warranty did not cover “losses, costs, expenses,

liabilities and damages ( . . . and all other consequential damages).” Id. at 814.

Thermatool built the machine and sent it to Webco, who paid the purchase

price in full. Because Webco was having problems with its financing for the new

mill, the machine was placed in storage for four years after it was delivered to

Webco while Webco worked out its financing and constructed the mill.

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Thermatool was aware of the situation and agreed to extend its performance

guarantee through the storage period and the time the IPM was placed into

service. When the mill was completed in 1994, Webco began preparations to

remove the IPM from storage, assemble it, and prepare it for service.

It is undisputed that the machine could not be installed as configured by

Thermatool. In its original configuration, IPM did not fit the space envelope

provided for it, and parts would have hit one another during operation. This

problem became apparent in early 1994 as Webco was preparing to install the

IPM in the mill. Webco notified Thermatool of the situation in March 1994. In

April, Thermatool representatives visited the plant to observe the problem first-

hand and agreed that some modifications had to be made. Webco requested that

Thermatool set up a schedule for the required modifications so that the

installation could proceed and the mill could begin operation. When Thermatool

did not provide the schedule or make the required modifications, Webco

ultimately started making the modifications in early October, with input from

Thermatool personnel. The IPM was placed into operation the last week of

October and the first week of November 1994.

It is also undisputed that prior to delivery the IPM did not conform to

Webco’s specifications and that Thermatool was aware of this fact. Pre-delivery

testing by Thermatool showed that the IPM consistently marked tube in excess of

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the 0.003 inch limit set by Webco. Specifically, when the jaws that pulled the

tube apart exerted sufficient force to part the tube, the teeth in the jaws left marks

in the tube that exceeded the specification. Webco presented evidence at trial that

it was unaware of the marking problem until after the machine began operation.

Although the IPM otherwise performed well after the mill became

operational, the jaw teeth continued to mark the tube in excess of 0.003 inches.

Webco presented testimony at trial from its founder and chairman of the board,

Bill Weber, describing the problems created by the marks. 2 Mr. Weber testified

that the marked pipe would be rejected by Webco’s customers, that the company

therefore could not sell it, and that it could not be cut due to length requirements.

Webco was thus required to scrap it. Thermatool has never disputed the

legitimacy of Webco’s marking specification.

When the IPM began operation the first week of November 1994, Bill

Obermark of Webco observed the marking problem. He pointed it out to

Thermatool personnel assisting with the startup, and listed the jaw design as an

item of discussion with Thermatool engineers. At the end of November, Mr.

2
Mr. Weber testified that one particular customer took tube, applied a
lubricant to it and extruded it. “These marks will cause [the customer’s]
extruding system to gall the metal, pick up the metal and it balls up and basically
will break a die, break a mandrel, those kinds of things. Also, this [kind] of mark
would . . . not clean up in a centerless grinding process that we talked about
earlier . . .” Aplee. App. vol. I at 77.

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Obermark asked Thermatool for a progress report and was told that Thermatool’s

engineering department would work on developing a new jaw design and get back

to him. See Aplt. App. vol. IV at 1007. Mr. Obermark testified at trial that he

had heard nothing from Thermatool by the end of the year and that everything the

IPM was making was scrap. He therefore felt that Webco had to design and

manufacture its own jaws. Webco began to do so and sent a copy of the

engineering to Thermatool for its reference and opinions. Webco also returned

the Thermatool jaws to the company with a request that Webco receive a credit,

which Thermatool did not honor. Thermatool personnel did not respond to

Webco’s alternative jaw design, and Webco continued to attempt to develop a

design that did not mark the tube. Webco was ultimately able to use its jaws to

produce a certain amount of tube that met the marking specification.

Thermatool engineers came to the mill in July 1995 to see the problem and

determined that the markings were caused because the machine did not have the

capacity to grip the tube with sufficient strength. In August 1995, Thermatool

proposed a solution that required using a redesigned jaw that would grip the tube

using a hydraulic pressure system rather than the cam system already in place.

The design of the hydraulic system was discussed by Webco and Thermatool

personnel through January 1996. During that time Webco lost substantial profits

because it was unable to manufacture tube required by many of its customers.

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Although Thermatool produced an acceptable design in March 1996, it demanded

that Webco pay for the modifications. At a meeting between Webco and

Thermatool personnel, Webco agreed to pay half the cost of the fix if Thermatool

could get the changes made by August 31. Thermatool was to provide Webco an

implementation schedule within one week of the meeting. Webco nonetheless

began to investigate alternative cutting technologies.

Thermatool did not provide the required schedule nor make the agreed

modifications. In correspondence with Webco immediately before the August 31

deadline, Thermatool first mentioned to Webco its opinion that the problem with

the machine might be electrical rather than mechanical. In September,

Thermatool sent Webco a letter stating that the IPM had a heating problem in

addition to inadequate clamping force, and that this problem was in turn the result

of electrical problems caused by the original modifications done by Webco in

order to fit the IPM into the mill space. Webco bought an alternative machine in

September and switched out the IPM in February 1997.

II

THE PRETRIAL RULING

Webco moved for summary judgment on its contract and UCC claims,

asserting the undisputed facts established that Thermatool had breached the

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contract by selling Webco a machine violating the specifications agreed upon by

the parties. Webco asserted it was entitled as a matter of law on the resulting

undisputed damages. Thermatool sought a summary judgment ruling that its

maximum liability was limited to a refund of the purchase price paid to it by

Webco. The district court ruled that Webco’s contract and UCC claims were

limited by the terms set out in Thermatool’s order acknowledgment, which

excluded liability for “losses, costs, expenses, liabilities and damages (including

loss of use or profits, all liabilities of the buyer to its customers or third persons

and all other consequential damages).” Aplt. App. vol. III at 814. Alternatively

the court held that Webco’s contract and UCC claims, other than those based on

Thermatool’s performance guarantee, were barred by the applicable statute of

limitations. 3

The parties agree that the claims raised in this diversity action are governed

by Michigan law. Webco contends the district court erred in ruling that the terms

of Thermatool’s acknowledgment governed the remedies available for breach of

3
The district court denied Thermatool’s motion for partial summary
judgment, holding that the performance guarantee limited damages to the
purchase price unless Webco proved that Thermatool breached its obligation to
make every effort to rectify the problems. In that event, Webco would be entitled
to recover out-of-pocket expenses incurred in making the repairs necessary to
bring the IPM’s performance up to the contract specifications. The court further
held that material fact issues existed as to whether Thermatool breached its
contract with Webco, and that the matter would proceed to trial, with the damages
limited as described above.

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contract, asserting, inter alia, that under Michigan law the purported limitation is

“knocked out” by the conflicting term in Webco’s order and it is invalid because

it is inconspicuous. We need not decide these issues, however, because we

conclude that even if Webco is correct in contending that the acknowledgment

was not a valid limitation of remedies, the contract and UCC claims are barred by

the applicable statute of limitations.

The warranty provisions of Michigan’s version of the UCC are governed by

the statute of limitations set out in M ICH . C OMP . L AWS A NN . § 440.2725 (West

2000). Section 2725 provides that “[a]n action for breach of any contract for sale

must be commenced within 4 years after the cause of action has accrued.” Id. §

2725(1). The section further provides that a “cause of action accrues when the

breach occurs,” and that a “breach of warranty occurs when tender of delivery is

made.” Id. § 2725(2). Under Michigan law, tender of delivery occurs for

purposes of the limitation period when the seller delivers the goods, even if they

are defective when measured against the contract’s requirements. See Baker v.

DEC Int’l, 580 N.W.2d 894, 897 (Mich 1998). 4 In this case, Thermatool

delivered the IPM to Webco in 1989 and Webco did not file the present action

4
We point out that we are here concerned only with Webco’s claims for
breach of contract and breach of warranties provided by Michigan’s version of the
UCC. Thermatool’s performance guarantee is not governed by the limitation
period because Thermatool expressly waived it as to that guarantee.

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until 1998, long after the four year period had expired.

Webco seeks to bring this case within the exception recognized by the court

in Baker, under which “[i]f installation were a term of the contract, then mere

physical delivery would not fulfill defendant’s contractual obligation. Only when

the component parts were fully installed could the defendant be viewed as

tendering goods ‘as if in’ fulfillment of its contractual responsibilities.” Id. at

898. Under this exception, if the seller were contractually obligated to install the

goods, tender would not occur until that contractual obligation had been fulfilled.

Webco argues the exception applies here because under the terms of Thermatool’s

acknowledgment, Thermatool was contractually obligated to provide startup

assistance consisting of “15 days, excluding travel time, for the purpose of

inspecting the installation, performing in the field adjustments and instructing

customers personnel in the proper use of the equipment.” Aplt. App. vol. III at

812. Webco argues that these obligations are identical to the installation

obligation at issue in Baker for purposes of extending the limitation period. We

disagree.

The court in Baker specifically distinguished between a contractual

obligation to install and the obligation to inspect and test relied on by Webco.

The court stated that “‘tender of delivery’ is not contingent upon inspection,

testing, or acceptance in the absence of a clear contractual provision to the

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contrary.” Baker, 580 N.W.2d at 898. The court pointed out its holding was

consistent with those of many other jurisdictions interpreting the UCC, noting that

“[m]any courts have held that contractual provisions for postdelivery testing or

inspection do not toll the accrual of breach of warranty claims. Id. at 898 n.14.

As examples of such holdings the court cited H. Sand & Co. v. Airtemp Corp.,

738 F. Supp. 760 (S.D.N.Y. 1990), rev’d in part on other grounds, 934 F.2d 450,

457 (2d Cir. 1991) (inspection provision in contract does not postpone tender of

delivery); City of Cincinnati v. Dorr-Oliver, Inc., 659 F. Supp. 259 (D. Conn.

1986) (tender of delivery is not contingent upon inspection, testing, or

acceptance); Ontario Hydro v. Zallea Syst., Inc., 569 F. Supp. 1261 (D. Del.

1983) (inspection clause in contract did not affect tender of delivery). In view of

the express language in Baker and the cases it cites, we conclude that under

Michigan law postdelivery obligations to inspect, test and provide instruction do

not toll the accrual of a breach of warranty claim unless the contract specifically

so provides. We therefore affirm the district court’s holding that Webco’s claims

for breach of contract and breach of UCC warranties are time-barred.

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 III

THE CROSS APPEAL

A. Judgment as a Matter of Law

In its cross appeal, Thermatool claims Webco’s alteration of the IPM’s

configuration voided all warranty remedies and Webco is therefore not entitled to

any damages. Thermatool contends Webco’s changes made it impossible for

Thermatool to perform its contract obligation to bring the machine into

compliance with Webco’s specifications. Consequently, Thermatool believes it

was entitled to judgment as a matter of law under F ED . R. C IV . P. 50. Webco

responds that the evidence at trial shows Thermatool had ample opportunity to

rectify the problems before Webco made the modifications, but chose not to do

so, and that in any event the modifications did not prevent Thermatool from

rectifying the marking problem.

In reviewing the denial of a Rule 50 motion, we determine only whether the

jury verdict is supported by substantial evidence when the record is viewed most

favorably to the prevailing party. See Beck v. N. Natural Gas Co., 170 F.3d 1018,

1022 (10th Cir. 1999). Substantial evidence is something less than the weight of

the evidence, and is defined as “such relevant evidence as a reasonable mind

might accept as adequate to support a conclusion, even if different conclusions

also might be supported by the evidence.” Id. (internal quotations omitted). We

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do not retry issues, second guess the jury’s decision-making, or assess the

credibility of witnesses and determine the weight to be given their testimony. Id.

It is the province of the jury, and not this court, to resolve conflicts in the

evidence. Thunder Basin Coal Co. v. Southwestern Pub. Serv. Co., 104 F.3d

1205, 1213 (10th Cir. 1997). “Thus, the mere existence of contrary evidence does

not itself undermine the jury’s findings as long as sufficient other evidence

supports the findings.” Id.

As set out in Part I supra, Webco presented evidence demonstrating that

Thermatool knew before it delivered the IPM that the machine did not meet

Webco’s marking specification. Webco also presented evidence that Thermatool

agreed the IPM could not operate in the mill as originally configured and that

Thermatool had several months in which to reconfigure the machine before

Webco did so. Evidence in the record also tends to show that Thermatool at least

tacitly approved Webco’s decision to reconfigure by providing engineering input

for Webco’s modification plans. In addition, Webco presented evidence through

three expert witnesses who had tested the IPM. These witnesses testified that the

modifications to the configuration made by Webco did not adversely affect the

machine’s performance and in fact may have enhanced its operation.

Webco thus presented evidence from which the jury could have found that

Thermatool did not avail itself of the opportunity to modify the machine’s

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configuration even though Thermatool agreed that a modification was required

before the machine could be operated. Webco also presented evidence to support

the jury’s determination that Thermatool was not prevented by Webco’s

modifications from complying with its contractual obligation to rectify the

machine’s marking problems. In view of the sufficient evidence supporting

Webco’s claims, Thermatool’s contrary evidence does not undermine the jury’s

findings. Accordingly, we affirm the district court’s denial of Thermatool’s Rule

50 motion for judgment as a matter of law.

B. Damages

Thermatool also contends in its cross appeal that the trial court erred in

permitting Webco to recover as damages more than the purchase price it paid for

the IPM. As we noted above, the district court held in a pretrial ruling that

Webco’s damages were limited by the performance guarantee to the purchase

price unless Webco demonstrated that Thermatool had violated the guarantee by

failing to make every effort to rectify the problems with the machine’s

performance. In that event, Webco would be entitled to recover its out-of-pocket

expenses for any repairs Webco made to bring the IPM into compliance with the

agreed specifications. In accordance with this ruling, the court instructed the

jury:

1. If you find that Thermatool had a reasonable opportunity to
rectify the problem of the cutoff machine and made every effort to do

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 so, then you must find that Webco is entitled to damages limited to
$735,000, the amount paid by Webco to Thermatool for the machine.
You may also award interest on that amount; or
2. If you find that Thermatool had a reasonable opportunity to
rectify the problem of the cutoff machine and did not make every
effort to do so, then you must find that Webco is entitled to damages
in the amount paid by Webco to Thermatool for the machine and you
must further determine the amount of out-of-pocket expenses
incurred by Webco, as a result of Thermatool’s breach of express
warranty, for any repairs performed to cause the cutoff machine to
meet agreed specifications. This amount of out-of-pocket expenses
should then be added to the $735,000 amount paid by Webco to
Thermatool for the machine. You may also award interest on that
total amount.

Aplt. App. vol. II at 648

The purchase price of the IPM was $735,000. Webco presented undisputed

evidence that it paid financing charges on the machine itself in the amount of

$330,507. In addition, Webco’s uncontroverted evidence demonstrated that, in its

attempts to eliminate the marking problem, it paid $211,000 in supplies and

$339,000 in manpower, as well as $247,318 in interest on these items. The jury

returned a general verdict awarding Webco $1,115,500, an amount exceeding the

$1,065,507 sum of the purchase price and the interest paid on the purchase price.

Thus, as Thermatool’s argument recognizes, the jury’s damage award reveals that

it found Thermatool had breached its duty to rectify the problems with the

machine and accordingly gave Webco some amount of out-of-pocket expenses as

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directed in the court’s damages instruction. 5

Thermatool contends that the performance guarantee limited Webco’s

remedies to either repair of the problems or return of the purchase price, and that

because this remedy did not fail in its essential purpose, Webco may not recover

consequential damages. Under Michigan’s version of the UCC, “[w]here

circumstances cause an exclusive or limited remedy to fail of its essential

purpose, remedy may be had as provided in this act.” M ICH . C OMP . L AWS A NN . §

440.2719(2) (West 2000). In applying this provision, the Michigan Court of

Appeals stated:

the parties to a sales agreement may agree to limit remedies and
damages for breach of the agreement. However, subsection (2)
further provides that where the limited remedy fails in its purpose or
operates to deprive either party of the value of the bargain, the
parties may pursue other remedies provided elsewhere in the U.C.C.

Kelynack v. Yamaha Motor Corp, USA, 394 N.W.2d 17, 19-20 (Mich. Ct. App.

1986) (per curiam); see also Krupp PM Eng’g, Inc. v. Honeywell, Inc., 530

N.W.2d 146, 149 (Mich. Ct. App. 1995) (notwithstanding a valid limitation of

liability in warranty, buyer may pursue other remedies where seller delays

completing promised repairs or replacements).

5
Under one possible explanation for the amount of the jury’s award, the
jury could have given Webco the purchase price of $735,000, $211,000 as the cost
of the materials incurred by Webco, and $169,500 as half the cost of the labor
charges incurred, and no interest, for a total of $1,115,500. Indeed, the evidence
shows that, at one point, Webco offered to pay for half of the repairs.

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 The performance guarantee in this case stated that “if the cutoff system

fails to meet [Webco’s] specifications, Thermatool will make every effort to

rectify the problems or take back the cutoff and remit monies paid to Thermatool

to that point.” Aplt. App. vol. III at 785. The jury apparently found that

Thermatool did not make every effort to correct the machine’s problems.

Moreover, it is undisputed that Thermatool never offered to take back the

machine and refund the purchase price. Indeed, at one point it wanted Webco to

pay the entire cost of bringing the machine into compliance with the marking

specification, and ultimately accepted Webco’s offer to pay half. It is also

undisputed that Thermatool did not rectify the problems even after Webco agreed

to pay half the cost, that Webco tried for several years to run the mill using the

IPM, and that the machine never operated within the agreed marking

specification.

We look to Michigan law to determine whether these facts demonstrate that

the performance guarantee failed in its essential purpose and therefore support the

jury’s award of damages in excess of the purchase price. In Krupp, the buyer

received an invoice on parts to repair a commercial furnace. The invoice stated

that the buyer’s remedy would be limited to a twelve-month warranty and that the

seller would not be liable for consequential damages. The court held that

because plaintiff [buyer] was deprived of its furnace for eighteen
months and the furnace was not completely fixed for three years, the

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 warranty failed in its essential purpose. Even where a valid
limitation of liability in a warranty exists, a buyer is entitled to
pursue other remedies where the seller takes too long to complete the
repairs or replacements promised in the warranty.

Krupp, 530 N.W.2d at 149 (citation omitted).

In so holding the court in Krupp relied on King v. Taylor Chrysler-

Plymouth, Inc., 457 N.W.2d 42 (Mich. Ct. App. 1990), and Kelynack, 394 N.W.2d

17. In King, the buyer purchased a car, represented as a demonstration vehicle,

that came with a limited warranty excluding incidental and consequential

damages. The buyer began to have problems with the car immediately after

delivery and took it in for service eight times before she stopped driving it less

than a year later. Although some of the problems were repaired, a stalling

problem was never corrected. In holding that the warranty failed in its essential

purpose, the court observed that the “plaintiff took the car to defendant for repair

of the stalling problem seven times over a period of nine months. The repairs

were unsuccessful and, as a result, plaintiff became fearful of driving the car.”

Id. at 46. The court pointed out that the seller must repair or replace the defective

condition within a reasonable time and had failed to do so, entitling the plaintiff

to seek consequential damages notwithstanding the limited warranty.

In Kelynack, the plaintiff purchased a motorcycle with a limited six-month

warranty providing for repair or replacement. While the vehicle was still under

warranty, it developed problems and the buyer took it to the dealer for service.

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When the dealer had not repaired the motorcycle two months later, the buyer

stopped paying on it and learned for the first time that the engine was seriously

damaged. The motorcycle was ultimately repaired over three months after the

original purchase and the buyer attempted to revoke the contract on the ground

that the repairs had not been made within a reasonable time. The court held that

the limited warranty had failed in its essential purpose and the buyer was entitled

to pursue other remedies. The court noted that the “plaintiff had the motorcycle

in his possession for only ten weeks before it became totally inoperable. He

immediately returned it to the dealer where it remained for over three months. By

the time the motorcycle was returned to him, it was late November and the

weather precluded its use.” Kelynack, 394 N.W.2d. at 20. The court held that

“[w]here a manufacturer or dealer has limited its obligation under the sales

agreement to repair or replace defective parts the seller does not have an

unlimited time to make the repairs, but rather must repair or replace the parts

within a reasonable time.” Id.

Finally, in Bosway Tube & Steel Corp. v. McKay Mach. Co., 237 N.W.2d

488 (Mich. Ct. App. 1976), the court addressed circumstances very similar to

those before us. The plaintiff had purchased a mill for producing tube which did

not perform properly. After both the buyer and the seller had expended funds for

a year in attempted repairs, the seller stopped making repairs although the mill

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was still not producing the required product. The buyer then sold the machine

and brought suit. The court rejected the seller’s argument that the buyer’s

damages were limited by a clause restricting the seller’s liability to repair or

replacement, holding that the warranty failed in its essential purpose because

several defects were never corrected by the seller. Id. at 430.

Thermatool contends these Michigan cases are inapposite because they

concern “repair or replacement” warranties and in this case Thermatool offered a

performance guarantee coupled with a refund of the purchase price. Thermatool

has not explained why this difference is material and has offered nothing to

indicate that Michigan courts would consider such a distinction dispositive. We

are not convinced that, with respect to the issue of failure of essential purpose, a

warranty limiting remedies to repair or replacement is materially distinguishable

from one limiting remedies to repair or refund of the purchase price. Accordingly

we are persuaded that whether the seller is obligated to repair or replace, or repair

and refund, Michigan law requires the seller do so within a reasonable time under

the nature and circumstances of the case. In our judgment, the cited cases

describing the reasonableness requirement under Michigan law clearly indicate

that the requirement was not met by Thermatool here. 6 We therefore conclude

6
Thermatool notes that in a majority of jurisdictions, when a warranty fails
a separate provision barring consequential damages will survive if it is not
(continued...)

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that the district court did not err in allowing Webco to recover as consequential

damages an amount in excess of the purchase price.

IV

ATTORNEYS’ FEES

After judgment on the jury verdict was entered, Webco brought a motion

for attorneys’ fees claiming Michigan law allowed the award as part of Webco’s

consequential damages. In support of its argument, Webco cited two decisions by

the Michigan Court of Appeals holding a court has discretion under Michigan’s

version of the UCC to award attorneys’ fees as an element of consequential

damages. See Kelynack, 394 N.W.2d 17; Cady v. Dick Loehr’s, Inc., 299 N.W.2d

69 (Mich. Ct. App. 1980). The district court denied Webco’s motion, relying on

an unpublished Sixth Circuit opinion concluding that the Michigan Supreme

Court would not agree with the state court of appeals decisions on the matter. See

Olbrys v. Peterson Boat Works, Inc., Nos. 94-2016, 94-2070, 1996 WL 143466

6
(...continued)
unconscionable. Michigan law, however, is to the contrary. In Kelynack v.
Yamaha Motor Corp., USA, 394 N.W.2d 17 (Mich. Ct. App. 1986), the court
acknowledged the conflicting opinions on this issue and agreed “with those
jurisdictions which have held that the failure of an exclusive remedy provision
contained in a warranty renders the limitation of damages inoperable. In our
view, the repair and replace remedy and the exclusion of consequential damages
are integral and interdependent parts of the warranty . . . .” Id. at 21.

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(6th Cir. Mar. 28, 1996) (per curiam). Alternatively, the district court ruled that

even if fees were recoverable, they were an element of damages to be proven at

trial and under F ED . R. C IV . P. 54(d)(2)(A) could not be recovered as costs.

In Cady, the Michigan Court of Appeals reviewed a trial judge’s decision

awarding the plaintiff attorneys’ fees in a breach of warranty claim. The plaintiff

argued on appeal that he was entitled to fees under M ICH . C OMP . L AWS A NN . §§

440.2714 and 440.2715 (West 2000), the Michigan UCC provisions allowing the

recovery of consequential damages. The court recognized the general rule that

fees are not ordinarily recoverable as costs or awarded absent statutory authority,

and that the matter was an issue of first impression in Michigan. Nonetheless, the

court held that the language of the statutes “confers on the trial court discretion to

award attorneys’ fees as an element of the damages incurred as a result of a

breach of warranty.” Cady, 299 N.W.2d at 72.

In Kelynack, as we discussed in Part III.B. supra, the Michigan Court of

Appeals held that the limited warranty at issue failed in its essential purpose and

that the plaintiff was therefore entitled to pursue other remedies available under

the UCC. The trial judge had awarded attorneys’ fees and the defendant argued

on appeal that the court abused its discretion in so doing because the warranty

excluded consequential damages. The court of appeals disagreed, concluding that

the failure of the exclusive remedy in the warranty rendered the limitation

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inoperable and that the trial court had not abused its discretion in awarding the

fees as consequential damages under the circumstances. See Kelynack, 394

N.W.2d at 21.

The district court here declined to follow these two court of appeals

decisions, persuaded by the Sixth Circuit that the Michigan Supreme Court would

disagree with them. This court has long held that “where jurisdiction rests solely

on diversity of citizenship and there is no controlling decision by the highest

court of a state, a decision by an intermediate court should be followed by the

Federal court, absent . . . convincing evidence that the highest court of the state

would decide otherwise.” B.F. Goodrich Co. v. Hammond, 269 F.2d 501, 505

(10th Cir. 1959) (citing West v. A.T. & T. Co., 311 U.S. 223, 237 (1940)); see also

Lowell Staats Mining Co. v. Pioneer Uravan, Inc., 878 F.2d 1259, 1269 (10th Cir.

1989) (citing same). As our court has recognized, “[w]here an intermediate

appellate state court rests its considered judgment upon the rule of law which it

announces, that is a datum for ascertaining state law which is not to be

disregarded by a federal court unless it is convinced by other persuasive data that

the highest court of the state would decide otherwise.” Hicks ex rel Feiock v.

Feiock, 485 U.S. 624, 630 n.3 (1988) (quoting West, 311 U.S. at 237-38).

In Olbrys, the Sixth Circuit concluded the Michigan Supreme Court would

reject the court of appeals decisions allowing attorney’s fees as an element of

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consequential damages under Michigan’s version of the UCC. The circuit based

its conclusion on the general rule that fees are not recoverable as an element of

damages and that section 440.2715, the Michigan UCC provision on

consequential damages, is silent as to fees. The court also found important the

fact that the Michigan court of appeals decisions conflict with the decisions of the

highest courts in other states.

The court in Cady recognized the general rule that fees are ordinarily not

recoverable as costs and most often will not be awarded absent statutory

authority, but nonetheless concluded that they could be included as incidental

damages under the UCC. See Cady, 299 N.W.2d at 71. In so doing, the court

looked to decisions in which it had held that a provision in the Michigan

Environmental Protection Act (MEPA) stating that costs could be apportioned to

the parties “if the interests of justice so required” gave the trial judge discretion

to grant attorneys’ fees. See id. at 71-72.

In our view, this is the unusual case in which persuasive data convinces us

the Michigan Supreme Court would not agree with the court of appeals decisions

allowing an award of attorneys’ fees as an element of incidental damages under

section 440.2714 of the Michigan UCC. In addition to the evidence relied upon

by the Sixth Circuit in Olbrys, we find compelling the Michigan Supreme Court’s

discussion in Nemeth v. Abonmarche Dev., Inc., 576 N.W. 2d 641 (Mich. 1998).

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There the court addressed whether the language in the MEPA providing that costs

could be apportioned to the parties in the interest of justice permits a trial judge

to apportion attorneys’ fees. This is the same language the Cady court relied on

in its analysis. In concluding that this language did not permit an award of fees,

the Michigan Supreme Court pointed out that Michigan follows the common law

tradition providing that attorneys’ fees are not recoverable unless a statute, court

rule, or common-law exception provides to the contrary. Id. at 651. The court

found persuasive the Supreme Court’s analysis in Alyeska Pipeline Serv. Co. v.

Wilderness Soc., 421 U.S. 240, 245 (1975), applying the traditional rule against

the nonstatutory allowance of attorneys’ fees even when a fee award would

further a particular public policy. The Michigan Supreme Court stated that the

analysis in Alyeska comports with its view that selecting the occasions when an

award of fees is appropriate is the prerogative of the legislature and not of the

courts. Nemeth, 576 N.W.2d at 653-54.

In view of the Michigan Supreme Court’s emphatic statement that fees may

not be allowed absent statutory authority, even when compelling public policy

reasons are advanced to support such an award, we must conclude that court

would disagree with the nonstatutory award of fees under the UCC. Accordingly,

we affirm the district court’s decision denying Webco’s request for fees in this

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case. 7

V.

PREJUDGMENT INTEREST

Webco filed a post-trial motion for taxation of prejudgment interest,

claiming that under Michigan law interest should be awarded at a rate of 12% per

annum. The district court denied the motion, concluding that “the question of

interest on the award was submitted to the jury and therefore, that an award of

additional statutory interest to Webco would constitute an impermissible double

recovery.” Aplt. App. vol. II at 766.

On appeal, Webco maintains that in light of the evidence presented to the

jury, no double recovery could have occurred. At trial Webco presented evidence

that it paid $735,000 to Thermatool for the machine and an additional $330,507 in

financing charges. It also established that it paid $211,000 in supplies and

$339,000 in manpower in an effort to repair the problems with the operation of

the machine, plus financing charges of $247,318 on those expenses. Webco

contends that prejudgment interest on the entire damages award is mandated by

Michigan law in addition to any financing charges the jury may have awarded it

We therefore need not address the district court’s alternative ruling
7

refusing to award fees under F ED . R. C IV . P. 54(d)(2)(A).

-28-
as part of its compensatory damages. Thermatool responds that prejudgment

interest under the Michigan statute invoked by Webco is a procedural provision

not applicable in federal court and that the claim for prejudgment interest is an

impermissible request for additur. Thermatool further argues that because the

jury was permitted to award interest, and because this court may not speculate on

the components of the jury’s general verdict, the district court was correct in

concluding that granting prejudgment interest post-trial would amount to

impermissible double recovery.

Thermatool’s first two arguments may be dismissed summarily. It is

beyond argument that “prejudgment interest traditionally has been considered part

of the compensation due plaintiff.” Osterneck v. Ernst & Whinney, 489 U.S. 169,

175 (1989). “‘Prejudgment interest is normally designed to make the plaintiff

whole and is part of the actual damages sought to be recovered.’” Johnson v.

Continental Airlines Corp., 964 F.2d 1059, 1062-63 (10th Cir. 1992) (quoting

Monessen S.W. Ry. v. Morgan, 486 U.S. 330, 335 (1988), and citing cases).

Prejudgment interest in a diversity action is thus a substantive matter governed by

state law. See Erie R.R. v. Thompkins, 304 U.S. 64, 78 (1938).

We are likewise not persuaded by Thermatool’s contention that if the award

of prejudgment interest is a substantive matter, it would constitute an

impermissible additur to include it subsequent to the jury’s award of damages.

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Thermatool appears to assert that prejudgment interest in a diversity case must be

presented to the jury and cannot be the subject of a post-trial motion. The law,

however, is to the contrary. As the Supreme Court made clear in a case involving

a jury, “a postjudgment motion for discretionary prejudgment interest constitutes

a motion to alter or amend the judgment under Rule 59(e).” Osterneck, 489 U.S.

at 175. See also id. at 176 n.3 (same when prejudgment interest is available as

matter of right); Capstick v. Allstate Ins. Co., 998 F.2d 810, 812-13 (10th Cir.

1993) (prejudgment interest is part of merits and should be sought by Rule 59(e)

motion). These cases and those to which they cite leave no room for the argument

that granting such a motion would result in impermissible additur. 8

We turn to the district court’s ruling that an award of prejudgment interest

in this case would result in an impermissible double recovery. Michigan provides

by statute for the recovery of interest on a money judgment in a civil action, see

M ICH . C OMP . L AWS A NN . § 600.6013(1) (West 2000), to be calculated from the

date the complaint is filed to the date the judgment is satisfied at the rate of 12%

per year, id. § 6013(5). The Michigan courts have distinguished between interest

paid on the total judgment under the above statute and “interest as an item of

damages or loss that is related to a substantive claim.” Sullivan Indus., Inc. v.

8
As authority for its argument, Thermatool cites only to Dimick v. Schiedt,
393 U.S. 474 (1935), a case that did not address the award of prejudgment
interest.

-30-
Double Seal Glass Co., 480 N.W.2d 623, 633 (Mich. Ct. App. 1992). Both types

of interest are recoverable under Michigan law upon a proper showing by a

plaintiff.

The purpose of an award of prejudgment interest is “to compensate
the prevailing party for the expenses incurred in bringing an action
and for the delay in receiving money damages.” However, interest as
an item of damages is generally interest incurred and paid by a
plaintiff as a result of additional borrowings made necessary by a
defendant’s breach of a contract. It is recoverable in Michigan, in
addition to prejudgment interest, under general principles governing
damages where the seller had reason to know of the borrowing, or
where the parties could reasonably foresee the additional interest
incurred as potential loss in event of the breach at the time the
contract was made.
Interest paid on loans taken out to maintain the business, if
foreseeable, falls within the category of consequential damages as
prescribed by the U.C.C.

Id. (citations omitted).

Thermatool contends awarding prejudgment interest after the jury returned

its verdict would allow Webco to “double dip” in light of the jury instruction

given on damages. However, a careful review of the trial transcript convinces us

that granting Webco’s posttrial motion for prejudgment interest would not result

in an impermissible double recovery.

It is true that the damage instruction given to the jury stated it could award

interest either on the amount of the purchase price or on the amount of out-of-

pocket expenses, or both. See Aplt. App. vol. II, at 648. But the jury was not

instructed with respect to the award of prejudgment interest in accordance with

-31-
the applicable Michigan statute. Significantly, the jury was also instructed

several times that its “decision in this case must be made solely on the evidence

presented at the trial.” Id. at 624. See also id. at 627 (“[y]ou should consider

only the evidence”); id. at 628 (“it is your duty to determine the facts, and in so

doing you must consider only the evidence admitted in the case”).

The only evidence presented by either party addressed to interest was that

presented by Webco. As we have mentioned, Webco presented evidence only

with respect to the interest it paid as financing charges on the machine itself and

as financing charges on the manpower and material used in its attempt to correct

the machine’s operating deficiencies, both of which went to the total cost to

Webco of purchasing the machine and making the repairs and were therefore part

of Webco’s compensatory damages. The jury was given no evidence pertaining to

the award of statutory prejudgment interest on the total amount of its award.

In sum, the jury was not instructed with respect to the award of statutory

prejudgment interest on the judgment as a whole, was instructed to base its

verdict only on the evidence, and was presented with no evidence to support an

award of statutory prejudgment interest. Under these circumstances there is no

possibility the jury included in its verdict any amount attributable to statutory

prejudgment interest. Consequently, we reverse the district court’s denial of

Webco’s posttrial motion for prejudgment interest under Michigan law and

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remand this matter for further proceedings.

The judgment of the district court is AFFIRMED in part, REVERSED in

part, and REMANDED for further proceedings in accordance with this opinion.

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