U&W Industrial Supply, Inc. v. Martin Marietta Alumina, Inc.

Opinions of the United
1994 Decisions States Court of Appeals
for the Third Circuit

9-8-1994

U&W Industrial Supply, Inc. v. Martin Marietta
Alumina, Inc.
Precedential or Non-Precedential:

Docket 93-7318

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 UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
___________

No. 93-7318
___________

U&W INDUSTRIAL SUPPLY, INC.,
Appellant

v.

MARTIN MARIETTA ALUMINA, INC.

___________

No. 93-7350
___________

U&W INDUSTRIAL SUPPLY, INC.

v.

MARTIN MARIETTA ALUMINA, INC.

MARTIN MARIETTA ALUMINA PROPERTIES, INC.,
Appellant

___________

Appeal from the District Court of the Virgin Islands
(D.C. Civil Action No. 85-00195)

___________

Argued: December 2, 1993

PRESENT: MANSMANN, HUTCHINSON and LEWIS, Circuit Judges

(Filed September 8, 1994)

____________

Thomas Alkon, Esquire
Alkon, Rhea & Hart
2115 Queen Street
Christiansted, St. Croix, U.S.V.I. 00820

and

Arthur Newbold, Esquire (Argued)
Kathleen Milsark, Esquire
Dechert, Price & Rhoads
4000 Bell Atlantic Tower
1717 Arch Street
Philadelphia, PA 19103-2793
Attorneys for U&W Industrial Supply, Inc.

Diane Trace Warlick, Esquire
Warlick & Quigley, P.C.
P.O. Box 3209
Christiansted, St. Croix, U.S.V.I. 00822

and

R. Eric Moore, Esquire
Downtown Station
P.O. Box 3086
Christiansted, St. Croix, U.S.V.I. 00822

and

Henry L. Feuerzeig, Esquire (Argued)
Dudley, Topper and Feuerzeig
P.O. Box 756
St. Thomas, U.S.V.I. 00804
Attorneys for Martin Marietta Alumina, Inc.

____________

OPINION OF THE COURT
____________

HUTCHINSON, Circuit Judge.

In this appeal and cross-appeal, appellant U&W

Industrial Supply, Inc. ("U&W") contends that a judgment for

damages of $27,790.19 entered by the District Court of the Virgin
Islands on U&W's requirements contract claim is inadequate. U&W

argues that the district court erroneously held U&W had a duty to

mitigate damages arising from appellee and cross-appellant Martin

Marietta Alumina Properties, Inc.'s ("MMA's") breach of

contracts, styled by the parties "blanket order contracts," under

which U&W agreed to supply MMA's requirements of certain parts

and supplies.

MMA, in its cross-appeal, argues that the district

court should have entered judgment in its favor on U&W's breach

of contract claims. MMA contends that the district court erred

in awarding partial summary judgment to U&W on the theory that

MMA breached a duty of good faith which the law implies in all

commercial contracts. The district court implied a thirty day

notice provision into the blanket order contracts because it felt

MMA had breached this good faith duty when it failed to give U&W

thirty days notice before canceling individual purchase orders it

had the option of placing under its blanket order contracts with

U&W. The district court's holding had the effect of adding a

second thirty day notice provision to blanket order contracts

which had only expressly required MMA to give U&W thirty days

notice of a change in production levels at MMA's St. Croix

aluminum ore processing facility.

Because MMA's requirements did not end, and its

production levels did not vary substantially from those the

requirements contracts were based on, until it actually closed

its Virgin Island plant operations in May of 1985, we conclude

that the court erred in implying this second thirty day notice
provision into the contracts. Moreover, because uncontradicted

evidence in this record establishes that the production levels on

which U&W's obligation to maintain its own inventories was based

never decreased before the plant closed in May of 1985, we also

conclude that there is no disputed issue of material fact whose

resolution in U&W's favor would permit it to prevail under

applicable substantive law. Therefore, we will reverse the

district court's order entering partial judgment for U&W and its

order denying MMA's cross-motion for summary judgment and remand

with instructions to enter an order granting summary judgment to

MMA.

I. Statement of Facts

U&W is an industrial piping and valve supplier located

on the island of St. Croix in the United States Virgin Islands

("Virgin Islands"). MMA operated an aluminum processing plant on

St. Croix until May of 1985. From time to time, prior to 1983,

MMA purchased large quantities of industrial piping and valves

from U&W for use in MMA's aluminum processing operations under

individual purchase orders. MMA's orders constituted 90% of

U&W's business.

In 1982, MMA decided to implement a blanket order

system for the purchase of materials. In doing so it joined an

industry trend toward the use of blanket orders as a means of

better competing against the Japanese. Before adopting the

blanket order system, MMA had maintained a six month supply of

the materials U&W was supplying. It wanted to reduce its
inventory to a one week supply and rely on contractors to supply

those items and other materials as needed. As finally adopted,

MMA's blanket ordering system required suppliers who signed on to

maintain inventories adequate to meet MMA's usual production

levels but required MMA to place only one order within ninety

days of signing. MMA was then free to place, or not place,

orders as it saw fit.

U&W was one of the suppliers who signed on after

responding to MMA's invitations to bid on some of the blanket

order contracts. U&W submitted bids for valves, instrumentation,

gaskets, electrical supplies, fittings and piping. On these

items U&W's bid was the lowest and MMA awarded U&W requirements

contracts for these items under the terms of the blanket order

contracts. In its invitations to bid, MMA had included an

analysis of its inventory needs that gave part numbers and

descriptions of the items required, its levels of use or

consumption of each for the current and prior year and the

maximum quantity MMA had previously kept in inventory. These

blanket contracts were drafted by MMA and were offered to U&W on

a "take-it-or-leave-it basis." Brief for Appellee at 6. U&W

attempted to negotiate the terms of the blanket contracts but

MMA's purchasing manager informed U&W the agreement could not be

modified. U&W then accepted the blanket contracts as MMA had

presented them.

The parties executed four of the five blanket contracts

at issue on December 23, 1983 and these were designed to run from

January 1, 1984 to December 31, 1984. The fifth contract ran
from July 1, 1983 to June 30, 1984. Except for the description

of the products required, all five contained identical terms and

conditions. Under each, U&W was obligated to maintain an

inventory of each specific part adequate to supply MMA's needs at

its current level of production. U&W understood the agreement

obligated it to carry a ninety day supply of each part for MMA

until the term of that blanket contract expired or it was

otherwise terminated by one of the parties. Paragraph 19 of the

blanket contracts stated:
19. ESTIMATED QUANTITY OF PRODUCT

Estimated quantity of PRODUCT required
and release activity as defined in Exhibit A,
is based on current production levels at []
Tons. [MMA] reserves the right to change
production levels at its sole discretion. In
the event of any cahnges [sic] in production
levels, [MMA] will notify vendor of either a
reduction in PRODUCT quantities or increase
in PRODUCT quantities to the maximum level
set forth in Exhibit A. Any increase beyond
the maximum level set forth in Exhibit A will
require written agreement between [MMA] and
[U&W].

Joint Appendix ("Jt. App.") at 248. Each blanket contract

expressly obligated MMA to place only one order within the first

90 days, but each agreement also specifically stated MMA intended

to place follow-up orders with U&W, despite MMA's disclaimer of

any obligation to do so. Each blanket contract contained a

cancellation provision:
18. CANCELLATION

(a) [MMA] may cancel this agreement
upon thirty (30) days written notice, at its
sole discretion, provided however, that [MMA]
 shall remain obligated to pay for any PRODUCT
order hereunder proir [sic] to the effective
date of any such cancellation. [MMA] may
cancel any individual Purchase Order or
release placed hereunder, subject to payment
for materials committed to the manufacture of
PRODUCT ordered hereunder prior to the time
of such cancellation. No other cancellation
charges shall apply.

Id. (emphasis in original).

In mid-1984 MMA sought purchasers for its St. Croix

plant. In order to maintain the plant as a going concern pending

its sale, MMA wanted to cut plant operating costs but still

maintain production at pre-existing levels. In July of 1984, to

help accomplish this, MMA decided to reduce all its inventories.

Accordingly, on July 20, 1984 MMA sent U&W reduction orders

canceling or reducing individual purchase orders it had already

placed under the blanket contracts. MMA informed U&W that MMA

was reducing its inventory without changing its production levels

but cautioned U&W against ordering certain items to replenish

stock until MMA advised it to. Nevertheless, U&W states it never

received any notice of decreased requirements from MMA.

In response to the July 20, 1984 reduction orders and

MMA's cautions, U&W decreased its own inventory of the items it

had agreed to supply MMA, even though MMA's production levels

remained the same. Glenn Knorr, a U&W officer, testified on

deposition:
A: [After receiving the reduction orders,
U&W] did not continue to order products
and material to reinforce [our]
inventories. [With respect to the
blanket contract for piping,] I spoke
 specifically with [James Ross ("Ross"),
head of purchasing for MMA's St. Croix
plant] and asked him, look are we going
to have to order a fair amount of pipe
in order to adhere to this contract and
he advised me verbally again that I
should hold off on ordering any pipe
until he advised me again. So at that
time we [held off].

* * *

Q: . . . After June or July of 1984 [sic]
then you stopped ordering from your
suppliers to replenish your inventories?

A: That's correct.

Jt. App. at 319-20.

On October 16, 1984 MMA's parent corporation publicly

announced it was withdrawing from the aluminum business. The

announcement, as well as MMA's subsequent efforts to locate a

buyer for its St. Croix plant, were well publicized but efforts

to sell the plant failed. U&W conceded it knew of MMA's attempts

to sell the St. Croix plant as early as the spring of 1984 but

was continually reassured by MMA that it would be "business as
always," Jt. App. at 319, and MMA had assured U&W that if it

could sell the plant as a going concern, U&W's contracts would

pass to the new owner. Also, even though U&W knew MMA's St.

Croix plant was for sale, it believed MMA's reduction of its

parts inventory would somehow, in the end, increase U&W's sales

because MMA would have to rely even more heavily on U&W to make

timely delivery of parts MMA needed.
 When the St. Croix plant closed, U&W unsuccessfully

attempted to dispose of its remaining supply of the parts that

were the subject of its requirements contracts with MMA. U&W

also offered MMA an exchange of those parts it could not sell on

the island for parts that could be sold there, dollar for dollar,

but MMA refused this exchange offer. U&W eventually sold some of

the parts to a salvage company.

II. Statement of Procedural History

On August 12, 1985 U&W filed this action against MMA.

The complaint sought damages for breach of contract, contending

U&W was entitled to actual, formal notice in July, 1984 of MMA's

decreased needs so that U&W could make appropriate adjustments in

its own inventory levels. U&W alleged MMA had failed to give

notice of a decrease in its production level and that this was a

breach of the governing agreements. Both parties filed motions

for summary judgment on liability. On April 24, 1987 the late

Chief Judge David V. O'Brien granted partial summary judgment in

favor of U&W after concluding MMA "constructively canceled" five

of the contracts when it implemented internal inventory

reductions in July of 1984 without advance notice to U&W and that

this breached an implied obligation of good faith and fair

dealing reciprocal to U&W's express contractual duty to maintain

an inventory "adequate" to meet MMA's requirements. The court

held U&W was entitled to thirty days' notice of MMA's changed

needs because MMA had an express contractual right to terminate

the blanket contracts on thirty days' written notice. Judge
O'Brien granted summary judgment to MMA on the remaining

liability issues and ordered a hearing at a later date to

determine damages.1 He issued two additional orders on July 16,

1987 and September 21, 1987 concerning the damages U&W would be

permitted to prove. Under these orders, U&W was limited to

damages resulting from its inability to dispose of inventory

acquired during the thirty days immediately prior to U&W's

receipt of MMA's reduction orders.2 If U&W had thirty days

advance notice of MMA's construction cancellation, the court

reasoned that U&W would not have purchased any additional

inventory during this thirty day period. The court did not

permit U&W to recover damages for the inventory it had on hand

but could not return prior to the date notice was required.

Judge O'Brien's unfortunate death and Hurricane Hugo

delayed final decision in the case for several years. In 1991,

it was assigned to a visiting judge, who had been temporarily

assigned to the District Court for the Virgin Islands. The

district court held a hearing to assess damages and on

December 27, 1991, appointed a Special Master to "prepare a

report with findings of fact and conclusions of law and [make] a

1
. U&W has not appealed the portion of Judge O'Brien's order
granting partial summary judgment to MMA.
2
. Neither the parties nor the district court tell us whether
those damages would be measured by the difference between the
salvage price U&W received for the items it purchased during that
thirty day period and its cost, or the prices it expected to
receive from MMA.
recommendation for total damages to be awarded to [U&W]." Jt.

App. at 10.

On August 20, 1992, the Special Master filed a report

recommending U&W receive damages of $27,790.19. The Special

Master concluded that the "thirty day window" for damages ran

from June 20, 1984 to July 20, 1984. The report stated that the

Special Master "view[ed] the scope of her review as being

strictly limited to the holdings of the late [Judge] O'Brien" and

therefore awarded damages only for inventory acquired during the

thirty-day window as the inventory U&W "could have . . .

returned"3 within the thirty day window but for lack of fair

notice from MMA. Jt. App. at 11-12, 17. In setting U&W's

damages at a net of $27,790.19, the Special Master decided U&W

had not fully mitigated the loss that resulted from MMA's

July 20, 1984 cancellation of the contracts because U&W should

have immediately made greater efforts to reduce its inventory

than it had.

The Special Master found that U&W did make some

reduction in its purchases after July 20, 1984, that U&W knew it

would not need to maintain as large an inventory as it had before

that date and that this triggered its immediate duty to mitigate.

Perhaps the Special Master's most pointed conclusion on

mitigation was that U&W should have reduced its inventory to the

3
. The fact that MMA continued to purchase parts from U&W after
July of 1984, and as late as May of 1985 when the plant closed,
seems arguably inconsistent with the conclusion that U&W would
have ceased purchasing inventory during the thirty days prior to
the reduction. See also infra note 12.
level it would have normally maintained absent its blanket

contracts to supply MMA's requirements. Finally, the Special

Master recommended that U&W receive prejudgment interest of 9% on

the damages awarded from the date of cancellation, July 20, 1984,

until payment.

Both U&W and MMA objected to the Special Master's

Report. On April 12, 1993 the district court adopted the Special

Master's Report and ordered MMA to pay damages to U&W in the

amount of $27,790.19, but only awarded interest of $3.98 per day

to U&W from July 20, 1992 to date.4 U&W appealed this order on

May 3, 1993. MMA filed its cross-appeal on May 11, 1993.

III. Statement of Jurisdiction and Standard of Review

The district court had subject matter jurisdiction over

this breach of contract action pursuant to V.I. Code Ann. tit. 4,

§ 32(a) (Supp. 1993). We have appellate jurisdiction pursuant to

28 U.S.C.A. § 1291 (West 1993). The construction of an

unambiguous contract is a matter of law for the court and

therefore is subject to plenary review. Contract interpretation,

as opposed to construction, involves mixed questions of law and

fact. We exercise plenary review over questions of law and

reverse findings of fact only if they are clearly erroneous. See
Coca-Cola Bottling Co. of Elizabeth, Inc. v. Coca-Cola Co., 988

F.2d 386, 401 (3d Cir.), cert. denied, 114 S. Ct. 289 (1993).

4
. The district court rejected the Special Master's prejudgment
interest recommendation because she felt both sides had
contributed to the long delay in this case.
When reviewing an order granting summary judgment, we view the

facts in the light most favorable to the nonmoving party and

decide whether any genuine issue of material fact exists and

whether the moving party is entitled to summary judgment as a

matter of law. Fed. R. Civ. P. 56(c); see Clark v. Modern Group

Ltd., 9 F.3d 321, 326 (3d Cir. 1993). An order granting summary

judgment will be reversed if there is sufficient evidence for a

jury to return a verdict in favor of the nonmoving party;

however, if the evidence is merely colorable or not significantly

probative, an order granting summary judgment should be affirmed.

A disputed fact is material if it would affect the outcome of the

lawsuit. Id.

IV. The District Court Erred When It Rewrote
the Parties' Contract in Favor of U&W

Under the UCC as adopted by the Virgin Islands, V.I.

Code Ann. tit. 11A, § 1-203 (1987), and the Restatement (Second)

of Contracts § 205 (1981),5 all contracts impose an obligation of

good faith and fair dealing in their performance and enforcement.

See also Action Eng'r v. Martin Marietta Aluminum, 670 F.2d 456,

460 n.8 (3d Cir. 1982). This obligation of good faith
5
. The blanket contracts do not provide what local law is to
govern their construction or interpretation. The parties assume
that the law of the Territory of the Virgin Islands applies.
Because the contract was entered into and performed in the Virgin
Islands by two corporations organized and existing under the laws
of the Virgin Islands, we agree and will apply Virgin Islands
law. The Virgin Islands look to the Restatement for their common
law. V.I. Code Ann. tit. 1, § 4 (1984); see also St. Surin v.
Virgin Islands Daily News, Inc., 21 F.3d 1309, 1315 n.5 (3d Cir.
1994).
incorporates honesty in fact as well as reasonable commercial

standards of fair dealing. See V.I. Code Ann. tit. 11A, § 1-201

(defining good faith); Restatement (Second) of Contracts § 205

cmt. a. We have held that UCC section 1-203 imposes a general

requirement of fundamental integrity in commercial transactions

falling under the UCC. Skeels v. Universal C.I.T. Credit Corp.,

335 F.2d 846, 851 (3d Cir. 1964). In this case, it is U&W's

burden to prove that MMA acted in bad faith. See Tigg Corp. v.

Dow Corning Corp., 962 F.3d 1119, 1123 (3d Cir.), cert.

dismissed, 113 S. Ct. 834 (1992); HML Corp. v. General Foods

Corp., 365 F.2d 77, 83 (3d Cir. 1966);6 see also V.I. Code Ann.

tit. 11A, § 2-306.

Because of the risk U&W agreed to expose itself to

under the blanket contracts by undertaking to maintain a parts

inventory adequate to meet MMA's usual production requirements,

the district court decided that the duty of good faith which

U.C.C. § 1-203 implies required it to add a notice term otherwise

"missing" from the contract. We disagree. The implied duty of

good faith and fair dealing in commercial contracts that section

1-203 imposes controls the manner in which the contracting

parties carry out the obligations they have undertaken in a

6
. In Tigg we noted two different theories by which a court may
decide who should bear the burden of proving bad faith: the case
law approach, implying the burden should be placed on seller, and
the commentator approach, favoring placing the burden on whoever
is to benefit from a showing of bad faith. Tigg Corp., 962 F.2d
at 1123-24. In HML Corp., we simply placed the burden on the
plaintiff. HML Corp., 365 F.2d at 83. Here, under either
theory, U&W is the appropriate party on which to place the
burden.
contract; it does not give a court the power to impose additional

obligations on one contracting party because a court concludes it

is unfair to have the other shoulder a market risk that the

former expressly bargained to avoid and the other expressly

agreed to assume.

The district court relied on Tymshare, Inc. v. Covell,

727 F.2d 1145 (D.C. Cir. 1984), and KLT Industries, Inc. v. Eaton

Corp., 505 F. Supp. 1072 (E.D. Mich. 1981) to reach its

conclusion that the duty to act in good faith necessitated MMA's

giving notice to U&W. Tymshare was a breach of contract action

brought by a salesman against his former employer. The salesman

alleged the employer breached the implied contractual duty of

acting in good faith when it altered sales quotas in such a way

as to deprive the plaintiff of previously earned commissions.

Then-Judge Scalia noted that "the doctrine of good faith

performance is a means of finding within a contract an implied

obligation not to engage in the particular form of conduct which

. . . constitutes 'bad faith.'" Tymshare, 727 F.3d at 1152. The

court then noted that "the object of our inquiry is whether it

was reasonably understood by the parties to this contract that

there were at least certain purposes for which the expressly

conferred power to adjust quotas could not be employed. If not,

then [the employer] is correct that no action in this regard

could constitute 'bad faith'--or, as we would put it, there is no

implicit contractual restriction." Id. at 1153. The court

stated that the implied covenant of good faith does not

countermand acts specifically authorized, id. (quoting VTR, Inc.
v. Goodyear Tire & Rubber Co., 303 F. Supp. 773, 778 (S.D.N.Y.

1969), nor should it be permitted to dictate an outcome contrary

to the intent of the parties. Id. (quoting MacDougald Constr.

Co. v. State Highway Dep't, 188 S.E.2d 405 (Ga. 1972)). But, as

the court in Tymshare noted, "the trick is to tell when a

contract has been so drawn." Id. (emphasis in original).

KLT Industries provides one example of how a duty to

notify may be included in the generalized obligation to act in

good faith. In that case, two parties entered into an agreement

where the plaintiff would design and fabricate six highly

specialized test stands to be used by the defendant in testing

and adjusting cruise control devices. Although the plaintiff did

not perform on time, the defendant did not object and plaintiff

continued on in the design and fabrication of the parts. Then

the defendant, without notice, canceled the contract without

giving the plaintiff an opportunity to demonstrate it could

complete the contract. The court held that termination without

notification violated the duty to act in good faith:
The good faith obligation imposed by the
UCC requires reasonable notification before
termination to avoid surprise, protect good
faith judgment and reduce uncertainty. Under
the circumstances here [defendant's] conduct
led [plaintiff] to reasonably believe it
would have the opportunity to perform under
the contract. At least [plaintiff] was
entitled to the opportunity to demonstrate to
[defendant] it could perform under the
contract within the time frame contemplated
. . . .
KLT Indus., 505 F. Supp. at 1079-80. Thus, where the defendant

permitted the plaintiff to continue a specialized contract and

failed to object to a performance that did not strictly conform

to the agreement, the defendant was required to give some notice

of its intention to cancel the contract.

Neither of these cases stands for the proposition that

a party invariably has a good faith obligation to notify a

supplier before reducing, altering or canceling an agreement.

Instead, they merely acknowledge certain circumstances in which a

general implied obligation to act in good faith will command or

prohibit acts not specifically delineated in the agreement. But,

as Tymshare recognized, the language of the agreement and

expressed intent of the parties always guide the application of

the implied duty of good faith.

Here, MMA did not act in bad faith when it reduced or

canceled some of the individual purchase orders issued under the

contracts. When MMA sent U&W the individual purchase order

reductions in July or August of 1984, it did so under section

18(a) of the contract. That section required no prior notice of

such reductions but made MMA liable to pay U&W only "for

materials committed to the manufacture of PRODUCT ordered

hereunder prior to the time of such cancellation." Jt. App. at

248.7 The district court incorrectly treated MMA's decision to

reduce its own inventory as a change in MMA's requirements.

7
. U&W does not contend that MMA owes it any money for materials
committed at the time of these cancellations and/or reductions.
Although MMA decided to reduce its individual purchase orders

because it wanted to reduce its own inventory and use up stocks

on hand, it continued to maintain normal production and

accordingly continued to place individual purchase orders with

U&W as necessary to meet its usual production requirements until

it closed its plant in May 1985. The blanket contracts were not

canceled by MMA's actions because MMA continued to order parts

from U&W and U&W continued to supply parts to MMA to meet MMA's

normal production levels, in accordance with the blanket

contracts. See infra note 12.

Despite MMA's additional reliance on U&W for parts that

resulted from MMA's decision to reduce its own inventory, MMA

told U&W not to order certain additional parts until MMA told U&W

it needed them and never objected to U&W's decision to reduce its

own inventory of some of the parts it had agreed to supply to

MMA. Indeed, with MMA's knowledge and implicit approval, U&W

thereafter curtailed its own orders from its suppliers and

delayed placing them until absolutely necessary to meet MMA's

continuing requirements. In fact, this caused U&W's inventory of

the parts it had agreed to supply to MMA to fall below that which

would have been required to meet the estimated production levels

MMA continued to maintain, thus putting U&W itself in technical

breach of its express obligation to maintain an inventory

adequate to meet MMA's unchanged production requirements.8 MMA
8
. This is consistent with Knorr's testimony that he understood
"if [U&W didn't] have the quantities on hand even up to the end
of the agreement[,] the agreement can be terminated." Jt. App.
at 311.
not only acquiesced in this, it told U&W not to order certain

additional parts unless advised otherwise.9 In order to help U&W

reduce its inventory, U&W's Knorr testified MMA also extended

delivery times on orders for items U&W still had on its shelves.

MMA's previously specified production levels were the

guide the blanket order agreement required U&W to use in deciding

how many parts it had to keep on hand to meet its obligations

under the blanket contracts. Paragraph 19 of the blanket

contract required MMA to give U&W notice of changes in its

production level because MMA's production level was the basis for

U&W's inventory levels. See Jt. Ap. at 248. Ross testified

MMA's production levels and its commensurate needs did not change

until shortly prior to the plant's closing on May 12, 1985, and

there is no other evidence in the record showing that MMA

decreased its production levels between July of 1984 and May of

1985.10

Under the blanket contracts, MMA was not obligated to

buy any product from U&W beyond placing one initial order within

ninety days of entering into each contract. U&W expressly agreed

to bear the market risk of disposing of unneeded inventory it had
9
. We note, however, that the court did correctly grant summary
judgment to MMA on the two blanket contracts under which MMA had
advised U&W not to order additional parts.
10
. Knorr did testify that he noticed a decrease in MMA's
production levels during the first quarter of 1984, (App. at 317)
but U&W does not claim any damages resulted from this reduction.
Although U&W alleges it was harmed by a decrease in MMA's
production levels in July of 1984, there is no evidence
supporting U&W's allegation that MMA's production decreased
between July 1984 and May 1985 when the plant closed.
purchased to meet MMA's normal requirements when its contract

with MMA was terminated. See Jt. App. at 248.

This unrebutted evidence contradicts any implicit

finding the district court may have made that MMA dealt unfairly,

dishonestly or unreasonably with U&W.11 Thus, U&W, the moving

party on its motion for partial summary judgment, has failed to

produce evidence from which it could be inferred that MMA acted

in bad faith. See HML Corp., 365 F.2d at 83.

U&W took a calculated business risk when it agreed to

supply MMA with parts as needed. It accepted the risk that it

would have to dispose of unused inventory if MMA canceled the

contract or went out of business. This risk is inherent in

requirements contracts. The contract did not oblige MMA to make

any more than one order, let alone notify U&W if it would not be

placing its usual amount of purchase orders.

It is indeed unfortunate that U&W was unable to return

the parts it had on hand when MMA terminated the contract in May

of 1985, but this is a risk it assumed when it agreed to supply

MMA's requirements on MMA's terms.12 In a requirements contract,
11
. The district court stated that "MMA's unbridled discretion
[to expose U&W to great risk in requiring it to keep the same
inventory even though MMA had decreased its own] requires a
corresponding duty to act in good faith." Jt. App. at 209.
Thus, it implied a notice provision because "a good faith
performance required advanced notice." Id. The court never
expressly found that MMA acted in bad faith but that finding is
implicit in its decision to add a second notice requirement into
the blanket order agreements.
12
. U&W co-owner John McCallum ("McCallum") testified he did not
try to return any of his stock when he received the reduction
and/or cancellation orders from MMA because he did not believe
the contracts were terminated by MMA's actions. He testified
"[t]he seller assumes the risk of all good faith variations in

the buyer's requirements, even to the extent of a determination

to discontinue the business." Welded Tube Co. of Am. v. Phoenix

Steel Corp., 377 F. Supp. 74, 79 (E.D. Pa. 1974), aff'd in

relevant part, 512 F.2d 342 (3d Cir. 1975); see also HML Corp.,

365 F.2d at 81. MMA did not breach its contract with U&W or

contravene its duty to act in good faith in May of 1985, when it

closed its Virgin Islands bauxite plant, or in July of 1984, when

it notified U&W it planned to reduce its own inventories while

maintaining pre-existing production levels. See Welded Tube Co.,

377 F. Supp. at 79.13

V. Conclusion

The order of the district court granting partial

summary judgment to U&W and its order denying MMA's motion for

summary judgment will be reversed and the case will be remanded

to it with instructions to enter judgment for MMA.

(..continued)
that had he attempted to return his stock at that time, his
suppliers would have accepted approximately 80-85% of it in
returns. When U&W attempted to return parts to its suppliers
after the plant closed in May of 1985, the suppliers refused to
accept U&W's returns. U&W believes they did so because they no
longer considered U&W a good customer based on U&W's lack of
recent orders and rumors concerning MMA's plant closing.
13
. Because of our disposition of the case, we do not reach
U&W's argument that the district court erred in reducing its
damages because it had not met its duty to mitigate.