GARLOCK SEALING TECHNOLOGIES v.NAK SEALING TECHNOLOGIES CORP.,

Filed 3/21/07

CERTIFIED FOR PUBLICATION

COPY

IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

THIRD APPELLATE DISTRICT

(Sacramento)

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STORY CONTINUED FROM PART II..

Mao Shun does not set forth all the material evidence and totally ignores the trial courts specific findings that Rockwells application of Mao Shuns brown viton seals was not unusual or extraordinary. The application presented no exceptional factors in terms of size of the seal, speed of the shaft, shaft material or hardness, temperature, lubricant type, environment or operational durability requirements. To the contrary, the seals at issue were employed in an ordinary manner, within ordinary parameters, and for their ordinary purpose. According to the trial court, [d]ue to the extraordinary abrasiveness of the Mao Shun oil seals resulting in damage to the gear reducer shafts and accelerated exhaustion of the seals[] effectiveness, . . . the seals were not fit for the ordinary purposes for which such goods are used as required under . . . section 2314[, subdivision] (2)(c). (Capitalization omitted.) Mao Shun has not shown these findings are not supported by substantial evidence; Mao Shun argues only its interpretation of portions of the evidence and picks out isolated phrases of the statement of decision favorable to its position.

We are required, however, to start[] with the presumption that the record contains evidence to sustain every finding of fact. [Citations.] (Foreman & Clark, supra, 3 Cal.3d at p. 881.) And indeed, in this case it does. As the trial court noted, [i]f goods contain an impurity of such a nature as to render them unusable, and therefore unsaleable, for the general uses and purposes of goods of the kind described, the goods are not merchantable. (Burr v. Sherwin Williams Co. (1954) 42 Cal.2d 682, 694.) The goods must be fit for the ordinary purposes for which such goods are used[.] ( 2314, subd. (2)(c).) Evidence was submitted at trial that the selection of a radial lip-type oil seal made from viton was an appropriate selection for the gearbox application of Rockwell based on consideration of shaft speed, size compatibility, and heat tolerance. The operating conditions for Rockwells use of the seals were not unusual or excessive for viton seals. It was a typical application, even if specially designed for Rockwell. A viton polymer properly formulated should have been able to handle the application easily. However, almost 30 percent of the Mao Shun brown viton radial lip-type oil seals leaked. This was considered a catastrophic leakage rate in the industry. Garlocks expert, Leslie Horve, stated that one of the purposes of oil seals is to prevent premature oil leakage and when a seal experiences premature leakage it has not performed its intended purpose and has failed. When Rockwell replaced all brown viton seals with green viton seals, the leakage rate immediately went down to one or two percent and there was no shaft grooving.

The trial courts conclusion that Mao Shun breached the implied warranty of merchantability was supported by both substantial evidence and its express findings of fact.

III.

The Trial Courts Award of Damages For The Breach Of The Implied Warranty of Merchantability

The trial court awarded consequential damages to Garlock, concluding [t]he type of damage caused to Rockwells products by Mao Shuns seals, and Rockwells necessary response to its customers directly resulting complaints and demands, was a reasonably foreseeable and probable result of Mao Shuns breach of the warranty of merchantability. (Capitalization omitted.)

Mao Shun attacks the trial courts award to Garlock of consequential damages and contends Garlock obtained the standard remedy for breach of a warranty when prior to any litigation Mao Shun provided replacement seals at no charge. Mao Shun also contends the award of additional consequential damages under section 2715, subdivision (2), was not proper as the damages were not reasonably foreseeable, were not supported by substantial evidence, and included damages related to oil seals purchased outside the statute of limitations period and used after Garlock had actual notice of the alleged defect. We consider each of these claims in turn.

A. Reasonable Foreseeability of Consequential Damages

Section 2714, subdivision (2) (buyers damages for breach in regard to accepted goods), provides: The measure of damages for breach of warranty is the difference at the time and place of acceptance between the value of the goods accepted and the value they would have had if they had been as warranted, unless special circumstances show proximate damages of a different amount. (Italics added.) Consequential damages resulting from a sellers breach, include [] (a) Any loss resulting from general or particular requirements and needs of which the seller at the time of contracting had reason to know and which could not reasonably be prevented by cover or otherwise; and[] (b) Injury to person or property proximately resulting from any breach of warranty. ( 2715, subdivision (2)(b), buyers incidental and consequential damages.)

Mao Shun contends Garlock received the value of the goods as warranted when it provided replacements for the brown viton seals without charge ( 2714, subd. (2)) and that any further consequential damages for the cost to replace complete gear reducers were not reasonably foreseeable by Mao Shun. ( 2715, subd. (2)(a).)

Garlock contends, however, substantial evidence supports the award of consequential damages under section 2715, subdivision (2)(b), for damages from injury to property proximately resulting from Mao Shuns breach of warranty and suggests Mao Shuns foreseeability arguments should be considered under the rubric of whether Mao Shun has shown these other alleged superseding causes eliminate its liability as a matter of law. (Brewer v. Teano (1995) 40 Cal.App.4th 1024, 1030-1031 [considering the interplay of the rules of intervening and superseding causes in the concept of foreseeability of tort damages]; Mosley v. Arden Farms Co. (1945) 26 Cal.2d 213, 218 [intervening agency not a superseding cause in tort action].)

Mao Shun does not provide any legal analysis in its briefs of section 2715, subdivision (2)(b), does not address Garlocks claim that the evidence established Mao Shuns brown viton oil seals were a substantial factor in damaging, i.e., proximately causing the damage to, Rockwells gear reducer shafts, and does not address Garlocks analysis of its foreseeability arguments as superseding causes.

Mao Shun complains Garlock had knowledge of leakage problems as early as 1997 and that it was not reasonably foreseeable Garlock would fail to disclose this information to Sunrise Trading or Mao Shun and would continue to sell brown viton oil seals to Rockwell when it knew they were failing. Mao Shun contends: (1) it was not reasonably foreseeable it would be responsible for an alleged defect when it manufactured the seals in compliance with the RA-37 specification; (2) it was not reasonably foreseeable Garlock would fail to do appropriate testing of the seals; (3) it was not reasonably foreseeable Garlock would continue to use the seals when it knew they were not working in the Rockwell applications; (4) it was not reasonably foreseeable the failure of a $1 oil seal would lead to replacement of a $400 gear reducer given the lack of any prior complaints or concerns about the abrasiveness of Mao Shuns seals; and, (5) it was not reasonably foreseeable Garlock would include broad express warranties in its contract with Rockwell and then try to attempt to hold Mao Shun responsible for damages stemming from those obligations.

We need not consider Garlocks claim that damages were properly awarded under section 2715, subdivision (2)(b), nor whether superseding cause analysis is applicable in this contractual breach of warranty setting because we conclude Mao Shun has not met its burden to show substantial evidence does not support the trial courts finding of reasonable foreseeability. Mao Shun has not shown the award of consequential damages under section 2715, subdivision (2)(a), was improper.

Under section 2715, subdivision (2)(a), consequential damages include any loss resulting from general or particular requirements and needs of which the seller at the time of contracting had reason to know and which could not reasonably be prevented by cover or otherwise[.] (Italics added.)

It is often said that damages must be foreseeable to be recoverable for breach of contract. The seminal case announcing this doctrine, still generally accepted as a limitation on damages recoverable for breach of contract, is Hadley v. Baxendale (1854) 156 Eng.Rep. 145. (Resort Video, Ltd. v. Laser Video, Inc. (1995) 35 Cal.App.4th 1679, 1696, quoting Brandon & Tibbs v. George Kevorkian Accountancy Corp. (1990) 226 Cal.App.3d 442, 455-456.) The reason to know language of section 2715, subdivision (2)(a) incorporates the Hadley v. Baxendale limitation. (Sun-Maid Raisin Growers v. Victor Packing Co. (1983) 146 Cal.App.3d 787, 791.) The code, however, has imposed an objective rather than a subjective standard in determining whether the seller should have anticipated the buyers needs. Thus, actual knowledge by the seller of the buyers requirements is not required. The only requirement under section 2715, subdivision (2)(a), is that the seller reasonably should have been expected to know of the buyers exposure to loss. (Ibid.) This issue, unless it can be ruled on as a matter of law, is one of fact to be determined by the trier of fact. [Citation.] If supported by the evidence, the decision cannot be overturned on appeal. (Id. at p. 790.)

Again we note, although the issue raised by Mao Shun involves an application of the substantial evidence standard, Mao Shun has failed to summarize all the material evidence and argue how it fails to support the trial courts decision. Mao Shun does not show it should not have been expected to know Garlock would be exposed to loss, through Rockwells complaints and demands for replacement costs of the damaged gearboxes, if the brown viton seals sold by Mao Shun were unmerchantable because of the abrasiveness of the pigment. Mao Shun does not show how it was unreasonable to expect it to know of Garlocks exposure to loss -- it simply argues its view of the evidence.

Thus, Mao Shun complains Garlock had knowledge of leakage problems as early as 1997 and that it was not reasonably foreseeable Garlock would fail to disclose this information to Sunrise Trading or Mao Shun and would continue to sell brown viton oil seals to Rockwell when it knew they were failing. Actually, the evidence shows Garlock had knowledge of the nitrile oil seals leaking in 1997 and may have had some knowledge of a small number of gear reducer units with brown viton oil seals leaking by the second quarter of 1998, but there is no evidence Garlock knew the cause of the leakage problems or that it continued to sell the seals to Rockwell after it knew the cause of the leakage problem and had an available alternative. In fact, Mao Shuns argument really goes to whether Garlock could have prevented or limited the loss, but, as we have already discussed, substantial evidence supports the trial courts finding that the abrasiveness of the oil seal lips was not a defect that Garlock ought to have discovered in 1997 or 1998. There was evidence that Garlock continued to sell Rockwell the brown viton seals once it was known they were defective only because there was no other available material for the seals and Rockwell still needed to meet its customers needs. And the evidence showed that Garlock did so only until the green viton seal replacements were available.

Mao Shuns arguments that it was not reasonably foreseeable it would be responsible for an alleged defect when it manufactured the seals in compliance with the RA-37 specification and that it was not reasonably foreseeable Garlock would fail to do appropriate testing are a reprise of its claims that it should not be responsible for an implied warranty of merchantability in this case. These arguments do not establish Mao Shun could not have reasonably foreseen Garlocks loss if it breached the warranty of merchantability.

Mao Shun claims it was not reasonably foreseeable the failure of a $1 oil seal would lead to replacement of a $400 gear reducer given the lack of any prior complaints or concerns about the abrasiveness of Mao Shuns seals. On the contrary, as a longtime manufacturer of oil seals, Mao Shun should have known a radial lip-type oil seal is intended to ride on a rotating shaft so as to seal lubrication in and contaminants out. Thus, it would have understood the seal could not be used without being incorporated into other machinery, which could be damaged and require replacement if the seal abraded the shaft on which it was set. The lack of prior complaints or concerns about the abrasiveness of its seals is evidence Mao Shun did not have prior actual knowledge of the abrasiveness of its brown viton seals. However, the lack of prior complaints and the lack of prior actual knowledge of the abrasiveness of the brown viton seal does not establish Mao Shun did not have reason to know at the time of contracting that its oil seals should not include abrasive materials and that if they did, substantial property damage to the equipment in which they were installed could follow.

Finally, Mao Shun argues it was not reasonably foreseeable Garlock would include broad express warranties in its contract with Rockwell and then try to attempt to hold Mao Shun responsible for damages stemming from those obligations. It is true Rockwells purchase order to Garlock contained express, as well as implied, seller warranties, but the existence of warranties in the Garlock/Rockwell contract beyond the implied warranty of merchantability did not make the Mao Shun brown viton oil seals any less defective and more merchantable. Based solely on the abrasiveness of the brown viton oil seal Mao Shun manufactured which Garlock supplied to Rockwell, Garlock breached the implied warranty of merchantability it gave to Rockwell and no resort to any further or additional warranties would have been necessary for Garlock to have been liable to Rockwell in the federal lawsuit for the damages caused by its breach.

B. Substantial Evidence To Support The Award Of Consequential Damages

The trial court concluded Garlock had proved recoverable consequential damages in the amount of $1,678,267.00. The statement of decision explains how the court arrived at this figure as follows: Garlock demonstrated that there existed a high probability that Rockwell would recover $2,176,556.00 in damages against Garlock for the Mao Shun seal failure. This figure is composed of $1,892,882.00 costs of replacement (not including Rockwells airfare, travel, other labor, lost profits, or attorneys fees), and interest upon that amount at 10% for a period of 18 months in the amount of $283,673.00. This figure constitutes 73.79% of the total figure of $2,949,418.00 which was characterized by Garlock as the high probability Rockwell damage risk, a figure used by Garlock to calculate its ultimate settlement with Rockwell. Garlock paid Rockwell $2,274,383.00 to settle the parties dispute (the court values the product discounts, incurred or anticipated, at $74,383.00). The sum of $1,678,267.00 represents the percentage of Garlocks actual settlement payment that corresponds to the portion of Rockwells damages, the recovery of which was highly probable and sufficiently established by the evidence at trial. (Capitalization omitted.)

The trial courts figures are drawn directly from exhibit H to the damages summary prepared by James Skorheim, Garlocks accounting expert, who testified at trial regarding Garlocks economic losses from its dispute with Rockwell regarding the defects in the brown viton seals produced by Mao Shun. The figures are fully supported by Skorheims testimony and supporting documentation to his summary.

Nevertheless, Mao Shun claims on appeal the award of damages is not supported by substantial evidence. Mao Shun contends the trial courts calculation of damages erroneously focuses on the reasonableness of Garlocks settlement with Rockwell in light of the testimony of its expert [Skorheim] regarding the probability of incurring an adverse judgment at various monetary levels. (Capitalization omitted.) Mao Shun claims this was legal error because the proper analysis is whether Garlock proved the damages were proximately caused by Mao Shuns purported breach of the implied warranty of merchantability. Mao Shun claims Garlock did not meet this burden and there is not substantial evidence to support the award. Mao Shun claims the trial evidence is clear Garlocks liability to Rockwell stemmed from the broad express warranty and separate indemnification provision in its contract with Rockwell.

Mao Shuns argument is based on the flawed premise that Garlocks liability to Rockwell was not based on Garlocks [Mao Shuns] breach of the implied warranty of merchantability. In fact, the evidence shows Skorheim calculated his estimates of Garlocks probability of loss from the deficiencies and defects in the brown Viton oil seal produced by Mao Shun. John Mayo, legal counsel for Garlock at the time of its settlement with Rockwell, testified he negotiated and recommended Garlocks settlement of the lawsuit for a total of $2.88 million, which was below the low end of his estimation of Garlocks liability. Mayo admitted part of his analysis in recommending settlement was the applicability of the terms and conditions in Garlocks contract with Rockwell, but such terms and conditions specifically contained a warranty that all goods covered by this order are merchantable, free from defects in design, material and workmanship. Mayo was concerned Rockwell would win the case against Garlock if it went to trial. And, as we have already noted, given the conclusion the Mao Shun oil seals were not merchantable, Garlock would have been liable to Rockwell for the breach of such implied warranty regardless of whether additional warranties existed.

The trial courts damage award is supported by substantial evidence.

C. Damages For Oil Seals Purchased Outside the Statute of Limitations Period

Mao Shun claims the consequential damages awarded by the trial court improperly included replacement costs related to oil seals purchased outside the statute of limitations period.^[1] Mao Shun points to testimony by Bushey, Rockwells warranty administrator, regarding Rockwells purchase of brown viton oil seals starting in 1997 and her knowledge of warranty claims for leaking gear reducers in 1997. What Mao Shun fails to do, however, is to connect such testimony to the trial courts award of consequential damages.

The trial court did not award consequential damages for all the costs of replacement incurred by Rockwell. The trial court awarded as damages a percentage of Garlocks settlement payment that corresponds to the portion of Rockwells damages, the recovery of which was highly probable and sufficiently established by the evidence at trial. (Italics added.) The damage figures from which such percentage was derived were taken from Skorheims calculation of Garlocks economic losses from the dispute with Rockwell. Such damage figures were themselves a product of a percentage of probability that a jury would have awarded Rockwell those damages against Garlock if the case had gone to trial. That is, the damage figures were a portion of Rockwells damages, but we do not know which portion.

In these circumstances, we cannot say the award of consequential damages as calculated by the trial court contained any damages for replacement costs related to oil seals purchased more than four years before the filing of this action. Mao Shun has not established any error.^[2]

D. Damages For Oil Seals Used After Garlock and Rockwell Had Notice Of The Alleged Defect

Mao Shun claims the consequential damages awarded by the trial court improperly included replacement costs related to oil seals used after Garlock and Rockwell had actual knowledge of problems with the brown viton oil seals. Mao Shun argues such use of its seals after notice of the problem was a failure to mitigate if not an outright assumption of the risk. Accordingly, such replacement costs should not be included in any damages award. We disagree.

We view the evidence in the light most favorable to the prevailing party, accept as true all the evidence and reasonable inferences therefrom that tend to establish the correctness of the trial courts findings and decision, and resolve every conflict in favor of the judgment. [Citation.] (Baxter Healthcare Corp. v. Denton, supra, 120 Cal.App.4th at p. 369.) The record here contains evidence that Garlock and Rockwell had no choice other than to use the defective seals until the precise cause of the leakage problem was identified and an alternative material was found. Rockwell could not just stop supplying its customers needs. It would be responsible for the customers losses and would lose customers. In such circumstances, there was no failure to mitigate or assumption of the risk. The trial court was not required to exclude from its damages calculation replacement costs attributable to seals used after notice of the problem.

E. The Effect Of The Number of Gear Reducers Examined On The Award Of Damages

In its reply brief Mao Shun raises for the first time a claim Garlock and Rockwell examined a statistically insignificant number of gear reducers to support the replacement costs on which the trial court relied for its award of consequential damages.

We will not consider points raised for the first time in an appellants reply brief, unless good reason is shown for the failure to present them earlier. (Neighbours v. Buzz Oates Enterprises (1990) 217 Cal.App.3d 325, 335, fn. 8.) Mao Shun has made no such showing.

TO BE CONTINUED AS PART IV..

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^[1]Section 2725 provides a four-year statute of limitations for an action for breach of any contract for sale. ( 2725, subd. (1).) Garlock filed this action on October 4, 2002.

^[2]Given this resolution of the issue, we need not consider Garlocks responsive argument that no portion of its cause of action was barred by the statute of limitations, since the statute of limitations did not start under section 2725, subdivision (2), until Garlocks discovery of the breach of warranty.