APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF NEW JERSEY. (D.C. Civil Action No. 74-507).
Adams, Rosenn and Weis, Circuit Judges.
A seller's precipitous decision to declare a breach of contract and the district court's premature entry of judgment in agreement with the seller's position underlie this appeal. Because the legality of its stance is uncertain, the seller may have been hasty in its action and, hence, the district court was likewise in granting summary judgment. Accordingly, we will vacate and remand for a more complete development of the facts.
In a shortage market where transactions are negotiated by brokers acting at long distances from both the ultimate customers and suppliers, doubts as to the broker's ability or willingness to deliver the promised goods can warp a transaction. A general shortage of polyvinyl chloride caused plaintiff Diskmakers, a manufacturer of phonograph records, to enter such a market. In February of 1974, a group of brokers offered plaintiff a contract for the purchase of two million pounds of this plastic in the form of regrind material, a granular, hard substance made from record-making scraps. As its name implies, regrind material may be reused, but it is important that the material be free from contamination.
In addition to specifying quality, the contract stated that:
"Not later than the end of the fifth business day following delivery to Buyer of this contract fully executed, Buyer shall deposit with Seller a letter of credit drawn by a reputable commercial United States bank for $760,000.00 in such form as will secure the purchase price to Seller."
Paragraph Five of the contract read:
"If Buyer shall fail to comply with the terms of Paragraph 4 [describing the letter of credit], it shall pay Seller $10,000.00 as liquidated damages for such failure in lieu of any and all other damages . . . ."
At the time the brokers sent the contract to plaintiff, it had not yet learned the identity of the seller, DeWitt Equipment Corporation. Only after the agreement was returned did plaintiff speak directly to Burt DeWitt, defendant's president. In this initial conversation, some doubt arose as to whether the material would satisfy the contract's specifications.
During the ensuing five days, several developments both complicated the contract and cast a cloud over its performance. DeWitt and representatives of Diskmakers had several telephone conversations concerning the quality and quantity of the material being furnished, as well as the economies of shipping in truckload lots. Although the exact content of these conversations is in dispute, DeWitt apparently agreed to make inquiries of his supplier (who in turn acted as a broker for another) and "get back" to the buyer. In the buyer's version, these conversations did little to allay its doubts and much to increase them since DeWitt asked to be released from his obligations under the contract.
Soon thereafter, Diskmakers assigned the contract to Dixie Pressing, Inc., a large record making concern in Tennessee.*fn1 In concert with Dixie and its bank, plaintiff decided to provide a revocable letter of credit. The terms of the letter required a signed statement by seller that, inter alia : (1) the product had been available for inspection and testing in New Jersey; (2) Dixie was in default on payment; and (3) Dixie failed to accept delivery within four days after receipt of notice. These terms were not in the original contract.
The letter was apparently issued on March 7, 1974 and transmitted to DeWitt within a few days. Upon receipt of the document, DeWitt declared that the plaintiffs had breached the contract and demanded payment of the ...