The Business Court yesterday sifted through cross motions
for summary judgment brought by the seller and buyer of a business selling
"power protection devices used primarily to control power surges and to
provide power filtration in high volume office equipment." The case
turned on the application of New York law, which the APA had specified as the
governing law, and the Order left a number of claims for trial.
The principal breach of warranty claimed by the buyer in KLATMW,
Inc. v. Electronic Systems Protection, Inc., concerned the stability of
the seller's customer base. Section 3.18 contained the following
none of the customers . . . required to be listed on
Schedule 3.18 has cancelled, terminated or otherwise materially altered
(including any material reduction in the rate or amount of sales or purchases
or material increase in the prices charged or paid, as the case may be) or
notified the Business of any intention to do any of the foregoing.
The seller had a significant customer,Global, that was in
the process of being acquired by Xerox at the time the APA was signed.
There was some evidence that the seller should have expected a decline in the
sales to Global as a result of Xerox's historical lack of interest in the
seller's product, and Global was in fact listed on Schedule 3.18 as a customer
whose sales volume "appears to be diminishing" as a result of Xerox'
acquisition of Global. As things developed, the Global business declined
by more than $2 million in the year following the purchase.
The buyer made claims following the closing for breach of
warranty, and for fraud. Its claims included breaches of warranty other
than of section 3.18. The claims were to be resolved per New York law, as
the Court ruled in a 2010
Order. As Judge Gale explained in yesterday's opinion, New York law
made a difference in the resolution of the case, both as to the buyer's
obligation to prove reliance on the warranty, and the circumstances under which
the buyer might be found to have waived the warranty.
In New York, reliance is an element of a breach of contract
claim, but reliance is established "so long as a buyer demonstrates that
the warranty is a part of the basis of the parties' bargain." And waiver
is proved only based on information provided by the seller to the point
of knowledge on the part of the buyer of a breach of the warranty at the time
of the closing. Knowledge obtained from sources other than the seller,
such as information commonly known, is irrelevant to waiver.
Judgre Gale did an admirable summary of ten years
of New York law'on the questions of breach of warranty, reliance, and
waiver. Op. pars. 59-64 After this analysis, he found that there were
questions of fact as to the buyer's level of knowledge regarding the impending
decline of the Global business.
Judge Gale dismissed the tort claims on the ground that
the buyer could not show reasonable reliance on the misrepresentations it
claimed with respect to Global's status as a customer. That finding
stemmed in part from the buyer's independent and extensive due diligence
through a business broker which directly contacted Global representatives
about Xerox' intentions. He also dismissed a Chapter 75 claim because
"the contract claims are adequate to provide the remedies [the buyer]
seeks if those claims can be proven." There's a whole lot more to
the facts of this case and to the claims made by the parties than are mentioned
in this post. Those especially interested in New York law should read the
Read this article in
its entirety on North
Carolina Business Litigation Report, a blog for lawyers focusing on issues
of North Carolina business law and the day-to-day practice of business
litigation in North Carolina courts.
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