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7th Circuit: Damages proper in contract dispute between welding company, supplier

February 15, 2019

The 7th Circuit Court of Appeals has affirmed an award of damages to a welding company after finding language in an agreement with a welding supplies distributor did not entitle the latter to deferred payment.

In October 2014, ARC Welding Supply Co. – a distributor of compressed gases and welding supplies based in Vincennes – and owner Charles McCormick entered into an agreement with American Welding & Gas, Inc. ARC then sold the majority of its assets to American, including its stock of asset cylinders.

Per the agreement, American paid ARC roughly $1.5 million for its assets, primarily its asset cylinders. Sales prices were based on McCormick’s representation that there would be 6,500 cylinders, though the parties could not establish a precise count of the cylinders that would be transferred because many were “out in the field” with customers. Thus, the agreement provided that American would hold back $150,000 for 180 days, referred to as the Cylinder Deferred Payment, to protect against a marginal shortage of up to 1,200 cylinders, at a valuation of $125 per cylinder.

The contract also required American to engage in an audit to count and verify the number of asset cylinders in the possession of ARC and its customers that would be transferred under the contract. Upon receiving an extension from McCormick to continue collecting data for the audit past its April 15, 2015 deadline, American submitted the audit on May 22, 2015, finding ARC owned and transferred 4,663 asset cylinders to American - 1,837 cylinders short of the 6,500 promised in the agreement.

ARC argued that American breached the contract when it did not complete the audit within the 180-day period and, therefore, owed ARC $150,000. But the U.S. District Court for the Southern District of Indiana rejected that argument, finding American did not miss the deadline per McCormick’s given extension. The court also determined that because less than 5,300 cylinders were delivered, ARC was not entitled to the $150,000 payment. Thus, the court entered judgment for American, awarding damages of $33,765.52, plus interest.

On appeal, ARC contended the district court erred in finding the extension valid because the agreement was fundamentally a contract for the sale of goods, and the Uniform Commercial Code prohibits oral modification of such contracts. It further argued that American breached the contract by failing to tender a verified count within the required time period.

 But the 7th Circuit Court found ARC’s argument lacked support in ARC Welding Supply Co., Inc. v. American Welding & Gas, Inc.,18-1546.

“The language in the contract in this case does not allocate any amount to be forfeited for the failure to complete the audit in the specified time,” Circuit Judge Ilana Rovner wrote for the court. It also noted ARC’s failure to present evidence to question the district court’s conclusion about the purpose of the deadline.

“The audit reflected a significant shortfall in the 6,500-cylinder amount envisioned in the Agreement, and the 4,663 cylinders accounted for was far below the 5,300 threshold that would trigger the Cylinder Deferred Payment,” Rovner wrote. “Because ARC was not entitled to any of the Cylinder Deferred Payment in that it provided less than the 5,300 cylinders, it could not have been damaged by the delay in completing the audit. When zero dollars are owed, the failure to pay it earlier is without consequence.”

Additionally, the 7th Circuit Court found the damages award to American was not improper and that the district court did not err in basing the award it on the $125 valuation for the cylinders.

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