Friday, December 30, 2011

Team America

SEC America, LLC v. Marine Electric Systems, Inc., 2011 VT 125 (mem.).

What do you get when you cross a first-year contracts exam with international, high-tech weapons defense?  Here it goes…

In 2007, EMW, an Israeli company owned by a gentleman named Alon Wallach, created a device called the MILJAM 350.  This “jammer” disrupts the remote detonation of improvised explosive devices or IEDs—and it makes a great stocking stuffer!  EMW then entered into talks with NATO to sell its MILJAM 350 jammers to NATO for its forces to use in Afghanistan.

But there was a hitch: NATO rules prohibit it purchasing from companies domiciled in non-NATO countries.  So to get around this, Wallach at EMW contacted Epstein at MES, a New Jersey defense contractor.  MES bought the technology from EMW in order to manufacture it right here in the good ol’ U-S-of-A.  Wallach also helped Epstein find a manufacturer for the MILJAM 350’s power supply converters—and he looked no further than New England’s Darth Valley: Vermont!  As it turns out, Wallach is related to the head of SEC America, a Vermont-based electrical engineering firm and manufacturer.  With a few modifications to an existing product, SEC would be able to supply the DC converters needed for the jammers.

The contract between MES and SEC involved two separate batches of converters.  SEC manufactured and shipped the first batch of converters and began work on second batch up until April 2008, when MES still had not paid for the first batch and SEC stopped work.  We’d hate to get all Cold War-era here and call it trickle-down economics, but suffice it to say that the deal between NATO and EMW fell through, so EMW wasn’t going to pay MES, and MES couldn’t pay SEC.  And that’s how you get international intrigue right here on the back forty: after MES sued EMV and no crumbs shook out for SEC, SEC sued MES in Vermont.

The trial court awarded SEC $37,400—the unpaid contract price—for the first batch of converters, $23,275—the lost profits—for the second batch of converters, and $17,595.75 in prejudgment interest for a grand total of $78,270.75. 

MES’s first argument on appeal is that the breach of contract damages should have been reduced by $15,000 because SEC received this amount from Uncle Wallach (recall that SEC’s Herz is a distant relative of Alon Wallach). Of course, SEC also paid the $15,000 back.  Amazingly, the SCOV agreed with the trial court that this transaction could be considered a loan and not a partial payment on MES’s contract.  After all, even if it were not a loan, SEC would not be legally obligated to accept a tender of payment from a third party who was never a party to the contract with MES.

Next, MES claimed that no contract was formed as to the second batch of units because SEC never “accepted” the purchase order from MES.  Oh, offer and acceptance, you dastardly duo! Guess it’s time to dust off the Uniform Commercial Code, because, folks, we’ve got a sale of goods.  And what do you know?  Performance is a reasonable mode of acceptance where no other mode is clearly indicated.  In that case, buying stuff and exchanging emails about the production process, labels, specifications, and costs was sufficient to demonstrate acceptance by performance according to SCOV.

“But wait!” says MES. “There was no contract formation because it lacked the ‘essential’ term of time for delivery.”  The undersigned blogger learned contracts from an adjunct who wore Adidas Sambas, loved hockey, and complained about his wife.  The phrase “reasonable time” has been ringing in my poor ears ever since he scraped it on the whiteboard and screamed it at the top of his lungs in the midst of a particularly grueling cold call event when someone (else) forgot to read that day.  Yup, there’s still a contract.  When no delivery time is stated, then delivery time equals reasonable time.

MES also contests the award of lost profits for the second batch of units, given that MES merely repudiated that portion of the contract.  Usually, the measure of damages is THE DIFFERENCE BETWEEN WHAT HE SHOULD HAVE GOTTEN AND WHAT HE ACTUALLY GOT, aka, “the difference between the market price at the time and place for tender and the unpaid contract price.”  But, as the SCOV points out, this remedy may be inadequate in a case such as this one, where there is no standard resale market, thereby making lost profit on the sale the more appropriate remedy.  So here is an important point and holding from the SCOV: there is no standard resale market for DC power supply converters re-configured for installation in a MILJAM-350 “jammer” device that NATO no longer wants to buy.  Remember that the next time your arms dealer client has a uniform commercial code question for you.

The case wraps up with a minor evidentiary moment and an affirmation that prejudgment interest on a lost profit award can be appropriate where the amount is readily ascertainable.  The SCOV also rejected SEC’s cross-appeal, affirming the trial court’s ruling that SEC failed to mitigate its damages by “sit[ting] on the incomplete circuit boards for almost a year.” And with that, judgment was affirmed.


  1. Hi Cara,

    There are some inaccuracies in the analysis above, but I like your take overall. As far as intrigue goes, the above is nothing compared to the knots that the Court in the 2nd District of NY got itself into regarding events associated with the above. A true demonstration of how team America gets wedgied by its shorts. If you are interested, contact me.

    Ernest Herz

  2. Inaccuracies in the analysis or inaccuracies in the facts? The trouble with the recitation of "legal" facts is that it begins to look a lot like a game of telephone. The attorneys recite the facts to the trial court, the trial court finds "facts" based on those conflicting recitations, and then the Supreme Court re-explains the facts that the trial court found. The SCOV blog lays out the "facts" as the SCOV re-explains them. Needless to say, the "real" story is always differs from our factual summaries, because we're at least six steps removed from the parties.