Hubler Rentals, Inc. v. Roadway Express, Inc.

PER CURIAM: In this diversity action, Hubler Rentals, Inc. (Hubler) sued Roadway Express, Inc. (Roadway) for wrongful termination of a contract under which Hubler leased motor vehicles to Roadway, a common carrier engaged in the interstate transportation of freight, for use by Roadway for local pickup and delivery. Roadway counterclaimed, alleging principally that Hubler had breached its obligation to maintain and service the vehicles in such a way as to enable Roadway to conduct normal operations. Roadway also counterclaimed for tortious conversion of fuel, fraudulent overcharges for parts and services and damages allegedly caused by Hubler to Roadway’s Laurel, Maryland, garage facility. After a protracted bench trial, the district court, 459 F.Supp. 564, made extensive findings of fact and stated its conclusions of law. It ruled that Roadway had terminated the contract in a manner different from the sole method of termination provided in the contract, so that its purported termination was a repudiation of the agreement constituting a breach by Roadway. For this breach, the district court awarded Hubler $170,799.54 with $66,373.17 prejudgment interest.** The district court found that Hubler had also breached its contractual obligation to maintain and service the vehicles it leased to Roadway but that, under Maryland law, Roadway could not recover for the breach since it too had breached the contract. With regard to its other counterclaims, the district court awarded Roadway $2,347.80 with prejudgment interest of $1,169.40 for fuel conversion but concluded that, although it could be found that Hubler overcharged for parts, “there is no reasonable basis in the record for the court to assess damages even if it were to make such a finding.” Roadway withdrew its claim for damage to its garage at trial. Roadway has appealed. We affirm in part and reverse in part. I. Our examination of the record persuades us that the district court had a firm and substantial evidentiary base for its finding that Roadway terminated the contract not in accordance with the contract provisions for termination so that it breached the contract by unauthorized termination. Roadway had earlier sought to terminate the agreement by purchasing all of the vehicles; but when Hubler declined to sell them at the price that Roadway was willing to pay, Roadway embarked on a plan to assemble sufficient evidence of nonperformance on the part of Hubler to enable Roadway to terminate the agreement for cause. Such evidence, as we hereafter develop, was not lacking, but under the terms of the agreement, breaches on the part of Hubler did not give rise to a right on the part of Roadway to terminate unless Hubler failed to correct the breach within twenty days after Roadway gave written notice “specifying with substantiating evidence the nature, time, place, circumstances and all other available information relevant to the breach ...” While Roadway, on December 8, 1971, wrote three letters to Hubler, we agree with the district court that they failed to comply with the termination provisions of the agreement. Although they alerted Hubler to the evidence of maintenance problems concerning the vehicles and although by internal investigation Hubler could probably have determined that it was in default in carrying out its undertaking to maintain and service the vehicles, we do not think that the letters satisfied or relieved Roadway of its contractual obligation to [260] provide specific data when claiming a breach of contract giving rise to a right of termination. As a consequence, Roadway’s purported termination of December 29,1971 was legally ineffective and constituted a breach of the agreement on account of which Hubler terminated the agreement on January 28, 1972. We are also persuaded that Hubler was substantially in default under the agreement. Hubler covenanted to maintain each leased vehicle so as to enable Roadway “to conduct normal business operations.” The agreement not only spelled out that an objective of the agreement was to enable Roadway “satisfactorily” to use the leased vehicles to enable it to conduct “normal business operations,” but it stressed that “service and maintenance of the vehicles are essential to that objective” and that Roadway had chosen to lease, rather than buy, the vehicles furnished by Hubler “as an inducement to Hubler for its efficient service and maintenance thereof.” Of course, the agreement provided Hubler would provide substitute vehicles for any leased vehicle which might become inoperable, but we deem this contractual obligation to be in addition to its covenant to maintain the vehicles so as to enable Roadway to conduct normal business operations and not an independent, alternative option of performance. The district court found that “the degree of maintenance to the leased vehicles by Hubler in the latter half of 1971 was insufficient to enable Roadway ... ‘to conduct normal business operations’ as required by the Agreement.” On this record, that finding is unassailable. The record includes not only those reports prepared by Roadway in anticipation of terminating the lease, but pickup and delivery failure and availability reports, prepared monthly in the ordinary course of business. They demonstrate an unusually high incidence of breakdowns in 1971. The 1971 breakdowns represent both an increase over the previous years and a higher rate than that experienced by Roadway after the lease was terminated. There was also testimony concerning numerous individual vehicle files illustrating the failure to perform any preventive maintenance after early 1971. The work orders show that no preventive maintenance was done, and the index cards which three Hubler officials claimed would reflect the work done were mysteriously missing. The evidence showed that repairs were not made until vehicles actually broke down. Indeed the record shows that Hubler falsified hundreds of work orders to correspond to repair requests which had not been honored. II. In denying Roadway recovery from Hubler for its principal claim, the district court correctly summarized the applicable (and in this diversity action, controlling) Maryland law: Performance of the contract by parties suing on it is a condition precedent to recovery. Wischhusen v. Spirits Co., 163 Md. 565, [163 A. 685] (1933). Where a contractual duty is a condition precedent to recovery, non-performance of the condition bars recovery. Laurel Race Course v. Regal Construction Co., 274 Md. 143, [333 A.2d 319] (1975). Having failed to properly terminate the Agreement . .. [Roadway] is in a position analogous to one who has unjustifiably rescinded a contract. Such a party cannot prevail on a breach of contract action. Macon v. Zeiler, 233 Md. 160, [195 A.2d 687] (1963). Inexplicably the district court did not discuss nor apparently consider the application of this rule to Hubler's claim against Roadway. The failure to apply the rule, we think, was error. “It is clear that in proper circumstances a court may refuse to allow recovery by either party to an agreement because of their mutual fault, which in contract terms might be more properly described as mutual default.” Westinghouse Electric Corp. v. Garrett Corp., 601 F.2d 155, 158 (4 Cir. 1979); Accord, American Hot Rod Association v. Carrier, 500 F.2d 1269 (4 Cir. 1974). We think it certain that under Maryland law, a party suing on the contract [261] must first prove his own performance, or an excuse for nonperformance, in order to recover for any breach by the opposing party. Laurel Race Course, Inc. v. Regal Const. Co., Inc., 274 Md. 142, 333 A.2d 319 (1975); Wischhusen v. American Medicinal Spirits Co., 163 Md. 565, 163 A. 685 (1933). Hubler’s breach of its covenant to maintain was a material one; the language of the agreement reflects that it was a condition precedent to Hubler’s right to payment. Moreover, Hubler’s breach temporally preceded Roadway’s abortive attempt to terminate the agreement. The record reflects neither justification nor excuse for Hubler’s breach. It follows that Hubler’s judgment against Roadway cannot be permitted to stand. Our dissenting brother is of the view that Roadway cannot defend itself from damages for its breach of contract (the inadequate notice of termination) by asserting Hubler’s failure adequately to maintain the leased vehicles because Roadway did not avail itself of the breach to terminate the contract by giving proper notice. This thesis, in our view, confuses the separate concepts of (1) a breach of contract on the part of Hubler, and (2) Roadway’s right to terminate the contract by following the ritual of termination prescribed by the contract. We do not think that Roadway’s right to assert Hubler’s breach of contract to immunize Roadway from damages for its breach depends in any part on whether it had properly terminated the contract. The breach, as found by the district court, was a breach irrespective of termination. Indeed, the contract itself presupposed the fact of a breach as the premise for termination as the breach was not corrected within the prescribed time after the prescribed notice. The fact of the breach, in our view, was all that the Maryland rule requires to bar Hubler from recovering damages for breach of contract from Roadway. While we have found no Maryland authority precisely expressing our view, an analysis of its rationale shows that our conclusion is sound. The Restatement of Contracts § 274 (1932) expresses the rule that we are applying as follows: § 274. Failure of Consideration as a Discharge of Duty. (1) In promises for an agreed exchange, any material failure of performance by one party not justified by the conduct of the other discharges the latter’s duty to give the agreed exchange even though his promise is not in terms conditional. An immaterial failure does not operate as such a discharge. (2) The rule of Subsection (1) is applicable though the failure of performance is not a violation of legal duty. In Comment C on Subsection (2), it is said: The law excuses a contracting party from performing his promise for a variety of reasons — infancy, insanity, impossibility caused in certain ways; but however blameless in law and fact a party to a contract may be in failing to perform his promise, if he does fail he should not have what is promised in exchange for his performance, (emphasis added) It follows, we think, that if non-performance without fault is a bar to recovery of damages for the other contracting party’s breach of contract, non-performance with fault but without exercise of the right of termination is also a bar. III. Hubler did not appeal from the judgment entered for Roadway for $2,347.80 on Roadway’s counterclaim for tortious conversion of fuel. But since this claim was one sounding in tort and not one arising from breach of contract, we do not think that, under Maryland law, Roadway is barred from recovery because of its repudiation of the agreement. The judgment on this claim will be affirmed. In contrast, Roadway’s counterclaim for overcharges for parts is a contract claim since the method of charging was specified in a letter agreement, supplemental to the main agreement, and the claim is founded upon proof that the formula for charges was exceeded. Roadway is barred from recovery under Maryland law even if the amount of the overcharges could be proven. [262] AFFIRMED IN PART; REVERSED IN PART. Footnotes [**] The district court also awarded Hubler $37.37 for an improper deduction made by Roadway from an invoice submitted by Hubler for truck rentals.