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Electronic Switching Industries Inc. v. Faradyne Electronics Corp.

decided: November 13, 1987.


Appeal and cross-appeal from judgment entered in the United States District Court for the Eastern District of New York (1) in favor of plaintiff against defendant Gayshen Corporation on plaintiff's claim for a percentage of Gayshen's monthly collections from accounts receivable pursuant to a separate management, billing, reporting and maintenance services contract, (3) dismissing all of plaintiff's other claims against Gayshen and all of plaintiffs claims against the other defendants, and (4) dismissing all counterclaims. Affirmed.

Oakes, Meskill and Mahoney, Circuit Judges.

Author: Mahoney

MAHONEY, Circuit Judge:

This litigation is based upon two contracts dated October 14, 1982 between plaintiff, a New York corporation, and defendant Gayshen Corporation ("Gayshen"). One contract (the "Purchase Contract"), supplemented by purchase orders dated February 7, 1983 and March 21, 1983 on the letterhead of defendant Mansol Ceramics Company ("Mansol"),*fn1 was for the purchase by Gayshen from plaintiff of a "least cost" telephone routing system for telephone resale application, known as the "ESI 6020." The other contract (the "Service Contract") called for the provision of management, billing, reporting and maintenance services by plaintiff to Gayshen. Plaintiff sought recovery of the $40,676.83 balance due on the Purchase Contract from all defendants. Defendants in turn claimed that plaintiff had breached the Purchase Contract, and defendants accordingly were not liable for that balance. The United States District Court for the Eastern District of New York (Leonard D. Wexler, Judge) found for plaintiff on his claim against Gayshen, and dismissed as to the other defendants. Plaintiff also sought recovery from all defendants of eight percent of defendant's receivables, as provided in the Service Contract, in the amount of $6,000 for collections to and including June 30, 1983, and for anticipated receivables to December 31, 1984. The district court awarded $6,000.00 against Gayshen, but denied any further recovery because the claimed damages were deemed too speculative in view of the default of plaintiff combined with the lack of proof as to specific damages. The claims under the Service Contract were dismissed as to all other defendants, and all counterclaims were dismissed.


The function of the ESI 6020 "least cost" telephone routing system, also known as a telephone switching system, is to select via pre-programmed information the least expensive among the various long distance companies, such as MCI and Sprint, for the completion of a long distance telephone call placed by a business entity, such as Gayshen, which avails itself of the ESI 6020. Gayshen entered into the Purchase and Service Contracts in connection with its commencement of a new business as a "resale common carrier" vending telephone services to customers on a retail basis.

Gayshen began using the ESI 6020 in January, 1983, after its installation, and continued using it until May 24, 1983, when Gayshen disconnected the ESI 6020 and replaced it with another switching device manufactured by Digital Switch Corporation. Gayshen's justification for this action, in terms of the Purchase Contract, was that plaintiff had failed to provide a switch with an automatic redundancy feature (a device which facilitates switching to a backup system in the event of the primary system's failure), as purportedly agreed by the parties. As to the Service Contract, Gayshen contended, and the district court agreed, that plaintiff had failed to comply with the requirements for traffic engineering recommendations expressed in the following paragraphs of that agreement:

TRAFFIC The Company [plaintiff] will from time to time, at no ENGINEERING additional cost to the Operator [Gayshen], analyze the Operator's traffic data and traffic printouts and make recommendations for changes in routing or alternate routing patterns as well as changes in trunk quantities. Upon request by the Operator the Company will develop and install the required program changes into the Operator's system at no additional cost to the Operator.

TELCO The Company will assist the Operator in ordering new equipment orCOORDINATION services or changing exiting equipment or services from the telephone company, other common carriers, or other suppliers to change the routing system configuration at no additional cost to the Operator.

Further factual matters will be set forth as they become relevant to the ensuing legal discussion.


A. The Purchase Contract

The district court resolved this issue in plaintiff's favor on the basis that the Purchase Contract was unambiguous on its face, did not refer to an automatic redundancy feature, and could not be altered by parol evidence. The district court also found that: "during 1982 and the beginning of 1983, plaintiff was working on a redundancy feature which plaintiff agreed to install when completed;" "all routing switches used in the telephone resale industry have an automatic redundancy feature;" Gayshen "orally asked for a redundancy feature and plaintiff orally promised to provide such a feature;" and plaintiff had not perfected the features as of May 24, 1983, when Gayshen replaced the ESI 6020. The uncontested evidence at trial was that defendant asked, on several occasions after the contract was in effect, when the automatic redundancy feature would be ready, and was told "in a week or two."

The record reveals that the district court was troubled by Gayshen's failure to insist on including in the contract a specific reference to the automatic redundancy feature, given Gayshen's knowledge prior to signing the contract that plaintiff did not have the feature completed. During redirect examination of Gayshen's executive vice president James A. Foster, the following colloquy occurred between the court and Foster:

THE COURT: But this is the part that puzzles me.

You entered into a long contract; you entered into a contract of something new. There was a contract depending upon one individual's ability. At the time you knew that he did not have the switching-switch, redundancy switch, whatever you want to call it, ready and available.

He kept giving you dates, according to you, and kept adjourning it. Nothing is in the contract about it; nothing is in the writing about it?

THE WITNESS: Sir, -- or your Honor --

THE COURT: Why is it in isn't it in the contract?

THE WITNESS: I'm not a lawyer, first of all. I'm in ...

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