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March 9, 1992


The opinion of the court was delivered by: MICHAEL B. MUKASEY



 Plaintiff claims that defendant breached a contract ("the Contract") to supply a pollution control system. Defendant now moves for summary judgment pursuant to Rule 56, Fed. R. Civ. P. For the reasons set forth below, defendant's motion for summary judgment is denied.


 Plaintiff, St. Anne-Nackawic Pulp Company, whose principal place of business is in New Brunswick, Canada (Compl. P2), produces wood pulp and related products. (Id. P5) Defendant, a New Jersey corporation, engineers, designs, manufactures, and installs air pollution products. (Id. PP3, 6) In 1986, defendant purchased the assets of Teller Environmental Systems, Inc. ("TESI"), a company founded and managed by Dr. Aaron J. Teller ("Teller"). Teller is the inventor of numerous patented processes for pollution control. (Teller Aff. PP3-12; Teller Dep. at 3, 6)

 The subject of the Contract between plaintiff and TESI, as defendant's predecessor, is a system designed by TESI to limit the amount of Total Reduced Sulfur ("TRS") discharged as a by-product of the pulp making process. The principal objection to TRS is that it generates a strong sulphurous smell, rather like the odor of rotten eggs. Consequently, its discharge is regulated by New Brunswick environmental laws.

 In 1980, "after the original Teller equipment was destroyed in a fire," plaintiff contacted TESI to "design new equipment." (Compl. P9) The new system was supposed to bring plaintiff's plant into compliance with New Brunswick regulations, which had been amended not long before to limit further the acceptable level of TRS discharge. Teller submitted a proposal dated January 26, 1981 for "the supply and installation of a Teller Crossflow Nucleation Scrubber and Roy-Lin Venturi with Expansion Joint and Supply only of Hydroclones." (See Raymond Aff. Ex. 2, Proposal at 1)

 Section 7 of the Contract's general conditions is titled "Warranty." Section 7.1 contains a "Performance Warranty," which provides that seller's performance is complete once the system satisfies the performance specifications, including the promised TRS level, for a continuous three-day testing period to be conducted within 120 days of "start-up" but "in any event not later than nine (9) months after mechanical completion of the scrubber." (Id., Gen. Conditions at 4) The performance warranty further provides that: "In the event that the System fails to operate as stated above, Teller shall at its own expense, provide all engineering, drawings and specifications to modify the System as is necessary to make the System operate as warranted herein." (Id.) The Contract states that plaintiff will retain 10% of purchase price until TESI satisfies its obligations under the performance warranty. (Id., Proposal at 7) In addition to the performance warranty, the Contract also contains a "Warranty Regarding Engineering Services" for any "design error" discovered within one year of start-up (§ 7.2) and a "Warranty Regarding Equipment" (§ 7.3).

 The system was completed mechanically *fn1" on September 22, 1982; start-up occurred *fn2" on December 16, 1982. (Initial Compl. P18) An independent consultant tested the system in March 1983, June 1983, and March 1984. Each time TRS emissions exceeded the 10 ppm level specified by the performance guarantee. From the first testing of the system in March 1983 until the time of this suit, the parties have attempted to determine the cause of, and a possible cure for, the system's failure. The parties agree that the system failed to achieve the promised emission levels although they dispute the cause of the failure.

 On February 4, 1986, TESI and defendant entered into an asset purchase agreement under which defendant agreed to purchase the assets of TESI and assume certain of its obligations. Schedule 5.9.1 of the Asset Purchase Agreement listed the Contract as an "Open Contract" that was 98% complete and that had a $ 3,350 estimated completion cost. (Raymond Ex. 26) Section 5.9.1 of that agreement provides in relevant part:

 "Open Contract" means each agreement pursuant to which Seller is, or was, obligated to perform any service or provide any goods and Seller's performance is not complete, Seller has not received full payment, any warranty made by Seller has not expired or any claim or communication with respect to any warranty has been received by Seller.

 (Raymond Aff. Ex. 25, 3425)

 Following the sale, Teller became a consultant to defendant; he is now defendant's Vice President of Technology. (Teller Dep. at 67-68) On October 10, 1986, Teller wrote an internal memorandum captioned "Closeout of Teller Jobs." He described the Contract as follows: "After the last turnaround the system performance is significantly better than guarantee. It is expected that after official testing information is acquired, the contract can be closed out." (Raymond Ex. 29, at 3451)

 On July 14, 1987, Teller wrote to plaintiff, stating that he had reviewed the latest data on the system (the system operating data and the test column data). He asserted:

 Inasmuch as the system has exhibited oxygenation capacity to neutralize the high TRS inlets when in stable operation, we believe that the job should be closed out from a guarantee aspect.

 However, as we have established in our relationship for these many years, we will continue to work with you toward the total ...

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