The Root Cause of Contract Disputes

Centuries before much of the world became litigious, a noted French author (in the English translation) said this: “We promise according to our hopes, and we perform according to our fears.” And therein lies the root of many contract disputes.

Based in Peabody, Mass., JRM Hauling & Recycling Services, Inc. had contracts with various municipalities to collect curbside recycling, including loose paper. Notably, the company guaranteed these communities that the paper would indeed be recycled.  

In 2005, a promising confluence of circumstances occurred. JRM needed a customer for its loose paper and it was also scouting a new location for its operations. At the same time, The Newark Group, Inc. wanted all the loose paper it could get for the recycled board products it manufactured. As it happens, a Newark employee had a facility, located in Maiden, Mass., that was available for rent and suitable for JRM's purposes.

Later that year, JRM negotiated agreements for the use of the Maiden facility and for the sale of loose paper. The first of these agreements, a 10-year lease, was signed on July 1, 2005. Sixteen months later, JRM and Newark executed a 10-year output contract whereby JRM agreed to sell and Newark agreed to buy all the loose paper JRM produced at the Maiden facility. 

When JRM signed the contract, the Maiden facility was the only location where JRM received recyclables. JRM trucks collected curbside recycling and returned to Maiden, where loose paper and other recyclables were dumped in separate areas. From there, the loose paper was pushed onto a conveyor belt leading to a compactor and then into a transfer trailer for delivery to Newark. Newark did not care about the source of the loose paper—whether it came from the Maiden facility or not—as its chief goal was to obtain as much of it as possible.

Over the next few years, the market softened for the recycled board products that Newark produced. By 2014, Newark was using only 10 percent of the loose paper that it was receiving from all its suppliers, including JRM, and was processing and selling the remaining material at a substantial loss.

As JRM's 10-year lease on the Maiden facility drew to a close in 2015, the company opened a state-of-the-art recycling facility through a separate company called Green Works, Inc. (GW). The site contained an area where JRM trucks could dump and process loose paper for delivery to Newark. Needing material to test its new sorting machine before bringing the operation online, JRM directed its drivers to deliver loose paper to GW for this test phase but failed to inform Newark that it would not be making a regular delivery. When Newark sent an e-mail message to JRM asking about the missing delivery, JRM nonetheless responded that it had loose paper if Newark wanted it. In fact, Newark did not want the loose paper and had no objection to JRM temporarily suspending its deliveries. But shortly after the missed delivery, Newark abruptly informed JRM that it would no longer accept any more deliveries from JRM.

After Newark stopped taking the loose paper, JRM began looking for other buyers but could not obtain the price that Newark, by contract, was obligated to pay. With no apparent alternative, JRM transferred the loose paper to GW, which refined it into a higher-grade baled paper for which there was a market.

JRM then filed suit against Newark in Suffolk County Superior Court for breach of contract. Following a trial, the judge concluded that Newark wrongfully repudiated its contract with JRM but that JRM failed to prove it suffered a loss. Accordingly, the court awarded JRM only nominal damages and denied Newark's motion for legal fees and expenses.

On appeal, Newark argued that it had no obligation to purchase loose paper produced at the GW facility and that the judge was wrong in considering “extrinsic evidence,” meaning matters outside the specific terms of the contract, before he concluded that Newark was obligated to do so. Newark's argument was based on a sentence in its contract with JRM that required Newark to purchase all loose paper "produced by [JRM] at the following location(s): 1130 Eastern Avenue, Maiden, MA." Newark contended that this sentence, whose meaning is easy to understand, precluded the judge from looking elsewhere for an explanation.

Under the law in most jurisdictions, judges have wide discretion in considering extrinsic evidence to discover what the parties had in mind and the meaning of contractual terms. Here, the judge's use of extrinsic evidence “fell squarely within the goal of discovering the intent of the parties,” said the appeals court.  

“The Newark executive in charge of negotiating the contract with JRM testified that Newark did not care whether the loose paper came from the Maiden facility,” the opinion noted. “This testimony was corroborated by (1) evidence that Newark's main objective was to purchase as much loose paper as possible, and (2) evidence that production of the loose paper did not require anything unique to the Maiden facility.  *  *  *  Based on the evidence concerning the parties' objectives when they entered into the contract, Newark would have viewed the Green Works facility's greater capacity as a benefit. *  *  *  Accordingly, we discern no error in the judge's conclusion that Newark was obligated to purchase loose paper produced by JRM at the Green Works facility.”

New Jersey law allows a seller of goods to recover damages where the buyer wrongfully refuses acceptance or repudiates the contract outright. Damages are measured by the difference between the market price and the unpaid contract price, together with any incidental damages, but offset by any expenses saved due to the buyer's breach.

While this calculation is typically straightforward, the trial judge focused on the market price of baled paper, not of loose paper. For its part, JRM did not offer—nor did it assume it had to offer—any evidence comparing the market prices of non-comparable paper. However, the judge viewed such omission as a failure by JRM to prove damages.

“The flaw in the judge's analysis is that there was no reason to look at the market price of baled paper,” said the appeals court. Generally, the market price of comparable goods is admissible evidence if there is no available data or information on the current market price of the specific goods. “While the judge found that JRM introduced evidence showing that there was no market for loose paper, there is an important distinction between whether there was evidence of its current market price and whether there was no market for loose paper. The former may occur, for example, when a good is so rare that sales are infrequent. By contrast, the latter (the absence of any market for the sale of an abundant commodity) implies that the market price was zero dollars, because no one wanted to purchase the loose paper.”

After reviewing the trial judge's original findings and rulings, JRM filed a motion asking him to reconsider his decision. JRM argued that instead of trying to extrapolate the market price of loose paper from baled paper, the judge should have calculated damages based on a market price for loose paper of zero dollars. He disagreed.   

During the post-trial hearing on the motion, the judge stated that there was a market for loose paper because "Newark itself wanted delivery of the loose paper to meet some obligations it had to meet to sell to third parties. *  *  *  At minimum, there was a market for buying loose paper so that it could be refined to a higher grade at a profit, as demonstrated by both Green Works and Newark."

Giving due regard for a trial judge’s opportunity to observe witnesses and hear their testimony firsthand, the judge’s finding—in this case, that a market for loose paper existed—will nonetheless be overturned when the reviewing court is convinced that he or she made a consequential mistake.

Here, the judge's finding was based on the fact that GW and Newark were refining loose paper into baled paper. However, the relevant question is whether GW and Newark were willing to pay for loose paper, and the evidence shows that they were not.

“At the time of Newark's repudiation, JRM was transferring the loose paper to GW for no consideration, and nothing in the record suggests that Newark would have purchased the loose paper for even a nominal sum of money,” the opinion continued. “When asked whether JRM was able to sell the loose paper for at least some compensation after Newark stopped accepting it, JRM's president testified that ‘[n]o one else really wanted loose newspaper’ and that they had to refine it into baled paper to sell it. JRM's vice-president similarly testified that there were no alternative buyers who would take the paper loose and unbaled.” Moreover, the appeals court noted that the judge found the testimony of JRM's vice president and president to be credible and that Newark's witnesses did not contradict JRM on this point.

Based on the record, the appellate panel concluded that the judge was clearly wrong in determining a market for loose paper existed. It set aside the judgment and sent the case back to lower court for a full hearing on the damages to which JRM is entitled.

JRM Hauling & Recycling Services, Inc. v. The Newark Group, Inc., No. 18-P-1103, Mass. App. Ct., April 2, 2019.

Barry Shanoff is a Bethesda, Md., attorney and general counsel of the Solid Waste Association of North America.