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October 18, 1985

HOWARD GERSHMAN, ESQ., Assignee for Benefit of creditors of Vanguard Machinery, Inc.

The opinion of the court was delivered by: LORD

 During 1979 and 1980 Vanguard Machinery, Inc. manufactured more than 7,000 printhead assemblies pursuant to written purchase orders from IBM Corporation. IBM rejected thousands of the parts claiming that they were out of blueprint specification. With the expectation of receiving purchase orders for up to 50,000 printhead assemblies, Vanguard devoted additional man hours to reworking several thousand of the parts. When the anticipated purchase orders were not forthcoming, the substantial losses already incurred on the project led to Vanguard's insolvency and the appointment of plaintiff as the assignee for the benefit of Vanguard's creditors.

 According to plaintiff the parts were rejected and needed to be reworked because IBM supplied Vanguard with gauges that were incapable of measuring accurately the precision tolerances called for by IBM's blueprints. Since IBM allegedly required Vanguard to use the faulty gauges, plaintiff claims that IBM is responsible for the parts needing to be reworked and must bear the costs incurred by Vanguard in reworking the parts to specification.

 As well as denying liability, defendant has counterclaimed to recover (1) various tools defendant consigned to Vanguard which have not yet been returned; (2) parts paid for by defendant which are still in plaintiff's possession; and (3) costs incurred by defendant in reworking nonconforming parts.

 Judgment was originally entered in this suit on March 29, 1984. On appeal by defendant, the court of appeals remanded the case with an order under which plaintiff was permitted to amend his complaint, defendant was permitted to amend its answer, and the parties were given the opportunity to present additional evidence. What follows constitute my findings of fact and conclusions of law based upon the amended pleadings, the evidence at the first trial and the evidence produced at the second trial.

 Plaintiff is the assignee for the benefit of the creditors of Vanguard Machinery, Inc. Plaintiff is an individual and a citizen of the Commonwealth of Pennsylvania. Defendant is a New York corporation with its principal place of business in New York. The amount alleged to be in controversy is more than $10,000. I therefore have subject matter jurisdiction over this suit.

 In 1979 and 1980 Vanguard received written purchase orders from IBM for approximately 7,500 printhead assemblies. As it does with other of its suppliers, IBM loaned Vanguard numerous tools to aid in the production of the parts it had on order. Among those tools were the gauges at issue in this lawsuit, which Vanguard used to measure whether the parts it was producing met IBM's demanding specifications.

 One of these tooling certificates was signed by Vanguard before it contracted to produce any of the parts at issue in this suit, and was in effect when IBM submitted its first four purchase orders. A second tooling certificate was signed by Vanguard in October, 1979, and was in effect when IBM submitted the remaining purchase orders at issue in this suit. Since by their terms the tooling certificates covered all IBM owned tools and equipment in Vanguard's possession, they clearly applied to the gauges provided by IBM.

 Over the two year course of production of the printhead assemblies, IBM furnished Vanguard with four different gauges to measure the parts being produced. Whenever IBM provided Vanguard with a gauge it kept a copy so that IBM could also check the printhead assemblies as they were received from Vanguard. The first set of gauges, referred to as P-B and P-G, had been previously used by Vanguard in the production of another part for IBM. Due to Vanguard's problems with the first set of gauges, they were replaced by IBM in early May, 1980, with a gauge referred to as P-D. In late May, 1980, Vanguard received another gauge from IBM referred to as the "super gauge."

 Vanguard has made two somewhat contradictory complaints about the gauges. First, Vanguard claims that because of the design of the gauges it was physically impossible for them to measure the specifications about which IBM was concerned. Due to the equipment supplied by IBM, it was, therefore, impossible for Vanguard to know whether it was producing conforming parts. Vanguard also claims that the P-B gauge maintained by Vanguard and the P-B gauge maintained by IBM did not correspond to one another, so that parts which conformed to specifications according to the Vanguard gauge would appear to be nonconforming when measured on IBM's gauge. *fn1"

 IBM's own internal documents show that gauge P-G needed to be redesigned and that the P-B gauges needed to be recalibrated so that they would correspond to one another. I therefore find that the inability of gauges P-B and P-G to measure properly the assemblies caused Vanguard to produce nonconforming parts. Vanguard, however, has not sustained its burden of proving that the gauges delivered by IBM in May, 1980, had defects which caused Vanguard to produce nonconforming parts. I therefore find that beginning in early May, 1980, when Vanguard received gauge P-D, IBM's gauges did not cause Vanguard to produce nonconforming parts.

 Simply because IBM supplied Vanguard with gauges P-B and P-G, which were in fact faulty gauges and which did in fact cause the production of nonconforming parts, however, does not establish IBM's liability for Vanguard's damages. At most, plaintiff has established that IBM agreed to supply Vanguard with certain tools, including gauges to measure whether conforming parts were being produced by Vanguard. There is insufficient evidence, however, to prove that IBM agreed to design and supply tools which would meet Vanguard's needs in fulfilling its contract with IBM. IBM was relying on Vanguard to decide which tools would be used to manufacture conforming parts and how those tools would be designed. If Vanguard was unhappy with the gauges first supplied by IBM, it did not have to use them. Instead, Vanguard could have told IBM what type of gauges it needed and showed IBM how to design them. IBM then either would have built the gauges for Vanguard or paid for someone else to do so.

 The fact that a buyer agrees to supply some of the tools and raw materials needed to produce an article it wants to purchase, does not necessarily mean that the buyer has agreed to decide what tools and raw materials should be used in production. In many instances one would expect a supplier who has the skill and expertise necessary to produce the desired article, to decide which tools or raw materials will be used, even if the buyer has agreed to furnish them. When a production run of thousands of duplicate parts requires the design and manufacture of unique tools, as was necessary in the production of printhead assemblies by Vanguard, one cannot assume that ...

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