This opinion will be unpublished and

may not be cited except as provided by

Minn. Stat. § 480A.08, subd. 3 (1996).

STATE OF MINNESOTA

IN COURT OF APPEALS

C4-96-1537

Alliant Techsystems, Inc.,

Appellant,

vs.

Valentec International Corporation,

Respondent.

Filed February 4, 1997

Reversed and remanded

Peterson, Judge

Hennepin County District Court

File No. 94CT8008

Kevin D. Conneely, Richard H. Kyle, Jr., Robins, Kaplan, Miller & Ciresi, 2800 LaSalle Plaza, 800 LaSalle Avenue, Minneapolis, MN 55402-2015 (for Appellant)

Patrick J. O'Connor, Jr., James J. Hartnett, IV, Deborah J. Bartz, Faegre & Benson, 2200 Norwest Center, 90 South Seventh Street, Minneapolis, MN 55402-3901 (for Respondent)

Read K. McCaffrey, Benjamin G. Chew, Eric A. Kuwana, Patton Boggs, L.L.P., 2550 M Street Northwest, Washington, D.C. 20037 (for Respondent)

Considered and decided by Peterson, Presiding Judge, Harten, Judge, and Forsberg, Judge.[*]

U N P U B L I S H E D O P I N I O N

PETERSON, Judge

On appeal from a summary judgment, appellant argues the district court erred in determining that appellant presented insufficient evidence to create a genuine issue of material fact on whether respondent's breach of contract caused appellant to incur damages. We reverse.

FACTS

Appellant Alliant Techsystems Inc., a defense contractor, hired respondent Valentec International Corporation as a subcontractor on a contract to manufacture ammunition for the United States Army. Alliant brought this action against Valentec for breach of contract, breach of warranty, violation of the Minnesota Deceptive Trade Practices Act, negligent misrepresentation, and fraudulent misrepresentation. Alliant alleged that Valentec's failure to properly perform inspections required by the contract caused Alliant to incur damages.

Between 1989 and 1991, Alliant entered into four contracts with the Army, under which Alliant agreed to manufacture and deliver 120 millimeter (120mm) tank ammunition. In 1990 and 1991, Alliant entered into six contracts or purchase orders with Valentec, under which Valentec agreed to manufacture and deliver the case base component of the 120mm tank ammunition cartridge. To assure quality case bases, Valentec was required to conduct a 20-second magnetic particle inspection (MPI) of each case base. The purpose of MPI testing

is to inspect the 120mm case base metal for surface and near surface flaws, such as cracks, bursts, seams, laps, inclusions and other discontinuities.

The 20-second MPI testing requirement was incorporated into each of the six purchase orders.

On November 5, 1991, Gary Meyer, an Army contracting officer, informed Philip S. Kilpatrick, Alliant's director/vice president of tank ammunition, that he had received an anonymous tip from a former Valentec employee that Valentec did not perform MPI tests on one lot of case bases. Later the same day, Kilpatrick spoke with Ken Russell, who worked in the Army's tank main armament system. Russell informed Kilpatrick that the Army was investigating allegations that Valentec had failed to perform MPI tests on case bases dating back up to two years. Russell requested that Alliant conduct an independent quality audit at Valentec.

On November 11 and 12, 1991, Arthur W. Skeates, III, Alliant's lead quality control engineer on the 120mm tank ammunition project, visited Valentec and observed the magnetic particle operator visually inspecting parts for only about three seconds, not the required 20 seconds. A government representative, Jim Weitzner, was present during the visit, but it is unclear whether he personally observed the MPI testing.

On November 20, 1991, based on a telephone conversation that occurred on November 15, 1991, Army contracting officer Meyer sent a letter requesting that Alliant perform several actions to ensure product quality of the case bases: assist in conducting 100% monitoring of Valentec's MPI tests; visually inspect case bases manufactured by Valentec that had already been sent to the Army's loading, assembly, and packaging facility to be assembled into ammunition rounds; and perform an evaluation of rejected case bases. The letter instructed Alliant to prepare a cost analysis of the requested actions and to not construe the letter as a directive to implement the actions unless implementation would not affect contract prices.

On November 21, 1991, Peter Fritsche, an Alliant quality engineer, visited Valentec and observed inspectors performing MPI tests for only three to five seconds per case base. The same day, Alliant authorized Mason & Hanger-Silas Mason Company to begin reinspecting case bases that had already been manufactured by Valentec and were ready to be assembled into ammunition rounds. Based on Meyer's letter, Alliant understood that as of November 20, 1991, the Army was requesting only a cost estimate, not actual performance of the proposed reinspection. But Kilpatrick testified that based on other discussions, Alliant knew the Army would eventually require performance of the reinspection before it would accept the case bases.

On November 22, 1991, Alliant began 100% monitoring of Valentec's MPI testing and notified the Army that it had done so. A few days later, Valentec notified Alliant that as a result of Alliant requiring Valentec to perform MPI tests for 20 seconds per case base, Valentec could not keep up its production rate. Valentec then began scheduling additional employees to perform MPI tests.

On November 25, 1991, Alliant wrote the Army a letter regarding the Army's refusal to accept one lot of case bases manufactured by Valentec. The letter indicated that Alliant believed tests other than MPI had adequately assured the quality of the case bases.

On November 25-26, 1991, James P. Helm, an Army quality assurance engineer visited Valentec. The report he prepared documenting the visit stated:

I met with Peter [Fritsche] and Harlan Huls of Alliant at Valentec Olivette. Mr. [Fritsche] is the Quality Assurance Engineer assigned to this contract and Mr. Huls is a Senior Engineer with past experience in magnetic particle inspection. I initially asked Mr. Huls what the problem was with the magnetic particle inspections. He informed me that there was a situation but could not discuss the specifics. I then asked Mr. [Fritsche] if they had found any problems with the magnetic particle (MP) process since they started their investigation. Mr. [Fritsche] said that they had observed the operators only taking 2 to 5 seconds to inspect a part. According to Valentec procedures, they were required to take a minimum of 20 seconds. We also agreed that 2-5 seconds was not enough time to adequately inspect a part. He informed me that this had been corrected and that the operators were now taking at least 20 seconds per operation.

Based on his observations and the information he received during the visit, Helm made the following recommendation:

A review of Valentec's magnetic particle inspection process for the 120MM Case Base produced satisfactory results, but only after corrective action was implemented by Alliant Techsystems. * * * This level of performance can only be maintained if the operators follow inspection procedures, i.e., time spent inspecting the part. Recommend that operators be monitored periodically to assure that minimum inspections times are being adhered to.

On November 27, 1991, Kenneth J. Jenson, Alliant's executive vice president and chief operating officer, discussed with Army Major General Greenberg the government's concerns about the safety of the case bases and the government's refusal to pay Alliant at that time. Jenson specifically advised Greenberg about Valentec's failure to conduct MPI tests for 20 seconds as required by the purchase orders.

On about January 2, 1992, Army contracting officer Meyer sent a letter to Doyle Anderson of Alliant. The letter referred to the November 25 letter from Alliant to the Army and to the November 27 discussion between Jenson and Greenberg. The letter stated that the Army would not accept the case bases until "questions of safety and quality are assured." The letter also stated that two additional safety issues had been identified, a loose primer issue requiring 100% inspection for suspect lots and burning residue during lot acceptance tests. The Army was in the process of conducting a visual inspection of suspect case bases at Iowa Army Ammunition Plant (AAP). Of the first 2000 case bases inspected, 92 were set aside because they were suspected of having cracks or other surface discontinuities, which are problems MPI testing is designed to detect. Meyer's letter directed Alliant to perform MPI tests, like those required under the contract with Valentec, on the case bases suspected to have defects.

On January 31, 1992, and February 6, 1992, the Army wrote letters to Alliant directing Alliant to reinspect case bases on training ammunition at Iowa AAP and Milan AAP. Valentec had manufactured the case bases. The January 31 letter specifically stated that "case bases where the magnetic particle inspection at Valentec was monitored 100% do not require any further inspection."

Mason & Hanger and another company, Martin Marietta, screened 43,388 unassembled case bases and 80,995 completed cartridges for Alliant. Alliant submitted invoices to the district court showing that Alliant paid Martin Marietta and Mason & Hanger $704,018 for screening case bases. Alliant also claimed $277,307.50 in damages for internal employee efforts.

D E C I S I O N

On appeal from a summary judgment, this court must determine whether any genuine issues of material fact exist and whether the district court erred in applying the law. Offerdahl v. University of Minn. Hosps. & Clinics, 426 N.W.2d 425, 427 (Minn. 1988). This court must view the evidence in the light most favorable to the nonmoving party. Id. But

[t]he nonmoving party has the burden of producing evidence as to all material facts for which it bears the burden of proof at trial.

Goward v. City of Minneapolis, 456 N.W.2d 460, 464 (Minn. App. 1990).

To recover on a breach of contract claim, a party must prove that its damages resulted from or were caused by the breach. Nguyen v. Control Data Corp., 401 N.W.2d 101, 105 (Minn. App. 1987). The evidence required to show causation in a contract action is similar to the evidence required to show causation in a tort action. Id. Causation exists if a defendant's conduct was a substantial factor in bringing about the harm. Gits v. Norwest Bank Minneapolis, 390 N.W.2d 835, 837 (Minn. App. 1986) (conversion action). Causation is usually a fact issue and seldom can be decided on a motion for summary judgment. Hamilton v. Independent Sch. Dist. No. 114, 355 N.W.2d 182, 184 (Minn. App. 1984) (negligence action).[1]

Alliant alleged that it incurred damages as a result of Valentec's failure to perform MPI tests for the required minimum of 20 seconds per case base. The district court found that the undisputed facts showed that Valentec had breached its contracts with Alliant by failing to perform MPI tests for the required 20 seconds per case base. The district court concluded, however, that Valentec was entitled to summary judgment because Alliant presented insufficient evidence to create a genuine fact issue on whether Valentec's actions caused Alliant's damages. This conclusion was based on the absence of evidence that the Army knew about Valentec's breach of the 20-second requirement on November 20, 1991, when it sent the letter to Alliant requesting a cost analysis for rescreening actions.

We conclude that the district erred in requiring evidence that the Army knew about Valentec's breach on November 20, 1991. Demonstrating that the Army knew about Valentec's breach of the 20-second MPI test requirement on November 20, 1991, was not essential to Alliant's breach of contract claim. Whether Valentec's breach of the 20-second test requirement caused Alliant to incur damages does not depend on what the Army knew on November 20, 1991; it depends on whether the Army ultimately would have accepted the completed ammunition in spite of the fact that the 20-second MPI tests were not conducted.

It is undisputed that by November 20, 1991, Alliant knew that some of the case bases produced by Valentec had not been subjected to a 20-second MPI test as required by Alliant's contract with the Army. At that point, Alliant had to decide what course of action to take to satisfy the terms of its contract with the Army. Alliant presented evidence about events that occurred after November 20, 1991, indicating that when the Army made its final decision to require reinspection, it knew about the breach of the 20-second MPI test requirement and considered it to be significant. This evidence was sufficient to create a genuine fact question regarding whether the Army would have accepted the completed ammunition even though the cases bases were not subjected to a 20-second MPI test and, therefore, whether Valentec's failure to perform the tests caused Alliant's damages.

By November 26, 1991, when Army quality assurance engineer Helm spoke to Alliant quality engineer Fritsche, the Army was advised that Valentec had been performing MPI tests for 2 to 5 seconds per case base and that the minimum MPI test requirement was 20 seconds per case base. Helm and Fritsche agreed that 2 to 5 seconds was insufficient time to inspect a case base adequately, and Fritsche informed Helm that the problem had been corrected and operators were inspecting each case base for at least 20 seconds. Helm recommended that Valentec be monitored periodically to assure compliance with minimum inspection times. This evidence indicates that the Army did not approve a minimum inspection time of less than 20 seconds.

The letters written by the Army to Alliant in January 1992 also indicate the Army considered the 20-second MPI test requirement to be important. The January 2, 1992, letter implicitly rejects Alliant's opinion that even if MPI testing was not performed, other tests adequately assured the quality of the case bases. On case bases suspected of having cracks or other surface discontinuities following visual inspection, the Army directed Alliant to perform MPI tests like those required under the contract with Valentec. The January 31, 1992, letter directing Alliant to reinspect case bases on training ammunition at Iowa AAP and Milan AAP specifically excepted "case bases where the magnetic particle inspection at Valentec was monitored 100%" from any further inspection. When MPI testing was monitored 100%, it was performed for 20 seconds per case base.

We conclude that the evidence was sufficient to create a genuine fact issue on whether Valentec's breach of the 20-second test requirement caused Alliant to incur damages by having Martin Marietta and Mason & Hanger test case bases produced by Valentec. Cf. Gits, 390 N.W.2d at 836, 837 (when bank wrongfully retained appellant's bond while bank's lawsuit to recover money erroneously paid to appellant was pending, jury properly determined that legal fees appellant incurred in defending against bank's lawsuit were substantially connected either to bank's wrongful retention of bonds or to bank's legal strategy in abandoning lawsuit after bonds matured).

Because we have concluded that Alliant presented sufficient evidence to create a genuine fact issue on whether Valentec's breach of contract caused Alliant to incur damages, we do not reach the remaining issues raised by the parties on appeal.

Reversed.

[ ]* Retired judge of the Minnesota Court of Appeals, serving by appointment pursuant to Minn. Const. art. VI, § 10.

[ ]1Causation is also an element of Alliant's other claims. See Florenzano v. Olson, 387 N.W.2d 168, 174 nn.3-4 (Minn. 1986) (negligent and fraudulent misrepresentation); Heil v. Standard Chem. Mfg. Co., 301 Minn. 315, 324, 223 N.W.2d 37, 42 (1974) (breach of warranty); Alternative Pioneering Sys., Inc. v. Direct Innovative Prods., Inc., 822 F. Supp. 1437, 1441-42 (D. Minn. 1993) (Minnesota Deceptive Trade Practices Act).