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Monday, February 11, 2013

Teaching Sales 5: White v. Summers and Diamond Fruit Growers

Last week, I taught an infuriating case called Diamond Fruit Growers v. Krack Corp.  The case infuriates me not only because I think the Ninth Circuit bungled the battle of the forms so as to eliminate the UCC's § 2-207's important innovations and replaced them with with a rule unknown in either the code or the common law, but because James White, co-author with Robert Summers of the standard treatise on the Uniform Commercial Code, endorses the opinion.  I can't understand why.  Summers disagrees with his co-author but without the passion or incredulity that I think the context demands.

The parties to the contract at issue had been doing business together for ten years.  Metal-Matic provided metal tubing for Krack's air conditioning business.  The parties' practice was that Krack would send Metal-Matic an annual estimate of its needs, and Metal-Matic would send back its own acknowledgment form disclaiming warranties and consequential damages.  Moreover, capitalizing on the langauge of § 2-207(1), Metal Matic's form included the following: "Metal-Matic, Inc.'s acceptance of purchaser's offer or its offer to purchaser is hereby expressly made conditional to purchaser's acceptance of the terms and provisions of the acknowledgment form."

9th CircuitThe effect of that language under the UCC should be to make Metal-Matic's response into a counter-offer which would govern the parties' transactions once Krack, having notice of the terms, had accepted delivery.  In this case, we know that Krack had notice of the terms, because it tried to get Metal-Matic to remove the disclaimer of warranties and limitations of damages, and Metal-Matic refused to do so.  Having continued to accept delivery on that basis, Krack should be bound by Metal-Matic's terms.

Krack delivered some air conditioning units to Diamond Fruit Growers, but some of the Metal-Matic tubing failed, causing harm to Diamond Fruit Growers products.  Diamond sued Krack and Krack turned around and filed a third-party complaint againts Metal-Matic.  Metal-Matic's disclaimers and limitations on damages were now in play.

The court noted the important principle of neutrality underlying § 2-207.  In contrast to the common law mirror image rule and last shot rule, the UCC is designed to avoid privileging either the offer or the counter-offer.  Determining that it therefore could not give effect to Metal-Matic's unilaterally imposed terms, it looked to the UCC, as is proper under § 2-207(3), to supply the missing terms of the contract that had been formed by the parties' conduct.  Since the UCC does not provide for limitations of damages and disfavors disclaimers of warranties, the court found that Metal-Matic's terms were out.  

The court was focused on avoiding a return to the common law's last shot rule: 

That result is avoided by requiring a specific and unequivocal expression of assent on the part of the offeror when the offeree conditions its acceptance on assent to additional or different terms. If the offeror does not give specific and unequivocal assent but the parties act as if they have a contract, the provisions of section 2-207(3) apply to fill in the terms of the contract. 

The are numerous problems with this approach.  Most obvsiouly, the UCC does not require a specific and unequivocal expression of assent by the offerer to additional terms.  It certainly could have done so if the framers of the UCC so intended.  More fundamentally, the result at which the court arrives is inconsistent with the principle of neutrality at the heart of the UCC"s approach to the battle of the forms.  Indeed, the court's solution to the problem presented advantages the offeror far more than did the common law.  Under the court's approach, the offeror is not only master of the offer; she is master of the transaction, and the offeree can do nothing through its writings to add terms to the contract.  

The court suggests that allowing Metal-Matic to prevail in this situation would be arbitrary because it would turn only on which party sent the form last.  But that is not so.  Metal-Matic conditioned its acceptance on Krack's assent to its terms.  Krack did not do likewise.  Sticking to the language of the forms at issue in this transaction, Metal-Matic's terms would govern regardless of the order in which the parties exchanged forms.  Here we have two sophisticated parties who knew what they were about.  Metal-Matic insisted on its terms and Krack acquiesced because it needed the tubing.

The outcome of the case thus seems extremely unfair.  Although I don't think it changes the UCC analysis, one might feel differently about the equities in the case if Krack were unaware of the terms and accepted the goods thinking that they were warranted, etc., but that was not the case here.  Krack took the goods knowing the terms on which it accepted them.  The court should not bail out commercial parties in these circustances, and courts do not bail out consumers who are bound by shrink-wrap terms to which they never expressly and unequivocally assent.

But James White, in § 2-13 of the White and Summers Treatise suggests otherwise, apparently on the ground that the UCC does not recognize acceptance by performance in this context.  That's very odd, because the UCC is all about the liberalization of rules, including rules of offer and acceptance.  As Summers points out, even the common law recognizes acceptance by performance and Summers sees no injustice given the parties' conversation about the disputed terms.  White thinks the proper remedy for seller is to refuse to ship until buyer assents to its terms, but since a straight reading of the UCC would give a seller no reason to think such express assent necessary, I do not think Metal-Matic was on notice of that requirement.  

[JT]

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Comments

Jeremy, I wasn't aware of this case, but my tic-tac-toe analogy applies here. You are absolute correct on this one. One CAN lose at tic-tac-toe if one makes a stupid move. The lesson in 2-207 is that an informed buyer should never lose the battle. All it has to do is insert the counter-term to the effect that the offer expressly limits acceptance to the terms of the original offer. That creates the tic-tac-toe standoff, the knockout rule applies, we turn to 2-207(3), and the buyer gets the result she wants.

Indeed, as I teach my students, the only way for a seller to win against an informed buyer is to have a negotiated agreement that varies from the Code. It sounds like that's exactly what happened here, but that the court saved the buyer's bacon. Boo.

Posted by: Jeff Lipshaw | Feb 11, 2013 9:06:12 AM

I agree with you. The court overplayed the neutrality principle. I once had a student who was a metallurgist. He said that pin hole leaks develop in tubing from bending the tubing when the tubing has been defectively produced by the tubing manufacturer. This equiry may account for the court's outcome.

The issue is when does a reply make a 207(3) counter offer & when does it make a common law counter offer (in which the term in question becomes binding by acceptance of the goods)

I like to contrast this case with two hypos:

1. Assume the remedy limitation clause is in the fill in the blank portion of the form? same result?

2. Assume the seller used a letter not a form with all all typed terms including the remedy limitation. Same result?

Posted by: jwladis | Feb 13, 2013 1:07:05 PM

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