ContractsProf Blog

Editor: Myanna Dellinger
University of South Dakota School of Law

Tuesday, February 12, 2013

Teaching Sales 6: Another Problematic Case

2d CircuitYesterday, I bellyached about a Ninth Circuit opinion with which I disagree.  Today, I would like to complain about a Second Circuit decision with which I disagree, although not quite so passionately.  The case is Bayway Refining Co. v. Oxygenated Marketing and Trading.  The relevant facts are pretty simple.  Oxygenated Marketing and Trading (OMT) send an order to Bayway Refining Co. (Bayway) for 60,000 barrels of a gasoline blendstock.  Bayway sent a conflirmation that specified all of the relevant terms of the agreement and also included the following language:

Notwithstanding any other provision of this agreement, where not in conflict with the foregoing, the terms and conditions as set forth in Bayway Refining Company's General Terms and Conditions dated March 01, 1994 along with Bayway's Marine Provisions are hereby incorporated in full by reference in this contract.

Bayway's General Terms included a "Tax Clause" that required the purchaser to pay all taxes associated with the transaction.  OMT never asked for and Bayway never sent a copy of its General Terms.  Bayway then sent the blendstock and OMT accepted delivery.  The taxes associated with the transaction came to nearly $500,000.  Bayway paid the tax and then sued OMT to recover.

The Second Circuit correctly saw the outcome of the case as turning on the battle of the forms.  Under UCC § 2- 207(1), Bayway's confirmation constitutes an acceptance of OMT's offer even though it contained additional terms.  Under 2-207(2), because both parties are merchants, the additional terms become part of the contract unless one of three exceptions apply.  The relevant exception in this case is materiality.  The Second Circuit correctly noted that the Tax Clause was not per se material, in that there was no clear legal rule that had already determined such clauses to be material.   So the Court proceeded to determine materiality based on a common law test, under which a clause is material if it causes surprise or (perhaps) hardship.  

The court defined "surprise" as meaning that "under the circumstances, it cannot be presumed that a reasonable merchant would have consented to the additional term."  The court found that no surprise occurred in this case because provisions like the Tax Clause were common (although not universal) in the industry.  New York law is not clear on whether hardship is an element of its materiality analysis for the purposes of the battle of the forms.  The Second Circuit did not reach the issue because it found that OMT could not show hardship in this case.  OMT claimed hardship because "it is a small business dependent on precarious profit margins, and it would suffer a loss it cannot afford."  The Second Circuit was unmoved because "any loss that the Tax Clause imposed on OMT is limited, routine and self-inflicted."  

I have two problems with the Second Circuit's analysis.  First, its discussion of surprise did not address the fact that clause at issue was part of an agreement incorporated by reference and never shared with OMT.  While that fact might not change the outcome in the case, since the court found the evidence of industry practice convincing enough to put OMT on constructive notice, it strikes me as at least worthy of mention in the context of a discussion of surprise.  

Second, I think the court could have treated the Tax Clause as relating to price.  Industry practice suggested that sometimes contracts like the one at issue in the case included language like the Tax Clause, but in other cases the tax was just added to the price of the product.  If OMT's original order included a price term, then Bayway's confirmation containing a price term plus the Tax Clause introduces not an additional term but a different term.  I think the best reading of UCC § 2-207(2) suggests that different terms knock each other out.  We then proceed to § 2-207(3) to enforce a contract consisting of the agreed-upon terms plus any additional terms the UCC can provide.  The court should have been able to then determine the fair market price for the 60,000 barrels of a gasoline blendstock.  Such an approach might have resulted in a Solomonic ruling or it might have made clear that one party or the other was trying to pull a fast one.


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I think that this case may turn on the equity that B could have avoided the tax by applying for an exemption but did not. jwladis

Posted by: jwladis | Feb 13, 2013 12:58:11 PM

That may well be. The opinion simply states that OMT was not registered for the exemption. It may have been more than a matter of filling out the right forms; perhaps OMT could not register.

However, if you are right and the failure to register was a product of OMT's own negligence, that would explain the court's view that the harm was "self-inflicted."

Nonetheless, I am troubled by the court's failure to cite to any authority for its notion that the fact that one could have warded off surprise with due diligence negates a claim that one actually was surprised. If we're going to decide the case on the equities, what of Bayway's good faith duty to disclose its terms to its trading partner. One should not have to play "go fish" in order to find out all the terms hidden in an agreement incorporated by reference.

Posted by: Jeremy Telman | Feb 14, 2013 6:22:56 AM

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