Tuesday, August 21, 2012

When Silence Is Your Signature: Cotton Seed Sprouts Trouble for Merchant Who Didn't Object To Contract Terms

Apex LLC v. Sharing World, Inc. (May 31, 2012) 206 Cal.App.4th 999, 142 Cal.Rptr. 3d 201

The  Court of Appeal, Orange County, California, (Fourth District, Division Two), issued a detailed opinion explaining how the UCC fills the gaps in commercial contract forms exchanged between merchants.

Apex sold cottonseed to Sharing World, which sourced the cottonseed to Korean end-users, primarily dairy farmers.  Apex and Sharing World would exchange written  purchase orders and counter offers.  Once Sharing World okayed the quote, Apex would generate a written sales contract specifying the price, quantity, and shipment period.  Each contract incorporated the rules of a trade association and had various terms on the back side.  Sharing World did not sign the contracts, and it did not object either.  Over the course of several months, Apex shipped tons of product.  Problems developed when, due to price volatility, Sharing World was not able to lock in contracts with its end-users.  Over a course of many months, Sharing World declined to accept about 14,625 tons of cottonseed. 

Apex sued for damages and lost in the trial court.  The trial court ruled that there was an oral condition precedent--that Sharing World had no obligation to take delivery until its end-user was locked into position with a letter of credit.  The trial court also held that there was no contract, because the parties had not agreed on essential term, including time of performance and payment conditions.  The trial court also held that the seller had failed to establish the basis for its damages.

The Court of Appeal reversed on all these points.
  • No Need for a Signed Contract. Seller made an oral offers, and the buyer "accepted each offer," presumably verbally.  Seller followed up with written contracts.  The parties were merchants.  Under UCC 2-201(2) (Cal. U. Comm. Code 2201(2)), between merchants the requirement for a signed writing is satisfied if a written confirmation of the contract is sent, and the buyer does not object within ten days after receipt.  Since Sharing World was a merchant, a contract was formed when Sharing World did not give a notice of objection within ten days after receiving the contract.  Buyer's silence was its signature.
  •  Gap Fillers Supply Missing Terms.  Even though one or more terms were left open, a contract does not fail for indefiniteness if the parties intended to make a contract and there is a reasonably certain basis for providing an appropriate remedy.  UCC 2-204(3). (Cal. U. Comm. Code 2204(3).) The court of appeal held that oral offers to sell a certain quantity, at a specific price, were made.  Many other tons of cottonseed were shipped and paid for, besides those in dispute. Apex's sending of a written contract was evidence of the intent to make the contract.  The details, such as time and place of payment and delivery (UCC 2310(a)), time and place of payment (UCC 2-310(a)), delivery and manner of tender (UCC 2-308, 2-309(1), 2-503(1)), were specified by the UCC to the extent the contract terms were silent. 
  • No Verbal Condition Precedent.  Buyer claimed to be acting basically as a middle-man broker, and thus argued that no contract was formed unless it had a purchaser under contract. This verbal condition precedent was rejected by the appellate court.  Under the UCC parol evidence rule (UCC 2-202), if the court finds the writing to be a complete and exclusive statement of the terms of the agreement, the writing alone forms the contract.  The buyer argued that the condition precedent was a "consistent additional term" which supplemented the written contract under UCC 2-202(b).  In the face of conflicting authorities, the court adopted a broader definition of "inconsistency"-- as "the absence of reasonable harmony in terms of the language and respective obligations of the parties."  The court relied heavily on Official Comment 3 to UCC 2-202, which states, in part: "If the additional terms are such that, if agreed upon, they certainly would have been included in the document in the view of the court, then evidence of their alleged making must be kept from the trier of fact."  The sizable amount at stake, and the seller's complete lack of control over buyer's customers, suggested to the court that the parties certainly would have included this term, had they agreed upon it.  The court of appeal reached this conclusion "de novo" and as a "matter of law."
  •  Mitigation of Damages--Reasonableness of Resale of Wrongfully Rejected Goods.  UCC 2-706 (1) requires the seller to resell the wrongfully rejected goods in a commercially reasonable manner."  Quoting various authorities, the court held that there is "no clearcut or easily identifiable rule" as to what constitutes "commercially reasonable time."  Ordinarily, the resale should be "made as soon as practicable."  According to an official comment, reasonableness depends on the nature of the goods, condition of the market, and "other circumstances which cannot be measured by any legal yardstick."  The court of appeal pointed to extensive communications between the seller and buyer, and held that adverse inferences as to seller's "unreasonableness" were not supported by the evidence. The court remanded for a new trial on the issue of whether the resales were conducted in a commercially reasonable manner. 
  • Measure of Damages: Seller's Cost Irrelevant.   On remand, the court of appeal also noted that seller's damages were not dependent on the amount it paid for the goods.  Under UCC 2-706(1), the seller's measure of damages--assuming commercially reasonable reasonable resales--was the difference between the resale price and the contract price, plus incidental damages.  The seller was not required to prove its own cost for the goods.
This case is a signal illustration of the myriad of issues governed by the UCC in a sale of goods.  There are a thousand roads from New York to Los Angeles.  Take a wrong turn on any of them, and you'll arrive at another destination. So it is with the UCC. 

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