Friday, January 18, 2013

Stretching The Fabric: Overcoming Late Delivery of Goods Using UCC Sections 1-103(b) and 2-202

Horizon Textiles, Inc. v. Pandelco, Inc.
(2012 WL 6622123,Unpublished)
December 20, 2012; California Court of Appeal, 2nd District, Division 1

When is delivery after the contract-specified date not "late" for purposes of termination due to breach of contract?  That question was effectively posed by the Horizon Textiles case.

The buyer, Pandelco, ordered custom-made fabric from seller Horizon Textiles. The contract, based on purchase orders, specified delivery by a certain date. The seller was waiting for final approval of the finished fabric sample before completing the manufacture and delivery of the fabric.  If the buyer had given approval, the delivery would have been made a few days late, but still in time for the buyer to meet its customer deadline.  Instead of approving the final fabric sample, the buyer waited and canceled the order as "late" under the contract.

The seller prevailed in the trial court and court of appeal.   The court of appeal relied on two concepts: (a) application of custom and usage of trade under California Uniform Commercial Code section 2202 (UCC Section 2-202), and (b) common law estoppel, under California Uniform Commercial Code section 21103(b) (UCC Section 1-103(b)).

The seller testified that contract-specified deadlines were not strictly observed in the fabric production industry: "a 'few days late' is acceptable in the industry."  The court accepted this as evidence of custom and usage to explain and supplement the contract due date under UCC section 1-103(b). 

The court also found there was evidence, in email exchanges and other dealings, that the buyer had agreed to a later delivery of the fabric; and that its non-approval of the final fabric samples and cancellation were inconsistent with the buyer's earlier actions. The buyer's email correspondence before the cancellation did not unambiguously state that the buyer would terminate the contract unless delivery were strictly made by the due date.  This evidence supported a finding of common law estoppel. The court upheld the enforcement of this estoppel under UCC section 1-103(b), which specifically states the UCC does not displace the principles of equity and estoppel.

The court found email extensions of time constituted "additional terms" that may become part of the contract under UCC section 2-207.  That part of the opinion seems less solid, because the purchase orders had  presumably been accepted months before the emails were exchanged; these were emails in the course of performance, not contract formation. The concept of estoppel is what seemed to turn the decision in favor of the seller.  Seller had done most of the work to deliver the fabric and would have completed it without adverse commercial consequences to the buyer if buyer had promptly communicated its approval of the fabric.

Thursday, January 3, 2013

Court Refuses to Enforce Bank’s Instructions Requiring Two Signatures for Withdrawals -- UCC Section 11-202(b)

Dark Hall Productions, LLC v. Bank of America, N.A., (Dec. 13, 2012) 2012 WL 6202186
(Unpublished, California Court of Appeal, Second District, Division 2)

Oh, the agony of dealing with banks. One business owner thought he was protecting himself from unauthorized withdrawals by his co-owner, when they opened a company savings account, requested that the signatures of both individuals be obtained before any withdrawals, and secured the bank’s own instructions to this effect in the bank’s notes for the account.
However, the bank allowed the other signer to withdraw all funds from the account.  The aggrieved party sued the bank, but framed the suit only in terms of negligence.  The bank argued, among other things, that the deposit agreement and signature card were controlling, and that they expressly excluded any obligation of the bank to require two signatures.
The court refused to allow theories founded on negligence, based on Zengen, Inc. v. Comerica Bank (2007) 41 Cal.4th 239. In Zengen the California Supreme Court found that Division 11 of the UCC displaced common law causes of action in the context of authorization of payment orders.
The appellate court did not furnish any extensive analysis of the UCC issues involved but noted that California Commercial Code section 11202(b) was relevant. That section provides, among other things, that “The bank is not required to follow an instruction that violates a written agreement with the customer . . . .”
At the trial court level, the defrauded investor had sought to amend the complaint to go beyond negligence-related theories. These included breach of contract, intentional and negligent misrepresentation and promissory estoppel. However, the trial court held that a 2 ½ year delay justified a refusal to allow amendment, and the appellate court would not find an abuse of discretion.