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. 

UCC Litigation Blog Nominated for the Top 25 Business Law Blogs of 2011

For the second year in a row, UCC Litigation has been nominated by LexisNexis for its Top 25 Business Law Blogs!

We are pleased that our blog has been noticed by one of the prominent legal publishers in the country.

You can support out blog by commenting on the nomination announcement post at LexisNexis' Corporate & Securities Community.

Each comment is counted as a vote toward the supported blog. To submit a comment, visitors need to log on to their free LexisNexis Communities account.  If you haven’t previously registered, you can do so for free by following this link. The comment box is at the very bottom of the blog nomination page. The comment period for nominations ends on October 25, 2011.

LexisNexis will then post the finalists for the Top 25 Business Law Blogs of 2011. Thereafter, a LexisNexis community vote will choose the Top Blog through a Zoomerang survey. The final announcement will be be made in early November.

Breach of Implied Warranty in Sale of Consumer Goods: Don't Forget The Jury Instructions Under Civil Code 1794 and UCC 2-711 through 2-714

Alaimo v. Hallmark-Southwest Corporation (Aug. 31, 2011) 2011 WL 3811941
(Not Officially Published)

Plaintiff lost her home in a wildfire and replaced it with a manufactured home. The home was delivered in two halves.  The homeowner had difficulty fitting together the two halves and found various other problems.  The jury rejected her claim for breach of express warranty and awarded $55,000 damages for breach of implied warranty.

The court of appeal reversed because the trial court had not not given any jury instructions on how damages for breach of implied warranty should be computed.  Neither party asked for any instructions.  Construing Agarwal v. Johnson (1979) 25 Cal.3d 932, 951, the court of appeal reversed due to a "complete failure to instruct on material issues and controlling legal principles."

The court noted that the correct measure of damages for breach of an implied warranty in sale of a consumer product is determined by California Civil Code section 1794. Section 1794, subdivisions (b)(1) and (b)(2) incorporate the UCC damages standard.  If the buyer rightfully rejected the goods, damages are calculated under sections UCC 2-711, 2-712, and 2-713 (Cal. U. Comm. Code sections 2711, 2712, 2713).  If, as in the Alaimo case, the buyer accepted the goods, damages are  calculated under UCC 2-714 and 2-715 (Cal. U. Comm. Code sections 2714, 2715).

Judgment was reversed and remanded. The plaintiff lost her status as a prevailing party and an award of attorneys fees that exceeded the implied damages.  Don't forget the jury instructions.

When Does Website Content Create an Express Warranty Under the UCC?

Zwart v. Hewlett-Packard Company (N.D. CA Aug. 23, 2011) 2011 WL 3740805

Can website content create an express warranty for the goods offered? In Zwart v. Hewlett-Packard Co. (N.D. CA Aug. 23, 2011) 2011 WL 3740805 the court said "yes". Plaintiff claimed that the computer he purchased online did not have a wireless card with features described on HP's website. Plaintiff argued that the website's feature descriptions constituted an express warranty, and that HP was liable for a breach of that warranty because the laptop did not conform. The foundation for plaintiff's case was UCC Section 2-313(1)(b), which provides that "any description of goods which is made the basis of the bargain creates an express warranty that the goods shall conform to the description."

HP answered that the website language could not be construed as a representation or warranty. The court indicated that because the language at issue was activated when a customer opened a pop-up box, it was reasonable to conclude that this could be a representation. The court's analysis was cursory. The court did not actually conclude that the language was a representation creating a warranty, merely that the allegation was sufficient to survive an attack on the pleadings. Further, the court noted that California case law supports the proposition that a limited warranty might not bar the right to pursue a claim for an express warranty by description.

Ultimately, the court dismissed the plaintiff's case, because the website language at issue related to custom-order laptops, and the plaintiff had only purchased an off-the-shelf laptop, not a custom laptop.

No Recovery Under UCC § 1-308 for Voluntary Payment Made By Wire Transfer “Under Protest” As Part of Settlement Agreement

Steinman v. Malamed, (June 28, 2010) 185 Cal.App.4th 1550, 111 Cal. Rptr. 3d 304.
This case suggests that UCC § 1-308 (allowing payment “under protest”) may not be interpreted broadly to allow a party to reserve rights when making a disputed payment.

This blog entry is longer than usual. That's because the court's opinion seems is suspect in analysis and perhaps result.

It is not too often that the court of appeal lets a party who admittedly is not owed $300,000 keep that money just because the rightful owner of money made a mistake paying it--and reverses the trial court to make that happen. What do you think?

In Steinman, the defendant financial advisor lost a bench trial and signed a $6,500,000 settlement agreement after the judge issued a proposed statement of decision concluding the defendant had breached its fiduciary duty. The settlement agreement provided for a reduced settlement amount if paid early. The defendant was anxious to meet the early payment deadline, but a dispute arose as to the how to calculate the payoff amount.

The defendant tried to hedge against losing the early payment discount by paying the greater amount demanded plaintiff “under protest.” The plaintiff stated that it would not accept a payment made “under protest.” The defendant made the payment by wire transfer. The defendant subsequently sought to recover the overpayment.

The trial court found that the defendant was correct and that there was in fact an overpayment and ordered the return of the money. But the appellate court reversed. It did not overturn the finding of an overpayment. Rather, it concluded that because the defendant’s overpayment was voluntary, it could not be recovered. The appellate court found that the defendant had not properly protected itself because the plaintiff had announced it would not accept a payment under protest and the defendant had paid anyway.

UCC § 1-308 (California Commercial Code Section 1308) would, on its face, provide a different result. Section 1-308(a) specifies that if a party performs under an explicit reservation of rights in response to a demand by the other side, then the performing party will not waive its rights. The Steinman court found that the UCC rule did not apply to this situation.

Since the disputed payment was made under a settlement agreement, not a typical commercial transaction, that result might not seem unusual. However, at least one prong of the court’s analysis missed a major point, and other portions of the opinion seemed to be guided by the intended decision rather than the analysis.

The court first stated that the UCC should not apply because payment was by wire transfer not check. (185 Cal. App. 4th at 1561).

• This is a questionable reason to refuse application of UCC § 1-308. California has enacted UCC Article 4A, which is designed to deal with commercial wire transfers. (California Commercial Code §11101 et seq.) UCC § 1-102 (California Commercial Code 1102) states that this division (Division 1, “General Provisions,” which includes § 1-308) applies to a transaction governed by another division, such as Division 11, “Funds Transfers” (UCC Article 4A.) So the method of payment (wire transfer not check) should not disqualify application of the UCC.

The appellant attempted to come under the UCC by arguing that the payment was made under a “negotiable instrument,” (the promissory note being paid as part of the settlement agreement).

• UCC § 3-104 does cover negotiable instruments. Without any description of the factual record, the court of appeal merely noted that the lower court “did not make” a determination that the promissory note was negotiable. The court of appeal did not make an independent analysis of whether the settlement note was a negotiable instrument.

The determinative factor for the court was UCC § 1-103(b) (California Commercial Code Section 1103(b).). Section 1-103(b) provides that common law principles concerning contract, duress, coercion and other matters continue to apply, unless the UCC specifically displaces them.

• The court cited Connecticut Printers, Inc. v. Gus Kroesen, Inc. (1982) 134 Cal. App. 3d 54. Connecticut Printers held that UCC § 1-308 (then known as 1-207) did not displace common law principles which allowed a party to offer an “accord and satisfaction” on a disputed account by tendering a check “in full payment” of the account. This is a different situation than the one facing the Steinman court. The Steinman court did not discuss the factual differing fact patterns. The court of appeal was unwilling to find that the UCC “explicitly displaced” common law principles of “economic duress” and “involuntary payment” in a transaction involving wire payment of an obligation arising under a settlement agreement. (185 Cal. App. 4th at 1562.)

Because the factual circumstances of the dispute were not explicitly within 1-308, the court of appeal chose to rely on common law.

The case, which sits at the intersection of common law and the UCC, could probably spawn some law review articles. In the meantime, for day-to-day lawyers, one must proceed carefully in order to protect a performing party’s rights in an ongoing contract.

UCC § 3-104 Definition of “Negotiable Instrument” Helps Bank Defeats Widow’s Stale Claim

Gabriel v. Wells Fargo Bank, N. A., (August 30, 2010) 2010 WL 3388062 (Not Officially Published)

This case illustrates how the UCC often appears in a supporting role, cited by the courts to bolster a conclusion.

A widow sued a bank (Wells Fargo) as the beneficiary of a bank certificate of deposit originally worth nearly $1 million. The certificate of deposit was opened by her husband in 1988. The husband placed a receipt for the certificate of deposit in a safety deposit box. He died a few years later without telling her about the certificate of deposit. The widow did not learn of the certificate of deposit for another 16 years (after the contents had been sent to the state as unclaimed property). The safety deposit box contained a receipt for the certificate of deposit—which the state controller sent to the widow.

In defense of the widow’s claim, the bank pointed out that the funds on deposit were subject to withdrawal; that most of its records had been destroyed; and that such records as it could locate implied that that no funds were left in the account at the time it was closed. The widow countered with California Evidence Code Section 635, which states that an obligation possessed by a creditor (in this case, the widow) is presumed not to have been paid. This is where the UCC comes in. Rightly or wrongly, the court interpreted Section 635 as dealing primarily with negotiable instruments. The court looked to UCC § 3-104 (California Commercial Code 3104) for the definition of a negotiable instrument. Under 3-104(d) an instrument is not negotiable if it “contains a conspicuous statement” to that effect. Unfortunately for the widow, the receipt for the certificate of deposit stated that it was “not transferrable or negotiable.” Thus, the Court did not apply the Evidence Code Section 635 in favor of the widow.

The Court cited other reasons why the widow could not prevail, primarily because she could not prove that any money her husband had not withdrawn the money prior to his death. Since the funds could be withdrawn, the existence of a receipt originally depositing the funds did not imply that the funds remained on deposit. This appears to be the dispositive reason why the court of appeals denied the widow’s claim.

For the litigator, the case illustrates how the UCC is often a persuasive source of authority. For the transactional lawyer, the case is another sad tale of how better estate planning (and estate administration) could have eliminated the need for the lawsuit and resolved the issue while records were intact.

Victim or Deadbeat: UCC Article 9 and California Real Estate Broker’s License Requirements

Greenlake Capital, LLC v. Bingo Investments, LLC (June 14, 2010)
2010 WL 2351460

This case illustrates the broad reach of the California Real Estate Broker's License law, the risks of noncompliance, and the potential impact of UCC Article 9 (lending secured by personal property).

Greenlake Capital originated and helped negotiate a $150 million mezzanine loan for Bingo Investments, charging a $3 million fee. Bingo reneged on the fee, asserting that Greenlake forfeited its fee by failing to hold a California real estate broker's license. (Ca. Bus. & Prof. Code Sections 10131, 10136.) The trial court granted summary judgment: Bingo was a victim of unlicensed activity, and therefore not required to pay the fee.

The court of appeal reversed for a full trial. Perhaps Greenlake's lending activity was not within the definition of real estate loan brokerage. If so, Bingo would be treated as a deadbeat, not a victim, and would be obligated to pay the fee.

The court cited recent cases holding that if some of the services fell outside the definition of real estate loan brokerage, part of the fee may be recoverable based on a theory of severability (services not requiring a license being severed from those that do). If the "central purpose" of the contract was not tainted with illegality, it may be possible to recover a part of the fee for those acts "for which no license was required." This was important, because "at the start of the relationship, neither party "intended the financing to take a form that would necessarily" violate the licensing requirement.

More importantly, the services may fall outside the scope of the licensing requirement altogether. A mezzanine loan is typically secured by equity in another entity--personal property-- rather than a mortgage. When the borrower had "no direct equity position" in the underlying real property, the licensing requirements may not be triggered. Thus, UCC Article 9 may apply, not local mortgage laws. On remand, the trial court will be required to sort it out, based on "a complete factual investigation" into the "nature of the obligations created by the" parties' credit and security agreements, and the "policies and equities" inherent in the licensing statutes. The case is not a quick fix for legal and financial professionals because the court did not offer any litmus test or even a checklist of factors.

The complicated financing arrangements have generated arguments on both sides as to whether the real estate loan brokerage licensing laws should apply. For businesses raising money, it is better to be safe than sorry. Holding the right license will transform the nonpaying client from a potential victim into a deadbeat. This will make it much easier to enforce the fee. Careful examination of the licensing arena is advisable.