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Case: Mathis v. Exxon Corporation1
Facts: Exxon marketed gasoline to retailers in three ways. Franchisees (who owned local gas stations)
were required to purchase a minimum number of gallons per month at the dealer tank wagon price
(DTW) set by Exxon. Jobbers (distributors who could resell to dealers) paid the "rack price," which
was generally lower than the DTW. Company operated stores (CORS), owned by Exxon, paid nothing.
A group of 54 Texas franchisees sued, claiming that Exxon set their gasoline prices artificially high in
order to drive them out of business and replace their franchises with more profitable CORS. The
evidence indicated that the franchisees' DTW was consistently higher than the rack price paid by
jobbers.
The plaintiffs argued that this evidence demonstrated that Exxon set the prices in bad faith. The jury
agreed, awarding plaintiffs $5.7 million in damages plus $2.3 million in attorney fees. Exxon appealed.
Issue: Did Exxon set the prices in bad faith?
Holding: Judgment for plaintiffs affirmed. Excerpts from the court’s opinion:
UCC Section 2-305 (2) rejects the idea that the seller may fix any price he wants. Good faith
includes observance of reasonable commercial standards of fair dealing in the trade if the party is a
merchant. In the normal case a "posted price" or a future seller's or buyer's "given price," "price in
effect," "market price," or the like satisfies the good faith requirement.
The franchisees here are alleging a breach of good faith grounded in Exxon’s failure to set the
price in good faith. Suits recognizing such a cause of action are rare for good reason: We would be
ill-advised to consider a case to be outside the norm based only on an allegation of improper motive
by the party setting the price.
Plaintiffs produced enough evidence to escape [the] "normal case" limitation. They showed, for
example, that Exxon planned to replace a number of its franchises with CORS, that the DTW price
was higher than the sum of the rack price and transportation, that Exxon prevented the franchisees
from purchasing gas from jobbers, and that a number of franchisees were unprofitable or
non-competitive.
Exxon's bad faith, in this regard, is shown by the record. Facing the competition of self-service
stations that were either selling food and other goods or had bare pumps with no overhead costs
incurred in servicing vehicles, Exxon decided years ago that retail marketing through franchise
dealers was becoming economically unsound. Accordingly, the jury's finding that Exxon breached
its duty of good faith in setting the DTW price it charged the plaintiffs is not without foundation in
the law or the evidence.
Question: What three issues does this case raise?
Answer: (1) Whether the parties could form a binding agreement without specifying the price, (2)
Question: What sections of the UCC does the court look at to resolve these issues?
Answer: UCC §2-305 (1): The parties may conclude a contract even though they have not settled
the price.
Question: According to the court, why are suits alleging breach of good faith in setting a price
rare?
Answer: Because the normal methods by which sellers set prices satisfy the good faith
Question: Why do plaintiffs here escape the “normal case” limitation?
1 302 F.3d 448 United States Court of Appeals for the Fifth Circuit, 2002.
Question: Such as?
Answer: Exxon planned to replace a number of its franchisees with CORS, the DTW price was
Question: What is the result?
CODE PROVISIONS DISCUSSED IN THIS CASE
Issue Relevant Code Section
1. May the parties form a binding agreement
without specifying the price?
UCC §2-305(1): The parties may conclude a
contract even though they have not settled the
price.
2. May a contract permit one party to settle the
price?
UCC §2-305(2): “A price to be fixed by the seller
or by the buyer” requires that it be fixed in good
faith.
3. What does good faith mean? UCC §§1-201(19), 1-203 and 2-103: For
non-merchants, good faith means honesty in fact.
For a merchant, good faith means honesty in fact
plus the exercise of reasonable commercial
standards of fair dealing.
Output and Requirements Contracts
Under §2-306, an output contract obligates the seller to sell all of his output to the buyer, who
agrees to accept it. A requirements contract is the reverse, obligating a buyer to purchase all of his
needed goods from the seller. The UCC requires that the parties in an output or requirements
contract make their demands in good faith. Neither party can suddenly increase her demand or
production far beyond what the parties expected. The buyer may reduce his demand far below what
the parties anticipated, as long as he makes the reduction in good faith.
You Be the Judge: Lohman v. Wagner.2
Facts: Legal research can take you in odd directions. Today, for example, we learn that a "weaner pig"
is a very young pig that has just been weaned from its mother. You must raise and sell a lot of them to
make a living. Farmers who raise pigs to full size need to sell fewer animals to get by.
Farmer Charles Lohman talked extensively with John Wagner about raising weaner pigs for a new
"pork network" that Wagner, the owner of Swine Services, was thinking of putting together. Lohman
eventually decided to join Wagner, and convert his pig farm to one that specialized in raising weaner
pigs. He needed to borrow money to remodel his farm, and he needed to convince his bankers that, if
they loaned him the necessary money, he would be in a reasonable position to repay them.
He told Wagner that he "would need something to show his banker." Wagner faxed over a
document with several blanks entitled "Weaner Pig Purchase Agreement." It said, in part,
"PRODUCER agrees to supply ____________ weaner pigs weekly." When he received the fax,
Lohman wrote "300" in the blank. After showing the fax to his banker, Lohman was able to secure his
loan. He never sent Wagner a copy of the document with the blank filled in.
2 862 A.2d 1042, Court of Special Appeals of Maryland, 2004.
For a while, everyone was happy. Lohman shipped weaner pigs to Wagner and was paid $28 each
for them. But eventually, problems arose. The price Wagner offered for weaner pigs dropped to $18,
and Wagner never assembled the promised pork network, which Lohman argued would have helped to
boost prices. Lohman sued Wagner for breach of contract.
The trial court found that the agreement did not meet the UCC's requirement that a quantity term
be included, that it was unenforceable, and that Lohman was entitled to nothing. Lohman appealed.
You Be the Judge: Does Lohman have an enforceable agreement with Wagner?
Argument for Lohman: First, the UCC's statute of frauds, and its requirement that a quantity term be
included, should not apply. This agreement is essentially one for services, and not for goods. My client
furnishes housing for weaner pigs, labors to raise them, and ships them to the defendant. His services
are the largest part of this contract.
Even if this contract is deemed to be a sale of goods, there is a quantity term included in the
weaner pig purchase agreement – 300. The number was entered by my client as a good faith estimate of
the number of animals he could produce.
In any event, UCC 2-306 does not require a quantity term in this case. This agreement was an
output contract. Lohman sold every weaner pig he produced to Wagner, and Wagner accepted and paid
for them. Output contracts, by definition, do not include specific quantity terms; they merely obligate a
seller to sell all of his output to the buyer.
This case amounts to nothing more or less than a greedy man trying to reap where he did not sow,
and to use legal technicalities to hog all the profits for himself.
Argument for Wagner: The UCC does apply to this agreement, because pigs are clearly goods. Most
products require some labor to assemble and bring to market. Someone "labored" to make my shoes,
my necktie, and my pen here. But all are goods.
In a UCC contract, a quantity must be written by the defendants, but here the "300" was written by
the plaintiff. It was never communicated to my client. He never agreed to it, or even had a chance to
review it. The same holds true for the claim that this is an output contract. My client never agreed to
buy all the pigs that Lohman produced.
Holding: The court found that the Weaner Pig Purchase Agreement did not contain a quantity term as
required by the UCC Statute of Frauds, and, therefore, was not enforceable against Wagner.
Question: Do you think the agreement was for goods or services?
Answer: Based on the title and wording provided here, it seems clear that the agreement was for
Question: Does this case involve an outputs contract or a requirements contract?
Modication
Another way in which the UCC is pro-contract and pro-business is in its treatment of contract
modifications. If two sides have a contract and seek to make changes, are the changes enforceable? The
UCC allows the parties to modify some contracts orally, but they may agree to prohibit oral
modifications and insist that all modifications be in writing and signed. Between merchants, such a
clause is valid. But if either party is not a merchant, such a clause is valid only if the non-merchant
separately signs it.
The following case deals with UCC §§2-209(2) & 2-209(4).
Additional Case: You Be the Judge: Marley Cooling Tower Co. v. Caldwell
Energy & Environmental, Inc.3
Facts: Caldwell agreed with Duke/Fluor Daniel (D/FD) to install a power plant cooling system in
Aiken, South Carolina. The contract stated that Caldwell would pay liquidated damages of $5,000 per
day if the system was late. Marley agreed to ship to Caldwell all of the material and equipment needed
to build the cooling system, and to deliver it no later than April 1. Their contract disclaimed either
party’s liability for consequential and liquidated damages and required any modification be in writing.
Marley delivered its material almost two months late, making Caldwell late in its obligations to build
the cooling system. D/FD assessed Caldwell liquidated damages of $135,000. Caldwell attempted to
pass this cost, which it called "backcharges," on to Marley by paying $135,000 less than Marley's
invoice demanded.
Marley sent Caldwell a letter, stating "We would like to work with you to resolve this issue.
However, before we can agree to these backcharges, we must have [certain specified] documents."
Caldwell supplied the documents plus a change order indicating that Marley accepted the backcharges
once it was signed by both Caldwell and Marley. A Marley executive agreed orally to accept the
charges, but Marley never signed or returned the change order and later rejected the charges. Caldwell
refused to pay the full contract price and Marley sued.
You Be the Judge: Is Marley obligated to pay the backcharges?
Holding: Marley wins. Excerpts from the court’s opinion: The contract expressly prohibited oral
modifications, and there was no written modification. Caldwell’s only hope is that Marley waived the
writing requirement. But Marley’s conduct did not amount to a waiver. Yes, there was some evidence
that Marley orally agreed to modify. The telephone call is Caldwell’s best evidence. However, when
balanced against the contractual requirement of a writing, and Marley’s refusal to execute a written
modification, one phone call is not enough to create a waiver. (The court also expressed amazement
that Caldwell would agree to a $5,000 per day liquidated damage clause while not taking any steps to
protect itself, such as insurance, or a corresponding clause in the contract with Marley.)
Question: What two issues does this case raise?
Answer: (1) Whether the parties could orally modify the contract, and (2) whether Marley’s
Question: What sections of the UCC does the court look at to resolve these issues?
Answer:
§2-209(2): A signed agreement which excludes modification or rescission except by a signed
Question: Could the parties orally modify the contract?
Answer: Oral modification clearly fails under §2-209(2). The contract expressly prohibited oral
Question: Marley indicated some willingness to resolve the dispute. Did its conduct constitute
waiver of the modification prohibition?
Question: Why not?
Answer: The evidence supporting the argument that Marley waived the prohibition does not
Question: Why isn’t the evidence sufficient to prove that Marley waived the prohibition on
modification?
3 280 F.Supp.2d 651 United States District Court for the Western District of Kentucky.
Answer: The court required something more than Marley’s statement that it “would like to work
Multiple Choice Questions
1. For a contract governed by the UCC sales article, which one of the following statements is correct?
(a) Merchants and non-merchants are treated alike.
(b) The contract may involve the sale of any type of personal property.
(c) The obligations of the parties to the contract must be performed in good faith.
(d) The contract must involve the sale of goods for a price $500 or more.
2. Which one of the following transactions is not governed by Article 2 of the UCC?
(a) Purchasing an automobile for $35,000
(b) Leasing an automobile worth $35,000
(c) Purchasing a stereo worth $501
(d) Purchasing a stereo worth $499
3. Fred assembles computers in his garage and sells them. He makes an agreement with Alpha
Company under which Alpha will deliver 100 keyboards. The agreement does not specify when
payment is due. Which of the following is true?
(a) Fred has no obligation to pay, because there was no "meeting of the minds" and no contract
was formed.
(b) Fred must pay within 10 days of making the agreement.
(c) Fred must pay within 10 days of accepting the keyboards.
(d) Fred must pay within a commercially reasonable time.
4. Under the UCC Statute of Frauds, a contract must be signed by the ________________ to count as
being "in writing”. Also, the _____________ of the goods must be written.
(a) plaintiff; price
(b) plaintiff; quantity
(c) defendant; price
(d) defendant; quantity
5. Assume that a contract is modified. New consideration must be present for the modification to be
binding if the deal is governed by:
(a) The common law
(b) The UCC
(c) Both A and B
(d) Neither A nor B
Essay Questions
1. The Massachusetts Bay Transit Authority (MBTA) awarded the Perini Corp. a large contract to
rehabilitate a section of railroad tracks. The work involved undercutting the existing track,
removing the ballast and foundation, rebuilding the track, and disposing of the old material. Perini
solicited an offer from Atlantic Track & Turnout Co. for Atlantic to buy whatever salvageable
material Perini removed. Perini estimated the quantity of salvageable material that would be
available. Atlantic offered to purchase “all available” material over the course of Perini’s deal with
the MBTA, and Perini accepted. But three months into the project, the MBTA ran short of money
and told Perini to stop the undercutting part of the project. That was the work that made Perini its
profit, so Perini requested that the MBTA terminate the agreement, which the agency did. By that
point Perini had delivered to Atlantic only about 15 percent of the salvageable material that it had
estimated. Atlantic sued. What kind of contract do the parties have? Who should win and why?
Answer: The parties have an output contract, because Perini has promised to deliver to Atlantic
100 percent of its output of certain material and Atlantic has agreed to buy it all. Under UCC
§2-306, such contracts are valid, even though the quantity of goods is, by definition, not stated. The
2. Hasbro used to manufacture a toy called "Wonder World Aquarium." The toy included a powder
that, when mixed with water, formed a gel that filled a plastic aquarium. Children could then place
plastic fish in the aquarium and create underwater scenes. Cloud Corporation supplied the powder
to Hasbro. The toy sold poorly, and Hasbro's need for the powder diminished,
The two companies discussed changing the powder's formula. Cloud believed the conversation
amounted to an indication that Hasbro would continue to buy powder, so it produced large
quantities. Although it did not receive an order from Hasbro, Cloud sent an order acknowledgement
for 9.5 million packets to Hasbro. Hasbro made no objection to it.
Did the order acknowledgement create an enforceable agreement? What specific facts determine
your answer?
Answer: Because both Cloud and Hasbro are merchants, a confirmatory memo sent and not
objected to within 10 days carves out an exception to the statute of frauds. The only essential term
3. Nina owns a used car lot. She signs and sends a fax to Seth, a used car wholesaler who has a huge
lot of cars in the same city. The fax says, “Confirming our agrmt—I pick any 15 cars fr yr lot—
30% below blue book.” Seth reads the fax, laughs, and throws it away. Two weeks later, Nina
arrives and demands to purchase 15 of Seth’s cars. Is he obligated to sell?
Answer: Probably. Under UCC §2-201(2), a signed memo between merchants that would be
4. The Brugger Corp. owned a farm, operated by Jason Weimer, who acted as the company’s business
agent. Tri-Circle, Inc. was a farm equipment company. On behalf of Brugger, Weimer offered to
buy from Tri-Circle certain equipment for use on the farm. Tri-Circle accepted the offer, using a
pre-printed form. The form included a finance charge for late payment. Weimer’s offer had said
nothing about finance charges, but he made no objection to the new term. Tri-Circle supplied the
farm equipment but later alleged that Brugger had refused to pay for $12,000 worth of the supplies.
Tri-Circle sued. In deciding whether Tri-Circle was entitled to finance charges, the court first
inquired whether Brugger, Weimer, and Tri-Circle were merchants. Why did it look into that issue?
Were they merchants?
Answer: Tri-Circle has added an additional term to Weimer's offer. Under UCC §2-207, in a
contract between merchants an additional term becomes part of the contract unless (1) the offer
5. You Be the Judge: WRITING PROBLEM. Brewster manufactured plastic
bottles. Dial made personal care products at many plants around the country, including one
in Salem, Virginia. The companies agreed that Dial would purchase from Brewster all of the plastic
bottles it needed for its Salem factory. Dial estimated its requirements for one year at 7,850,000
bottles, but added a clause stating that “quantities are estimated only and do not bind Dial to
purchase any minimum quantity.” A few months later, Dial concluded that its Salem plant was
unprofitable. The company closed the factory and notified Brewster that it would buy no bottles at
all. Brewster sued. Did Dial have the right to reduce its orders to zero? Argument for Brewster:
The parties had a clear contract for a massive number of bottles. Dial knew that this contract was
extremely important to Brewster. Although Dial had some right to adjust its orders, it had no right
to reduce them to zero. Argument for Dial: The issue is whether Dial acted in good faith. It did.
The company had a legitimate reason for closing the factory—it was losing money—and with no
factory it certainly did not need any bottles.
Answer: The evidence indicates that the parties did reach an oral agreement in their phone
conversation. Because the writings contained conflicting versions of the escape clause, UCC
§2-207 determines the contract terms. The conflicting terms drop out and the contract encompasses
the oral agreement, which was Brewster's version. Dial could escape only on the anniversary date.
Discussion Questions
Apply the following facts to the next two questions.
England vs. America: Does the Statute of Frauds Encourage or Prevent Fraud in Modern Times?
The publication of the original UCC in 1952 sparked an expansion of the statute of frauds in the
United States to cover sales of goods of $500 or more. At about the same time (in 1954), the British
Parliament repealed its longstanding statute of frauds as applied to sales of goods. Some have
argued that we should scrap UCC 2-201 on the grounds that it encourages misdealing as much as it
prevents fraud. Consider the following two hypotheticals:
(In the U.S.) Johnny is looking at a used Chevy Tahoe. He knows that the $7000 price is a good
one, but he wants to go online and see if he can find an even better deal. In the 20 minutes he has
been with the car's current owner, the owner has received three phone calls about the car. Johnny
wants to make sure that no one else buys the car while he is thinking the deal over, so he makes a
verbal agreement to buy the car and shakes the seller's hand. He knows that, because of the statute
of frauds, and the fact that that nothing is in writing; he does not yet have any enforceable
obligation to buy the car.
(In the U.K.) Nigel sells used Peugeots in Liverpool. When he senses interest from customers, he
aggressively badgers them until they verbally commit to buy. If the customers later get cold feet
and try to back out of the deal, he holds them to the verbal contracts. Because there is no longer a
UCC-style statute of frauds in Britain, the buyers are stuck.
1. Rate the degree to which you believe Johnny and Nigel acted wrongfully. Did one behave more
wrongfully than the other? If so, which one, and why?
2. Do you think that the UCC Statute of Frauds as it currently exists is more likely to prevent fraud, or
is it more likely to encourage misunderstandings and deception? Why?
Overall, is it sensible to require that purchases of big-ticket items be in writing before they are
final?
3. The UCC was written by a group of scholars and adopted by elected state legislators. But many
contracts that do not involve a sale of goods are still governed by old common law principles that
have been created by judges over a period of centuries. Who makes for better lawmakers – judges
or legislators? Do you prefer the way in which common law principles or UCC rules were created?
4. Under the UCC Section 2-207, "added terms" in an acceptance can become part of a contract
between merchants. Does this seem reasonable to you? Are businesses likely to take advantage of
it?
5. This chapter revisits the idea of unconscionability. Courts will sometimes refuse to enforce deals that
are, as UCC 2-302 states it, "shocking and fundamentally unfair." Consider the following two
cases. In each, an electronics store sells an HDTV with a fair market value of $600 for $1500.
a. Sale #1 is made to Ann. She has a terrible credit score, and is willing to pay $1500 because the
store offers to finance the TV, and she has no other available credit.
b. Sale #2 is made to Franklin J. Moneypenny, a very wealthy investment banker, on Christmas
Eve. He knows the price is much too high, but he is in a big hurry to finish his last minute
shopping.
In both cases, the consumers paid 2.5 times the fair value of the TV. In your opinion, is either
transaction unconscionable? If so, why? If not, why not?
Bonus Exam Strategy:
Question: Dana Owens hired Jeff Smith to decorate her apartment. Jeff Smith's business is
furniture "staging," where he is usually hired to re-arrange the owner's existing furniture and
accessories. Occasionally, Jeff purchases new pieces on behalf of the owner. Dana and Jeff have
exchanged e-mails describing what Dana is looking for and Jeff's thoughts on her ideas. They never
signed a formal agreement. Based on their e-mails, Jeff re-arranged Dana's existing furniture
charging Dana $850 for his work. Jeff also spent $450 on a new side chair for her den. Dana does
not like the chair and refuses to pay Jeff for it, or any of his work. Do the parties have a contract?
Strategy: There is a lot going on in the question. First, identify an agreement: Dana hired Jeff and
the two exchanged e-mails about the details. Jeff provided his services, which is consideration. So
far so good. Is this a contract for the sale of goods (the chair) or services (the decorating)? If the
predominant purpose of the contract is the sale of goods, then the UCC applies. If the predominant
purpose is the services, common law applies. Under common law, any written agreement needs to
be explicit, containing all of the essential terms and conditions of the agreement.
Result: Using the predominant purpose test, the agreement between Dana and Jeff is for services,
rather than goods. Dana hired Jeff to redecorate, and the chair was one small part of that service.
Because this is a contract for a service, the UCC does not apply, and all essential terms and
conditions need to be spelled out clearly in writing. Dana and Jeff did not have their agreement in
writing, thus there is no contract.
