978-1285860381 Chapter 21 Solution Manual Part 2

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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

1 302 F.3d 448 United States Court of Appeals for the Fifth Circuit, 2002

Question: Why do plaintiffs here escape the “normal case” limitation?

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

As stated previously, 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,

2 862 A.2d 1042, Court of Special Appeals of Maryland, 2004

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.

For awhile, 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: Your honor, I’m not a ham, and I won’t “boar” you with a long story. Our

arguments, briefly stated, are these.

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: My counterpart has managed to make several nifty pig-related references in

his argument, but nevertheless, no contract exists. 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.

My opponent is grasping at straws. Which pigs eat. I think. Get it? Oh, forget it.

Holding: After a three-day bench trial, the trial judge entered judgment for the defendants. The

trial court found that the alleged contract did not meet the requirements of the UCC statute of

frauds [UCC § 2-201], and that the alleged agreement was not enforceable against the Wagners.

Lohman appealed. We shall affirm the judgment entered by the trial court.

CODE PROVISIONS DISCUSSED IN THIS CASE

Issue Relevant Code Section

1. Which law governs this agreement? UCC 2-102.

2. Is there a writing sufficient to indicate a

contract?

UCC 2-201.

3. Was an output contract formed? UCC 2-306.

Modication

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?

Question: What sections of the UCC does the court look at to resolve these issues?

Answer:

3 280 F.Supp.2d 651 United States District Court for the Western District of Kentucky

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?

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.

(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

(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.

(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

(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

(d) Neither A nor B

Case 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.

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

insisted on its own terms, (2) the additional term materially alters the offer, or (3) the offeror

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

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 twenty 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 Uniform Commercial Code 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?