N&D Fashions, Inc. v. DHJ Industries, Inc.

Citation548 F.2d 722
Decision Date10 February 1977
Docket NumberNo. 76-1037,76-1037
Parties20 UCC Rep.Serv. 847 N&D FASHIONS, INC., a Minnesota Corporation and Nelly Don, Inc., a Missouri Corporation, Appellees, v. DHJ INDUSTRIES, INC., a New York Corporation, Appellant.
CourtUnited States Courts of Appeals. United States Court of Appeals (8th Circuit)

Jack Hassid (argued), New York City, Schermer, Schwappach, Borkon & Ramstead, Minneapolis, Minn., on briefs, for appellant.

Allen I. Saeks (argued), Edward M. Moersfelder, Minneapolis, Minn., on brief, for appellees.

Before BRIGHT and WEBSTER, Circuit Judges, and TALBOT SMITH, Senior District Judge. *

WEBSTER, Circuit Judge.

This litigation centers upon the effect to be given to a condition of sale requiring arbitration of disputes that was contained in the seller's acknowledgment of the buyer's written purchase order. It implicates the sometimes murky provisions of Section 2-207 of the Uniform Commercial Code, 1 which was intended to put to rest uncertainty arising from the "battle of the forms." Jurisdiction is based upon diversity of citizenship. 28 U.S.C. § 1332. 2

Nelly Don, Inc. is engaged in the domestic manufacture and wholesale of female wearing apparel; N&D Fashions, Inc., its wholly-owned subsidiary, is engaged in the purchase of fabric for foreign manufacture into wearing apparel which is imported into the United States for sale. DHJ Industries, Inc. is engaged in the manufacture and sale of fabric to the apparel trade.

In April, 1973, I. H. Shriber, an officer of Nelly Don who was acting as an agent of N&D, met with representatives of DHJ concerning the purchase of certain fabric. Shriber informed DHJ of N&D's special needs, specifically emphasizing that the fabric dye had to be colorfast and that non-colorfast dye would thus be unacceptable. The parties orally agreed that N&D would purchase and DHJ would sell some 75,000 yards of fabric, finalizing solely the type, color, amount, price, and terms of delivery.

Shriber confirmed the agreement by telephone a few days later, after which he sent a Nelly Don form purchase order to DHJ setting forth the amount and type of fabric and the purchase price. He believed that this order form would, when accepted by an agent of DHJ, constitute the written agreement of the parties. No clause pertaining to arbitration was contained in the document, and at the bottom of the form were the words:

This Purchase Order shall become a binding contract when acknowledged by Seller, or upon whole or partial shipment by Seller.

In response, Shriber received four documents which confirmed, by statement of essential terms, the purchase order. After examination of the documents, Shriber signed three and his secretary signed the fourth with his name. The bottom of the order form read: "PLEASE SIGN AND RETURN THIS COPY"; another statement immediately above the blanks provided for signatures read:

THIS CONTRACT IS SUBJECT TO ALL THE TERMS AND CONDITIONS PRINTED ON THE REVERSE SIDE.

On the reverse side, in fine print, were sixteen various terms and conditions, paragraph 9 of which provided:

Arbitration: Any controversy arising under, or in relation to, this contract shall be settled by arbitration. If the parties are unable to agree respecting the time, place, method or rules of the arbitration, then such arbitration shall be held in the City of New York, in accordance with the laws of the State of New York and the rules then obtained of the General Arbitration Council of the Textile Industry.

Subsequent invoices sent by DHJ contained statements with respect to proper fabric care upon which N&D contends it relied when it relied when accepting the fabric and when labeling its finished products with the words "Machine Washable." After sale of the products, it was allegedly determined that the fabric was not washable or colorfast as represented.

N&D and Nelly Don then brought suit for misrepresentation and fraud. DHJ moved to stay the proceedings pending arbitration in accordance with the terms of its order form and Section 3 of the Arbitration Act, 9 U.S.C. § 3. 3

The District Court, applying the Uniform Commercial Code but not expressly determining which state's law was applicable, 4 held that the parties had entered into an agreement for the purchase and sale of fabric but that the DHJ arbitration provision was a proposal for an additional term which constituted a material alteration of the contract. It found that Shriber did not manifest consent to the provision by his signing of the order form since he had no knowledge of such provision and there was no express indication on the front of the form that such a provision was contained on the reverse. It therefore held that the parties did not enter an agreement to arbitrate and thus denied the motion for stay pending arbitration.

DHJ appeals, claiming that the District Court erred in failing to find an agreement to arbitrate. Our jurisdiction is properly found under 28 U.S.C. § 1292(a)(1). 5 We reverse.

I.

It is undisputed that the parties reached an agreement with respect to the nature and quantity of the merchandise to be sold and delivered by appellant DHJ, as well as the price to be paid by the buyers. The Uniform Commercial Code does not require that all of the terms of the agreement be decided provided "the parties have intended to make a contract and there is a reasonably certain basis for giving an appropriate remedy." Uniform Commercial Code § 2-204(3). A problem is presented, however, when an acceptance or confirmation contains terms which are "additional to or different from" an offer or prior agreement. Under Uniform Commercial Code § 2-207, 6 if the dealings are between merchants, the additional terms become a part of the agreement provided (1) the original offer did not expressly preclude such additions (the offer here did not), (2) the additions do not materially alter the agreement, and (3) no seasonable notice is given of objections to the additions (none was given here). From this it follows that the provision for arbitration in this case, as a proposed additional term, became a part of the agreement unless, as the District Court found, it was a material alteration of the agreement.

The District Court relied upon Application of Doughboy Industries, Inc., 17 A.D.2d 216, 233 N.Y.S.2d 488, 1 UCC Rep. 77 (1962). This was a pre-Code case in which the New York state court articulated a "special rule" in New York that "the agreement to arbitrate must be direct and the intention made clear, without implication, inveiglement or subtlety." Id., 233 N.Y.S.2d at 492, 1 UCC Rep. at 80. Speaking for the court, Judge Breitel said, "It follows then that the existence of an agreement to arbitrate should not depend solely upon the conflicting fine print of commercial forms which cross one another but never meet." Id., 233 N.Y.S.2d at 493, 1 UCC Rep. at 81. It is significant that the purchase order in that case disavowed the future application of any subsequent differing acknowledgment, which would have precluded incorporation of the arbitration clause into the agreement under § 2-207(2)(a).

A clause will be held to "materially alter" a contract when it would " result in surprise or hardship if incorporated without express awareness by the other party." Uniform Commercial Code § 2-207, Comment 4. Official Comments 4 and 5 provide examples of terms which would and would not materially alter a contract, and an arbitration clause is listed under neither. While other cases have held that an arbitration clause would materially alter a contract under § 2-207, 7 the better reasoned position is that the question whether an additional term in a written confirmation constitutes a "material alteration" is a question of fact to be resolved by the circumstances of each particular case. See Dorton v. Collins & Aikman Corp., 453 F.2d 1161, 10 UCC Rep. 585, 595 (6th Cir. 1972); In re John Thallon & Co. and M&N Meat Co., 396 F.Supp. 1239, 17 UCC Rep. 31, 38 (E.D.N.Y.1975) (each holding that whether an arbitration clause constitutes a "material alteration" is a question of fact).

DHJ contends that the District Court's finding was clearly erroneous, as it disregarded the widespread use of arbitration clauses in the textile and garment industries, which gives a merchant reason to know that such clauses will be inserted in textile contracts. 8 Nelly Don and N&D assert, and DHJ does not deny, that arbitration was never mentioned during the course of their negotiations. There was no arbitration provision in the Nelly Don purchase order, and there was no evidence regarding industry practices or the past experience, if any, of Nelly Don and N&D with such clauses. Shriber testified that he did not read the clause.

We do not think it was incumbent upon the District Court to take judicial notice of industry practice, nor can we fault its finding upon a bare record. While it is generally recognized that commercial arbitration has had its principal use and development as a means of resolving disputes in the garment and fabric industries, and from this it may be inferred that the buyers should not have been surprised or subjected to unnatural hardship upon finding the clause in the contract, we cannot say on this record that the District Court was clearly erroneous in holding that the arbitration provision in DHJ's acknowledgment form was a "material alteration."

II

The effect of this holding is that we may not presume acceptance from mere failure to object; the arbitration clause in this case will not be considered a part of the agreement unless it was in fact agreed to by N&D.

The test to be applied is found in Uniform Commercial Code § 2-207, Comment 3:

Whether or not additional or different terms will become part of the agreement depends upon the provisions of subsection (2). If they are such as materially to alter the original bargain, they will not be included unless expressly agreed to...

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