Courtesy Enterprises, Inc. v. Richards Laboratories

• Decision Date: 15 December 1983
• Docket Number: No. 3-982A236,3-982A236
• Parties: 37 UCC Rep.Serv. 765 ., d/b/a CEI Truck and Ag Equipment, Defendant- Appellant, v. RICHARDS LABORATORIES, Plaintiff-Appellee. Court of Appeals of Indiana, Third District
• Court: Indiana Appellate Court

Page 572

457 N.E.2d 572

37 UCC Rep.Serv. 765

COURTESY ENTERPRISES, INC., d/b/a CEI Truck and Ag

Equipment, Defendant- Appellant, v. RICHARDS LABORATORIES, Plaintiff-Appellee.

No. 3-982A236.

Court of Appeals of Indiana,

Third District.

Dec. 15, 1983.

James R. Heuer, Gates & Gates, Columbia City, for defendant-appellant.

Michael D. Rush, Rush & Hufford, Columbia City, for plaintiff-appellee.

GARRARD, Judge.

Courtesy Enterprises, Inc. (Courtesy) appeals the trial court's decision for Richards Laboratories (Richards) on Richards' complaint on an account and on Courtesy's counterclaim for breach of warranty.

Richards manufactures "Floater Foam," which is used to mark the path along which chemicals have been applied to farm fields. Courtesy bought Floater Foam from Richards and sold it to farm cooperatives, which used it in their application of agricultural chemicals. Courtesy had been buying Floater Foam since 1978. In 1979 Courtesy notified Richards that the foam "jelled," or settled, in storage. Courtesy's customers were complaining because the jelled foam was unusable. Because Courtesy felt itself bound to honor a guarantee contained in a sales brochure supplied by Richards, it compensated the unhappy customers with replacement foam or with account credits. Richards, in turn, credited Courtesy's account for foam returned to Richards by Courtesy. Richards also devised a remedy for the problem: if jelled foam were heated and agitated, it returned to its original, usable state.

Because Courtesy found its customers unwilling to expend the effort required to revive jelled foam, it continued to accept returns, accumulating 2500 gallons of foam by 1980. Despite this accumulation, Courtesy ordered 1000 gallons of "new" foam from Richards on April 11, 1980. Richards sent the foam, and a bill for $5,140.00, but the bill was not paid. On July 2, 1980 Courtesy informed Richards that it wanted to return a quantity of foam, usable and unusable, for account credit. The return was to include the remnants of the April 11 shipment plus foam accumulated from customer returns. Richards agreed to the return on the condition that Courtesy submit, in advance, an inventory of exactly what would be returned.

On August 8, 1980 Richards received a shipment of foam from Courtesy, unannounced. Of the 1003 gallons which Courtesy apparently shipped, ¹ Richards received 643 gallons in varying states of preservation. Richards issued a credit to Courtesy's account for the value of the shipment, and demanded payment of the balance due it. This demand was renewed without success until finally, on February 17, 1981, Richards filed a complaint against Courtesy for the amount due. Courtesy responded with a counterclaim alleging breach of implied and express warranties and asking damages for foam replaced, shipping costs and customer dissatisfaction. The cause was tried to the court and resulted in a general judgment in favor of Richards, on both the complaint and the counterclaim.

Courtesy raises three issues on appeal:

1. Did the trial court improperly grant the plaintiff's complaint on account:

2. Did it improperly grant pre-judgment interest on that account?

3. Did the trial court's denial of Courtesy's counterclaim ignore express and implied warranties made on Floater Foam by Richards?

In assessing Courtesy's arguments, we will not weigh the evidence. We will consider only whether the evidence favorable to the judgment was sufficient to support the decision.

I.

Courtesy argues that the trial court should have denied Richards' complaint because the August 1980 shipment of foam to Richards revoked Courtesy's acceptance of the April 11, 1980 shipment and "cancel[led] out the amount claimed in Richards' Complaint." This argument fails because Courtesy's actions in regard to the August 1980 shipment failed to comply with the statutory requirements for a valid revocation of acceptance. The applicable statute is IC 26-1-2-608, which provides:

"(1) The buyer may revoke his acceptance of a lot or commercial unit whose non-conformity substantially impairs its value to him if he has accepted it

(a) on the reasonable assumption that its non-conformity would be cured and it has not been seasonably cured; or

(b) without discovery of such non-conformity if his acceptance was reasonably induced either by the difficulty of discovery before acceptance or by the seller's assurances.

(2) Revocation of acceptance must occur within a reasonable time after the buyer discovers or should have discovered the ground for it and before any substantial change in condition of the goods which is not caused by their own defects. It is not effective until the buyer notifies the seller of it.

(3) A buyer who so revokes has the same rights and duties with regard to the goods involved as if he had rejected them."

The first requirement for a revocation of acceptance under IC 26-1-2-608 is that the goods in question be "non-conforming." Because that requirement was not met in this case, Courtesy's first argument fails.

"Conforming" goods are goods consistent with the seller's obligations under its agreement with the buyer. IC 26-1-2-106(2). In determining whether goods are conforming, previous dealings between the parties are relevant. IC 26-1-1-205(1) and (3). Courtesy presented no evidence at trial that the foam in the April 11, 1980 shipment diverged in any significant degree from previous shipments of foam which Courtesy had accepted, and paid for. The only criticism Courtesy leveled against the foam in the April 11 shipment, or against Floater Foam in general, was its tendency to settle; but this was not a criticism unique to the April 11 shipment. All the foam which Courtesy had purchased from Richards had that tendency. Courtesy knew of that tendency in 1979. Courtesy knew of that tendency when it ordered the April 1980 shipment and when it accepted it. Because it knew of the foam's predilection for settling when it ordered and accepted the April 1980 shipment, and because the identical predilection was present in all the prior shipments ordered and accepted by Courtesy, there was no non-conformity in the April 11, 1980 shipment upon which to premise a revocation of acceptance under IC 26-1-2-608. Even if one were to assume that the tendency to jell represented the required non-conformity, Courtesy's acceptance of the shipment with knowledge of that tendency precluded its revocation of acceptance. IC 26-1-2-607(2).

Because Courtesy's argument founders upon the fundamental requirement of non-conformity, it is not necessary to discuss at length additional defects in Courtesy's attempt to execute that revocation. We feel constrained to point out, however, that Courtesy's return of foam from the April 11 shipment in company with returned foam from earlier shipments was not a revocation of acceptance of the "lot or commercial unit" accepted in April 1980, that the return in August 1980 was not made with a "reasonable time" as is required by the statute, and that Courtesy failed to provide Richards with notice of the revocation, as is also required. For all these reasons, Courtesy's first argument fails.

II.

Courtesy's second argument is that the trial court erroneously denied its counterclaim for damages resulting from Richards' breach of express and implied warranties on Floater Foam. Courtesy's counterclaim embraced all the foam it purchased from Richards from 1978 through 1980.

Assertion of breach of warranties is governed by IC 26-1-2-607(3)(a), which provides:

"(3) Where a tender has been accepted ... the buyer must within a reasonable time after he discovers or should have discovered any breach notify the seller of breach or be barred from any remedy."

A "reasonable time" for notice by a merchant buyer is determined by "applying commercial standards." UCC Section 2-607, comment 4. A "merchant" is one who "deals in goods of the kind or otherwise by his occupation holds himself out as having knowledge or skill peculiar to the ... goods involved." IC 26-1-2-104(1). Courtesy is held to the merchant buyer standard of IC 26-1-2-607(3)(a). Courtesy was in the business of selling agricultural equipment, including machinery for applying liquid fertilizer. Courtesy dealt in Floater Foam as an adjunct to that business. Therefore, Courtesy qualified as a "merchant" dealing in fertilizer foam under the first condition of IC 26-1-2-104(1). In addition, Courtesy's primary business occupation made it inevitable that Courtesy represented itself as possessing peculiar knowledge of fertilizer and fertilizer foam. ²

Before we can determine whether Courtesy provided the notice required by "commercial standards," we must consider the policies responsible for the notice requirement. Commercial policies are a fundamental consideration in applying our statute. IC 26-1-1-102(1). The Uniform Commercial Code requires notice of breach of warranties "to defeat commercial bad faith." UCC Section 2-607, comment 4. Commercial bad faith is the antithesis of commercial good faith, which is "honesty in fact and observance of reasonable commercial standards of fair dealing." IC 26-1-2-103(1)(b). The essence of good faith among merchants is the observance of commercial standards of fair dealing. Merchants are held to an " 'objective' standard ... measured by what a reasonable person in the trade ought to have done." 67 Am.Jur.2d "Sales" Section 16. Whether a buyer gave notice of an asserted breach of warranty as "a reasonable person ... ought to have done" depends upon the timeliness of the notice and upon its content. 67 Am.Jur.2d "Sales" Section 728. ³ We now consider whether the evidence established that Courtesy gave good faith notice of its intention to assert breach of warranties on Floater Foam.

IC 26-1-2-607(3)(a) explicitly requires notice within "a reasonable time." What is a reasonable time depends upon the particular circumstances. IC 26-1-1-204(2). One such...