Empire Gas Corp. v. American Bakeries Co.
| Decision Date | 12 May 1988 |
| Docket Number | No. 87-1411,87-1411 |
| Citation | 840 F.2d 1333 |
| Parties | 5 UCC Rep.Serv.2d 545 EMPIRE GAS CORPORATION, Plaintiff-Appellee, v. AMERICAN BAKERIES COMPANY, Defendant-Appellant. |
| Court | U.S. Court of Appeals — Seventh Circuit |
Bernard J. Nussbaum, Sonnenschein, Carlin, Nath & Rosenthal, Chicago, Ill., for defendant-appellant.
Thomas H. Davis, Morris, Larson, King & Stamper, Kansas City, Mo., for plaintiff-appellee.
Before POSNER, FLAUM and KANNE, Circuit Judges.
This appeal in a diversity contract case presents a fundamental question--surprisingly little discussed by either courts or commentators--in the law of requirements contracts. Is such a contract essentially a buyer's option, entitling him to purchase all he needs of the good in question on the terms set forth in the contract, but leaving him free to purchase none if he wishes provided that he does not purchase the good from anyone else and is not acting out of ill will toward the seller?
Empire Gas Corporation is a retail distributor of liquefied petroleum gas, better known as "propane." It also sells converters that enable gasoline-powered motor vehicles to operate on propane. The sharp rise in gasoline prices in 1979 and 1980 made American Bakeries Company, which operated a fleet of more than 3,000 motor vehicles to serve its processing plants and bakeries, interested in the possibility of converting its fleet to propane, which was now one-third to one-half less expensive than gasoline. Discussions between the companies resulted in an agreement in principle. Empire Gas sent American Bakeries a draft of its standard "Guaranteed Fuel Supply Contract," which would have required American Bakeries to install a minimum number of conversion units each month and to buy all the propane for the converted vehicles from Empire Gas for eight years. American Bakeries rejected the contract and Empire Gas prepared a new one, which was executed on April 17, 1980, and which was "for approximately three thousand (3,000) [conversion] units, more or less depending upon requirements of Buyer, consisting of Fuel Tank, Fuel Lock Off Switch, Converter & appropriate Carburetor & Small Parts Kit," at a price of $750 per unit. American Bakeries agreed "to purchase propane motor fuel solely from EMPIRE GAS CORPORATION at all locations where EMPIRE GAS has supplied carburetion and dispensing equipment as long as EMPIRE GAS CORPORATION remains in a reasonably competitive price posture with other major suppliers." The contract was to last for four years.
American Bakeries never ordered any equipment or propane from Empire Gas. Apparently within days after the signing of the contract American Bakeries decided not to convert its fleet to propane. No reason has been given for the decision.
Empire Gas brought suit against American Bakeries for breach of contract and won a jury verdict for $3,254,963, representing lost profits on 2,242 conversion units (the jury's estimate of American Bakeries' requirements) and on the propane fuel that the converted vehicles would have consumed during the contract period. The judge added $581,916 in prejudgment interest.
American Bakeries' first argument is that it was entitled to a directed verdict because the evidence showed that Empire Gas could not possibly have tendered conforming goods. Shortly before signing the contract with American Bakeries, Empire Gas had signed a contract to buy a Dutch-made conversion unit, the Be & Be, and it brought samples of the unit to its negotiating sessions with American Bakeries and gave American Bakeries literature describing the unit. This was the only unit the parties discussed. It was a flop, and eventually Empire Gas asked the U.S. Customs Service to reclassify it as either waste or scrap. American Bakeries argues that the contract it signed with Empire Gas was a contract to purchase the Be & Be unit, and hence that Empire Gas could not have supplied conforming goods even if American Bakeries had carried out its alleged contractual commitments in full.
American Bakeries relies on sections 2-313(1)(b) and (c) of the Uniform Commercial Code (). The former provides that "any description of the goods which is made part of the basis of the bargain creates an express warranty that the goods shall conform to the description," the latter that "any sample or model which is made part of the basis of the bargain creates an express warranty that the whole of the goods shall conform to the sample or model." As the clause (identical in both provisions) that we have italicized suggests--though none too clearly, as White & Summers, Handbook of the Law Under the Uniform Commercial Code 332-35 (2d ed. 1980), points out--the description or sample creates an obligation of conforming tender only if the parties intended to contract with reference to the specific description or sample. It thus is necessary to determine whether the Be & Be was the thing the parties intended to contract for or was merely descriptive, illustrative, or suggestive. See UCC Sec. 2-313, comment 6; Hawkland UCC Series Sec. 2-313:06 (Art. 2-p. 304) (1987). Ordinarily, and here, which it was is a jury question. See Alan Wood Steel Co. v. Capital Equipment Enterprises, Inc., 39 Ill.App.3d 48, 56-57, 349 N.E.2d 627, 632-33 (1976).
The contract does not mention the Be & Be unit, as American Bakeries could have demanded that it do; and as the contract contains a standard parol-evidence clause ("This Agreement comprises the entire Agreement, and there are no agreements, understandings, conditions, warranties or representation[s], oral or written, express or implied, concerning the subject matter or in consideration hereof which are not merged herein"), the discussions between the parties concerning the Be & Be unit cannot be used to alter the meaning of the contract. Anyway it is unlikely that American Bakeries cared what the brand was. What did it know about conversion units? Empire Gas was the expert on propane technology; all American Bakeries would have cared about was that Empire Gas supply a unit that worked. Empire Gas thought at the time that this would be the Be & Be unit, but it later changed its mind. Empire Gas does not manufacture conversion equipment, but supplies it essentially as an accommodation to the customers for its propane, the major part of its business. (The lion's share of the damages awarded by the jury was for lost profits on the sale of propane.) It would have been ridiculous for Empire Gas to sacrifice the contract's major objective by supplying unusable conversion equipment; no conversion, no sales of propane. Knowing this, American Bakeries presumably was content to let Empire Gas decide what conversion unit to supply. So at least a reasonable jury could conclude. It could also conclude that Empire Gas, which had an extensive inventory of conversion equipment manufactured by different companies, could and would have found satisfactory equipment to supply American Bakeries.
The heart of this case is the instruction concerning American Bakeries' obligation under the contract. If there were no legal category of "requirements" contracts and no provision of the Uniform Commercial Code governing such contracts, a strong argument could be made that American Bakeries agreed to buy 3,000 conversion units or slightly more or slightly less, depending on its actual needs, and hence that it broke the contract by taking none. This is not only a semantically permissible reading of the contract but one supported by the discussions that the parties had before the contract was signed (and these discussions are admissible to explain though not to change the parties' undertakings), in which American Bakeries assured Empire Gas that it was planning to convert its entire fleet. American Bakeries insisted on adding the phrase "more or less depending upon requirements of Buyer" just in case its estimate of 3,000 was off, and this is quite different from supposing that the phrase was added so that American Bakeries would have no obligation to buy any units at all.
The parties agree, however, that despite the negotiating history and the inclusion in the contract of a specific estimate of quantity, the quoted phrase sorted the contract into the legal bin labeled "requirements contract" and thereby brought it under the governance of section 2-306(1) of the Uniform Commercial Code, which provides:
A term which measures the quantity by the output of the seller or the requirements of the buyer means such actual output or requirements as may occur in good faith, except that no quantity unreasonably disproportionate to any stated estimate or in the absence of a stated estimate to any normal or otherwise comparable prior output or requirements may be tendered or demanded.
Over American Bakeries' objection the judge decided to read the statute to the jury verbatim and without amplification, remarking to the lawyers,
Now, I have nothing to do with the fact that there may be some ambiguity in 2-306. If there is ambiguity, well, that is too bad. This is the law that the legislature has adopted. With due respect to all these great judges that [American Bakeries' counsel] has cited and these great academic lawyers he has called to my attention, well, good, they have a lot of time to mull over these problems.
But I have the problem of telling this jury what the law is, and the law is right here, right here in this statute, and I have a good deal of faith in this jury's ability to apply this statute to the facts of this case.
It is not true that the law is what a jury might make out of statutory language. The law is the statute as interpreted. The duty of interpretation is the judge's. Having interpreted the...
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