Madison Industries, Inc. v. Eastman Kodak Co.

• Decision Date: 05 April 1990
• Citation: 581 A.2d 85,243 N.J.Super. 578
• Parties: , 13 UCC Rep.Serv.2d 325 MADISON INDUSTRIES, INC., a New Jersey Corporation, Plaintiff-Appellant, v. EASTMAN KODAK COMPANY, a New Jersey Corporation, Defendant-Respondent.
• Court: New Jersey Superior Court — Appellate Division

Page 578

243 N.J.Super. 578

581 A.2d 85, 13 UCC Rep.Serv.2d 325

MADISON INDUSTRIES, INC., a New Jersey Corporation, Plaintiff-Appellant, v. EASTMAN KODAK COMPANY, a New Jersey Corporation, Defendant-Respondent.

Superior Court of New Jersey,

Appellate Division.

Argued Feb. 13, 1990.

Decided April 5, 1990.

William J. Bigham, argued the cause for plaintiff-appellant (Hannoch & Weisman, attorneys; William J. Bigham, of counsel and on the briefs with Susan Stryker, Princeton).

Mark T. McMenamy, argued the cause for defendant-respondent (Bressler, Amery & Ross, attorneys; Mark T. McMenamy, of counsel and on the brief with Jon W. Olson, Florham Park).

Before Judges O'BRIEN, HAVEY and STERN.

The opinion of the court was delivered by

HAVEY, J.A.D.

Plaintiff Madison Industries, Inc., appeals from an order for summary judgment dismissing its breach of contract case against defendant Eastman Kodak Company. Prior to entering the order, Judge Harding took testimony at a hearing to resolve a preliminary question as to the applicability of the "merchant's exception" under the Uniform Commercial Code, N.J.S.A. 12A:2-201(2). The judge concluded that the purported contract between the parties involved an "open-ended option" and not a "sale" as defined by the Code and therefore the "merchant's exception" did not apply. Consequently, he applied the general statute of frauds, N.J.S.A. 25:1-5, and concluded that since the "life span" of the purported agreement exceeded one year, the contract was unenforceable to the extent it had not been performed by Eastman Kodak.

On appeal, Madison argues that its contract with Eastman Kodak involved the "sale" of zinc hydroxide sludge and therefore fell within the "merchant's exception" to the Code's statute of frauds. Alternatively, it contends that the agreement was sufficiently "signed" by Eastman Kodak to satisfy the statute of frauds requirements under the Code, N.J.S.A. 12A:2-201(1) and (3)(b). It also asserts that Eastman Kodak should be estopped from raising the bar of the statute of frauds and that the trial court abused its discretion in denying Madison's motion to amend its complaint. Finally, it argues that the trial judge improperly considered oral testimony on Eastman Kodak's summary judgment motion. We reject each contention and affirm.

The essential facts are not in dispute. Madison manufactures zinc salts. Eastman Kodak manufactures vitamin E at its Rochester, New York plant, using zinc to process the biologically non-active vitamin E to active vitamin E. The process generates a liquid waste stream of zinc chloride solution. Eastman Kodak converted the zinc chloride solution into zinc hydroxide sludge and, in the 1970's and early 1980's, disposed of the sludge by paying chemical waste handlers to remove it to a landfill.

In December 1981, Madison offered to purchase Eastman Kodak's zinc chloride solution for 10cents per pound of zinc. In early 1982, the parties made an arrangement whereby Madison began removing the zinc chloride solution from Eastman Kodak's Rochester plant and transporting it to Madison's plant in Old Bridge, New Jersey, with Madison billing Eastman Kodak for the freight charges incurred by it and giving Eastman Kodak a credit for each pound of zinc it recovered from the waste solution. On February 22, 1982 Eastman Kodak forwarded a draft agreement under which it proposed that the sale and transportation arrangement continue for a one-year period, with an extension for an additional two years.

On March 5, 1982, Madison's representative, Hyman Bzura, wrote to Eastman Kodak suggesting an alternate pricing scheme based upon a concentration of zinc chloride ranging from 30% to 46%. In response, Eastman Kodak forwarded a second revised agreement on April 15, 1982 which incorporated Bzura's suggested alternate pricing scheme, changed the term of the contract from one to three years (with a provision for an automatic three-year extension), and stated that New Jersey law was to govern the agreement's interpretation. After discussing the second draft with Bzura, Dennis Zink, Eastman Kodak's sales supervisor, advised Bzura that he had to secure the formal approval of his supervisor before the agreement could be executed.

In April 1982, it was determined that the zinc chloride solution had caused damage to the rubber lining of Madison's tank wagons. As a result, the parties agreed that Madison would no longer remove the liquid solution, but would only take zinc hydroxide sludge. On May 27, 1982, Madison sent a revised draft agreement to Eastman Kodak which provided for a term of five years, with an option for an additional three-year term. The agreement contained the following reference to zinc hydroxide sludge:

Madison shall have the right of first refusal to purchase any zinc hydroxide in Kodak's possession. Kodak will do its best to rid the zinc hydroxide of chlorides (in any event no higher than 5% chloride contained). The purchase price shall be a loading charge of $200.00 per dump trailer load.

On June 14, 1982, Eastman Kodak's attorney forwarded a revised draft of the agreement to Bzura which Bzura executed on September 16, 1982. However, Bzura added a sentence requiring Eastman Kodak to guarantee that its sludge would be 40% zinc, and asked Eastman Kodak officials to initial the addition. According to Madison, this sentence was a confirmation of Eastman Kodak's oral agreement regarding the purity of the sludge.

Eastman Kodak did not execute the revised draft because it knew that the waste sludge could not consistently contain 40% zinc. Although the agreement was not executed, Madison continued to receive zinc hydroxide sludge from Eastman Kodak until October 12, 1984. On that date, Eastman Kodak advised Madison that:

In light of the reduced volume of zinc hydroxide, it has been necessary to re-evaluate the present outlets of this by-product. Due to the limited amount of material it is necessary to reduce the number of our present outlets.

While service involving the pick ups of material has improved dramatically since January, I regret to inform you we have decided to discontinue supplying zinc hydroxide to your company at this time. Madison pays the lowest price per pound of zinc of any of our customers. This along with the continuing problem of a "past due account" were the major consideration [sic ] in reaching this decision.

If production levels increase and the fore mentioned [sic ] items can be resolved to the satisfaction of both parties, we would again look forward to supplying your company zinc hydroxide.

Madison thereupon instituted the present breach of contract suit. Eastman Kodak counterclaimed charging that Madison had caused additional handling expenses because of delays and had taken unauthorized deductions. Eastman Kodak moved for summary judgment and plaintiff cross-moved seeking leave to file an amended complaint.

On the parties' cross-motions for summary judgment, Judge Harding conducted a hearing to determine the intent of the parties as to the meaning of the term "right of first refusal" under the contract draft. Hyman Bzura testified on Madison's behalf that in the metal business a "right of first refusal" meant that the buyer would purchase the metal regardless of what happened, and if the price went up and the seller could sell to a third party at a higher price, then the buyer had the right of first refusal to meet the increased price or not buy the material.

For the purpose of making his findings, Judge Harding assumed that "the letter and contract executed by Madison and returned to Kodak on September 16, 1982, confirm and embody a prior oral agreement between the parties, sufficient to comply with the terminology of N.J.S.A. 12A:2-201(2)," the "merchant's exception" to the Code's statute of frauds. That section reads as follows:

Between merchants if within a reasonable time a writing in confirmation of the contract and sufficient against the sender is received and the party receiving it has reason to know its contents, it satisfies the requirements of subsection (1) against such party unless written notice of objection to its contents is given within ten days after it is received.

The judge recognized that in order for the "merchant's exception" to apply, the contract between the parties must be a "sale" as defined by the Code. In granting summary judgment in Eastman Kodak's favor, the judge concluded that while the term "right of first refusal" is used in the agreement, "the arrangement is more similar to an open-ended option granted to Madison." He reached this conclusion by noting that:

The expressed terms and clear meaning regarding the zinc sludge transactions required Kodak to offer Madison all the zinc hydroxide produced from that plant. It is an output obligation on Kodak's part and the only way to avoid the requirement is not to have a waste stream, an unlikely contingency. But according to the contract, Madison had no obligation to buy. It merely had a first right to purchase the output at $200. per load.

The judge rejected the testimony of Madison's witnesses at the hearing, first because the contract provided that it could not be supplemented or modified by testimony as to usage of the trade, and second, because even if the Code applied, the clear and unambiguous language of the agreement precluded parol evidence as to its meaning. See N.J.S.A. 12A:1-205(4). He concluded that since an "option" is not a "sale" under the Code, the "merchant's exception" did not apply and thus the agreement was governed and barred by the statute of frauds, N.J.S.A. 25:1-5. He therefore dismissed Madison's complaint and granted summary judgment on Eastman Kodak's counterclaim in the amount of $818.10. He also denied Madison's motion to file an amended complaint.

Preliminarily, we find no error in Judge Harding having conducted a fact-finding hearing prior to the summary judgment motion. The fact finding was...