Northrop Corp. v. Litronic Industries

• Decision Date: 18 July 1994
• Docket Number: Nos. 93-3912,93-4000,s. 93-3912
• Citation: 29 F.3d 1173
• Parties: 24 UCC Rep.Serv.2d 407 NORTHROP CORPORATION, Plaintiff-Appellee/Cross-Appellant, v. LITRONIC INDUSTRIES, Defendant-Appellant/Cross-Appellee.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 1173

29 F.3d 1173

24 UCC Rep.Serv.2d 407

NORTHROP CORPORATION, Plaintiff-Appellee/Cross-Appellant, v. LITRONIC INDUSTRIES, Defendant-Appellant/Cross-Appellee.

Nos. 93-3912, 93-4000.

United States Court of Appeals Seventh Circuit.

Argued May 17, 1994.

Decided July 18, 1994.

James T. Ryan (argued), Laura M. Maul, Ryan & Nelson, Laura M. Henry, Ryan, Nelson & McSherry, Arlington Heights, IL, Stephen M. Szarmack, Quantum Financial Services, Inc., Chicago, IL, for Northrup Corp.

David E. Gordon, Gerald B. Mullin (argued), Rosenthal & Schanfield, Chicago, IL, for Litronic Industries.

Before POSNER, Chief Judge, and HILL ^* and RIPPLE, Circuit Judges.

POSNER, Chief Judge.

"Battle of the forms" refers to the not uncommon situation in which one business firm makes an offer in the form of a preprinted form contract and the offeree responds with its own form contract. At common law, any discrepancy between the forms would prevent the offeree's response from operating as an acceptance. See Poel v. Brunswick-Balke-Collender Co., 216 N.Y. 310, 110 N.E. 619, 621-22 (1915). So there would be no contract in such a case. This was the "mirror image" rule, which Article 2 of the Uniform Commercial Code jettisoned by providing that "a definite and seasonable expression of acceptance or a written confirmation which is sent within a reasonable time operates as an acceptance even though it states terms additional to or different from those offered or agreed upon, unless acceptance is made conditional on assent to the additional or different terms." UCC Sec. 2-207(1). See Union Carbide Corp. v. Oscar Mayer Foods Corp., 947 F.2d 1333, 1335-36 (7th Cir.1991). Mischief lurks in the words "additional to or different from." The next subsection of 2-207 provides that if additional terms in the acceptance are not materially different from those in the offer, then, subject to certain other qualifications (id. at 1335-37), they become part of the contract, Sec. 2-207(2), while if the additional terms are materially different they operate as proposals and so have no effect unless the offeror agrees to them, UCC Sec. 2-207, comment 3; if the offeror does not agree to them, therefore the terms of the contract are those in the offer. A clause providing for interest at normal rates on overdue invoices, or limiting the right to reject goods because of defects falling within customary trade tolerances for acceptance with adjustment, would be the sort of additional term that is not deemed material, and hence it would become a part of the contract even if the offeror never signified acceptance of it. Id., comment 5.

The Code does not explain, however, what happens if the offeree's response contains different terms (rather than additional ones) within the meaning of section 2-207(1). There is no consensus on that question. See James J. White & Robert S. Summers, Uniform Commercial Code 33-36 (3d ed. 1988); John E. Murray, Jr., "The Chaos of the 'Battle of the Forms': Solutions," 39 Vand.L.Rev. 1307, 1354-65 (1986). We know there is a contract because an acceptance is effective even though it contains different terms; but what are the terms of the contract that is brought into being by the offer and acceptance? One view is that the discrepant terms in both the nonidentical offer and the acceptance drop out, and default terms found elsewhere in the Code fill the resulting gap. Another view is that the offeree's discrepant terms drop out and the offeror's become part of the contract. A third view, possibly the most sensible, equates "different" with "additional" and makes the outcome turn on whether the new terms in the acceptance are materially different from the terms in the offer--in which event they operate as proposals, so that the offeror's terms prevail unless he agrees to the variant terms in the acceptance--or not materially different from the terms in the offer, in which event they become part of the contract. John L. Utz, "More on the Battle of the Forms: The Treatment of 'Different' Terms Under the Uniform Commercial Code," 16 U.C.C.L.J. 103 (1983). This interpretation equating "different" to "additional," bolstered by drafting history which shows that the omission of "or different" from section 2-207(2) was a drafting error, Utz, supra, 16 U.C.C.L.J. at 110-12; Murray, supra, 39 Vand.L.Rev. at 1355, substitutes a manageable inquiry into materiality, Union Carbide Corp. v. Oscar Mayer Foods Corp., supra, 947 F.2d at 1336-37; Schulze & Burch Biscuit Co. v. Tree Top, Inc., 831 F.2d 709, 715 (7th Cir.1987); Douglas G. Baird & Robert Weisberg, "Rules, Standards, and the Battle of the Forms: A Reassessment of Section 2-207," 68 Va.L.Rev. 1217, 1246 (1982), for a hair-splitting inquiry into the difference between "different" and "additional." It is hair-splitting ("metaphysical," "casuistic," "semantic," in the pejorative senses of these words) because all different terms are additional and all additional terms are different.

Unfortunately, the Illinois courts--whose understanding of Article 2 of the UCC is binding on us because this is a diversity suit governed, all agree, by Illinois law--have had no occasion to choose among the different positions on the consequences of an acceptance that contains "different" terms from the offer. We shall have to choose.

The battle of the forms in this case takes the form of something very like a badminton game, but we can simplify it a bit without distorting the issues. The players are Northrop, the giant defense firm, and Litronic, which manufactures electronic components, including "printed wire boards" that are incorporated into defense weapon systems. In 1987 Northrop sent several manufacturers, including Litronic, a request to submit offers to sell Northrop a customized printed wire board designated by Northrop as a "1714 Board." The request stated that any purchase would be made by means of a purchase order that would set forth terms and conditions that would override any inconsistent terms in the offer. In response, Litronic mailed an offer to sell Northrop four boards for $19,000 apiece, to be delivered within six weeks. The offer contained a 90-day warranty stated to be in lieu of any other warranties, and provided that the terms of the offer would take precedence over any terms proposed by the buyer. Lynch, a purchasing officer of Northrop, responded to the offer in a phone conversation in which he told Litronic's man, Lair, that he was accepting the offer up to the limit of his authority, which was $24,999, and that a formal purchase order for all four boards would follow. Litronic was familiar with Northrop's purchase order form, having previously done business with Northrop, which had been using the same form for some time. Had Lair referred to any of the previous orders, he would have discovered that Northrop's order form provided for a warranty that contained no time limit.

Lynch followed up the phone conversation a month later with a "turn on" letter, authorizing Litronic to begin production of all four boards (it had done so already) and repeating that a purchase order would follow. The record is unclear when the actual purchase order was mailed; it may have been as much as four months after the phone conversation and three months after the turn-on letter. The purchase order required the seller to send a written acknowledgment to Northrop. Litronic never did so, however, and Northrop did not complain; it does not bother to follow up on its requirement of a signed acknowledgment.

Although Litronic had begun manufacturing the boards immediately after the telephone call from Lynch, for reasons that are unknown but that Northrop does not contend are culpable Litronic did not deliver the first three boards until more than a year later, in July of 1988. Northrop tested the boards for conformity to its specifications. The testing was protracted, either because the boards were highly complex or because Northrop's inspectors were busy, or perhaps for both reasons. At all events it was not until December and January, five or six months after delivery, that Northrop returned the three boards (the fourth had not been delivered), claiming that they were defective. Litronic refused to accept the return of the boards, on the ground that its 90-day warranty had lapsed. Northrop's position of course is that it had an unlimited warranty, as stated in the purchase order.

As an original matter one might suppose that this dispute is not over the terms of the warranty but over whether Northrop waited more than the "reasonable time" that the Uniform Commercial Code allows the buyer of nonconforming goods to reject them. UCC Sec. 2-602(1). That in fact is how the magistrate judge framed the issue, as we shall see. But the parties continue to treat it as a "warranty" case. Their implicit view is that Litronic's 90-day warranty, if a term of the contract, not only barred Northrop from complaining about defects that showed up more than 90 days after the delivery of the boards but also limited to 90 days the time within which Northrop was permitted to reject the boards because of defects that rendered them nonconforming. We accept this view for purposes of deciding these appeals.

The parties have an unrelated dispute, over a different specification of printed wire boards, which Northrop claims were also defective. Northrop filed this suit to recover the money that it had paid for both types of board. The magistrate judge gave judgment for Northrop in the amount of $58,000, representing the money it had paid for the three No. 1714 boards that it had taken delivery of, but denied it recovery for the other boards on the ground that Northrop had failed to return them to Litronic. Both parties appeal.

Northrop in its appeal argues that it was entitled to retain the other boards as security for its claim of breach of contract. UCC Sec. 2-711(3). The purchaser of defective goods by paying for them...