Schulze and Burch Biscuit Co. v. Tree Top, Inc.
| Decision Date | 10 September 1987 |
| Docket Number | No. 86-2679,86-2679 |
| Citation | 831 F.2d 709 |
| Parties | 4 UCC Rep.Serv.2d 641 SCHULZE AND BURCH BISCUIT COMPANY, Plaintiff-Appellant, v. TREE TOP, INC., Defendant-Appellee. |
| Court | U.S. Court of Appeals — Seventh Circuit |
Peter C. Woodford, Seyfarth, Shaw, Fairweather & Geraldson, Chicago, for plaintiff-appellant.
John J. George, Daley & George, Ltd., Chicago, for defendant-appellee.
Before BAUER, Chief Judge, CUMMINGS, Circuit Judge, and ESCHBACH, Senior Circuit Judge.
In this diversity case governed by the Uniform Commercial Code as adopted in Illinois, the principal issue is whether the inclusion of an arbitration clause in a confirmation form is a "material addition" to a contract for the sale of apple powder, where the same clause appeared in confirmation clauses sent in each of nine similar previous transactions between the contracting parties. Under Sec. 2-207 of the Uniform Commercial Code, an additional term in a confirmation form becomes part of the contract only if it does not materially alter the contract. Ill.Rev.Stat., Ch. 26, par. 2-207. The district court ruled that the arbitration clause became part of the contract. The district court thus granted defendant's motion to stay proceedings pending arbitration and to compel plaintiff to arbitrate, 642 F.Supp. 1155. Because under the circumstances of this case the addition of the arbitration clause would not result in "unreasonable surprise" and therefore would not be a "material alteration" of the contract, we will affirm.
In the transaction that gave rise to the dispute that led to this case, Schulze and Burch Biscuit Company ("Schulze") purchased low moisture 16-mesh dehydrated apple powder from Tree Top, Inc., ("Tree Top"). Schulze uses the dehydrated apple powder in making strawberry and blueberry toastettes, which it sells to Nabisco, Inc.
On April 27, 1984, E. Edward Park, Schulze's Director of Procurement, telephoned Rudolph Brady, a broker for Tree Top. Park ordered forty thousand pounds of Tree Top's apple powder. Park told Brady that the purchase was subject to a Schulze purchase order and gave Brady the number of the purchase order. Park did not send the purchase order or a copy of it to Brady or to Tree Top. On the front of the purchase order was the following clause:
IMPORTANT
The fulfillment of this order or any part of it obligates the Seller to abide by the terms, conditions and instructions on both sides of this order. Additional or substitute terms will not become part of this contract unless expressly accepted by Buyer; Seller's acceptance is limited to the terms of this order, and no contract will be formed except on these terms.
Shortly after the telephone conversation, Brady sent Schulze a form entitled simply "Confirmation." The form listed Brady as broker, Schulze as buyer and Tree Top as seller. It listed the quantity, price, shipping arrangements, and payment terms. It also showed the purchase order number that Park had given to Brady. Several preprinted provisions, including an arbitration clause, stood on the lower portion of the form:
SELLER GUARANTEES GOODS TO CONFORM TO THE NATIONAL PURE FOOD LAWS.
ALL DISPUTES UNDER THIS TRANSACTION SHALL BE ARBITRATED IN THE USUAL MANNER.
THIS CONFIRMATION SHALL BE SUBORDINATE TO MORE FORMAL CONTRACT, WHEN AND IF SUCH CONTRACT IS EXECUTED. IN THE ABSENCE OF SUCH CONTRACT, THIS CONFIRMATION REPRESENTS THE CONTRACT OF THE PARTIES.
IF INCORRECT, PLEASE ADVISE IMMEDIATELY.
Brady had sent a similar confirmation form to Schulze in each of at least nine prior transactions between Tree Top and Schulze. Schulze never objected to any of the preprinted provisions. Schulze had sent Brady a purchase order in two of those transactions. In each of the others, as in the transaction in the present case, Schulze simply informed Brady of the number of the appropriate purchase order.
Subsequently, Schulze brought this diversity suit seeking damages for breach of contract. Schulze alleged that the dehydrated apple powder had been so full of apple stems and wood splinters that it clogged the machinery of Schulze's toastette assembly line, causing the line to shut down, with various concomitant financial losses. Schulze alleged that the powder thus failed to meet Schulze's specifications, which had governed the various sales of apple powder. Those specifications set forth requirements and allowances for flavor, color, granulation, amount of foreign material, moisture and other characteristics. The specifications also provided that Schulze could test the powder "organopleptically," meaning Schulze's inspectors could test the powder with those most delicate of instruments, their own eyes, noses, and taste buds.
Tree Top's answer to the first amended complaint set forth several defenses: that Schulze had waived the right to enforce the alleged contract terms by its previous acceptances of similar powder, that Schulze's revocation of its acceptance in the present transaction was ineffective because Schulze should have discovered the nonconformity before using the powder in its assembly line, that Schulze should have sifted the powder before use, and that the damages were unforeseeable. Tree Top also alleged that the dispute was subject to arbitration because of the arbitration clause in the confirmation sent by Brady to Schulze.
Tree Top next filed a motion for stay of the action pending arbitration and for an order compelling Schulze to participate in the arbitration. The district court granted the motion. Schulze appeals. We have jurisdiction of the appeal under 28 U.S.C. Sec. 1292(a)(1), under the Enelow-Ettelson doctrine. Wilson-Wear, Inc. v. United Merchants and Manufacturers, Inc., 713 F.2d 324 (7th Cir.1983).
The resolution of this case depends upon UCC Sec. 2-207 (Ill.Rev.Stat., Ch. 26, par. 2-207):
Additional Terms in Acceptance or Confirmation
(1) 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 expressly made conditional on assent to the additional or different terms.
(2) The additional terms are to be construed as proposals for addition to the contract. Between merchants such terms become part of the contract unless:
(a) the offer expressly limits acceptance to the terms of the offer;
(b) they materially alter it; or
(c) notification of objection to them has already been given or is given within a reasonable time after notice of them is received.
(3) Conduct by both parties which recognizes the existence of a contract is sufficient to establish a contract for sale although the writings of the parties do not otherwise establish a contract. In such case the terms of the particular contract consist of those terms on which the writings of the parties agree, together with any supplementary terms incorporated under any other provisions of this Act.
In this case, Brady, acting as Tree Top's agent 1, sent a confirmation that contained terms additional to those discussed by Brady and Schulze. Schulze did not object to the additional terms. Whether the contract was formed orally by the telephone call or by the confirmation acting as an acceptance, the arbitration clause was a term "additional to or different from those offered or agreed upon." The parties have proceeded on the assumption that they are both "merchants" for the purposes of Sec. 2-207. The principal issue is thus whether the addition of the arbitration term would "materially alter" the contract. If so, under subsection 2, it would not become part of the contract.
The Uniform Commercial Code Comment to Sec. 2-207 gives some examples of terms that do and that do not materially alter contracts.
4. Examples of typical clauses which would normally "materially alter" the contract and so result in surprise or hardship if incorporated without express awareness by the other party are: a clause negating such standard warranties as that of merchantability or fitness for a particular purpose in circumstances in which either warranty normally attaches; a clause requiring a guaranty of 90% or 100% deliveries in a case such as a contract by cannery, where the usage of the trade allows greater quantity leeways; a clause reserving to the seller the power to cancel upon the buyer's failure to meet any invoice when due; a clause requiring that complaints be made in a time materially shorter than customary or reasonable.
5. Examples of clauses which involve no element of unreasonable surprise and which therefore are to be incorporated in the contract unless notice of objection is seasonably given are: a clause setting forth and perhaps enlarging slightly upon the seller's exemption due to supervening causes beyond his control, similar to those covered by the provision of this Article on merchant's excuse by failure of presupposed conditions or a clause fixing in advance any reasonable formula of proration under such circumstances; a clause fixing a reasonable time for complaints within customary limits, or in the case of a purchase for sub-sale, providing for inspection by the sub-purchaser; a clause providing for interest on overdue invoices or fixing the seller's standard credit terms where they are within the range of trade practice and do not limit any credit bargained for; a clause limiting the right of rejection for defects which fall within the customary trade tolerances for acceptance "with adjustment" or otherwise limiting remedy in a reasonable manner.
Illinois courts, in deciding whether particular clauses are material alterations, have looked to the Comment's formulation that a material alteration is one that would "result in surprise or hardship if incorporated without express awareness by the other party." Under Illinois law, the test for whether an...
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