Zemco Mfg. v. Navistar Int'l Transp.

• Decision Date: 27 July 1999
• Docket Number: No. 98-3795,98-3795
• Parties: (7th Cir. 1999) ZEMCO MANUFACTURING, INCORPORATED, Plaintiff-Appellant, v. NAVISTAR INTERNATIONAL TRANSPORTATION CORPORATION, Defendant-Appellee
• Court: U.S. Court of Appeals — Seventh Circuit

Page 815

186 F.3d 815 (7th Cir. 1999)

ZEMCO MANUFACTURING, INCORPORATED, Plaintiff-Appellant, v. NAVISTAR INTERNATIONAL TRANSPORTATION CORPORATION, Defendant-Appellee.

No. 98-3795

United States Court of Appeals, Seventh Circuit

Argued March 29, 1999

Decided July 27, 1999

Appeal from the United States District Court for the Northern District of Indiana, Fort Wayne Division. No. 97 C 260--William C. Lee, Chief Judge.

Before RIPPLE, ROVNER and EVANS, Circuit Judges.

RIPPLE, Circuit Judge.

Zemco Manufacturing ("Zemco") brought this action against Navistar International Transportation ("Navistar"), alleging breach of contract (Count I) and conspiracy to intentionally interfere with a contract (Count III). The district court granted Navistar summary judgment with respect to these claims, and Zemco appeals.¹ For the reasons set forth in the following opinion, we affirm in part and reverse and remand in part the judgment of the district court.

I BACKGROUND

Zemco manufactured and supplied machined parts to Navistar from 1968 to 1995. In 1983, the parties entered into a sales contract that was renewable on a yearly basis. From that date until 1995, Navistar purchased all of its requirements from Zemco. In January 1995, however, the sole shareholders of Zemco, Alan Zemen and Joel Pecoraro, fell into disagreement. Consequently, Pecoraro sold his interest in Zemco to Zemen. Pecoraro subsequently formed Pecoraro Manufacturing, Inc. ("PMI"). In the same year, Navistar began to buy parts from PMI and to phase out its purchase of parts from Zemco.

In Count I, Zemco alleges that Navistar breached its contract to buy parts from Zemco. Zemco claims that the contract provided that Navistar would purchase parts exclusively from Zemco. The district court, however, granted Navistar summary judgment on this claim; it held that the contract was not an exclusive "requirements" contract and that the oral extensions of the yearly contract violated the statute of frauds.

In Count III, Zemco alleges that Navistar conspired with Pecoraro to interfere tortiously with Zemco's rights under the contract. The district court granted summary judgment to Navistar on this claim because Pecoraro and Zemco had entered into a contract allowing Pecoraro to compete with Zemco.

II DISCUSSION

A. Whether the Contract Was an Exclusive Requirements Contract

The district court concluded that, as a matter of law, this contract is not a requirements contract. "A requirements contract is one in which the purchaser agrees to buy all of its needs of a specified material exclusively from a particular supplier, and the supplier agrees, in turn, to fill all of the purchaser's needs during the period of the contract." Indiana-American Water Co. v. Seelyville, 698 N.E.2d 1255, 1259 (Ind. Ct. App. 1998). This definition, which reflects not only Indiana law but the law of other American jurisdictions, establishes that a requirements contract exists only when the contract (1) obligates the buyer to buy goods, (2) obligates the buyer to buy goods exclusively from the seller, and (3) obligates the buyer to buy all of its requirements for goods of a particular kind from the seller. See James J. White & Robert S. Summers, Uniform Commercial Code sec. 3-9, at 154-55 (1995); see also E. Allan Farnsworth, Farnsworth on Contracts sec. 2- 15, at 135-37 (1990).

We first turn to the language of the contract. The district court took the view that the language of the contract made clear that this contract is not, as a matter of law, a requirements contract. The court stressed that the language of what it considered the most important paragraphs is permissive: Navistar is required to purchase "such quantities of the items listed herein as [it] might order or schedule." By the express language of the contract, Navistar could choose the quantities that it wished to order. Paragraphs 2 and 4 state, in part:

2. Unless otherwise specified, deliveries are to be made in quantities and at times specified in shipping schedules furnished to the Seller and from time to time by the Buyer, and the Buyer shall not be obligated to take any goods, the delivery of which has not been specified in such shipping schedules. . . .

4. Buyer shall have the right at any time and from time to time to cancel, in whole or in part, the deliveries specified and the authorizations contained in any shipping schedule given to the Seller.

R.1, Ex.A.

This language, standing alone, certainly does not establish the existence of a requirements contract. Nevertheless, we cannot say that it establishes, as a matter of law, that the contract is not such a contract. Rather, this language, upon which the district court and Navistar so heavily rely, is susceptible to several interpretations. As Navistar suggests, it may be construed as giving Navistar complete authority to decide how many parts to order from Zemco. On the other hand, the language may be read simply as an articulation of the manner in which Navistar should place its orders as it has need for the parts.

Other considerations, based on the language of the contract, make it even more clear that the contract is ambiguous as to whether it is a requirements contract. As Zemco notes, the contract provides that, in the event that Zemco cannot fill all the orders placed with it, it will give priority to the orders of Navistar as permitted by Indiana Code sec. 26-1-2-615. This contractual provision, standing alone, does not establish that the contract is a requirements contract. As the statutory language and its commentary suggest, the parties are entitled to great flexibility in agreeing how to allocate sales in the event all demands cannot be met. See Ind. Code sec. 26-1-2-615 & UCC cmt. 8.² It is quite possible, therefore, for parties to contract under this section of the Code for an arrangement other than a requirements contract. In this case, the contract contains a priority clause, and it also lacks a specific reference to quantity anywhere in the contract. As the Fifth Circuit has noted, in the absence of any explicit agreement as to quantity, the section of the Code authorizing requirements contracts is "the primary 'gap filler' in the Code for quantity terms." Reigel Fiber Corp. v. Anderson Gin Co., 512 F.2d 784, 789 (5th Cir. 1975); see also Gestetner Corp. v. Case Equip. Co., 815 F.2d 806, 811 (7th Cir. 1987).

When we evaluate all of these textual considerations, we must conclude that the contract, taken as a whole, is ambiguous and that further investigation as to whether the parties intended a requirements contract is required. Resort to extrinsic evidence is appropriate in such a situation. Indeed, the Indiana Commercial Code makes clear that the provisions ought to be harmonized with the parties' course of dealing and the usage of trade. Indiana Code sec. 26-1-2-208(2) states:

The express terms of the agreement and any such course of performance, as well as any course of dealing and usage of trade, shall be construed whenever reasonable as consistent with each other; but when such construction is unreasonable, express terms shall control course of performance and course of performance shall control both course of dealing and usage of trade.

Ind. Code sec. 26-1-2-208(2). Here, the text of the contract, in what it affirmatively says and in what it omits, renders the intent of the parties ambiguous. It is therefore necessary to construe these terms in conformity with the parties' course of dealing and the usage of trade. See Universal Power Systems, Inc. v. Godfather's Pizza, Inc., 818 F.2d 667, 671 (8th Cir. 1987). Examination of the course of dealing, to the extent that it is developed in this record, supports the conclusion that there exists a genuine issue of triable fact with respect to the parties' intent. For 12 years--every year in which the contract was in effect--Navistar purchased all of its requirements from Zemco. We therefore cannot affirm the district court's grant of summary judgment to Navistar on this ground.³

B. Whether the Contract Renewal Violated the Statute of Frauds

As an alternate ground for dismissal, the district court held that the renewal of the contract between Zemco and Navistar did not comply with the statute of frauds. We now turn to an evaluation of that contention.

1.

In 1983, the parties entered into the original written contract for the sale of parts. The contract was to last one year, but it was extended by written agreements until 1987. There has not been a written contract extension since 1987; the parties, however, have agreed orally to extend the contracts. Navistar submits that the oral contract extensions violate the statute of frauds. Zemco counters that simple time extensions or renewals of the contract need not be in writing because they are merely a modification of a non-definite contract term.

We begin our analysis of this question with Indiana Code sec. 26-1-2-209(3), which generally applies to contract modifications.⁴ It states that "[t]he requirements of the statute of frauds (IC 26-1-2-201) must be satisfied if the contract as modified is within its provisions." Ind. Code sec. 26-1-2-209(3). The interpretation of this provision, which is identical to Uniform Commercial Code ("UCC") sec. 2-209(3), has generated controversy among courts and commentators. One view is that all contract modifications must be in writing; another view is that only modifications of terms that are required to be in writing under UCC sec. 2-201 must be in writing. Under the second view, the time extension would not need to be in writing because the length of a contract is not a type of term that needs to be in writing. See Ind. Code sec. 26-1-2-201 & UCC cmt. 1.⁵

Indiana courts have not interpreted the meaning of sec. 26-1-2-209(3). A substantial number of the courts in other jurisdictions that have considered identical UCC provisions have held that every contract modification must be in writing. See Van...