Diamond Fruit Growers, Inc., an Oregon Corporation v. Krack Corporation, an Illinois Corporation, Defendant/third-Party v. Metal-Matic, Inc., a Minnesota Corporation, Third-Party

Citations: 794 F.2d 1440; 1 U.C.C. Rep. Serv. 2d (West) 1073; 1986 U.S. App. LEXIS 27353Docket: 85-3701

Court: Court of Appeals for the Third Circuit; July 22, 1986; Federal Appellate Court

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Metal-Matic, Inc. appeals a jury verdict favoring Krack Corporation in a case concerning a supply agreement. Krack, a manufacturer of cooling units, had sourced steel tubing from Metal-Matic for ten years, employing a routine of annual blanket purchase orders followed by specific release orders as needed. Metal-Matic's acknowledgment forms, sent in response to Krack’s purchase orders, included disclaimers of liability for consequential damages and limited remedies for defects to the refund of the purchase price or repair/replacement of the tubing. These terms were not included in Krack's purchase orders, but the acknowledgment form indicated acceptance of its terms was conditional. 

A discussion occurred between Krack's purchasing manager and Metal-Matic’s executive regarding the liability limitations, where Krack objected to the terms but continued to accept the tubing. In February 1981, Krack sold a cooling unit to Diamond Fruit Growers, which subsequently experienced ammonia leaks due to a pinhole defect in the tubing. This defect was discovered in January 1982, and the tubing was inspected multiple times, including by Metal-Matic’s representative in 1984. The court affirmed the lower court's judgment and the denial of Metal-Matic’s motion for judgment notwithstanding the verdict.

Diamond filed a lawsuit against Krack to recover losses incurred from removing fruit from storage due to a leak. Krack subsequently filed a third-party complaint against Metal-Matic and Van Huffel Tube Corporation, seeking contribution or indemnity if found liable to Diamond. The court granted Van Huffel's motion for a directed verdict, determining it was not responsible for the failed tubing, while denying Metal-Matic's motion. The jury ruled in favor of Diamond against Krack and awarded Krack a thirty percent contribution from Metal-Matic. Metal-Matic's motion for judgment notwithstanding the verdict (n.o.v.) was denied, and judgment was entered based on the jury's decision.

Metal-Matic appealed on two grounds: first, that its contract with Krack included a disclaimer of liability for consequential damages and limited liability for defects to either a refund or repair; second, that evidence did not support a finding that it manufactured the tubing involved in the leak. 

The court addressed Metal-Matic's disclaimer's inclusion in the contract, noting it is a legal question subject to de novo review. Krack argued that U.C.C. § 2-207 applies, which Metal-Matic contested, asserting that Krack had assented to the disclaimer. The court found that U.C.C. § 2-207 is relevant in this context, as it governs contract formation when parties exchange differing terms in purchase orders and acknowledgments. The court emphasized that the discussion of terms post-exchange does not exempt the case from U.C.C. § 2-207’s applicability.

Section 2-207 of the U.C.C. modifies the common law mirror-image rule, allowing an acceptance that introduces additional or different terms to be treated as an acceptance rather than a counteroffer. Under section 2-207(1), a response must contain a definite and timely expression of acceptance for it to form a contract, with the terms that align with the original offer constituting the contract. Additional terms in the response are treated as proposals for inclusion unless specific exclusions apply, such as the offer being limited to its original terms, the offeror objecting, or the additional terms materially altering the original offer (section 2-207(2)).

However, if the acceptance explicitly conditions agreement on the offeror's assent to the new terms, a contract is only formed if the offeror agrees to those terms (section 2-207(1) proviso). If the offeror does not assent but the parties act as though a contract exists, it is formed based on the mutually agreed terms and U.C.C. provisions (section 2-207(3)).

In this case, Metal-Matic's acknowledgment form explicitly conditioned acceptance on Krack's agreement to its additional terms, including a limitation of liability clause. Metal-Matic asserts that Krack assented to this term based on discussions between representatives from both companies, despite Krack's objections to the limitations. Metal-Matic argues that Krack's continued acceptance and payment for products constituted acceptance of the limitation term. The determination of what constitutes assent under section 2-207(1) remains unresolved, prompting a need to analyze the language and intent behind the section.

Section 2-207 emphasizes neutrality, aiming to prevent either party in a contract from gaining an advantage solely based on which party sent the first or last form. This section eliminates the common law "last shot" rule, which favored the offeree/counterofferor by granting them all terms just because they sent the last communication. Under section 2-207(3), all conflicting terms from the parties' forms are discarded, and the Uniform Commercial Code (U.C.C.) provides the missing terms instead. This approach is deemed fair since both parties share responsibility for any contract ambiguities due to their failure to negotiate clearly. However, it may disadvantage sellers who typically want to limit their liabilities. Despite this, the application of section 2-207(3) is recommended as it promotes equity and aligns with public policy.

In the context of Metal-Matic's argument regarding Krack's acceptance of warranty and liability terms, while there is a policy rationale for allowing sellers to dictate terms, it is ultimately rejected. Accepting Metal-Matic's position would reintroduce a version of the last shot rule, which is counter to the intent of section 2-207. An example illustrates that if the order of forms were reversed, favoring Krack's terms, applying Metal-Matic's reasoning would lead to an inconsistent outcome that contradicts the principles of section 2-207.

A specific and unequivocal expression of assent is required from the offeror when the offeree's acceptance is conditional upon additional or different terms. If the offeror fails to provide such assent but both parties proceed with the transaction, section 2-207(3) applies to clarify the contract terms. This section is relevant as both parties contribute to any ambiguity by continuing with the transaction despite unresolved disputes. If the seller does not wish to be bound without the buyer's assent, it must refrain from shipping until such assent is obtained.

In the case at hand, Krack's actions did not clearly indicate assent to Metal-Matic's terms, failing to meet the requirements of section 2-207(1). Metal-Matic also contends there is insufficient evidence to support the jury's verdict against it, arguing both that it did not manufacture the tubing in question and that it could not have caused the defect. Despite contradictory evidence, the jury had substantial support for its verdict in favor of Krack.

Regarding the tubing's manufacture, Krack exclusively purchased from Metal-Matic and Van Huffel between 1978 and 1981. Metal-Matic’s claim of insufficient evidence rests on testimony about past suppliers and the common storage of tubing. The jury's decision, based on conflicting evidence, is upheld.

As to the defect's cause, various experts testified, with differing opinions on whether a hacksaw caused the hole in the tubing. Metal-Matic argues that the hole could only have been made by Krack, citing that both parties possess hacksaws, but Krack is more likely to utilize one around the tubing. The jury had sufficient evidence to support its verdict, which will not be overturned on appeal.

The jury's verdict is upheld by the evidence and aligns with the Uniform Commercial Code (U.C.C.), leading the district court to correctly deny Metal-Matic's motion for a directed verdict. The blanket purchase order merely indicated Krack's intent to purchase tubing over the year, with both parties establishing their contract through Krack's release purchase orders and Metal-Matic's acknowledgments. Krack's claim of insufficient evidence regarding the timing of negotiations is countered by Van Krevelen's uncontradicted testimony of pre-incident discussions. Although Metal-Matic's acknowledgment form specified Minnesota law, the case was tried and will be adjudicated under Oregon law, which relies on the U.C.C. provisions. U.C.C. Section 2-207 allows for acceptance through written confirmation even if it includes additional or differing terms, which become part of the contract unless they materially alter it or if objections are raised. Conduct recognizing a contract's existence can establish its terms beyond written agreements. A related case, McKenzie v. Alla-Ohio Coals, Inc., is deemed of limited precedential value due to a lack of analytical support in the ruling. Metal-Matic's argument regarding Krack's employee's testimony suggests awareness of disclaimers but does not demonstrate agreement or adoption of those terms by Krack.