Charting a course: how courts should interpret course of dealing in a battle-of-forms dispute.

Author:Ranere, Stephen W.
 
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"A contract has, strictly speaking, nothing to do with the personal, or individual, intent of the parties. A contract is an obligation attached by the mere force of law to certain acts of the parties, usually words, which ordinarily accompany and represent a known intent. If, however, it were proved by twenty bishops that either party, when he used the words, intended something else than the usual meaning which the law imposes upon them, he would still be held...." (1)

  1. INTRODUCTION

    On February 25, 1999, an explosion erupted at the Jahn Foundry in Springfield, Massachusetts, causing extensive damage to the building and sending twelve foundry workers to the hospital with severe burns. (2) Three of the workers later succumbed to their injuries. (3) The injured parties, together with the heirs of the deceased, brought personal injury and wrongful death actions against one of Jahn's chemical suppliers, Borden Chemical, Inc. (Borden), alleging that a shipment of resin supplied by Borden had caused the explosion. (4) In response to the allegations, Borden brought a third-party indemnification suit against Jahn Foundry, Inc. (Jahn), the owner of the foundry and purchaser of the resin, based on a clause in the resin sale contract. (5)

    To adjudicate the dispute, the trial court applied Article 2 of the Uniform Commercial Code (U.C.C. or Code) because the contract at issue constituted a sale of goods. (6) The court granted summary judgment in favor of Jahn, holding that the indemnification provision was not part of the agreement between the parties. (7) On appeal, Borden argued that the contract incorporated the indemnification clause because the same clause had appeared in previous contracts between the parties. (8) According to Borden, Jahn failed to object to the clause each time it appeared in Borden's invoices over the course of four years and dozens of separate transactions. (9) Thus, Borden contended that Jahn's silence over this period of time equated to implied acceptance of the additional terms or, at the very least, established that the terms did not constitute a material alteration to the contract. (10)

    The U.C.C. characterizes the history of contracting between two parties as a "course of dealing." (11) In general terms, it represents the behavioral patterns exhibited by two parties over a course of previous contract performances. (12) While course of dealing has influenced contract interpretation to some degree for over one hundred years, its formal adoption by the U.C.C. significantly increased its role in resolving contract disputes. (13) Since that time, its role has only expanded. (14) Currently, a court's treatment of past conduct between two contracting parties may determine whether a party has complied with the terms of their agreement or, in the alternative, committed a breach. (15) This is a significant determination, as illustrated in Borden, where establishing a course of dealing might have saved Borden from a $25 million judgment. (16)

    This Note will first discuss the historical treatment of course of dealing in contract interpretation, from its common law formation to its present day treatment in the U.C.C. (17) This Note will then consider issues that arise under section 2-207 of the Code when parties invoke a course of dealing to resolve contract formation and interpretation disputes. (18) In particular, this Note will review several of the most frequently litigated aspects of section 2-207 and discuss how the courts have inconsistently applied course of dealing to resolve these disputes. (19) Finally, this Note will attempt to synthesize a set of rules for how future courts should utilize course of dealing to decide section 2-207 contests. (20)

  2. HISTORY

    1. Course of Dealing Before and After the Code Prior to the U.C.C.'s creation, many courts struggled to incorporate evidence of both trade custom and course of dealing into their interpretation of contracts. (21) While courts often discussed these concepts in their decisions, there developed "no unifying principle governing the admissibility of such evidence." (22) Ultimately, it was the litigant who relied on this evidence that suffered the consequence of its inconsistent application. (23) In response to a growing need for clarity in this and other areas of commercial law, a committee of scholars and practitioners convened in the early 1940s to begin drafting what would eventually become the U.C.C. (24)

      At the time of its creation, the U.C.C. signified "a comprehensive modernization of the law governing commercial transactions, designed to simplify and clarify the law, and to secure uniformity in the adopting states." (25) The U.C.C.--in particular Article 2--represented a fundamental change to contract law. (26) However, it did not make its mark through wholesale changes to black letter rules; rather, its real impact was in its shift to a new comprehensive theory of contract law. (27) This theory harmonized basic contracting principles with the commercial realities of modern-day business transactions. (28) The U.C.C. accomplished much of this by de-emphasizing the literal reading of contracts in favor of an increased focus on the circumstances surrounding contract formation in order to ascertain the parties' true intent. (29) In doing so, the U.C.C. drafters gave new significance to the concepts of trade usage and course of dealing relative to contract interpretation--so much so that these concepts made their way into the Code's very definition of "agreement." (30)

      Arguably, no provision of the U.C.C. better illustrates the goal of synthesizing established contract law with contemporary business practices than section 1-205. (31) Entitled "Course of Dealing and Usage of Trade," section 1-205 defines these two historical concepts and directs parties on how to utilize them when resolving contract disputes. (32) According to section 1-205, a course of dealing represents a "sequence of previous conduct," suggesting that contracting parties must engage in a minimum of two transactions before they can establish a course of dealing. (33) Section 1-205 then provides that a course of dealing can affect the interpretation of a contract in two distinct ways. (34) First, a course of dealing may provide the correct interpretation of an ambiguous term when evidence of prior dealings suggests the parties intended one meaning over the other. (35) Second, evidence of a course of dealing can supply additional terms to an existing contract even when those terms have been left out of the writing. (36)

      Early judicial efforts to incorporate Article 2 into contract interpretation appeared to pay little regard to the newfound roles of trade custom and party conduct. (37) Specifically, courts refused to entertain evidence of custom or conduct when it would contradict the plain meaning of the terms in a written agreement. (38) The first significant opinion to breathe controversy into section 1205 was the 1971 decision of Columbia Nitrogen Corp. v. Royster Co., (39) in which the Fourth Circuit held that parties may introduce a course of dealing to override the plain and unambiguous meaning of a contract term. (40) After Royster, courts and scholars alike began to question the wisdom of assigning such importance to the roles of custom and conduct, touching off an ideological debate that has persisted to the present. (41)

      Informally dubbed as a battle between "textualists" and "contextualists," the debate over custom and conduct is a modern-day illustration of the centuries-old conflict between the subjective and objective theories of contract interpretation. (42) On one side, the textualists advocate strict adherence to the literal reading of a contract, stressing that courts should interpret a bargain between two parties only within the four corners of the written instrument. (43) On the other side, the contextualists advocate a subjective theory of contract interpretation. (44) They maintain that, because contract interpretation must ascertain the parties' true intentions, all circumstances leading to the formation of a contract--including prior course of dealing--are relevant in resolving a dispute. (45) The debate surrounding the proper function of custom and conduct has historically focused more attention on the extent to which these factors should influence the meaning of existing contract terms. (46) There is, however, a separate issue regarding the extent to which parties may use evidence of custom and conduct to add new terms to an existing contract. (47) A prime setting for this debate arises in situations where a contract comes into existence through the exchange of non-matching forms. (48)

    2. Section 2-207: Battle of the Forms

      When Jahn purchased its shipment of resin from Borden, the two parties engaged in a typical modern-day exchange of forms. (49) In this type of exchange, the buyer sends a purchase order to the seller containing the essential terms of the transaction, such as price, quantity, and other "boilerplate" terms that appear on all of its orders. (50) In response, the seller sends back an invoice that confirms the essential terms of the transaction and also includes standard terms of its own, such as a disclaimer of warranties or an indemnity provision like the one at issue in Borden. (51) The standard language that each party adds to its forms is largely self-serving, and it is likely that neither party actually reads the other's fine print before completing the transaction. (52)

      Under common-law contract principles, this exchange of forms presents a number of issues: first, it is questionable whether the parties have reached a true "agreement" because the purported acceptance deviates from the terms of the offer; second, even if a contract has been created, it is unclear which of the terms comprise the final agreement. (53) To provide stability in this area of commercial law, the drafters of the U.C.C. enacted section...

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