BL 431 – THE LAW OF COMMERCIAL TRANSACTIONS Read the quotes and then explain the legal implications of what the person is saying.   For instance, if the quote were something like the following: “I’m thinking of selling my car for $5,000.” Legal implication: the party’s statement seems to be close to constituting an offer to sell his car for $5,000.  However, in order to make a valid offer, three requirements must be met: 1) the offer must exhibit the offeror’s present intent to be bound by a promise or action, 2) the te

BL 431 – THE LAW OF COMMERCIAL TRANSACTIONS

Read the quotes and then explain the legal implications of what the person is saying.   For instance, if the quote were something like the following:

1. “I’m thinking of selling my car for $5,000.”
   1. Legal implication: the party’s statement seems to be close to constituting an offer to sell his car for $5,000.  However, in order to make a valid offer, three requirements must be met: 1) the offer must exhibit the offeror’s present intent to be bound by a promise or action, 2) the terms of the offer must be sufficiently definite and 3) the offer must be communicated to the offeree.  In this instance, the offer is deficient since it does not indicate the offeror’s present intent to be bound.  Instead, the offeror is simply stating his future intention toward selling the car.  He is saying that he might, at some point in the future, consider selling his car for $5,000.  This is different than saying he is willing to sell it right now for $5,000 (present intent).  Thus, no legal offer has been created.

 

Some answers may be a little redundant, in that they will refer to the same rules of contracts as previous answers.  If this is the case, you do not have to re-state the same rule in each answer.   You may simply refer to the rule you have cited in a previous question.

 

Analyze the following statements from the video and explain whether they have (attempt to have, or fail to have) any legal significance:

 

1. Oscar: How much are you asking for the Celica?  We’re friends.  How about letting me have it for four thousand?
2. Vinny: I can’t do it.  Maybe five…
3. Oscar:   I’ll take it.  But you gotta let me pay you four thousand now and the other thousand in two weeks.
4. Maria: You want sixty-five hundred for it, right?
5. Maria: I’ll take it.
6. Oscar: I just bought it.
7. Maria: I’ll give you five thousand for it, on the condition that it will pass the smog test (assume that this negotiation is taking place in a State like California that requires any vehicle sold to pass a smog test).
8. Oscar: I said I’ll pay you five thousand.
9. Vinny: Is that a firm offer?  You’re gonna give me the cash now?
10. Oscar:   I’ll give you cash.  Five thousand.  Now.
11. Vinny:   Deal.
12. Maria: Fifty-five hundred.
13. Vinny: You gonna match that offer?
14. Oscar: What do you mean, match that offer?  I just bought the damn car for five thousand.  I don’t have to match any offer.
15. Vinny: Hey, I still had the keys in my hands.  That’s what counts.  I give you the keys, then I’ve sold it to you.

 

 

PART 2 – Case Analysis

(10 points)

 

Please read the text of the cases provided below:  Lucy v. Zehmer, Sunrise Cooperative v. Perry and Colorado Carpet v. Palermo.  Answer the short answer questions following the opinions in the same document as your answers to Part 1.  Please number your answers and make sure to answer all of the parts of each numbered question to receive full credit.

 

CASE #1 – Intent to Contract

 

196 Va. 493, 84 S.E.2d 516

Supreme Court of Appeals of Virginia

1. O. LUCY AND J. C. LUCY
   v.
   A. H. ZEHMER AND IDA S. ZEHMER.

Record No. 4272.

November 22, 1954.

 

Appeal from a decree of the Circuit Court of Dinwiddie County. Hon J. G. Jefferson, Jr., judge presiding.

 

Reversed and remanded.

 

JUDGE: BUCHANAN

BUCHANAN, J., delivered the opinion of the court.

 

This suit was instituted by W. O. Lucy and J. C. Lucy, complainants, against A. H. Zehmer and Ida S. Zehmer, his wife, defendants, to have specific performance of a contract by which it was alleged the Zehmers had sold to W. O. Lucy a tract of land owned by A. H. Zehmer in Dinwiddie county containing 471.6 acres, more or less, known as the Ferguson farm, for $50,000. J. C. Lucy, the other complainant, is a brother of W. O. Lucy, to whom W. O. Lucy transferred a half interest in his alleged purchase.

 

The instrument sought to be enforced was written by A. H. Zehmer on December 20, 1952, in these words: ‘We hereby agree to sell to W. O. Lucy the Ferguson Farm complete for $50,000.00, title satisfactory to buyer,‘ and signed by the defendants, A. H. Zehmer and Ida S. Zehmer.

 

The answer of A. H. Zehmer admitted that at the time mentioned W. O. Lucy offered him $50,000 cash for the farm, but that he, Zehmer, considered that the offer was made in jest; that so thinking, and both he and Lucy having had several drinks, he wrote out ‘the memorandum‘ quoted above and induced his wife to sign it; that he did not deliver *495 the memorandum to Lucy, but that Lucy picked it up, read it, put it in his pocket, attempted to offer Zehmer $5 to bind the bargain, which Zehmer refused to accept, and realizing for the first time that Lucy was serious, Zehmer assured him that he had no intention of selling the farm and that the whole matter was a joke. Lucy left the premises insisting that he had purchased the farm.

 

 

1. O. Lucy, a lumberman and farmer, thus testified in substance: He had known Zehmer for fifteen or twenty years and had been familiar with the Ferguson farm for ten years. Seven or eight years ago he had offered Zehmer $20,000 for the farm which Zehmer had accepted, but the agreement was verbal and Zehmer backed out. On the night of December 20, 1952, around eight o’clock, he took an employee to McKenney, where Zehmer lived and operated a restaurant, filling station and motor court. While there he decided to see Zehmer and again try to buy the Ferguson farm. He entered the restaurant and talked to Mrs. Zehmer until Zehmer came in. He asked Zehmer if he had sold the Ferguson farm. Zehmer replied that he had not. Lucy said, ‘I bet you wouldn’t take $50,000.00 for that place.‘ Zehmer replied, ‘Yes, I would too; you wouldn’t give fifty. ‘ Lucy said he would and told Zehmer to write up an agreement to that effect. Zehmer took a restaurant check and wrote on the back of it, ‘I do hereby agree to sell to W. O. Lucy the Ferguson Farm for $50,000 complete.‘ Lucy told him he had better change it to ‘We‘ because Mrs. Zehmer would have to sign it too. Zehmer then tore up what he had written, wrote the agreement quoted above and asked Mrs. Zehmer, who was at the other end of the counter ten or twelve feet away, to sign it. Mrs. Zehmer said she would for $50,000 and signed it. Zehmer brought it back and gave it to Lucy, who offered him $5 which Zehmer refused, saying, ‘You don’t need to give me any money, you got the agreement there signed by both of us.‘

 

The discussion leading to the signing of the agreement, said Lucy, lasted thirty or forty minutes, during which Zehmer seemed to doubt that Lucy could raise $50,000. Lucy suggested the provision for having the title examined and Zehmer made the suggestion that he would sell it ‘complete, everything there,‘ and stated that all he had on the farm was three heifers.

 

Lucy took a partly filled bottle of whiskey into the restaurant with him for the purpose of giving Zehmer a drink if he wanted it. Zehmer did, and he and Lucy had one or two drinks together. Lucy said that while he felt the drinks he took he was not intoxicated, and from the way Zehmer handled the transaction he did not think he was either.

 

…On January 2 Lucy wrote Zehmer stating that the title was satisfactory, that he was ready to pay the purchase price in cash and asking when Zehmer would be ready to close the deal. Zehmer replied by letter, mailed on January 13, asserting that he had never agreed or intended to sell.

 

Mr. and Mrs. Zehmer were called by the complainants as adverse witnesses. Zehmer testified in substance as follows:

 

He bought this farm more than ten years ago for $11,000. He had had twenty-five offers, more or less, to buy it, including several from Lucy, who had never offered any specific sum of money. He had given them all the same answer, that he was not interested in selling it. On this Saturday night before Christmas it looked like everybody**519 and his brother came by there to have a drink. He took a good many drinks during the afternoon and had a pint of his own. When he entered the restaurant around eight-thirty *497 Lucy was there and he could see that he was ‘pretty high.‘ He said to Lucy, ‘Boy, you got some good liquor, drinking, ain’t you?‘ Lucy then offered him a drink. ‘I was already high as a Georgia pine, and didn’t have any more better sense than to pour another great big slug out and gulp it down, and he took one too.‘

 

…

After Zehmer had, as he described it, ‘scribbled this thing off,‘ Lucy said, ‘Get your wife to sign it.‘ Zehmer walked over to where she was and she at first refused to sign but did so after he told her that he ‘was just needling him [Lucy], and didn’t mean a thing in the world, that I was not selling the farm.‘ Zehmer then ‘took it back over there * * * and I was still looking at the dern thing. I had the drink right there by my hand, and I reached over to get a drink, and he said, ‘Let me see it.’ He reached and picked it up, and when I looked back again he had it in his pocket and he dropped a five dollar bill over there, and he said, ‘Here is five dollars payment on it.’ * * * I said, ‘Hell no, *498 that is beer and liquor talking. I am not going to sell you the farm. I have told you that too many times before.’‘

 

Mrs. Zehmer testified that when Lucy came into the restaurant he looked as if he had had a drink. When Zehmer came in he took a drink out of a bottle that Lucy handed him. She went back to help the waitress who was getting things ready for next day. Lucy and Zehmer were talking but she did not pay too much attention to what they were saying. She heard Lucy ask Zehmer if he had sold the Ferguson farm, and Zehmer replied that he had not and did not want to sell it. Lucy said, ‘I bet you wouldn’t take $50,000 cash for that farm,‘ and Zehmer replied, ‘You haven’t got $50,000 cash.‘ Lucy said, ‘I can get it.‘ Zehmer said he might form a company and get it, ‘but you haven’t got $50,000.00 cash to pay me tonight.‘ Lucy asked him if he would put it in writing that he would sell him this farm. Zehmer then wrote on the back of a pad, ‘I agree to sell the Ferguson Place to W. O. Lucy for $50,000.00 cash.‘ Lucy said, ‘All right, get your wife to sign it.‘ Zehmer came back to where she was standing and said, ‘You want to put your name to this?‘ She said ‘No,‘ but he said in an undertone, ‘It is nothing but a joke,‘ and she signed it.

 

She said that only one paper was written and it said: ‘I hereby agree to sell,‘ but the ‘I‘ had been changed to ‘We‘. However, she said she read what she signed and was then asked, ‘When you read ‘We hereby agree to sell to W. O. Lucy,’ what did you interpret that to mean, that particular phrase?‘ She said she thought that was a cash sale that night; but she also said that when she read that part about ‘title satisfactory to buyer‘ she understood that if the title was good Lucy would pay $50,000 but if the title was bad he would have a right to reject it, and that that was her understanding at the time she signed her name.

 

On examination by her own counsel she said that her husband laid this piece of paper down after it was signed; that Lucy said to let him see it, took it, folded it and put it *499 in his wallet, then said to Zehmer, ‘Let me give you $5.00,‘ but Zehmer said, ‘No, this is liquor talking. I don’t want to sell the farm, I have told you that I want my son to have it. This is all a joke. ‘ Lucy then said at least twice, ‘Zehmer, you have sold your farm,‘ wheeled around and started for the door. He paused at the door and said, ‘I will bring you $50,000.00 tomorrow. * * * No, tomorrow is Sunday. I will bring it to you Monday.‘ She said you could tell definitely that he was drinking and she said to her husband, ‘You should have taken him home,‘ but he said, ‘Well, I am just about as bad off as he is.‘

 

…

 

The defendants insist that the evidence was ample to support their contention that the writing sought to be enforced was prepared as a bluff or dare to force Lucy to admit that he did not have $50,000; that the whole matter was a joke; that the writing was not delivered to Lucy and no binding contract was ever made between the parties.

 

[1] It is an unusual, if not bizarre, defense. When made to the writing admittedly prepared by one of the defendants and signed by both, clear evidence is required to sustain it.

 

[2] In his testimony Zehmer claimed that he ‘was high as a Georgia pine, ‘ and that the transaction ‘was just a bunch of two doggoned drunks bluffing to see who could talk the biggest and say the most.‘ That claim is inconsistent with his attempt to testify in great detail as to what was said and what was done. It is contradicted by other evidence as to the condition of both parties, and rendered of no weight by the testimony of his wife that when Lucy left the restaurant she suggested that Zehmer drive him home. The record is convincing that Zehmer was not intoxicated to the extent of being unable to comprehend the nature and consequences of the instrument he executed, and hence that instrument is not to be invalidated on that ground. 17 C.J.S., Contracts, § 133 b., p. 483; Taliaferro v. Emery, 124 Va. 674, 98 S.E. 627. It was in fact conceded by defendants’ counsel in oral argument that under the evidence Zehmer was not too drunk to make a valid contract.

 

…

The appearance of the contract, the fact that it was under discussion for forty minutes or more before it was signed; Lucy’s objection to the first draft because it was written in the singular, and he wanted Mrs. Zehmer to sign it also; the rewriting to meet that objection and the signing by Mrs. Zehmer; the discussion of what was to be included in the sale, the provision for the examination of the title, the completeness of the instrument that was executed, the taking possession of it by Lucy with no request or suggestion by either of the defendants that he give it back, are facts which furnish persuasive evidence that the execution of the contract was a serious business transaction rather than a casual, jesting matter as defendants now contend.

 

…

If it be assumed, contrary to what we think the evidence shows, that Zehmer was jesting about selling his farm to Lucy and that the transaction was intended by him to be a joke, nevertheless the evidence shows that Lucy did not so understand it but considered it to be a serious business transaction and the contract to be binding on the Zehmers as well as on himself. The very next day he arranged with his brother to put up half the money and take a half interest in the land. The day after that he employed an attorney to examine the title. The next night, Tuesday, he was back at Zehmer’s place and there Zehmer told him for the first time, Lucy said, that he wasn’t going to sell and he told Zehmer, ‘You know you sold that place fair and square.‘ After receiving the report from his attorney that the title was good he wrote to Zehmer that he was ready to close the deal.

 

Not only did Lucy actually believe, but the evidence shows he was warranted in believing, that the contract represented a serious business transaction and a good faith sale and purchase of the farm.

 

In the field of contracts, as generally elsewhere, ‘We must look to the outward expression of a person as manifesting his intention rather than to his secret and unexpressed intention. ‘The law imputes to a person an intention corresponding to the reasonable meaning of his words and acts.’‘ First Nat. Bank v. Roanoke Oil Co., 169 Va. 99, 114, 192 S.E. 764, 770.

 

At no time prior to the execution of the contract had Zehmer indicated to Lucy by word or act that he was not in earnest about selling the farm. They had argued about it and discussed its terms, as Zehmer admitted, for a long time. Lucy testified that if there was any jesting it was about paying $50,000 that night. The contract and the evidence show that he was not expected to pay the money that night. Zehmer said that after the writing was signed he laid it down on the counter in front of Lucy. Lucy said Zehmer handed it to him. In any event there had been what appeared to be a good faith offer and a good faith acceptance, *503 followed by the execution and apparent delivery of a written contract. Both said that Lucy put the writing in his pocket and then offered Zehmer $5 to seal the bargain. Not until then, even under the defendants’ evidence, was anything said or done to indicate that the matter was a joke. Both of the Zehmers testified that when Zehmer asked his wife to sign he whispered that it was a joke so Lucy wouldn’t hear and that it was not intended that he should hear.

 

[4] The (subjective) mental assent of the parties is not requisite for the formation of a contract. If the words or other acts of one of the parties have but one reasonable meaning, his undisclosed intention is immaterial except when an unreasonable meaning which he attaches to his manifestations is known to the other party. Restatement of the Law of Contracts, Vol. I, § 71, p. 74.

 

‘* * * The law, therefore, judges of an agreement between two persons exclusively from those expressions of their intentions which are communicated between them. * * *.‘ Clark on Contracts, 4 ed., § 3, p. 4.

 

[5] An agreement or mutual assent is of course essential to a valid contract but the law imputes to a person an intention corresponding to the reasonable meaning of his words and acts. If his words and acts, judged by a reasonable standard, manifest an intention to agree, it is immaterial what may be the real but unexpressed state of his mind. 17 C.J.S., Contracts, § 32, p. 361; 12 Am. Jur., Contracts, § 19, p. 515.

 

So a person cannot set up that he was merely jesting when his conduct and words would warrant a reasonable person in believing that he intended a real agreement, 17 C.J.S., Contracts, § 47, p. 390; Clark on Contracts, 4 ed., § 27, at p. 54.

 

[6] Whether the writing signed by the defendants and now sought to be enforced by the complainants was the result of a serious offer by Lucy and a serious acceptance by the defendants, or was a serious offer by Lucy and an acceptance in secret jest by the defendants, in either event it constituted a binding contract of sale between the parties.

 

[7] Defendants contend further, however, that even though a contract was made, equity should decline to enforce it under the circumstances. These circumstances have been set forth in detail above. They disclose some drinking by the two parties but not to an extent that they were unable to understand fully what they were doing. There was no fraud, no misrepresentation, no sharp practice and no dealing between unequal parties. The farm had been bought for $11,000 and was assessed for taxation at $6,300. The purchase price was $50,000. Zehmer admitted that it was a good price. There is in fact present in this case none of the grounds usually urged against specific performance.

 

…

The complainants are entitled to have specific performance of the contracts sued on. The decree appealed from is therefore reversed and the cause is remanded for the entry of a proper decree requiring the defendants to perform the contract in accordance with the prayer of the bill.

 

Reversed and remanded.

END OF CASE

 

 

CASE #2 – Statute of Frauds, Leading Purpose Rule

 

Not Reported in N.E.2d, 1992 WL 179626 (Ohio App. 6 Dist.) 1992

Court of Appeals of Ohio, Sixth District, Huron County.

SUNRISE COOPERATIVE, Appellee,
v.
Robert PERRY, et al., Appellant.

No. H-91-32.

July 31, 1992.

 

DECISION AND JUDGMENT ENTRY

 

This case is an appeal from a judgment of the Norwalk Municipal Court. The present action was brought by appellee, Sunrise Cooperative, a feed supplier, against one of its customers, Robert Perry, for payment on his feed account and against appellant, Farm Credit Services of Mid America (“Farm Credit”), alleging Farm Credit guaranteed Perry’s feed account.

 

On June 25, 1991, the trial court entered a judgment in favor of Sunrise Cooperative and against Farm Credit and Perry, jointly and severally. On August 12, 1991, the trial court issued its findings of fact and conclusions of law. Farm Credit is appealing this judgment; Perry has not appealed.

 

The facts of this case are as follows. Perry had borrowed funds from Farm Credit in order to finance his business of raising hogs. In September 1989, Perry had an unpaid debt of approximately $26,000 owed to Farm Credit. To cure the $26,000 defaulted loan, Farm Credit entered into a new loan agreement with Perry. Farm Credit loaned Perry $43,364, $10,000 of which was allocated for feed. In turn, Perry agreed to pay back the loan and give Farm Credit a share of the proceeds upon sale of the hogs. This loan was secured by an agreement which covered Perry’s equipment, livestock and crops.

 

To facilitate the new loan agreement with Perry, Farm Credit asked Sunrise Cooperative to extend credit to Perry, assuring Sunrise Cooperative of payment for the feed sold to Perry. Perry had previously been placed on a cash only basis with Sunrise Cooperative because of prior unpaid debts. In reliance on Farm Credit’s guarantee, Sunrise Cooperative agreed to extend credit to Perry to purchase feed for his lot of hogs. Sunrise Cooperative claimed Farm Credit guaranteed payment for feed for that lot of hogs; Farm Credit claimed that there was a $10,000 limit to this guarantee.

 

In accordance with this agreement, Sunrise Cooperative sold Perry $15,228.25 worth of feed, and Farm Credit paid Sunrise Cooperative $10,000. However, neither Perry nor Farm Credit has paid Sunrise Cooperative the remaining $5,228.25 balance owed.

 

Following a bench trial, the court rendered judgment in favor of Sunrise Cooperative. It is from this judgment that Farm Credit raises the following assignments of error:

 

…

With respect to Farm Credit’s first assignment of error, Farm Credit argued that no contract of guarantee existed for more than $10,000, claiming there was no consideration, no express promise, and no meeting of the minds.

 

However, consideration did support the agreement between Farm Credit and Sunrise Cooperative. Under William Lipstraw Co. v. Seufert, “[b]enefit to creditor or disadvantage to debtor, although slight, is sufficient consideration to support agreement to extend * * * credit.” William Lipstraw Co. v. Seufert (1930), 36 Ohio App. 272, paragraph five of the syllabus. Farm Credit guaranteed payment to Sunrise Cooperative on Perry’s feed account in exchange for Sunrise Cooperative’s sale of feed to Perry. In providing such a guarantee, Farm Credit attempted to insure that its previous loan to Perry would be repaid and that it would obtain a share of the proceeds upon sale of the hogs. Thus, Farm Credit’s guarantee of payment was supported by sufficient consideration.

 

Farm Credit’s argument that no express promise was made and that there was no meeting of the minds to guarantee more than $10,000, raises a question of fact. However, the findings of the trier of fact are presumed to be correct…unless such a finding is against the manifest weight of the evidence. Seasons Coal Co. v. Cleveland (1984), 10 Ohio St.3d 77, 80.

 

…

Sunrise Cooperative testified that Farm Credit guaranteed payment on Perry’s feed account to feed out the lot of hogs and that Farm Credit placed no $10,000 limit on it guarantee. Sunrise Cooperative further testified that it only agreed to extend credit to Perry because of Farm Credit’s guarantee. Furthermore, Farm Credit in fact recognized its obligations under the guarantee by paying Sunrise Cooperative $10,000 on Perry’s feed account. This testimony presents sufficient evidence to support the trial court’s finding that an express promise was made and a finding that there was a meeting of the minds with respect to that promise.

 

Since the elements of a contract, consideration, express promise and meeting of the minds, were met, the trial court properly found that a contract of guarantee was created between Sunrise Cooperative and Farm Credit.

 

…

Farm Credit argues in its second assignment of error that its oral guarantee is barred by the statute of frauds and, thus, is not enforceable by Sunrise Cooperative.

 

*3 R.C. 1335.05 <Ohio’s statute of frauds>states that:

 

“No action shall be brought whereby to charge the defendant, upon a special promise, to answer for the debt, default, or miscarriage of another person; * * * unless the agreement upon which such action is brought, or some memorandum or note thereof, is in writing and signed by the party to be charged therewith or some other person thereunto by him or her lawfully authorized.” R.C. 1335.05.

 

However, Ohio has recognized an exception to the statute of frauds. Where the promisor’s leading object is to subserve its own pecuniary or business interest, an oral promise to pay the debt of another is enforceable. Wilson Floors Co. v. Sciota Park, Ltd. (1978), 54 Ohio St.2d 451, the syllabus. In Wilson Floors, a bank loaned money for the construction of apartments and an office building, and the bank held mortgages on the owner’s property as security. Id., at 452. The general contractor working on the project subcontracted with Wilson Floors Company. Id., at 451. The general contractor, however, fell behind in paying Wilson Floors, and Wilson Floors stopped working. Id., at 452. The bank, determining it would be more cost effective to complete the project rather than to foreclose on the mortgage, assured Wilson Floors that payments would be made so that Wilson Floors would continue working. Id., at 452, 453. When Wilson Floors completed the job, the bank refused to pay them. Id., at 453. However, the court held that the bank’s oral promise was enforceable. Id.

 

This court finds the test of Wilson Floors is applicable to the present case. As in Wilson Floors, Farm Credit loaned money to raise hogs and sell them when they were fed out. Farm Credit admitted it had a lien on Perry’s hogs, and that it expected to collect prior debts owed by Perry as well as earn additional money when the hogs were fed out and sold. Farm Credit made assurances to Sunrise Cooperative that payment would be made so that Sunrise Cooperative would continue to provide Perry with feed for the hogs on credit, then Farm Credit failed to pay.

 

The trial court found that Farm Credit’s leading purpose was to subserve its own pecuniary interest. As stated above, the trial court’s findings of fact are presumed to be correct unless against the manifest weight of evidence. Seasons Coal, supra, at 80.

 

…

Farm Credit further suggests that even if this were a contract of guarantee, Sunrise Cooperative needed to first seek payment from Perry, the primary obligor, before seeking payment from Farm Credit, the guarantor. However, the Wilson Floors court stated that when a promise of guarantee is made to further the promisor’s own pecuniary interest, the promise is enforceable regardless of whether the third party seeks payment from the primary obligor. Wilson Floors, supra, at 459. Since the court finds that Farm Credit made the guarantee with the object to subserve its own pecuniary interest, the promise is enforceable, and Sunrise Cooperative need not seek payment from Perry. Therefore, Farm Credit’s second assignment of error is not well-taken.

 

On consideration whereof, the court finds substantial justice has been done the party complaining, and judgment of the Norwalk Municipal Court is affirmed. It is ordered that appellant pay the court costs of this appeal.

GLASSER, P.J., and ABOOD and MELVIN L. RESNICK, JJ., concur.

END OF CASE

 

 

CASE #3 – Statute of Frauds – Specially Manufactured Goods

 

668 P.2d 1384, 45 A.L.R.4th 1113, 36 UCC Rep.Serv. 1516

Supreme Court of Colorado.

COLORADO CARPET INSTALLATION, INC., d/b/a Sierra Range Carpets, Inc., a Colorado corporation, Petitioner,
v.
Fred PALERMO and Zuma Palermo, Respondents.

No. 82SC168.

Sept. 12, 1983.

EN BANC.

QUINN, Justice, for the majority.

 

I

In July 1980 Colorado Carpet Installation, Inc., doing business as Sierra Range Carpets, Inc. (Colorado Carpet), commenced an action in the District Court of Adams County against Fred and Zuma Palermo for breach of contract. The claim was based on an alleged oral agreement in which the Palermos agreed to pay $4,775.75 to Colorado Carpet for the purchase and installation of carpeting, other flooring materials, and bathroom tile for the Palermo home in Thornton, Colorado. The Palermos in their answer denied the existence of a contract and affirmatively asserted that the statute of frauds, section 4-2-201(1), C.R.S.1973, rendered any such agreement unenforceable.

 

The controversy was tried to the court and arose as follows. Colorado Carpet is a Colorado corporation engaged in the business of selling and installing carpeting, tile and other flooring materials. In April 1980, Jack Duran, the president of Colorado Carpet, began negotiations with the Palermos for the sale and installation of carpeting, carpet padding, tile and vinyl floor covering in the downstairs and upstairs areas of their home. Colorado Carpet did not maintain an actual retail store or warehouse for these materials, but arranged to purchase them from other distributors. In the course of his negotiations with the Palermos, Duran delivered carpet samples to the Palermo home, measured the home, and assisted Mrs. Palermo in locating at local retail outlets the type and brand of flooring materials that she wanted. Further negotiations ensued, including a written proposal from Duran.

 

This written proposal, which referred to Colorado Carpet as “the seller” and to the Palermos as “the customer,” stated that Colorado Carpet offered for the Palermos’ acceptance the following items: a total of 195 square yards of Seduction and Amaretto carpeting, along with padding, at $15.95 per square yard, for a total price of $3110.45; 48 square yards of kitchen carpeting at $8.50 per square yard, for a total price of $399.50; ^FN1 55 square yards of deck carpeting at $7.50 per square yard, for a total price of $412.50; approximately 220 square feet of ceramic tile at $3.50 per square foot, for a total price of $770; and 9 square yards of vinyl floor covering at $9.50 per square yard, for a total price of $85.50. The proposal expressly included all labor. According to Duran, the source of Colorado Carpet’s profit from such a transaction would be the markup on the sale of the materials and not their installation, the latter being provided at cost. He estimated the labor cost at $2.00 per square yard for installing the upstairs, downstairs and kitchen carpeting, and $1.50 per square foot for installing the tile.

 

FN1. At $8.50 per square yard, the price of 48 square yards of kitchen carpeting should have been $408.

Although the Palermos never made a written acceptance of Colorado Carpet’s proposal, Duran testified that Mrs. Palermo orally accepted the proposal on or about April 25, 1980, shortly after he submitted it to her. Mrs. Palermo, in contrast, denied accepting the written proposal. It was her testimony that neither she nor her husband ever agreed to purchase any carpeting from Colorado Carpet and that she had contacted Duran only about a tiling job for the upstairs and downstairs bathrooms.

 

On April 30 and May 1, 1980, Colorado Carpet placed orders with Georgia and California manufacturers for the Seduction (downstairs) and the Amaretto (upstairs) carpeting. These orders called for both carpets to be cut into segments measuring 12 feet by 73 feet in order to permit effective installation in the upstairs and downstairs sections of the Palermo home. The orders were filled in due course, and the carpets were eventually delivered to a Denver warehouse. Colorado Carpet deferred ordering the carpet padding and kitchen carpet at this time because these were stock items and could be purchased immediately before the installation was to commence.

Colorado Carpet purchased and delivered the ceramic tile to the Palermo home for eventual installation in the upstairs and downstairs bathrooms. Mrs. Palermo, however, had a disagreement with Colorado Carpet’s tile man over some repair work in connection with the tile installation and arranged with some other contractor to supply and install other tile. Duran, on behalf of Colorado Carpet, attempted unsuccessfully to renegotiate with the Palermos but to no avail. Colorado Carpet removed its tile from the home, returned half of it to the supplier for a refund and sold the other half. It also shipped the Seduction carpeting back to the California manufacturer in exchange for some credit and was able to sell the Amaretto carpeting to a local purchaser.

 

The trial court found that Colorado Carpet’s proposal for the sale and installation of the carpeting and other materials had been orally accepted by the Palermos, thereby resulting in a contract, and determined that the contract was enforceable for two reasons: first, the agreement constituted a service contract for the performance of labor, rather than a contract for the sale of goods, and thus was not subject to the “writing” requirement of the statute of frauds section of the Uniform Commercial Code, section 4-2-201(1), C.R.S.1973; and second, even if the entire agreement was construed as a contract for the sale of goods, that part of the agreement relating to the purchase and installation of carpeting fell within the “specially manufactured goods” exception to the statute of frauds, section 4-2-201(3)(a), C.R.S.1973, and thus was enforceable on that basis. The court awarded damages to Colorado Carpet in the amount of $1,356.50, based upon lost profits, labor, and storage and shipping costs in connection with all the carpeting and padding ordered under the contract, not just the upstairs and downstairs carpeting. The court of appeals reversed the judgment, reasoning that although the agreement was a contract for the sale of goods, it did not satisfy the “specially manufactured goods” exception to the statute of frauds. We granted certiorari to consider whether the oral agreement in question constituted a contract for the sale of goods within the meaning of section 4-2-201(1) of the Uniform Commercial Code, and, if so, whether it qualified for the “specially manufactured goods” exception of section 4-2-201(3)(a).

 

 

II.

 

We first address the court of appeals’ determination that the contract was one for the sale of goods, rather than for the performance of labor or services. We conclude that the agreement in question involved a contract for the sale of goods as contemplated by section 4-2-201(1), C.R.S.1973.

 

[1] This section prohibits the enforcement of contracts “for the sale of goods for the price of $500 or more … unless there is some writing sufficient to indicate that a contract for sale has been made between the parties and signed by the party against whom enforcement is sought ….” By its terms, the statute applies only to contracts for the sale of goods, and not to contracts for labor or services. E.g., Robertson v. Ceola, 225 Ark. 703, 501 S.W.2d 764 (1973); George F. Mueller & Sons, Inc. v. Northern Illinois Gas Co., 12 Ill.App.3d 362, 299 N.E.2d 601 (1973); 3 R. Duesenberg & L. King, Bender’s Uniform Commercial Code Service § 2.02[4] at 2-24 (1982); cf. Samuelson v. Chutich, 187 Colo. 155, 529 P.2d 631 (1974) (statutory warranties imposed by Uniform Sales Act not applicable to service *1388 contracts). The Uniform Commercial Code defines “goods” to mean “all things (including specially manufactured goods) which are movable at the time of identification to the contract for sale other than the money in which the price is to be paid, investment securities … and things in action.” Section 4-2-105(1), C.R.S.1973. A “sale,” by statutory definition, “consists in the passing of title from the seller to the buyer for a price,” and a “contract for sale” includes a present sale of goods as well as a contract to sell goods at a future time. Id. 4-2-106(1).

 

[2] [3] In this case the subject of the contract involved “goods” because the carpeting and other materials were movable at the time that Colorado Carpet procured them for installation pursuant to the agreement. Since the agreement contemplated that title to the carpeting and other materials would pass to the Palermos, it constituted a “contract for sale.” The scope of the contract, however, included not only the sale of goods but also the performance of labor or service. Thus, we must determine whether such a mixed contract qualified as a contract for the sale of goods or, instead, constituted a contract for labor or service outside the scope of section 4-2-201(1), C.R.S.1973.

 

The performance of some labor or service frequently plays a role in sales transactions. “Goods,” however, are not the less “goods” merely because labor or service may be essential to their ultimate use by the purchaser. The mere furnishing of some labor or service, in our view, should not determine the ultimate character of a contract for purposes of section 4-2-201(1) of the Uniform Commercial Code. Rather, the controlling criterion should be the primary purpose of the contract-that is, whether the circumstances underlying the formation of the agreement and the performance reasonably expected of the parties demonstrates the primary purpose of the contract as the sale of goods or, in contrast, the sale of labor or service. We agree in this respect with the following statement in Bonebrake v. Cox, 499 F.2d 951, 960 (8th Cir.1974):

 

“The test for inclusion or exclusion is not whether [goods and services] are mixed, but, granting that they are mixed, whether their predominant factor, their thrust, their purpose, reasonably stated, is the rendition of service, with goods incidentally involved ( e.g., contract with artist for painting) or is a transaction of sale, with labor incidentally involved ( e.g., installation of a water heater in a bathroom).”

Accord, e.g., Care Display, Inc. v. Didde-Glaser, Inc., 225 Kan. 232, 589 P.2d 599 (1979); Burton v. Artery Co., Inc., 279 Md. 94, 367 A.2d 935 (1977); Meyers v. Henderson Construction Co., 147 N.J.Super. 77, 370 A.2d 547 (1977). See generally Annot., Applicability of U.C.C. Article 2 to Mixed Contracts for Sale of Goods and Services, 5 A.L.R. 4th 501 (1981).

This “primary purpose” test, we believe, is designed to promote one of the expressed statutory policies of the Uniform Commercial Code-“[t]o simplify, clarify, and modernize the law governing commercial transactions.” Section 4-1-102(2)(a), C.R.S.1973. Useful factors to consider in determining whether “goods” or “service” predominates include the following: the contractual language used by the parties, see, e.g., Triangle Underwriters, Inc. v. Honeywell, Inc., 604 F.2d 737 (2d Cir.1979); Bonebrake v. Cox, supra; Fifteenth Street Investment Co. v. People, 102 Colo. 571, 81 P.2d 764 (1938); whether the agreement involves one overall price that includes both goods and labor or, instead, calls for separate and discrete billings for goods on the one hand and labor on the other, see, e.g., Triangle Underwriters, Inc. v. Honeywell, Inc., supra; Aluminum Company of American v. Electro Flo Corp., 451 F.2d 1115 (10th Cir.1971); the ratio that the cost of goods bears to the overall contract price, see, e.g., Lincoln Pulp & Paper Co., Inc. v. Dravo Corp., 436 F.Supp. 262 (D.Me.1977); *1389 Van Sistine v. Tollard, 95 Wis.2d 678, 291 N.W.2d 636 (Wis.Ct.App.1980); and the nature and reasonableness of the purchaser’s contractual expectations of acquiring a property interest in goods (goods being defined as things that are movable at the time of identification to the contract, section 4-2-105(1), C.R.S.1973), see generally Marshall, The Applicability of the Uniform Commercial Code to Construction Contracts, 28 Emory L.J. 335, 365-76 (1979).

 

Considering the contract under these guidelines, we are satisfied that, as a matter of law, its primary purpose was the sale of goods and not the sale of labor or service.^FN4 The language in Colorado Carpet’s proposal referred to the parties as “seller” and “customer.” In addition, the agreement called for an overall contract price that included both the cost of goods and labor, and, as the trial evidence established, the charge for labor was slight in relation to the total contractual price.^FN5 Finally, the carpeting and other materials were movable when Colorado Carpet procured them for the purpose of selling them to the Palermos. The fact that these materials might later be installed in the Palermo home and assume the character of fixtures does not undermine the primary purpose of the contract as one for a sale of goods. See Saliba v. Reed Electric Co., 90 Colo. 287, 8 P.2d 1095 (1932). We therefore agree with the court of appeals that the agreement between Colorado Carpet and the Palermos constituted a contract for the sale of goods, with labor or service only incidentally involved, and thus within the statute of frauds provisions of the Uniform Commercial Code.

 

FN4. While some cases have concluded that certain installation agreements involving flooring materials are service contracts, we find them distinguishable from the instant case. See, e.g., Ranger Construction Co. v. Dixie Floor Co., Inc., 433 F.Supp. 442 (D.S.C.1977) (emphasizing that the agreement was a “construction contract” and not a contract for the sale of goods, one party being referred to as a “subcontractor” rather than a “materialman”); Dionne v. Columbus Mills, Inc., 311 So.2d 681 (Fla.Dist.Ct.App.1975) (installer provided all materials except the carpet itself which was furnished by the hiring party).

FN5. At the rate of $2.00 per square yard as the labor charge for installation of the upstairs, downstairs and kitchen carpets, and $1.50 per square foot for installation of the tile, the contract price of $4,777.75 represents a total labor charge of $926 ($596 for 298 square yards of carpeting and $330 for 220 square feet of tile). The record contains no evidence of a labor charge for installation of the vinyl floor covering.

 

III.

 

We turn now to the question whether the contract qualified for the “specially manufactured goods” exception to the statute of frauds. Section 4-2-201(3)(a), C.R.S.1973, states that a contract for the sale of goods which does not meet the “writing” requirements of section 4-2-201(1), C.R.S.1973, is nonetheless enforceable under the following circumstances:

 

“If the goods are to be specially manufactured for the buyer and are not suitable for sale to others in the ordinary course of the seller’s business and the seller, before notice of repudiation is received and under circumstances which reasonably indicate that the goods are for the buyer, has made either a substantial beginning of their manufacture or commitments for their procurement ….”

 

[4] The plain terms of section 4-2-201(3)(a), C.R.S.1973, make clear that four distinct criteria are necessary to satisfy the “specially manufactured goods” exception to the statute of frauds: (1) the goods must be specially made for the buyer; (2) the goods must be unsuitable for sale to others in the ordinary course of the seller’s business; (3) the seller must have substantially begun to have manufactured the goods or to have made a commitment for their procurement; and (4) the manufacture or commitment must have been commenced under circumstances reasonably indicating that the goods are for the buyer and prior to the seller’s receipt of notification of contractual repudiation. In this case there is no dispute that the third and fourth statutory criteria have been established. There is evidence *1390 demonstrating that Colorado Carpet, before receipt of the Palermos’ repudiation of the agreement and under circumstances reasonably indicating that the upstairs and downstairs carpeting was for them, placed special orders with carpet manufacturers for the procurement of these two pieces of carpeting. There being no controversy about these matters, we confine our consideration to the statutory provisions requiring the goods to be “specially manufactured for the buyer” and “not suitable for sale to others in the ordinary course of the seller’s business.”

 

A.

 

The “specially manufactured goods” exception is premised on notions of both evidentiary reliability and fairness. Certain marketing practices provide sufficiently reliable evidence on the matter of a contractual relationship as to dispense with the written requirements of the statute of frauds. It is a reasonable assumption, for example, that a seller will not make or procure goods not suitable for sale to others in the normal course of the seller’s business unless a purchaser has contracted with the seller to purchase these goods. See Impossible Electronics Techniques, Inc. v. Wackenhut Protective Systems, Inc., 669 F.2d 1026 (5th Cir.1982); 3 R. Duesenberg & L. King, supra, § 2.02[4] at 2-30. Denying enforcement of the contract under such circumstances can result in unfairness to the seller by encumbering him with unsalable goods. Impossible Electronics Techniques, Inc. v. Wackenhut Protective Systems, Inc., 669 F.2d at 1037. There is no unfairness in nonenforcement, however, when the goods are of a class customarily sold by the seller and are readily marketable to others in the ordinary course of the seller’s business.

 

[5] The term “specially manufactured” refers to the character of the goods as specially made for a particular buyer, and not to whether they were “specially made” in the usual course of the seller’s business. Id. Thus, although not articulated in the Uniform Commercial Code, “the unsalable quality of the goods presumably must be found in their characteristics of special manufacture and not in such tests as lost markets, passed seasons, or the objective inability of the particular seller to dispose of the goods for reasons unrelated to their nature as prescribed by the buyer.” 2 R. Duesenberg & L. King, supra, § 2.02[4] at 2-32. It has been held that “[i]f with slight alterations the goods could be sold, then they are not specially manufactured; if, however, essential changes are necessary to render the goods marketable by the seller to others, then the exception does apply.” Impossible Electronic Techniques, Inc. v. Wackenhut Protective Systems, Inc., 669 F.2d at 1037. It is in the light of these standards that the evidentiary state of the record must be considered.

 

B.

 

[6] There is no evidence from which one may reasonably conclude that the upstairs and downstairs carpets were “specially made” within the intendment of section 4-2-201(3)(a), C.R.S.1973. These styles of carpets had been observed by Mrs. Palermo in retail carpeting outlets in the Denver area, and both carpets were ordered by Colorado Carpet as stock items from carpet manufacturers in California and Georgia. No special dying, weaving or other treatment was required to fill the orders. The carpeting was not cut to any unusual shape nor even to the precise dimensions of the rooms where they were to be installed, but rather was cut in a rectangular shape with footage adequate for the entire project. In short, there is no showing of any unusual or special features of the carpeting that might attest to its character as specially made for a particular buyer. See, e.g., Maderas Tropicales v. Southern Crate & Veneer Co., 588 F.2d 971 (5th Cir.1979); Saliba v. Reed Electric Co., supra.

 

The record is similarly deficient in establishing that the upstairs and downstairs carpeting satisfied the other statutory requirement of section 4-2-201(3)(a), C.R.S.1973: “not suitable for sale to others in the ordinary course of the seller’s business.” The business of Colorado Carpet was to purchase carpeting from wholesalers or manufacturers and then to resell the carpeting to retail purchasers at a price inclusive of a labor charge for installation. As a dealer in carpeting and other flooring materials, Colorado Carpet continually dealt with goods of this nature and reasonably could be expected to find a buyer for them. There certainly was nothing in the character of the upstairs and downstairs carpeting that required basic or essential changes to be made in order to render them marketable to other purchasers. The dimensions of both pieces of carpeting were such that each could be easily recut, if necessary, to accommodate retail purchasers who might be looking for these particular brands in different dimensions. Indeed, the record shows that Colorado Carpet received credit from the manufacturer upon its return of the upstairs carpet and had little difficulty in selling the downstairs carpet to a local purchaser. This state of the record is manifestly insufficient to support the trial court’s determination that the upstairs and downstairs carpeting qualified for the “specially manufactured goods” exception to the statute of frauds.

 

We also conclude that there was no evidence to support the trial court’s inclusion of the carpet padding and the kitchen carpet in the “specially manufactured goods” category. The record shows that these materials were stock items, and, far from being cut or processed to conform to the needs of the customer, they were never ordered or obtained by Colorado Carpet in connection with the Palermo agreement.

It was the burden of Colorado Carpet to present sufficient evidence permitting the fact finder to reasonably conclude by a preponderance of the evidence that the goods included in its sales agreement with the Palermos satisfied the statutory criteria for the “specially manufactured goods” exception to the statute of frauds. It failed to carry its burden of proof on this issue, and, as the court of appeals correctly ruled, the trial court erred in enforcing the contract.

 

The judgment of the court of appeals is affirmed.

Colo.,1983.
Colorado Carpet Installation, Inc. v. Palermo
668 P.2d 1384, 45 A.L.R.4th 1113, 36 UCC Rep.Serv. 1516

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QUESTIONS

Case #1 – Lucy v. Zehmer

1. The Defendant, Zehmer, claimed that he did not enter into a contract because he and Lucy were not serious during their discussions. The Court pointed out the following facts in finding that Zehmer had formed an agreement:

The appearance of the contract, the fact that it was under discussion for forty minutes or more before it was signed; Lucy’s objection to the first draft because it was written in the singular, and he wanted Mrs. Zehmer to sign it also; the rewriting to meet that objection and the signing by Mrs. Zehmer; the discussion of what was to be included in the sale, the provision for the examination of the title, the completeness of the instrument that was executed, the taking possession of it by Lucy with no request or suggestion by either of the defendants that he give it back.

3

 

2. According to the Court in its analysis of whether the parties had the intent to form an agreement, did it matter what Zehmer actually believed he was doing? Why or why not?  What is important in a court’s determination of the parties’ intent?

 

3. Why didn’t the Court find that Zehmer lacked capacity (due to intoxication) to form a contract?

 

 

Case #2 – Sunrise Cooperative v. Perry, et al.

 

4. In this case, Farm Credit is arguing that the Ohio Statute of Frauds prevents their promise to guarantee Perry’s debt from being enforced. Explain their argument and what would be required to make such a promise enforceable.

 

5. The Ohio court recognized an exception to the Statute of Frauds. When and under what circumstances, does this exception apply?

 

6. The court found Farm Credit’s promise to be an enforceable guarantee…but shouldn’t Sunrise cooperative have to attempt to collect from Perry first? Why or why not?

 

 

Case #3 – Colorado Carpet v. Palermo

7. According to the Court, was the contract in question in Colorado Carpet, a contract governed by the UCC, or the common law? How did they determine which law applied?  To what evidence did the court refer in making this determination?

 

8. In this case, did it matter whether the UCC applied? Why or why not?

 

9. What are “specially manufactured goods” and how are they relevant to this case? What criteria are necessary to establish whether goods are “specially manufactured”?

 

10. The Colorado Supreme Court determined that the carpets in question were not “specially manufactured goods”, why? How could you change the facts of the case to make the specially manufactured goods exception apply?