E.C. Styberg Engineering Co. v. Eaton Corp.

Brief Fact Summary. Where parties’ communications evidence ongoing negotiations with no agreement reached as to key terms, such as price, quantity and monthly production volume, the Uniform Commercial Code (U.C.C) states that such a contract for the sale of goods have not been formed.

Facts.Eaton Corp. (D), an automobile parts producer purchased different components from E.C. Styberg Engineering Co. (Styberg) (P), a manufacturer of components. Within a period of two years, Eaton (D) made use of I-brake, a component which Styberg (P) had produced in certain transmission it produced. Initially, I-brake prototype units were made available to Eaton (D) who later commenced purchased of limited quantities of I-brake unit for it to test how acceptable the product was in the marketplace. Thereafter, Eaton (D) came to a decision to go into the full production of I-brakes and both parties began negotiating an agreement in which Styberg (P) was to produce I-brakes in commercial quantities for Eaton (D). In order to embark on this capital intensive project, Styberg (P) needed to get a minimum unit commitment from Eaton (D) which resulted in both parties making frantic efforts through e-mails, phone calls, letters and meetings in order to reach an agreement.
A proposal for 60,000 units was sent by Styberg (P) to Eaton (D) on the 8th of July, 1999 and enumerated in the proposal; Styberg (P) stated that the first batch of 13,000 units would be sold at $544.88 with the initial price of the units being $595 but was reduced due to the perfection of Styberg’s (P) manufacturing process. Also, in other to make sourcing of material easier for the customized production of the I-brakes, Styberg (P) requested for $343,000 assistance as “tooling money” and a production schedule was set forth. On the 29th of July, 1999, Eaton (D) communicated its willingness to make $293,000 available for tooling and to purchase 13,000 units at $544.88. Styberg (P) thanked Eaton for its July 29 commitment but also emphasized it needed a minimum commitment of between 25,000 and 30,000 units in order to cover its costs for embarking on the project. Thereafter, employees of both parties participated in a conference call on the 1st of September 1999, at which Styberg (P) reiterated the insufficiency of the 13,000 commitment made by Eaton (D) which could not cover its costs and emphasized it needed a 30,000 commitment.
This call, noted by Eaton (D) revealed that “Styberg will come back w/capacity + quotes for 13k flat out”. A production schedule was hereafter sent by Styberg (P) on the 9th of September 1999, containing a detailed break-down of Styberg’s (P) anticipated monthly production capacity for 13,000 units of I-brakes as well as a quote for the initial unit price of $595 including a $31/unit until a certain part became available. The acceptance of this proposal was alleged to have been confirmed by Eaton on the 27th of September 1999, but evidence to prove that this was communicated could not be found. There was no prove to show that Styberg (P) sent a purchase order for 13,000 I-brakes nor did Eaton (D) issue a specific purchase order for 13,000units. However, Eaton (D) did notify Styberg (P) in April 2000 that it expected 240 units of I-brakes to be delivered, which Styberg (P) reciprocated by sending the specified units under an existing purchase order and payment was effected by Eaton (D). A subsequent request for another 240 units of I-brakes was made by Eaton (D) on the 8th of May 2000 to be delivered the following month. But this did not see the light of the day because it was cancelled three days later by Eaton (D), who neither placed another order nor paid for any I-brakes after May 11, 2000. This action of made Styberg (P) to sue Eaton (D) for breaching their contract and sought damages to the tune of $3.4 million. Judgment was awarded in favor of Eaton (D) by the district court on the ground that no contract had been formed for the purchase of 13,000 units of I-brakes. The court held that the e-mail, telephone and letter exchanges were evidence of ongoing negotiations in which the parties could not come to terms on key issues such as the quantity, price and monthly production volume. A review to this judgment was later granted by the court of appeals.

Issue. Where parties’ communications evidence ongoing negotiations with no agreement reached as to key terms, such as price, quantity and monthly production volume, can it be said that a contract for the sale of goods is formed as stipulated under the Uniform Commercial Code?

Held. (Flaum, J) No. Where parties’ communications evidence ongoing negotiations with no agreement reached as to key terms, such as price, quantity and monthly production volume, the Uniform Commercial Code (U.C.C) states that such a contract for the sale of goods have not been formed.  The ground upon which the district court gave judgment in favor of Eaton (D) and its legal conclusions was challenged by Styberg (P). But the ruling of the district court clearly did not run foul to the provisions of the relevant case laws and evidence that was available.  A contract for the sale of goods may actually be made in any manner sufficient to show agreement, including conduct by both parties which recognizes the existence of such contract as stipulated under U.C.C. S 2-204.
This represents a liberal view on what is needed to create a contract for the sale of goods. However, essential terms must be agreed upon for a contract for a sale of goods to be formed notwithstanding this liberal approach. In the view of Styberg (P), an agreement was reached when Eaton (D) agreed to purchase13, 000 units of I-brakes at an average price of $544.88. To buttress his point, Styberg (P) sited three key issues for the alleged contract: (1) the July 29, 1999 letter of Eaton (D); (2) September 9, 1999 Styberg’s schedule (3) request Eaton (D) made for I-brakes in 2000. He further asserted that Eaton’s (D) July 29, 1999 letter was either  an offer to buy I-brakes that Styberg’s (P) accepted on the 9th of August, 1999 by saying “thank you” or an acceptance of Styberg’s (P) offer made on the 8th of July. Styberg (P) also alleged that negotiation continued for larger orders and other open terms after they had established the contract price and the quantity terms.
But in the view of Eaton (D), the July 29 letter was part of the process of the continuous negotiations in which both parties could not come to terms on key terms in which Styberg (P) wanted a minimum of 22,000 units in order to cover its expenditure on the production of the I-brakes. Eaton (D) was not willing to be bound by such commitment. There is a provision that a price quotation is considered an invitation for an offer in case law, rather than an offer to form a binding contract. Hence, the letter Styberg (P) sent on the 8th of July was an invitation for an offer and if this was not the case, then the letter Eaton (D) sent on the 29th of July could not have constituted an acceptance of that offer. Thus, it can be said that the district court was right to some extent in finding that Styberg (P) rejected the offer and continue to push for a higher minimum-unit commitment, assuming that the July 29 was actually an offer that was responding to the price quotation. The conference call both parties had on the 1st of September was another avenue in which Styberg (P) indicated that the 13,000 unit commitment was not enough. The district court ruling was not totally justified in finding that Eaton (D) did not communicate on the 27th of September that it had accepted the September 9 proposal schedule of Styberg (P), as conflicting evidence and the district court’s judgement of witness veracity supported such a finding. The court also did not totally err by rejecting Styberg’s (P) assertion that the conduct of the parties manifested the existence of a contract. The total amount of 240 units sold to Eaton (D) at the specified price, was grossly inadequate to prove an agreement for the sale of 13,000 units. Situations where there has been repeated and ongoing conduct which manifests an agreement or where the parties had an established course of dealing to which they adhered have been the basis where courts the courts find contracts on the basis of conduct.  In this particular case, Eaton’s purchase cannot be said to repetitive since of the two requests made for 240 units of I-brakes, one request was cancelled. Therefore, there was no ongoing dealing to establish the fact a contract existed. The court of appeal upheld the district court’s ruling.

Discussion. this case portrays a typical scenario of ongoing negotiations where the formation of contract is at issue. The outcome of cases of this nature as it pertains to this particular case is not actually clear-cut. The reason why the court of appeals affirmed the ruling of the district court was because the choice of the district court between two reasonable interpretations of that evidence was not clearly erroneous. However, to be fair to Styberg (P), Styberg (P) held a strong reason in believing that Eaton (D) had agreed to the minimum 13,000 unit purchase agreement.