In the

United States Court of Appeals

For the Seventh Circuit ____________

No. 02-1486

CLOUD CORPORATION,

Plaintiff-Appellant,

v.

HASBRO, INC.,

Defendant-Appellee.

____________

Appeal from the United States District Court

for the Northern District of Illinois, Eastern Division.

No. 97 C 3457—Rebecca R. Pallmeyer, Judge.

____________

ARGUED NOVEMBER 8, 2002—DECIDED DECEMBER 26, 2002

____________

Before POSNER, ROVNER, and WILLIAMS, Circuit Judges.

POSNER, Circuit Judge. “Wonder World Aquarium” is a

toy that Hasbro, Inc., the well-known designer and marketer of toys, sold for a brief period in the mid-1990s. The

toy comes as a package that contains (we simplify slightly)

the aquarium itself, some plastic fish, and, depending

on the size of the aquarium (for this varies), large or

small packets of a powder that when dissolved in distilled water forms a transparent gelatinous filling for the

aquarium. The gel simulates water, and the plastic fish

can be inserted into it with tweezers to create the illusion

of a real fish tank with living, though curiously inert, fish.
2 No. 02-1486

“Pretend blood,” included in some of the packages, can be

added for even greater verisimilitude. The consumer can

choose among versions of Wonder World Aquarium that

range from “My Pretty Mermaid” to “Piranha Attack”—the

latter a scenario in which the pretend blood is doubtless a

mandatory rather than optional ingredient.

Hasbro contracted out the manufacture of this remarkable product. Southern Clay Products Company was to

sell and ship Laponite HB, a patented synthetic clay, to

Cloud Corporation, which was to mix the Laponite with

a preservative according to a formula supplied by Hasbro,

pack the mixture in the packets that we mentioned, and

ship them to affiliates of Hasbro in East Asia. The affiliates

would prepare and package the final product—that is,

the aquarium, the packet of gel, and the plastic fish

(and “pretend blood”)—and ship it back to Hasbro in

the United States for distribution to retailers.

The project was in operation by the middle of 1995.

Hasbro would from time to time issue purchase orders

for a specified number of large and small packets to

Cloud, which would in turn order the quantity of Laponite

from Southern Clay Products that it needed in order to

manufacture the specified number of packets. The required quantity of Laponite depended not only on the

number of large and small packets ordered by Hasbro

but also on the formula that Hasbro supplied to Cloud

specifying the proportion of Laponite in each packet. The

formula was changed frequently. The less Laponite per

packet specified in the formula, the more packets could

be manufactured for a given quantity of the ingredient.

Early in 1997 Hasbro discovered that its East Asian

affiliates, the assemblers of the final package, had more

than enough powder on hand to supply Hasbro’s needs,
No. 02-1486 3

which were diminishing, no doubt because Wonder World

Aquarium was losing market appeal. Mistakenly believing

that Hasbro’s market was expanding rather than contracting, Cloud had manufactured a great many packets of

powder in advance of receiving formal purchase orders

for them from Hasbro. Hasbro refused to accept delivery

of these packets or to pay for them. Contending that this

refusal was a breach of contract, Cloud sued Hasbro in federal district court in Chicago, basing jurisdiction on diversity of citizenship and seeking more than $600,000 in damages based mainly on the price of the packets that it had

manufactured and not delivered to Hasbro and now was

stuck with—for the packets, being usable only in Wonder

World Aquaria, had no resale value. After a bench trial,

the district judge ruled in favor of Hasbro.

 Cloud does not quarrel with the district judge’s findings

of fact, but only with her legal conclusions. The governing

law is the Uniform Commercial Code as interpreted in

Illinois.

The original understanding between Hasbro and Cloud

regarding Cloud’s role in the Wonder World Aquarium

project either was not a contract or was not broken—

probably the former, as the parties had not agreed on the

price, quantity, delivery dates, or composition of the

packets. These essential terms were set forth in the purchase orders that Hasbro sent Cloud, confirming discussions between employees of Cloud and Kathy Esposito,

Hasbro’s employee in charge of purchasing inputs for the

company’s foreign affiliates. Upon receipt of a purchase

order, Cloud would send Hasbro an order acknowledgment and would order from Southern Clay Products the

quantity of Laponite required to fill the purchase order.

In October 1995, which is to say a few months after the

launch of Wonder World Aquarium, Hasbro sent a letter
4 No. 02-1486

to all its suppliers, including Cloud, that contained a

“terms and conditions” form to govern future purchase

orders. One of the terms was that a supplier could not

deviate from a purchase order without Hasbro’s written

consent. As requested, Cloud signed the form and returned it to Hasbro. Nevertheless, to make assurance

doubly sure, every time Hasbro sent a purchase order to

Cloud it would include an acknowledgment form for

Cloud to sign that contained the same terms and conditions that were in the October letter. Cloud did not sign any

of these acknowledgment forms. The order acknowledgments that it sent Hasbro in response to Hasbro’s purchase orders contained on the back of each acknowledgment Cloud’s own set of terms and conditions—and the

provision in Hasbro’s letter and forms requiring Hasbro’s

written consent to any modification of the purchase order was not among them. There was a space for Hasbro

to sign Cloud’s acknowledgment form but it never did

so. Neither party complained about the other’s failure

to sign the tendered forms.

Hasbro placed its last purchase orders with Cloud in

February and April 1996. The orders for February specified 2.3 million small packets and 3.2 million large

ones. For April the numbers were 1.5 and 1.4 million.

Hasbro notified Cloud of the formula that it was to use

in making the packets and Cloud ordered Laponite from

Southern Clay Products accordingly.

Now as it happened Southern Clay Products was having trouble delivering the Laponite in time to enable

Cloud to meet its own delivery schedule. In June 1996,

amidst complaints from Hasbro’s East Asian affiliates

that they were running out of powder, and concerned

about the lag in Laponite deliveries, Hasbro notified Cloud

that it was to use a new formula in manufacturing the

powder, a formula that required so much less Laponite
No. 02-1486 5

that the same quantity would enable Cloud to produce

a third again as many packets. Cloud determined that by

using the new formula it could produce from the quantity

of Laponite that it had on hand 4.5 million small and 5

million large packets, compared to the 3.8 and 3.9 million called for by the February and April orders but not

yet delivered. Cloud had delivered 700,000 of the large

packets ordered in February and April; that is why it had

7.7 million packets still to deliver under those orders

rather than 8.4 million, the total number of packets ordered (2.3 + 3.2 + 1.5 +1.4 = 8.4).

Although it had received no additional purchase orders,

Cloud sent Hasbro an order acknowledgment for 4.5 million small and 5 million large packets with a delivery

date similar to that for the April order, but at a lower price

per packet, reflecting the smaller quantity of Laponite,

the expensive ingredient in the powder, in each packet.

Cloud’s acknowledgment was sent in June. Hasbro did

not respond to it—at least not explicitly. It did receive it,

however. And Kathy Esposito continued having e-mail

exchanges and phone conversations with Cloud. These

focused on delivery dates and, importantly, on the quantities to be delivered on those dates. Importantly because

some very large numbers—much larger than the February and April numbers, numbers consistent however

with Cloud’s order acknowledgment sent to Hasbro

in June—appear in these and other e-mails written by

her. In two of the e-mails the quantity Cloud is to ship

is described as “more or less depending on the formula,”

consistent with Cloud’s understanding that if the formula reduced the amount of Laponite per packet Cloud

should increase the number of packets it made rather

than return unused Laponite to Southern Clay Products.

A notation made in August by another member of Hasbro’s
6 No. 02-1486

purchasing department, Maryann Ricci—“Cloud O/S;

4,000,000 sm; 3.5 million lg.”—indicates her belief that

Cloud had outstanding (“O/S”) purchase orders for 4

million small and 3.5 million large packets. These numbers were far in excess of the undelivered portions of

the February and April orders; and since all the earlier

orders had, so far as we can determine, already been

filled and so were no longer outstanding, she must

have been referring to the numbers in Cloud’s June order acknowledgment.

The district judge, despite ruling for Hasbro, found

that indeed “Hasbro intended to exceed the quantities

of . . . packages it had ordered from Cloud in February and

April of 1996,” that “Hasbro was more concerned with

prompt product than with the specific terms of its order[s],”

and, most important, that “given Hasbro’s repeated message

that it could not get enough Laponite HB to fill its needs

in a timely fashion, Cloud’s decision to produce as many

packets as possible appeared to be a safe course of action.

Cloud was trying to keep pace with Hasbro’s Laponite

HB needs, a task made virtually impossible by the length

of time it took Southern Clay to fill Cloud’s Laponite

HB orders.” The judge even suggested that given Hasbro’s

desperation, Cloud could have persuaded Hasbro to execute additional purchase orders at prices equal to those

in the February and April orders. Instead, rather than trying to take advantage of Hasbro’s fix, Cloud reduced its

price to reflect its lower cost. A curious consequence of

the reduction, unremarked by the parties, is that even

if Cloud has no contract remedy, it has (unless time barred)

a remedy in quantum meruit for the benefit it conferred

on Hasbro by voluntarily reducing the price specified in

the February and April purchase orders.

When some months later Hasbro pulled the plug on

Wonder World Aquarium, Cloud had not begun delivering
No. 02-1486 7

any of the additional quantity that it had manufactured

over and above the quantities called for in the February

and April purchase orders.

Was Cloud commercially unreasonable in producing

the additional quantity without a purchase order? If not,

should the Uniform Commercial Code, which was intended to conform sales law to the customs and usages

of business people, UCC §§ 1-102(2)(b), 1-105 comment 3;

In re Merritt Dredging Co., 839 F.2d 203, 206 (4th Cir. 1988);

Kerry Lynn Macintosh, “Liberty, Trade, and the Uniform

Commercial Code: When Should Default Rules Be Based

on Business Practices?” 38 Wm. & Mary L. Rev. 1465, 1488-

91 (1997), nevertheless condemn Cloud, as the district

judge believed, for failing to request written purchase

orders for the additional quantity that the change in formula enabled it to manufacture? Or was Hasbro contractually obligated to pay for that additional quantity?

The answer to these questions depends on whether

there was a valid modification of the quantity specifications in the February and April purchase orders (obviously Hasbro cannot complain about the price modification!).

The October letter provided that purchase orders could

not be modified without Hasbro’s written consent. Cloud

signed the letter and so became bound by it, consideration being furnished by Hasbro’s continuing to do business with Cloud. Hasbro’s order acknowledgments accompanying its February and April purchase orders also

provided that the orders could not be modified without Hasbro’s written consent.

Cloud did not sign Hasbro’s acknowledgments and its

own acknowledgments omitted the provision requiring

that any modification have Hasbro’s written consent. But

these facts have no significance. In the case of discrepant

order and acceptance forms, if the acceptance merely adds
8 No. 02-1486

a term, that term binds the offeror, UCC § 2-207(1); this

modification of the common law’s “mirror image” rule

minimizes transaction costs by eliminating a negotiation

over the additional term unless the offeror is unwilling

to accede to the offeree’s desire for it. But what if the term

added by the acceptance contradicts a term in the offer?

Then it doesn’t become a part of the contract—that much

is clear. § 2-207(2)(b). But is there a contract, and if so

what are its terms? The UCC doesn’t say, but the majority

rule, and the rule in Illinois, is that the inconsistent

terms cancel each other out and the court fills the resulting void with a term of its own devising. William B. Davenport, Daniel R. Murray & Donald R. Cassling, Uniform

Commercial Code with Illinois Code Comments § 5/2-207,

Illinois Code Comment 11, pp. 126-27 (Illinois Practice

Series, vol. 2a, 1997).

In this case, however, there was neither a supplemental

nor an inconsistent term in the acceptance; there was no

term concerning modification, and in such a situation

Hasbro’s term is enforceable. Earl M. Jorgensen Co. v. Mark

Construction, Inc., 540 P.2d 978, 982-83 (Hawaii 1975);

1 James J. White & Robert S. Summers, Uniform Commercial Code 15-16 (4th ed. 1995). It is a case of different but

not inconsistent terms, in which event the acceptance is

effective to make a contract. UCC § 2-207(1). The offeree’s

silence is not interpreted as rejection in this situation

because transaction costs would again be higher if the

offeror had to quiz the offeree on whether every term in

the offer not mentioned in the acceptance was acceptable

to the offeree. Cloud, the offeree, knew that Hasbro wanted

the modification provision and if this was unacceptable

it should have said so.

For unexpressed reasons the district judge did not

focus on the contractual provisions requiring that any
No. 02-1486 9

modification of a purchase order be in writing. She considered only whether the UCC’s statute of frauds required

this, and ruled that it did. The quantity term in a contract

for the sale of goods for more than $500 must be memorialized in a writing signed by the party sought to be held

to that term, UCC § 2-201(1), and so, therefore, must a

modification of that term. UCC § 2-209(3). However—and

here we part company with the district judge—Kathy

Esposito’s e-mails, plus the notation that we quoted earlier signed by Maryann Ricci, another member of Hasbro’s

purchasing department, satisfy the statutory requirement.

The UCC does not require that the contract itself be in

writing, only that there be adequate documentary evidence

of its existence and essential terms, which there was here.

Architectural Metal Systems, Inc. v. Consolidated Systems,

Inc., 58 F.3d 1227, 1229-31 (7th Cir. 1995); Monetti, S.P.A.

v. Anchor Hocking Corp., 931 F.2d 1178, 1185 (7th Cir. 1991);

Axelson, Inc. v. McEvoy-Willis, 7 F.3d 1230, 1233 n. 6 (5th

Cir. 1993).

But what shall we make of the fact that Kathy Esposito’s

e-mails contained no signature? The Electronic Signatures

in Global and National Commerce Act, 15 U.S.C. § 7001,

provides that in all transactions in or affecting interstate

or foreign commerce (the transactions between Cloud and

Hasbro were in interstate commerce and affected both

interstate and foreign commerce), a contract or other record relating to the transaction shall not be denied legal

effect merely because it is in electronic form. That would

be conclusive in this case—had the e-mails been sent

after the Act took effect in 2000. But they were sent in

1996. The Act does not purport to be applicable to transactions that occurred before its effective date, and, not

being procedural, compare Landgraf v. USI Film Products,

511 U.S. 244, 275 (1994), it is presumed not to apply retroactively. Johnson v. Ventra Group, Inc., 191 F.3d 732, 745 (6th
10 No. 02-1486

Cir. 1999). But like the court in Shattuck v. Klotzbach, No.

011109A, 2001 WL 1839720, at *2-3 (Mass. Super. Dec. 11,

2001), we conclude without having to rely on the federal

Act that the sender’s name on an e-mail satisfies the signature requirement of the statute of frauds. Toghiyany v.

AmeriGas Propane, Inc., 309 F.3d 1088, 1091 (8th Cir. 2002),

another e-mail case that does not cite the electronic signatures act (maybe because, as in this case, the contract

predated the Act), tugs the other way. But it is unclear

whether the court thought the absence of a signature fatal

or thought that it was that absence combined with the

absence of an essential term—the duration of the contract—that triggered the statute of frauds.

Neither the common law nor the UCC requires a handwritten signature, Just Pants v. Wagner, 617 N.E.2d 246, 251

(Ill. App. 1993); Monetti, S.P.A. v. Anchor Hocking Corp.,

supra, 931 F.2d at 1182; Hillstrom v. Gosnay, 614 P.2d 466, 469

(Mont. 1980); Davenport, Murray & Cassling, supra, § 5/1-

201, Illinois Code Comment 42, pp. 53-54; cf. Restatement

(Second) of Contracts § 134, comment a (1981), even though

such a signature is better evidence of identity than a typed

one. It is not customary, though it is possible, to include an

electronic copy of a handwritten signature in an e-mail, and

therefore its absence does not create a suspicion of forgery or other fraud—and anyway an electronic copy of a

signature could be a forgery.

The purpose of the statute of frauds is to prevent a

contracting party from creating a triable issue concerning

the terms of the contract—or for that matter concerning

whether a contract even exists—on the basis of his say-so

alone. That purpose does not require a handwritten signature, especially in a case such as this in which there is

other evidence, and not merely say-so evidence, of the

existence of the contract (more precisely, the contract
No. 02-1486 11

modification) besides the writings. The fact that Cloud

produced the additional quantity is pretty powerful evidence of a contract, Consolidation Services, Inc. v. KeyBank

National Ass’n, 185 F.3d 817, 821 (7th Cir. 1999); Monetti,

S.P.A. v. Anchor Hocking Corp., supra, 931 F.2d at 1183, as

it would have been taking a terrible risk in doing so had

it thought it would have no right to be paid if Hasbro

refused to accept delivery, but would instead be stuck

with a huge quantity of a product that had no salvage

value. Actually, in the case of a contract for goods specially

manufactured by the buyer, partial performance by the

seller takes the contract outside the statute of frauds,

without more. UCC § 2-201(3)(a). This may well be such

a case; but we need not decide.

The background to the modification—the fact that the

parties had dealt informally with each other (as shown by

their disregard of the form contracts), and above all that

Hasbro plainly wanted more product and wanted it fast—

is further evidence that had Cloud asked for a written

purchase order in June 1996 for the additional quantity,

Hasbro would have given it, especially since Cloud was

offering a lower price.

There is more: “between merchants [a term that embraces ‘any transaction with respect to which both parties

are chargeable with the knowledge or skill of merchants,’

UCC § 2-104(3)] if within a reasonable time a writing

in confirmation of the contract and sufficient against

the sender is received and the party receiving it has reason to know its contents, it satisfies the requirements of

subsection 1 [the statute of frauds] . . . unless written notice

of objection to its contents is given within 10 days after it

is received.” UCC § 2-201(2). Cloud sent an order acknowledgment, reciting the increased quantity, shortly after the

oral modification, and Hasbro did not object within ten
12 No. 02-1486

days. Campbell v. Yokel, 313 N.E.2d 628, 628-31 (Ill. App.

1974); Klockner, Inc. v. Federal Wire Mill Corp., 663 F.2d 1370,

1374, 1376 (7th Cir. 1981); Apex Oil Co. v. Vanguard Oil &

Service Co., 760 F.2d 417, 423 (2d Cir. 1985).

So Hasbro’s statute of frauds defense fails on a number

of independent grounds. But what of the contractual requirement of the buyer’s consent in writing to any modification? Could that stiffen the requirements of the UCC’s

statute of frauds? Parties are free to incorporate stronger

conditions for contractual modification than the UCC

provides: “A signed agreement which excludes modification

or rescission except by a signed writing cannot be otherwise modified or rescinded, but except as between merchants such a requirement on a form supplied by the merchant must be separately signed by the other party.” UCC

§ 2-209(2); see Martinsville Nylon Employees Council Corp.

v. NLRB, 969 F.2d 1263, 1267 (D.C. Cir. 1992); Wisconsin

Knife Works v. National Metal Crafters, 781 F.2d 1280, 1292

(7th Cir. 1986) (dissenting opinion); Frank A. Rothermel,

Comment, “Role of Course of Performance and Confirmatory Memoranda in Determining the Scope, Operation

and Effect of ‘No Oral Modification’ Clauses,” 48 U. Pitt. L.

Rev. 1239, 1251-52 (1987). The UCC’s statute of frauds

requires only quantity terms to be in writing. The contractual requirement that the buyer’s consent be in writing

was not limited to quantity terms, but this makes no difference, since those are the terms in dispute.

Could the contractual statute of frauds (to speak oxymoronically) be broader in a different sense? Specifically,

could “consent in writing” require an explicit written

statement of consent, missing here, rather than merely an

inference of consent from a writing or series of writings?

Maybe, but Hasbro does not argue that the contractual

statute of frauds in this case has any different scope from
No. 02-1486 13

the statutory, though it seems highly unlikely that a no-oralmodification clause would be subject to the exception in

section 2-201(2) (quoted earlier) to the statute of frauds.

Such a clause is added to a contract when the parties

want to draft their own statute of frauds, as they are permitted to do; and there is no reason to suppose that they

would want to adopt wholesale the limitations that the

UCC imposes on its own statute of frauds. If they wanted

those limitations they wouldn’t need their own, customized clause.

So we may set section 2-201(2) to one side. That leaves

intact, however, Cloud’s argument, which we have accepted, that there was adequate evidence of written consent to the modification. And it leaves intact still another

alternative argument by Cloud: “an attempt at modification” that does not satisfy the statute of frauds nevertheless “can operate as a waiver.” § 2-209(4). The word “can”

is key. To prevent the “attempt” provision from eviscerating the statute of frauds, the courts require that the attempting modifier, Cloud in this case, must show either

that it reasonably relied on the other party’s having waived

the requirement of a writing, Wisconsin Knife Works v.

National Metal Crafters, supra, 781 F.2d at 1286-87 (7th Cir.

1986); American Suzuki Motor Corp. v. Bill Kummer, Inc.,

65 F.3d 1381, 1386 (7th Cir. 1995); contra, BMC Industries,

Inc. v. Barth Industries, Inc., 160 F.3d 1322, 1333 (11th Cir.

1998), or that the waiver was clear and unequivocal. In

re Nitz, 739 N.E.2d 93, 103 (Ill. App. 2000); Lavelle v.

Dominick’s Finer Foods, Inc., 592 N.E.2d 287, 291-92 (Ill. App.

1992); McElroy v. B.F. Goodrich Co., 73 F.3d 722, 724 (7th

Cir. 1996); Bank v. Truck Ins. Exchange, 51 F.3d 736, 739 (7th

Cir. 1995). This exception to the statute of frauds applies

equally to the “buyer’s written consent” provision of the

parties’ contracts, UCC § 2-209(4); Wisconsin Knife Works

v. National Metal Crafters, supra, 781 F.2d at 1284-87, be-
14 No. 02-1486

cause waiver is a general doctrine of contract law rather

than an appendage to the statute of frauds.

The district judge erred by requiring that Cloud show

both reasonable reliance and that the waiver was clear and

unequivocal. There was no clear and unequivocal waiver,

but there was reliance. The judge found reliance. She

found that Cloud had been acting in good faith in producing the additional quantity of packets because it reasonably believed that Hasbro wanted the additional quantity.

But she concluded that Cloud had been unreasonable

in relying on its reasonable belief because it could so

easily have insisted on a written purchase order modifying

the quantity terms in the February and April orders. Reasonableness, however, is relative to commercial practices

and understandings rather than to the desire of judges and

lawyers, reflecting their training and professional culture,

to see a deal memorialized in a form that leaves no room

for misunderstanding the legal consequences. The employees of Hasbro and Cloud who were responsible for

the administration of the parties’ contractual undertaking

were not lawyers. Doubtless because of this, the parties

had, as we have noted, been casual about documentation.

Cloud had treated the purchase orders as sources of information on how much Hasbro wanted when and according to what formula, but had paid no attention to

them as contracts containing terms and conditions that

might bind it. Hasbro had treated Cloud’s purchase-order

acknowledgments with similar insouciance. The parties

had a smooth working relationship the details of which

were worked out in informal communications. With time

of the essence and the parties on good terms and therefore careless or impatient with formalities, Cloud was

reasonable in believing that if Hasbro didn’t want to be

committed to buying the additional quantity that it plainly

wanted in the summer and autumn of 1996, it would so
No. 02-1486 15

advise Cloud rather than leading Cloud down the primrose path. A practice, under the rubric of “course of dealing,” can be evidence of what a contract requires, see, e.g.,

UCC § 1-205; Restatement (Second) of Contracts § 223 (1981);

Frank Novak & Sons, Inc. v. Sommer & Maca Industries, Inc.,

538 N.E.2d 700, 703-05 (Ill. App. 1989)—can even, under

the rubric of “contract implied in fact,” give rise to binding contractual obligations though no words are spoken.

Brines v. XTRA Corp., 304 F.3d 699, 703 (7th Cir. 2002). 

Cloud could have been more careful. But a failure to insist

that every i be dotted and t crossed is not the same thing

as being unreasonable. In any event, to repeat an earlier

point, Hasbro did give its written consent to the modification.

We conclude that the June modification was enforceable and we therefore reverse the judgment and remand

the case for a determination of Cloud’s damages.

REVERSED AND REMANDED.

A true Copy:

Teste:

 _____________________________

Clerk of the United States Court of 

Appeals for the Seventh Circuit 

USCA-02-C-0072—12-26-02