Source: https://openjurist.org/215/f3d/219/bayway-refining-company-tosco-corporation-v-oxygenated-marketing-and-trading-ag
Timestamp: 2018-10-21 14:28:25
Document Index: 569316602

Matched Legal Cases: ['§ 2', '§ 2', '§ 2', '§ 2', '§ 2', '§ 2', '§ 2', '§ 2', '§ 2', '§ 2', '§ 2', '§ 2', '§ 2', '§ 2', '§ 2', '§ 2', '§ 2', '§ 4101', '§ 4081', '§ 2', '§ 2', '§ 2', '§ 3']

215 F. 3d 219 - Bayway Refining Company Tosco Corporation v. Oxygenated Marketing and Trading Ag
215 F3d 219 Bayway Refining Company Tosco Corporation v. Oxygenated Marketing and Trading Ag
We affirm for substantially the reasons stated by the district court. We hold--on an issue of first impression in this Court--that in a "battle of the forms" case governed by N.Y. U.C.C. § 2-207(2)(b), the party opposing the inclusion of an additional term bears the burden of proving that the term works a material alteration. Viewing the evidence in the light most favorable to OMT, we conclude that OMT failed to shoulder that burden. Finally, we hold that the district court properly admitted the evidence concerning industry custom and practice.2
Under New York law, the rules of engagement for the "battle of the forms" are set out in the Uniform Commercial Code ("U.C.C."), § 2-207:
N.Y. U.C.C. § 2-207.
It was undisputed in the district court that Bayway's confirmation fax is effective to form a contract as an acceptance--even though it stated or referenced additional terms (including the Tax Clause)--because it was not made expressly conditional on OMT's assent to the additional terms. See id. § 2-207(1). Therefore, under § 2-207(2), the Tax Clause is a proposal for an addition to the contract. See id. § 2-207(2). The parties are both merchants within the meaning of the U.C.C. See id. § 2-104(1), (3). The Tax Clause therefore is presumed to become part of the contract unless one of the three enumerated exceptions applies. See id. § 2-207(2). In its defense, OMT invokes the "material alteration" exception of § 2-207(2)(b).
The allocation of the burden of proof under this exception to § 2-207(2) is a question of New York law, see United States v. McCombs, 30 F.3d 310, 323-24 (2d Cir. 1994) (holding that, under the Erie doctrine, federal courts sitting in diversity apply the forum state's law concerning burdens of proof), and is answered in the text of New York's U.C.C. § 2-207(2). Section 2-207(2)(b) is an exception to the general rule of § 2-207(2) that additional terms become part of a contract between merchants. That general rule is in the nature of a presumption concerning the intent of the contracting parties. Thus if neither party introduced any evidence, the Tax Clause would, by the plain language of § 2-207(2), become part of the contract. To implement that presumption, the burden of proving the materiality of the alteration must fall on the party that opposes inclusion. Accordingly, we hold that under § 2-207(2)(b) the party opposing the inclusion of additional terms shoulders the burden of proof. In so doing, we join almost every court to have considered this issue. See Avedon Eng'g, Inc. v. Seatex, 126 F.3d 1279, 1284 (10th Cir. 1997) (describing a "conventional UCC analysis" as placing "the burden of showing that [an additional term] is a material alteration . . . on the party opposing its inclusion because section 2 207 presumes inclusion of additional terms between merchants"); see also, e.g., Jom, Inc. v. Adell Plastics, Inc., 193 F.3d 47, 59 (1st Cir. 1999); Comark Merchandising, Inc. v. Highland Group, Inc., 932 F.2d 1196, 1201 (7th Cir. 1991); KIC Chems., Inc. v. ADCO Chem. Co., No. 95 CIV. 6321, 1996 WL 122420, at *4 (S.D.N.Y. Mar. 20, 1996); Bergquist Co. v. Sunroc Corp., 777 F. Supp. 1236, 1245 n.11 (E.D. Pa. 1991); LTV Energy Prods. Co. v. Northern States Contracting Co. (In re Chateaugay Corp.), 162 B.R. 949, 956 (Bankr. S.D.N.Y. 1994); Palmer G. Lewis Co. v. ARCO Chem. Co., 904 P.2d 1221, 1229 (Alaska 1995); Wilson Fertilizer & Grain, Inc. v. ADM Milling Co., 654 N.E.2d 848, 850 (Ind. Ct. App. 1995); Eskay Plastics, Ltd. v. Chappell, 660 P.2d 764, 767 (Wash. Ct. App. 1983). But see Westech Eng'g, Inc. v. Clearwater Constructors, Inc., 835 S.W.2d 190, 199 n.3 (Tex. App. 1992).
A material alteration is one that would "result in surprise or hardship if incorporated without express awareness by the other party." N.Y. U.C.C. § 2 207 cmt. 4 (emphasis added).
Certain additional terms are deemed material as a matter of law. For example, an arbitration clause is per se a material alteration in New York because New York law requires an express agreement to commit disputes to arbitration. See Marlene Indus. v. Carnac Textiles, Inc., 408 N.Y.S.2d 410, 413 (1978); see also N.Y. U.C.C. § 2-207 cmt. 4 (listing as examples of per se material alterations, inter alia, waivers of warranties of merchantability or fitness for a particular purpose and clauses granting the seller the power to cancel upon the buyer's failure to meet any invoice). OMT characterizes the Tax Clause as a broad-ranging indemnity clause, and analogizes it to these per se material alterations. We reject the analogy. The Tax Clause allocates responsibility for the tax payable on a specific sale of goods. See Union Carbide Corp. v. Oscar Mayer Foods Corp., 947 F.2d 1333, 1335, 1337 (7th Cir. 1991) (distinguishing between "open-ended" tax liability, which is a material alteration, from "responsibility for taxes shown on an individual invoice," which is not). And unlike an arbitration clause, which waives a range of rights that are solicitously protected, the Tax Clause is limited, discrete and the subject of no special protection. Unable to show that the Tax Clause is a material alteration per se, OMT must prove that in this case the Tax Clause resulted in surprise or hardship.3
Surprise, within the meaning of the material alteration exception of § 2-207(2)(b), has both the subjective element of what a party actually knew and the objective element of what a party should have known. See American Ins. Co. v. El Paso Pipe & Supply Co., 978 F.2d 1185, 1191 (10th Cir. 1992); In re Chateaugay, 162 B.R. at 956-57. A profession of surprise and raised eyebrows are not enough: "[C]onclusory statements, conjecture, or speculation by the party resisting the motion will not defeat summary judgment." Kulak v. City of New York, 88 F.3d 63, 71 (2d Cir. 1996). To carry the burden of showing surprise, a party must establish that, under the circumstances, it cannot be presumed that a reasonable merchant would have consented to the additional term. See Union Carbide, 947 F.2d at 1336.
OMT has adduced evidence that the Tax Clause came as an amazement to OMT's executives, who described the term's incorporation as "contract by ambush" and a "sl[e]ight-of-hand proposal." Thus OMT has sufficiently exhibited its subjective surprise. As to objective surprise, however, OMT has alleged no facts and introduced no evidence to show that a reasonable petroleum merchant would be surprised by the Tax Clause. See In re Chateaugay, 162 B.R. at 957 (including as types of evidence proving objective surprise "the parties' prior course of dealing and the number of written confirmations that they exchanged, industry custom and the conspicuousness of the term"). OMT had no prior contrary course of dealing with Bayway, and offered nothing concerning trade custom or practice.
Ordinarily, our inquiry into surprise would end here. However, in response to OMT's claim of surprise, Bayway introduced evidence that the Tax Clause reflects custom and practice in the petroleum industry, and on appeal OMT argues that Bayway's own evidence raises a genuine issue of material fact as to whether such a trade practice exists. Although the evidence was introduced by Bayway,4 we are "obligated to search the record and independently determine whether or not a genuine issue of fact exists." Jiminez v. Dreis & Krump Mfg. Co., 736 F.2d 51, 53 (2d Cir. 1984) (quoting Higgins v. Baker, 309 F. Supp. 635, 639 (S.D.N.Y. 1970)) (internal quotation marks omitted).
Upon our review of the evidence, we conclude that Bayway has adduced compelling proof that shifting tax liability to a buyer is the custom and practice in the petroleum industry. Two industry experts offered unchallenged testimony that it is customary for the buyer to pay all the taxes resulting from a petroleum transaction. One expert stated that "[t]his practice is so universally understood among traders in the industry, that I cannot recall an instance, in all my years of trading and overseeing trades, when the buyer refused to pay the seller for excise or sales taxes."
OMT misconstrues the evidence. Three of the contracts--those of CITGO Petroleum, Conoco, and Enron--mirror the Tax Clause. A fourth, Chevron's, differs from the others only in that the cost of the taxes is added into the contract price rather than separately itemized. Thus Chevron's standard contract affords OMT no support.
Moreover, common sense supports Bayway's evidence of custom and practice. The federal excise tax is imposed when taxable fuels are sold "to any person who is not registered under [26 U.S.C. § 4101]." 26 U.S.C. § 4081(a)(1)(A)(iv). The buyer thereby controls whether any tax liability is incurred in a transaction. A trade practice that reflects a rational allocation of incentives (as trade practices usually do) would place the burden of the tax on the party that is in the position to obviate it--here, on OMT as the buyer.
To recapitulate: A material alteration is one that would "result in surprise or hardship if incorporated without express awareness by the other party." N.Y. U.C.C. § 2 207 cmt. 4 (emphasis added). Although this Official Comment to the U.C.C. seemingly treats hardship as an independent ground for finding that an alteration is material, courts have expressed doubt: "You cannot walk away from a contract that you can fairly be deemed to have agreed to, merely because performance turns out to be a hardship for you, unless you can squeeze yourself into the impossibility defense or some related doctrine of excuse." Union Carbide, 947 F.2d at 1336 ("Hardship is a consequence [of material alteration], not a criterion. (Surprise can be either.)"); see also, e.g., Suzy Phillips Originals, Inc. v. Coville, Inc., 939 F. Supp. 1012, 1017-18 (E.D.N.Y. 1996) (citing Union Carbide with approval and limiting the test for material alteration to surprise); In re Chateaugay, 162 B.R. at 957 (same).
Typically, courts that have relied on hardship to find that an additional term materially alters a contract have done so when the term is one that creates or allocates an open-ended and prolonged liability. See, e.g., St. Charles Cable TV, Inc. v. Eagle Comtronics, Inc., 687 F. Supp. 820, 827 (S.D.N.Y. 1988) (finding a hardship in "shift[ing] all risks for any dispute to the buyers"), aff'd, 895 F.2d 1410 (2d Cir. 1989) (unpublished table disposition); Charles J. King, Inc. v. Barge "LM-10", 518 F. Supp. 1117, 1120 (S.D.N.Y. 1981).
OMT argues that the district court erred in considering Bayway's evidence of industry custom and practice because it was submitted with Bayway's reply submission rather than with its moving papers. We review for abuse of discretion the district court's decision to rely upon this evidence. Cf. Cifarelli v. Village of Babylon, 93 F.3d 47, 53 (2d Cir. 1996) (reviewing for abuse of discretion the denial of a motion to amend the judgment, in which the non-moving party objected to the court's reliance on an affidavit submitted with the moving party's reply papers).
Bayway brought this suit alleging that the Tax Clause had been validly incorporated and that OMT had breached the contract by refusing to pay the tax. OMT's answer denied generally that the Tax Clause was ever incorporated, without alleging specifically that it was a material alteration under § 2-207(2)(b). When Bayway moved for summary judgment, its papers tracked the allegations of its complaint. The material alteration argument was raised for the first time in OMT's opposing papers. Bayway's reply submission was thus its first opportunity to rebut OMT's argument with custom and practice evidence.
We affirm the district court's decision because "reply papers may properly address new material issues raised in the opposition papers so as to avoid giving unfair advantage to the answering party." Litton Indus. v. Lehman Bros. Kuhn Loeb Inc., 767 F. Supp. 1220, 1235 (S.D.N.Y. 1991), rev'd on other grounds, 967 F.2d 742 (2d Cir. 1992); see Bonnie & Co. Fashions, Inc. v. Bankers Trust Co., 945 F. Supp. 693, 708 (S.D.N.Y. 1996); Travelers Ins. Co. v. Buffalo Reinsurance Co., 735 F. Supp. 492, 495 (S.D.N.Y.), vacated in part on other grounds, 739 F. Supp. 209 (S.D.N.Y. 1990); United States v. International Bus. Machs. Corp., 66 F.R.D. 383, 384 (S.D.N.Y. 1975).
(i) OMT was not surprised by the affidavits in question. OMT knew that evidence of custom and practice in the industry could refute its material alteration argument, but chose not to introduce any evidence demonstrating that the Tax Clause was objectively surprising. Instead, OMT simply noted in its opposition papers that "Bayway . . . has presented no evidence whatsoever of any custom in the industry to have such a tax indemnity term in such a contract." This statement undermines OMT's claim that it was treated unfairly by the court's acceptance of Bayway's evidence. See Cifarelli, 93 F.3d at 53.
(ii) OMT did not move the district court for leave to file a sur-reply to respond to Bayway's evidence. OMT thus failed to seek a timely remedy for any injustice. See, e.g., Litton Indus., 767 F. Supp. at 1235 ("Where new evidence is presented in a party's reply brief or affidavit in further support of its summary judgment motion, the district court should permit the nonmoving party to respond to the new matters prior to disposition of the motion.").
(iii) OMT makes no claim that it has any contrary evidence to introduce even if it were given an opportunity to proffer it. OMT's real complaint seems to be that its attempt to surprise Bayway with its material alteration argument was thwarted by the district court's exercise of its discretion to receive evidence on the other side.
The underlying litigation also involved a second MTBE transaction. In June 1998, OMT contracted to sell 35,000 barrels of MTBE to Tosco Refining Company ("Tosco"), Bayway's parent company. Tosco offset the money claimed by Bayway under the Bayway/OMT contract at issue in this appeal. Tosco joined Bayway in its suit against OMT, seeking as alternative relief a declaration that Tosco was entitled to the offset; and OMT counterclaimed. The district court granted summary judgment in favor of OMT, concluding that Tosco had no right of offset under the June 1998 contract. See Tosco Corp., 1999 WL 328342, at *7. Tosco did not appeal that decision, and it is therefore not before this Court.
OMT raises two arguments for the first time on appeal. First, OMT argues that Bayway's acceptance was effected by a different confirmation fax, sent by a broker, which did not list or reference additional terms, and that the Tax Clause therefore never became a part of the contract. Second, OMT contends that the third "battle of the forms" exception also applies, because a supposed integration clause contained in OMT's offer constitutes a "notification of objection" to any additional terms contained in the Acceptance. N.Y. U.C.C. § 2-207(2)(c). "[I]t is a well-established general rule that an appellate court will not consider an issue raised for the first time on appeal." Greene v. United States, 13 F.3d 577, 586 (2d Cir. 1994). We decline to reach these untimely arguments.
Even if an additional term that places the tax liability on the opposing party was a material alteration per se, New York law allows a party to rebut this conclusion in some limited circumstances with a sufficient showing that the additional term reflects the custom and practice in the particular industry. See Avedon Eng'g, 126 F.3d at 1285 & n.15 (discussing New York law); Schubtex, Inc. v. Allen Snyder, Inc., 424 N.Y.S.2d 133, 135 (1979). As discussed below, Bayway's evidence that the Tax Clause reflects the custom and practice in the petroleum industry is compelling and unrebutted.
Bayway introduced the trade practice evidence to rebut OMT's claim of surprise. Typically, Bayway would bear the burden of establishing the custom and practice in the industry. See Putnam Rolling Ladder Co. v. Manufacturers Hanover Trust Co., 547 N.Y.S.2d 611, 615 (1989) ("[T]he burden of proving a trade usage has generally been placed on the party benefiting from its existence."). See generally 1 James J. White & Robert S. Summers, Uniform Commercial Code § 3-3, at 124 n.52 (4th ed. 1995) (collecting cases). This allocation of burden avoids forcing the party claiming objective surprise to prove a negative.