Opinion ID: 769029
Heading Depth: 2
Heading Rank: 1

Heading: Battle of the Forms.

Text: 19 Bayway argued its motion for summary judgment on the basis of New York law, presumably because one of the additional terms incorporated by its acceptance is a New York choice-of-law provision. OMT has accepted New York law as controlling for purposes of Bayway's summary judgment motion. 20 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: 21 (1) A definite and seasonable expression of acceptance or a written confirmation which is sent within a reasonable time operates as an acceptance even though it states terms additional to or different from those offered or agreed upon, unless acceptance is expressly made conditional on assent to the additional or different terms. 22 (2) The additional terms are to be construed as proposals for addition to the contract. Between merchants such terms become part of the contract unless: 23 (a) the offer expressly limits acceptance to the terms of the offer; 24 (b) they materially alter it; or 25 (c) notification of objection to them has already been given or is given within a reasonable time after notice of them is received. 26 N.Y. U.C.C. § 2-207. 27 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). 28
29 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  (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). 30
31 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). 32 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 33
34 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. 35 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. 36 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). 37 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. 38 OMT cites the standard contracts of five major petroleum companies that Bayway introduced to illustrate contract terms similar to the Tax Clause. OMT argues that only three of the five place the tax liability on the buyer, and that there is therefore an issue of fact as to whether the Tax Clause would objectively surprise a merchant in this industry. 39 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. 40 The fifth example, the Texaco contract, is silent as to the tax allocation issue in this case. But on this unrebutted record of universal trade custom and practice, silence supports no contrary inference. 41 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. 42 Viewing Bayway's evidence in the light most favorable to OMT, we conclude that allocating the tax liability to the buyer is the custom and practice in the petroleum industry. OMT could not be objectively surprised by the incorporation of an additional term in the contract that reflects such a practice. 43
44 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). 45 We need not decide whether hardship is an independent ground of material alteration, because even if it were, OMT failed to raise a genuine issue of material fact as to hardship. OMT's only evidence of hardship is (generally) that it is a small business dependent on precarious profit margins, and it would suffer a loss it cannot afford. That does not amount to hardship in the present circumstances. 46 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). 47 The Tax Clause places on a buyer a contractual responsibility that bears on a specific sale of goods, that is (at least) not uncommon in the industry, and that the buyer could avoid by registration. The cry of hardship rings hollow, because any loss that the Tax Clause imposed on OMT is limited, routine and self-inflicted. 48 OMT failed to raise a factual issue as to hardship or surprise. Summary judgment was therefore appropriately granted in favor of Bayway. 49