Sales law and open price terms and 2-305 and uniform commerical code and article 2 and subjective/objective tests

INTRODUCTORY NOTE: I need to make a comment or two on the Code we are using. I stressed in class during the first two weeks that we are using the new Article 1 and the old Article 2 in class. Occasionally I would make reference to the new Article 2--but neither I nor anyone I know expects legislatures to approve it as is. So, make sure you use the proper Code revisions. That being said, a few of you pointed out interesting changes that the new Article 2 proposes, especially as they relate to 2-509, risk of loss, which we considered on 2/17. One of the two significant proposed changes are to get rid of the word "duly" in 2-509(1), which would mean that 2-510(1) would be the primary remedy for a buyer against a seller who delivered a product (my example was fish) to a carrier without making sure, for example, that the carrier had refrigerated cars. The "duly" in old 2-509(1) would also catch the seller. So, I would say that it is interesting to see what the revisers chose to do, but for purposes of this class, we are under old Article 2.

A second example is also interesting. Kerry and I had a miscommunication in class on Thursday because he was reading the new 2-509(3) when I was reading the old 2-509(3). The one we are using in class differentiates between a merchant and an individual seller, whereas the new Article 2 collapses that distinction. Thus, we can see that in the judgment of the revisers, at least, the merchant/individual distinction has lost its persuasiveness for the risk of loss section. But, as we are still under old Article 2, that is what I am requiring of you. It is not an easy situation, to be sure; but it is the best way to handle things at present, I believe.

Thus, finally, if I seem to be in a different section than you, please ask. Don't tell me you don't know the answer to my question. Ask for clarification, please. My goal is to remove the confusion or, at least, to make sure you are confused for a good reason--meaning because we are perplexed at the same language, rather than being confused simply because we are not on the same page together....Now, to Mathis.

Mathis v. EXXON Corp., 302 F3d 448 (5th Cir. 2002)

This recent case shows us that the Article 2, and specifically the good faith provision in 2-305(2) is still alive. At issue in the case is whether the requirement of "good faith" in the fixing of prices includes the subjective as well as the objective definition of good faith. Defendant EXXON argued that Cmt. 3 to 2-305 provided that only an objective definition was appropriate. Indeed, EXXON's point was that the definition of good faith there seemed only to suggest "observance of reasonable commercial standards" as evidenced by the seller's sale of goods at "market price." That is, a sale at "market price" would be a sort of safe harbor beyond which a court would not venture in determining whether good faith was being observed. The appellate court disagreed with EXXON's reading of this section, but getting through the argument takes a bit of close reading.

The relevant facts of the case are that certain franchisees of EXXON complained that EXXON was trying to drive them out of business by charging a rate for their gasoline (the "DTW") that exceeded the price that jobbers would charge competitors. Why would EXXON do this, according to plaintiffs? Because plaintiff alleged that EXXON wanted to convert all their stores to CORS (the convenience-store model). Thus, plaintiffs brought suit for breach of contract arguing, among other things, that EXXON had breached its contract with franchisees by not selling to the franchisees in good faith. Expert testimony at trial convinced a jury that EXXON indeed was charging more than was commerically reasonable, and the jury came back with a large award for plaintiffs. Of the several grounds for appeal, EXXON's argument that a jml ("Judgment as a matter of law"--e.g., on the definition of good faith) should be granted formed the basis of the appellate court's opinion.

The court therefore (pp.189-190) turned to the Texas UCC (remember, the UCC as adopted by legislatures is state law, and each state "tweaks" it a bit differently from its neighbors), and focused on the meaning of "good faith" in 2-305(2). Though it quoted other definitions of "good faith" in the Code, it said, "the key disagreement is over what constitutes a breach of the duty of good faith" (190). EXXON argued that good faith was satisfied by charging a price that was "commercially reasonable", while plaintiffs argued that "good faith" included both subjective and objective duties. The court had to divine the meaning of Cmt. 3 to 2-305 in order to answer the question of who was correct.

After concluding that the "bare text" of the statute offered little to resolve the question, the court decided to look at three sources to help it: (1) the structure of the UCC; (2) the legislative history of this provision; and (3) other caselaw. Its conclusion with respect to (1) was "there is nothing inconsistent" between a combination objective and subjective reading of the term and the general structure of the Code.

However, the court focused most of its attention on legislative history. In a rare glimpse into the committee debates before the provision was even adopted (provided, no doubt, by plaintiffs), the court showed how drafters ultimately rejected two suggested addenda to 2-305, one of which would have exempted certain industries' contracts from the reach of 2-305 and another of which would have construed the meaning of 2-305 only to prevent discrimination (p.192). By rejecting both of these "sweeping" alternatives, the court held that while price discrimination was the type of aberrant case on the minds of the drafters, it was really only a subset of what constituted an aberrant case. "Any lack of subjective, honesty-in-fact good faith is abnormal; price discrimination is only the most obvious way a price-setter acts in bad faith" (p.193).

Concluding Remark

I think the language of cmt 3 supports the court. Good faith "includes" commercial reasonableness, it says. This leaves the door wide open to the subjective test in relevant cases. In addition the comment says that "in the normal case," the "market price" satisfies good faith. This presupposes that there are "abnormal cases," which I would take this case to be. The caselaw cited by the court confirms this reading of "normal."

I have provided this case analysis as an indication of how I would like you to do such an analysis if I ask you about a case. Begin with the issue of the case, then move on to relevant facts, decision below, legal argument and holding.