Quick Summary
Bayway (plaintiff) sold gasoline to OMT (defendant), with a contract including a tax clause. OMT did not object initially but later refused to pay a federal excise tax incurred by Bayway.
The dispute centered on whether this tax clause was a material alteration of their contract under N.Y. U.C.C. § 2-207(2)(b). The appellate court confirmed that the clause was customary in the industry, thus not a material alteration, and upheld Bayway’s right to be reimbursed for the tax by Oxygenated Marketing and Trading (OMT).
Facts of the Case
Bayway Refining Company (plaintiff) entered into a verbal agreement to sell 60,000 barrels of gasoline to Oxygenated Marketing and Trading A.G. (OMT) (defendant). Following their verbal agreement, OMT sent a confirmation letter to Bayway, and Bayway responded with its own confirmation letter, which included a reference to Bayway’s general terms and conditions.
Among these terms was a clause that required the buyer to pay any federal excise tax incurred by the seller (the tax clause). OMT did not object to Bayway’s terms at that time.
However, when Bayway paid a $464,000 federal excise tax on the sale and billed OMT for it, OMT refused to reimburse Bayway. This disagreement over the tax payment led to the lawsuit in question.
Procedural History
- Bayway Refining Company filed a lawsuit against OMT for refusing to pay the federal excise tax as per their agreement.
- The district court granted summary judgment in favor of Bayway.
- OMT appealed the decision to the United States Court of Appeals for the Second Circuit.
I.R.A.C. Format
Issue
Whether the tax clause requiring the buyer to pay any federal excise tax incurred by the seller was a material alteration to the contract under N.Y. U.C.C. § 2-207(2)(b), and thus not part of the contract between Bayway and OMT.
Rule of Law
Under N.Y. U.C.C. § 2-207(2)(b), a new term is considered a proposal for addition to a contract between merchants and becomes part of the contract unless it materially alters the original terms, causing surprise or hardship if incorporated without express awareness by the other party.
Reasoning and Analysis
The court held that OMT had the burden of proving the tax clause materially altered the contract. Evidence presented showed that including such a clause was customary in the petroleum industry, suggesting that no surprise or hardship should have been caused to OMT.
The court found that OMT failed to demonstrate objective surprise or hardship resulting from the Tax Clause.
Consequently, the clause did not materially alter the agreement and was validly incorporated into the contract between Bayway and OMT.
The decision also hinged on industry practices; it is customary for buyers in petroleum transactions to shoulder tax liabilities when not registered for tax exemption, as was the case with OMT. The court affirmed that this standard practice would not objectively surprise a reasonable merchant in this industry.
Conclusion
The court affirmed the district court’s decision, ruling in favor of Bayway and concluding that the Tax Clause was a valid part of the contract between Bayway and OMT.
Key Takeaways
- The party opposing inclusion of an additional term under N.Y. U.C.C. § 2-207(2)(b) bears the burden of proving that the term materially alters the contract.
- A term that aligns with common industry practice is unlikely to be deemed a material alteration due to lack of surprise or hardship.
- The court may admit evidence of industry custom and practice even if it is introduced at a late stage in litigation, such as in reply papers.
Relevant FAQs of this case
What determines if a contract term constitutes a material alteration under U.C.C. Section 2-207?
A term is a material alteration if it results in surprise or hardship to the party that did not propose the term, failing this test makes it part of the contract.
- For example: A buyer and seller in the office supply industry might form a contract where the addition of a late delivery penalty fee could be seen as non-material if such penalties are standard in that market segment.
How does industry custom influence the incorporation of terms into a contract between merchants?
Industry custom can determine the reasonableness of including certain terms in a contract; terms aligning with accepted practices are less likely to be considered material alterations.
- For example: In the construction industry, it’s customary to include liquidated damages for delays, so a clause specifying such damages would typically not be a material alteration when contracting for building services.
In what ways can a party demonstrate 'surprise' or 'hardship' to avoid inclusion of a new term in a contract under U.C.C. Section 2-207?
To show ‘surprise’, a party could point out that the term was unconventional, while ‘hardship’ could be demonstrated by proving financial detriment due to the term’s enforcement.
- For example: If a software license agreement unexpectedly includes an exclusivity clause limiting the buyer’s use of competitors’ products, this could be argued as ‘surprise’ and potentially ‘hardship’ if it prevents pursuing cost-effective alternatives.
References
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