T. W. Oil, Inc. v. Consolidated Edison Co. of New York, Inc.

In the first case to wend its way through our appellate courts on this question, we are asked, in the main, to decide whether a seller who, acting in good faith and without knowledge of any defect, tenders nonconforming goods to a buyer who properly rejects them, may avail itself of the cure provision of subdivision (2) of section 2-508 of the Uniform Commercial Code. We hold that, if seasonable notice be given, such a seller may offér to cure the defect within a reasonable period beyond the time when the contract was to be performed so long as it has acted in good faith and with a reasonable expectation that the original goods would be acceptable to the buyer.

The factual background against which we decide this appeal is based on either undisputed proof or express findings at Trial Term. In January, 1974, midst the fuel shortage produced by the oil embargo, the plaintiff (then known as Joe Oil USA, Inc.) purchased a cargo of fuel oil whose sulfur content was represented to it as no greater than 1%. While the oil was still at sea en route to the United States in the tanker M T Khamsin, plaintiff received a certificate from the foreign refinery at which it had been processed informing it that the sulfur content in fact was .52%. Thereafter, on January 24, the plaintiff entered into a written contract with the defendant (Con Ed) for the sale of this oil. The agreement was for delivery to take place between January 24 and January 30, payment being subject to a named independent testing agency’s confirmation of quality and quantity. The contract, following a trade custom to round off specifications of sulfur content at, for instance, 1%, .5% or .3%, described that of the Khamsin oil as .5%.^[1] In the course of the negotiations, the plaintiff learned that Con Ed was then authorized to buy and burn oil with a sulfur content of up to 1% and would even mix oils containing more and less to maintain that figure.

When the vessel arrived, on January 25, its cargo was discharged into Con Ed storage tanks in Bayonne, New

The very next day, February 21, plaintiff offered to cure the defect with a substitute shipment of conforming oil scheduled to arrive on the S. S. Appollonian Victory on February 28. Nevertheless, on February 22, the very day after the cure was proffered, Con Ed, adamant in its intention to avail itself of the intervening drop in prices, summarily rejected this proposal too. The two cargos were subsequently sold to third parties at the best price obtainable, first that of the Appollonian and, sometime later, after extraction from the tanks had been accomplished, that of the Khamsin.^[3]

There ensued this action for breach of contract,^[4] which, after a somewhat unconventional trial course, resulted in a nonjury decision for the plaintiff in the sum of $1,385,512.83, essentially the difference between the original contract price of $3,360,667.14 and the amount received by the plaintiff by way of resale of the Khamsin oil at what the court found as a matter of fact was a negotiated

In support of its quest for reversal, the defendant now asserts that the trial court erred (a) in ruling that the verdict on a special question submitted for determination by a jury was irrelevant to the decision of this case, (b) in failing to interpret subdivision (2) of section 2-508 of the Uniform Commercial Code to limit the availability of the right to cure after date of performance to cases in which the seller knowingly made a nonconforming tender and (c) in calculating damages on the basis of the resale of the nonconforming cargo rather than of the substitute offered to replace it. For the reasons which follow, we find all three unacceptable.

I

nitially, we deal with the threshold contention over the special verdict, which, though not complex, if erroneously decided below, would require reversal. A product of an ad hoc pretrial arrangement peculiar to this case, on analysis,

This came about when the parties, finding themselves in accord on most of the facts, mutually agreed that the jury only be called upon to answer four stipulated questions, and then, by the close of the testimony, went on to further limit the jury’s scope by an understanding, as they read it into the record, “that in applying the law to the facts for an ultimate determination that the Court will consider the stipulated set of facts which have been presented in writing by counsel, the resolution of the specific questions by the jury as submitted to the jury, and counsel further stipulate that, if any other necessary fact is required to enable the proper application of the law to the facts of this case and such fact is not covered by either the stipulation of facts of the parties or the finding of the jury, and if further there is testimony in the record from which a finding could be made or in testimony or evidence of any kind from which a finding of such necessary fact can be made, the parties do hereby authorize the Court nonjury to make such determination as a prerequisite to the application of the law”.

That the court so understood its responsibility is clear from the language it employed in disregarding the verdict. For the only one of the four questions of which the appellant complains,^[6] reads as follows: “Q. Did Con Edison act reasonably in rejecting the substitute shipment which was offered by Joe Oil USA on February 21, 1974, for a scheduled February 28, 1974 arrival?” “Jury — ‘Yes’ ’’. And the

of his intention to cure and may then within the contract time make a conforming delivery.

“(2) Where the buyer rejects a non-conforming tender which the seller had reasonable grounds to believe would be acceptable with or without money allowance the seller may if he seasonably notifies the buyer have a further reasonable time to substitute a conforming tender.”

Since we here confront circumstances in which the conforming tender came after the time of performance, we focus on subdivision (2). On its face, taking its conditions in the order in which they appear, for the statute to apply (1) a buyer must have rejected a nonconforming tender, (2) the seller must have had reasonable grounds to believe this tender would be acceptable (with or without money allowance), and (3) the seller must have “seasonably” notified the buyer of the intention to substitute a conforming tender within a reasonable time.^[7]

In the present case, none of these presented a problem. The first one was easily met for it is unquestioned that, at .92%, the sulfur content of the Khamsin oil did not conform to the .5% specified in the contract and that it was rejected by Con Ed. The second, the reasonableness of the seller’s belief that the original tender would be acceptable, was supported not only by unimpeached proof that the contract’s .5% and the refinery certificate’s .52% were trade equivalents, but by testimony that, by the time the contract was made, the plaintiff knew Con Ed burned fuel with a content of up to 1%, so that, with appropriate price adjustment, the Khamsin oil would have suited its needs even if, at delivery, it was, to the plaintiff’s surprise, to test out at .92%. Further, the matter seems to have been put beyond dispute by the defendant’s readiness to take the oil at the reduced market price on February 20. Surely, on such a record, the trial court cannot be faulted for having found as a fact that the second condition too had been established.

Thus lacking the support of the statute’s literal language, the defendant nonetheless would have us limit its application to cases in which a seller knowingly makes a nonconforming tender which it has reason to believe the buyer will accept. For this proposition, it relies almost entirely on a critique in Nordstrom, Law of Sales (§ 105), which rationalizes that, since a seller who believes its tender is conforming would have no reason to think in terms of a reduction in the price of the goods, to allow such a seller to cure after the time for performance had passed would make the statutory reference to a money allowance redundant.^[8] Nordstrom, interestingly enough, finds it useful to buttress this position by the somewhat dire prediction, though backed by no empirical or other confirmation, that, unless the right to cure is confined to those whose nonconforming tenders are knowing ones, the incentive of sellers to timely deliver will be undermined. To this it also adds the somewhat moralistic note that a seller who is mistaken as to the quality of its goods does not merit

That the principle for which these cases stand goes far beyond their particular facts cannot be gainsaid. These holdings demonstrate that, in dealing with the application of subdivision (2) of section 2-508, courts have been concerned with the reasonableness of the seller’s belief that the goods would be acceptable rather than with the seller’s pretender knowledge or lack of knowledge of the defect (Wilson v Scampoli, supra; compare Zabriskie Chevrolet v Smith, 99 NJ Super 441 ).

It also is no surprise then that the afore-mentioned decisional history is a reflection of the mainstream of scholarly commentary on the subject (e.g., 1955 Report of NY Law Rev Comm, p 484; White & Summers, Uniform Commercial Code [2d ed], § 8-4, p 322; 2 Anderson, Uniform Commercial Code [2d ed], § 2-508:7; Hogan, The Highways and Some of the Byways in the Sales and Bulk Sales Articles of the Uniform Commercial Code, 48 Cornell LQ 1, 12-13; Note, Uniform Commercial Code, § 2-508: Seller’s Right to Cure Non-Conforming Goods, 6 Rutgers — Camden LJ 387, 399; Note, Commercial Law — The Effect of the Seller’s Right to Cure on the Buyer’s Remedy of Rescission, 28 Ark L Rev 297 , 302-303).

Ill

As to the damages issue raised by the defendant, we affirm without reaching the merits. At no stage of the proceedings before the trial court did the defendant object to the plaintiff’s proposed method for their calculation, and this though the plaintiff gave ample notice of that proposal by means of a preliminary statement and pretrial memorandum filed with the court. So complete was defendant’s acquiescence in the theory thus advanced that the plaintiff was permitted to introduce its proof of the Khamsin resale alone, and without opposition. Furthermore, in consensually submitting the four jointly framed advisory questions that went to the jury, the language of one of them, which was damages-related, indicates that both parties were