Memorandum Decision re Alleged Breach of Oral and Written Agreements

Original Filed
April 22, 1999

UNITED STATES BANKRUPTCY COURT NORTHERN DISTRICT OF CALIFORNIA

In re No. 97-32025DM Chapter 11 WIN FASHION, INC., Debtor. ___________________________________/ WIN FASHION, INC., Plaintiff, A.P. No. 98-3143DM vs. BYER CALIFORNIA, a California corporation, Defendant. ___________________________________/

MEMORANDUM DECISION

Introduction

In this adversary proceeding the debtor, Win Fashion, Inc. ("Win") seeks to recover $41,541.50 from the defendant, Byer California, Inc. ("Byer") for breach of twenty five separate contracts. Twelve of these contracts were in writing (collectively "the written agreements") and the remainder were allegedly oral (collectively "the remaining agreements"). A trial was held on March 12 and 24, 1999, Stephen Sherman, Esq. appeared on behalf of Win, and William H. Bassett, Esq. appeared on behalf of Byer. For the reasons that follow, the court will deny recovery as to all twenty five contracts.(1)

II. Facts(2)

Between April and August, 1996, Win, an outside sewing and clothing assembly contractor, and Byer, a seller of women's clothes, entered into a series of twenty five transactions. Pursuant to these transactions, Win provided sewing, cutting and garment assembly services in exchange for which Byer provided the design, style and fabric and paid the purchase price. The terms and conditions of twelve of these transactions were expressed as the written agreements. The written agreements did not contain integration clauses and the parties' own business practices and course of dealing did not preclude oral modification of these or other agreements.

The parties' course of performance and dealing shows that within a few days after each of the written agreements was signed, Win made oral requests for payment at a higher amount than that stated in the writings, that Byer made no meaningful response to any of these requests, and, thereafter, Win proceeded to complete the work as required by the written agreements. Win has demanded payment of the higher requested amounts. Byer paid either the amount reflected on the written agreements, or a higher amount, but never the amount sought by Win. As to these agreements, Win seeks damages totaling $19,605, representing the difference between the collective amount Byer actually paid and the collective amount Win contends is due pursuant to oral modifications.

The remaining agreements were not reduced to writing. They are, however, traceable to a document entitled "Byer Price Request Form." This document shows the amount that Byer was willing to pay Win for the sewing and assembly work associated with the particular garment styles which were the subject of these remaining agreements. The document also shows the amount which Win requested to receive for this work, an amount which was invariably higher than that which Byer was willing to pay. Despite the lack of a clear understanding with respect to price, Win actually performed under the remaining agreements and Byer actually received and made use of the finished garments. Win was paid for each of the remaining agreements, but not at the price it requested to receive. As for these agreements, Win seeks damages in the amount of approximately $21,000, representing the difference between the collective amount Win was actually paid and the collective amount to which Win alleges the parties agreed.

III. Issue

The issue is whether Win is entitled to the damages for breach of any of the twenty five agreements.

IV. Discussion

A. The California Commercial Code Does Not Apply To This Case

A threshold issue the court must resolve is whether the parties' transactions are governed by the sales division of the California Commercial Code ("UCC").(3) The parties have stipulated that the UCC applies but the court disagrees. The UCC governs transactions in goods. Cal.Com.Code § 2102.(4) Under the UCC goods are generally all things which are movable at the time of identification to the contract for sale, except the money in which the price is to be paid. Cal.Com.Code § 2105(1).(5)

Where a transaction has both a goods and a services component, the California courts apply the "essence of the agreement" test to determine whether or not a contract is a transaction in goods and, therefore, subject to the UCC, or an agreement for services. Filmservice Laboratories, Inc. v. Harvey Bernhard Enterprises, Inc., 208 Cal.App.3d 1297, 1305, 256 Cal.Rptr. 735, 739 (1989). Pursuant to this test, if service predominates, then the incidental sale of goods does not alter the basic transaction, and the UCC does not apply. Id.

While the transactions in this case undoubtedly had a goods component, namely, fabric and garments, the essence of the agreements was the provision by Win of sewing, cutting and garment assembling services from fabric supplied by Byer. Any sale of goods that may have occurred was merely incidental to this purpose. This conclusion is supported by the adversary proceeding complaint, wherein Win describes itself as engaged in the business of providing outside contract sewing and clothing assembly to clothing manufacturers, and prays for damages caused by Byer's breach of clothing assembly and sewing services agreements. That services predominated is also supported by the language of the written agreements. These agreements describe the contracted work as labor, including cutting and sewing. Finally, the parties' conduct shows that the sale of goods was merely incidental to the provision of services in that Byer, not Win, supplied the fabric from which the finished garments were produced.

California case law is also in accord. In Filmservice, supra, the defendant produced prints from negatives supplied by the plaintiff. After production, the plaintiff sold the prints to third parties. The court found the UCC inapplicable because the essence of the agreement between the parties was the provision of services, not goods. Here, like Filmservice, Win produced finished garments from fabric provided by Byer, after which Byer sold the garments to third parties. The cases are sufficiently analogous that the court is convinced that the parties transactions are not governed by the UCC.(6)

B. The Written Agreements Were Not Breached

Win argues that the price terms of the written agreements were orally modified and that Byer breached these agreements by failing to pay the modified price. The court agrees that the written agreements were modified, but disagrees that this entitles Win to the damages it seeks to recover because the written agreements were modified only to the extent that the oral modifications were executed by the parties.

California Civil Code § 1698(7) provides that a contract in writing may be modified by (1) a contract in writing, (2) an oral agreement to the extent that the oral agreement is executed by the parties, and (3) unless the contract otherwise expressly provides, an oral agreement supported by new consideration. There is no evidence that the written agreements were modified by a subsequent contract in writing or that Win gave any new consideration which would justify it being paid a higher price. The issue then is whether the written agreements were modified by an executed oral agreement and, if so, to what extent.

"An executed contract is one, the object of which is fully performed. All others are executory." Cal.Civ.Code § 1661. The evidence shows that after the written agreements were signed Win made oral offers to modify the price term, that Byer never responded to any of these offers, and that Win nonetheless completed the work. The general rule is that silence or inaction will not constitute acceptance of an offer. Golden Eagle Ins. Co. v. Foremost Ins. Co., 20 Cal.App.4th 1372, 1385, 25 Cal.Rptr.2d 242, 251 (1993). Thus, Byer's silence cannot be construed as an acceptance. However, Byer's payment pattern establishes that with respect to some of the written agreements, it did agree to pay a higher price than that stated in the writing. When Byer paid Win for its services it paid either a higher price than that stated in the underlying written agreements, or the price stated in the written agreements, but it never paid the amount which Win orally requested to receive. Thus, as for those written agreements that Byer paid a price higher than that stated in the writing, they were modified to the extent that higher prices were paid. To the extent that Byer paid the price stated in the written agreements, there were no modifications. This entitles Win only to the amount it actually received. Accordingly, there was no breach of contract with respect to written agreements and Win is not entitled to damages.

C. The Remaining Agreements Were Not Breached

Win contends that the remaining agreements were express oral agreements, all of which Byer breached by failing to make full payment. Here, the court finds that there were no express oral contracts, but rather that these agreements were implied-in-fact contracts for the reasonable value of Win's services. As explained below, this finding does not entitle Win to the amount it seeks to recover.

Under California law contracts are either express and implied. "An express contract is one, the terms of which are stated in words." Cal.Civ.Code § 1620. "An implied contract is one, the existence and terms of which are manifested by conduct." Cal.Civ.Code § 1621. An implied contract consists of obligations arising from a mutual agreement and intent to promise where neither the agreement, nor the promise, have been expressed in words. Varni Bros. Corp. v. Wine World, Inc., 35 Cal.App.4th 880, 889, 41 Cal.Rptr.2d 740, 745 (1995), citing 1 Witkin, Summary of Cal. Law (9th ed. 1990) Contracts, § 11, p. 46. There is an implied promise to pay the reasonable value for services rendered when one performs services for another with the other's knowledge, the services are of the type usually charged for, and the other person does not dissent but benefits from the services. See, e.g., Spinelli v. Talcott, 272 Cal.App. 2d 589, 595, 77 Cal.Rptr. 481, 485-486 (1969).

Here, there is no evidence from which the court can conclude that the parties expressly agreed, either orally or in writing, on the terms of their bargain with respect to the remaining agreements. The Byer Price Request Form, offered as proof of the oral agreements, shows just the opposite. In particular, the document fails to disclose the prices on which the parties agreed and the place, or manner, of delivery. Where the court cannot determine the terms of the contract before it, there is no agreement which it can enforce. California Lettuce Growers, Inc. v. Union Sugar Co., 45 Cal.2d 474, 481, 289 P.2d 785, 790 (1955).

However, it is undisputed that the parties reached some agreement with respect to these thirteen sewing jobs. It is also undisputed that Win actually performed the work, delivered the finished garments, and that these garments were received and used by Byer. The only dispute is with respect to the agreed prices. The court is unable to conclude that any agreement was ever reached in this regard. The court does find, however, that once Byer received and accepted the finished garments there was an implied agreement that Byer would pay the reasonable value of the services it received. Spinelli, supra. Win has not argued that the amounts it actually received from Byer were unreasonable in relation to the work it performed. Nor has it produced any evidence to establish the reasonable value of its services. Thus, the court concludes that a reasonable price for the work that Win performed is the amount that it actually received. Therefore, with respect to the remaining agreements, there was no breach and Win has suffered no damages.

V. Conclusion

In accordance with the above, Win is not entitled to recover damages as to any of the twenty-five contracts. Within twenty (20) days from the date of service of this Memorandum Decision, counsel for Byer should submit a form of judgment consistent with the foregoing. Byer will be entitled to its costs. Counsel for Byer should comply with B.L.R. 9021-1 and B.L.R. 9022-1.

Dated: April __, 1999 ______________________________ Dennis Montali United States Bankruptcy Judge

1. This conclusion moots Byer's contention that any damages it must pay should be reduced by the amount it voluntarily paid to Win as a volume bonus.

2. The following discussion constitutes the court's findings of fact and conclusions of law. Fed. R. Bankr. P. 7052(a).

3. The sales provisions of the UCC are codified in California Commercial Code §§ 2102-2801.

4. California Commercial Code § 2102 provides as follows: "Unless the context otherwise requires, this division applies to transactions in goods; it does not apply to any transaction which although in the form of an unconditional contract to sell or present is intended to operate only as a security transaction nor does this division impair or repeal any statute regulating sales to consumers, farmers or other specified classes of buyers."

5. California Commercial Code § 2105(1) defines goods as follows: "(1) 'Goods' means all things (including specially manufactured goods) which are movable at the time of identification to the contract for sale other than the money in which the price is to be paid, investment securities (Division 8) and things in action. 'Goods' also includes the unborn young of animals and growing crops and other identified things attached to realty as described in the section on goods to be severed from realty (Section 2107)."

6. The court is mindful of the fact that the parties stipulated at trial that the UCC applies to the case. However, the court is not bound the parties' stipulations as to matters of law. See, e.g., Caravansary, Inc. v. Passanisi (In re Caravansary, Inc.), 821 F.2d 1413, 1414 n.2 (9th Cir. 1987). In any event the court believes the result reached here would be the same under the UCC.

7. Civil Code § 1698 provides:

"(a) A contract in writing may be modified by a contract in writing.

(b) A contract in writing may be modified by an oral agreement to the extent that the oral agreement is executed by the parties.

( c ) Unless the contract otherwise expressly provides, a contract in writing may be modified by an oral agreement supported by new consideration. The statute of frauds (Section 1624) is required to be satisfied if the contract as modified is within its provisions.

(d) Nothing in this section precludes in an appropriate case the application of rules of law concerning estoppel, oral novation and substitution of a new agreement, rescission of a written contract by an oral agreement, waiver of a provision of a written contract, or oral independent collateral contracts."

NOTE: FILE also available in pdf format WinDM.pdf