New York Law Review

Tag: Goods Sold and Delivered

  • Created Gemstones, Inc. v. Union Carbide Corp., 47 N.Y.2d 23 (1979): Buyer’s Right to Deduct Damages from Payment

    Created Gemstones, Inc. v. Union Carbide Corp., 47 N.Y.2d 23 (1979)

    Under UCC § 2-717, a buyer can deduct damages resulting from a seller’s breach of contract from the price still due under the same contract, even in a seller’s action for goods sold and delivered, precluding summary judgment for the seller when breach issues remain unresolved.

    Summary

    Created Gemstones sued Union Carbide for breach of contract after Union Carbide limited Created Gemstones’ credit line and demanded cash payments for orders. Union Carbide counterclaimed for the outstanding balance on goods already delivered. The New York Court of Appeals held that summary judgment for Union Carbide on its counterclaims was improper because factual issues remained regarding whether Union Carbide breached the contract by unilaterally imposing a credit limit. The buyer’s right to deduct damages from the price due under the contract (UCC § 2-717) directly impacts the seller’s entitlement to payment. Therefore, the breach of contract claim and the counterclaim are intertwined and must be resolved together at trial.

    Facts

    In March 1972, Created Gemstones (buyer) and Union Carbide (seller) entered into a contract where Created Gemstones would distribute Union Carbide’s synthetic gems, agreeing to purchase a minimum of $400,000 worth annually for ten years.
    Until May 30, 1974, the agreement proceeded without issues.
    On that date, Union Carbide informed Created Gemstones that its credit line was limited to $200,000, and purchases exceeding that limit required cash payment.
    Despite this notice, Union Carbide continued to extend credit, with Created Gemstones owing $224,681.73 by July 31, 1974.
    In August 1974, Union Carbide allegedly refused to ship two gem orders on credit, demanding prepayment for all orders exceeding the $200,000 limit.

    Procedural History

    Created Gemstones sued Union Carbide for breach of contract.
    Union Carbide counterclaimed for $224,681.73 due for previous deliveries and a small overcredit.
    Special Term denied summary judgment on the complaint but granted it to Union Carbide on the counterclaims.
    A divided Appellate Division upheld the summary judgment on the counterclaims.
    The Court of Appeals granted leave to appeal, limiting the appeal to the issue of summary judgment on the counterclaims.

    Issue(s)

    Whether summary judgment may be granted on a seller’s counterclaim for goods sold and delivered when there are unresolved factual issues concerning whether the seller breached the underlying contract of sale.

    Holding

    Yes, because under UCC § 2-717, a buyer may deduct damages resulting from any breach of contract from any part of the price still due under the same contract. Therefore, if Union Carbide breached the contract, Created Gemstones’ liability on the counterclaims would be extinguished to the extent of the damages caused by the breach.

    Court’s Reasoning

    The Court relied on UCC § 2-717, which allows a buyer to “deduct all or any part of the damages resulting from any breach of the contract from any part of the price still due under the same contract.” This provision is an updated version of Section 69 of the Uniform Sales Act, which gave the buyer the right to recoup damages for breach of warranty.
    The court stated that “the intent underlying enactment of section 2-717 was not to alter the prior rule, but to expand it ‘so as to cover any breach of contract’”. Therefore, a buyer can defeat a seller’s action for goods sold and delivered by asserting a valid counterclaim for breach of contract.
    If Union Carbide breached the contract by improperly imposing the credit limit and demanding cash payments, Created Gemstones would be entitled to deduct any damages from the amount owed on the goods delivered.
    The court noted that if Union Carbide “did indeed refuse to perform unless plaintiff complied with a condition which went beyond the contract, then defendant’s conduct would amount to a repudiation”. In that situation, Created Gemstones could suspend their own performance without breaching the contract.
    Ultimately, the question of whether summary judgment should be granted as to the counterclaims must await resolution of the factual question of whether a breach occurred. “Whatever the ultimate result, proper disposition of the counterclaims must await resolution of this factual question. It was therefore error to grant summary judgment.”

  • Jamaica Tobacco & Sales Corp. v. Ortner, 398 N.Y.S.2d 865 (1977): Distinguishing a Guarantee from a Primary Obligation

    Jamaica Tobacco & Sales Corp. v. Ortner, 398 N.Y.S.2d 865 (1977)

    A writing described as a guarantee may actually constitute a primary agreement to pay one’s own debt if the writing reflects an intent to be directly responsible for purchases made on one’s own account.

    Summary

    Jamaica Tobacco & Sales Corp. sued Ortner to recover payment for goods. Ortner signed a document labeled a “guarantee” for credit extended to 91 East End Corporation. The court held that despite the label, the writing was actually Ortner’s agreement to pay for goods delivered to and used by Ortner. The court emphasized that the plaintiff’s business records showed the materials were delivered to Ortner’s address and credited to its account, and that Ortner admitted the goods were supplied and used at its construction project. Because the goods were supplied to Ortner and used for Ortner’s benefit, Ortner was primarily liable, and the mislabeling of the document did not alter that liability.

    Facts

    1. Jamaica Tobacco & Sales Corp. agreed to extend credit to Ortner if Ortner signed a “guarantee.”
    2. Ortner signed and returned the “guarantee,” which stated that Ortner guaranteed payment for any debt 91 East End Corporation had incurred or would incur.
    3. Jamaica Tobacco’s business records showed that materials were delivered to Ortner’s address and credited to Ortner’s account.
    4. Ortner admitted that the materials were supplied and used in a construction project at its premises.

    Procedural History

    The trial court found in favor of Jamaica Tobacco, holding Ortner liable for the debt. The Appellate Division affirmed the trial court’s decision. Ortner appealed to the New York Court of Appeals.

    Issue(s)

    Whether a document labeled a “guarantee” should be interpreted as a primary agreement to pay one’s own obligation when the evidence demonstrates that the goods were delivered to and used by the purported guarantor.

    Holding

    Yes, because the evidence established that the materials were delivered to the appellant’s address and credited to its account, and the appellant admitted that the materials were supplied and used in the construction project at its premises.

    Court’s Reasoning

    The court reasoned that despite being described as a guarantee, the writing was actually an agreement by Ortner to pay its own obligation for purchases made on its own account. The court relied on the case of Deeves & Son v. Manhattan Life Ins. Co., 195 N.Y. 324, 331, which supported the principle that such a writing can constitute an agreement to pay one’s own obligation. The Court emphasized that the plaintiff’s business records established that the materials were delivered to Ortner’s address and credited to its account. Furthermore, Ortner admitted at trial that the materials were supplied and used in the construction project at its premises. The court stated, “On this record we agree with the trial court that the evidence established appellant’s obligation to pay for the goods sold, delivered and credited to its account.” Therefore, the label attached to the document was not determinative; rather, the substance of the transaction established Ortner’s direct liability.