Interest Provision on Invoice Was Not a Term of the Contract Between Parties

A court of appeal recently addressed whether an interest provision in standard invoices was a term of the contract between two parties.  The court held that the trial court improperly decided the issue under section 2202 of the California Uniform Commercial Code and reversed judgment. (Hebberd-Kulow Enterprises, Inc. v. Kelomar, Inc.( --- Cal.Rptr.3d ----, Cal.App. 4 Dist., July 25, 2013).

Facts

For 20 years, Hebberd-Kulow Enterprises, Inc. (“HKE”) sold agricultural supplies to Kelomar, Inc. (“Kelomar”).  It was routine practice for Kelomar to order products over the phone.  HKE and Kelomar would discuss and agree to the type of item, quantity, and price.  Kelomar would provide HKE with a purchase order number.  After delivery, HKE would send Kelomar an invoice that corresponded to the purchase order number.  Kelomar often paid late, but HKE never charged Kelomar interest on the late payments.

In 2007, HKE delivered about $250,000 worth of goods to Kelomar.  These goods were shipped separately with corresponding invoices.  There were 33 invoices for the delivered goods.  At the bottom of most invoices was printed:  “Unpaid invoices beyond terms will be assessed a monthly service charge of 1-1/2%.”  Kelomar did not pay any of these invoices because it claimed to have incurred damages due to certain nonconforming labels supplied by HKE.  These nonconforming labels were not part of the 33 unpaid invoices, but were shipped under a separate contract.

HKE filed suit against Kelomar for its failure to pay the 33 invoices.  Prior to trial, HKE filed several motions in limine.  Motion in limine number four (“No. 4”) sought to preclude evidence that would vary the express terms of the 33 invoices, specifically the charging of interest or a service charge if the payment was made late.  Kelomar opposed motion in limine No. 4, arguing that the parties never intended any interest payment or service charge to be part of their contract and a prior course of conduct would show HKE never demanded payment of interest.  Kelomar asserted that the issue of whether the interest provision was a term of the contracts between the parties was governed by California Uniform Commercial Code section 2207. 

The trial court denied motion in limine No. 4, but ruled that the 33 invoices were writings intended by the parties as a final expression of their agreement under section 2202 of the California Uniform Commercial Code.  The court found that “the agreement between [the] parties may be explained or supplemented by either the course of dealing, course of performance, or usage of trade.”  However, the court made clear that it “found an express agreement between the parties, requir[ing] interest to be paid.”  The court, nevertheless, stated that it would allow evidence at trial to show the interest provision had never been enforced or may have been waived.

The dispute proceeded to trial, where a jury awarded HKE a total of $439,792.99, including $180,672.49 in interest.  After the jury’s verdicts were entered and the jury was discharged, there was a postjudgment hearing on matters briefed by the parties.  Kelomar argued that the determination whether interest was part of the parties’ contracts was a question of law for the court to decide.  The court declined to rule as a matter of law that HKE could not recover interest and Kelomar appealed.

Decision

The court of appeal determined that the trial court erred in deciding as a matter of law that the interest provision was a term of the parties’ contract and reversed the judgment awarding interest.  The court found that the trial court improperly relied on section 2202. 

Section 2202 removes written agreements for the sale of goods from the operation of Code of Civil Procedure section 1856, the general parol evidence statute.  Therefore, section 2202 is not a statute that provides particular guidance to a court to determine if a writing is intended to be the final expression of the parties’ agreement.  Instead, it directs the court regarding what evidence it should admit to explain or supplement the terms of the agreement.  Based on the limited evidence in front of the court when it considered motion in limine No. 4, there was no basis on which the court could conclude that the parties intended the invoices to be the final expression of their agreement.  Therefore, the court could not base its ruling that the interest provision was part of the parties’ agreement under section 2202 on the invoices themselves.

The court of appeal determined that section 2207 was the appropriate mechanism to determine whether the parties agreed to the interest provision.  Section 2207 provides a default rule that the parties intended their contract to contain the terms to which they have agreed, even if their subsequent forms contain different or additional terms.  Instead of analyzing strict offer and acceptance concepts, section 2207 looks to the dealings of the parties and gives legal effect to their conduct.  The evidence produced at trial supported the application of section 2207, but the trial court did not have this evidence before it when it ruled on the motion.  In fact, there was very little evidence offered in support or in opposition to motion in limine No. 4.  There was also an indication that conflicting evidence on the issue would be presented at trial.  Additionally, there was no jury instruction under section 2207 since the court had already decided the issue as a matter of law.