Cloud Corp. v. Hasbro Inc.
314 F.3d 289 (2002)
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Rule of Law:
Under the Uniform Commercial Code (UCC), a contractual provision requiring modifications to be in a signed writing can be satisfied by informal electronic communications, such as emails, that evidence assent to the new terms. The sender's name on an email is sufficient to satisfy the signature requirement of the Statute of Frauds.
Facts:
- Hasbro, Inc. hired Cloud Corporation to manufacture powder packets for its 'Wonder World Aquarium' toy.
- Hasbro's purchase orders, which Cloud agreed to, included a term requiring any modifications to be in a signed writing from Hasbro.
- In June 1996, facing a supply shortage and pressure from its affiliates, Hasbro instructed Cloud to use a new formula that required significantly less of a key ingredient (Laponite) per packet.
- Cloud determined the new formula would allow it to produce millions more packets from its existing Laponite supply and sent Hasbro a new order acknowledgment for this much larger quantity.
- Hasbro did not formally object to or sign the new order acknowledgment, but its purchasing employee, Kathy Esposito, sent several emails discussing delivery schedules for quantities consistent with the larger, modified amount.
- Another Hasbro employee made an internal note referencing outstanding orders for these larger quantities.
- After Cloud manufactured the additional packets based on these communications, Hasbro's demand for the toy dropped, and it refused to accept or pay for the extra quantity.
Procedural Posture:
- Cloud Corporation sued Hasbro, Inc. for breach of contract in the U.S. District Court for the Northern District of Illinois, a federal trial court.
- After a bench trial, the district court judge found in favor of the defendant, Hasbro.
- The plaintiff, Cloud Corporation, as the appellant, appealed the judgment to the U.S. Court of Appeals for the Seventh Circuit, with Hasbro as the appellee.
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Issue:
Does a series of emails and internal notes from a buyer, referencing larger quantities than specified in original purchase orders, constitute written consent to modify the quantity term, thereby satisfying both the UCC Statute of Frauds and a contractual 'no oral modification' clause?
Opinions:
Majority - Posner
Yes. A series of informal writings, including emails and internal memoranda, can satisfy both the UCC's statute of frauds and a contractual requirement for written consent to a modification. The court reasoned that the UCC does not require a formal, signed contract for a modification, but only adequate documentary evidence of its existence and essential terms. Here, emails from Hasbro's agent, Kathy Esposito, and an internal note from another employee, Maryann Ricci, which referenced the increased quantities, served as sufficient written evidence. The court further held that the sender's name on an email satisfies the signature requirement of the statute of frauds, a pragmatic adaptation of the law to modern commercial practices. Alternatively, the court found that Hasbro waived the writing requirement under UCC § 2-209(4) because Cloud reasonably relied on Hasbro's conduct and communications, which indicated an urgent need for the increased quantity, especially given the parties' informal course of dealing.
Analysis:
This decision is significant for adapting the UCC's writing requirements to the realities of modern electronic commerce. By holding that a name on an email can satisfy the signature requirement, the court provided crucial legal validation for the informal but prevalent business practice of finalizing agreements via email. The ruling emphasizes a pragmatic, context-sensitive approach to contract modification and waiver, focusing on the parties' course of dealing and reasonable reliance rather than rigid formalities. This precedent makes it more difficult for parties to use 'no oral modification' clauses or the statute of frauds to escape obligations that they have clearly assented to through informal electronic communications.
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