Foxco Industries, Ltd. v. Fabric World, Inc.
595 F.2d 976 (1979)
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Rule of Law:
Under the Uniform Commercial Code, evidence of established trade usage is admissible to explain or supplement the terms of a contract, and parties engaged in a trade are presumed to have contracted with reference to that usage, regardless of their individual knowledge of it.
Facts:
- Foxco Industries, Ltd. (Foxco) was a Delaware-based manufacturer of knitted fabrics.
- Fabric World, Inc. (Fabric World) was an Alabama-based retailer of fabrics.
- On April 22, 1974, Fabric World's president, Glenn Jameson, placed a written order with Foxco for 'first quality' goods, which later led to a dispute about the quality of the fabric delivered.
- On October 21, 1974, Jameson placed a second, larger written order with Foxco for 12,000 yards of 'first quality' fabric for $36,705.
- Shortly after the October order was placed, the market price for yarn and finished textile goods declined precipitously.
- On November 15, 1974, Fabric World sent a letter to Foxco cancelling the October 21 order.
- Foxco replied that the order was substantially completed and could not be cancelled.
- On December 3, 1974, Fabric World agreed to accept the order but stated it would return the entire shipment if it contained a single flaw, a condition Foxco believed was impossible to meet and treated as a breach.
Procedural Posture:
- Foxco Industries, Ltd. sued Fabric World, Inc. in the United States District Court for breach of contract, based on diversity jurisdiction.
- The case was tried before a jury.
- The district court judge instructed the jury, over Fabric World's objection, that Foxco was not 'doing business' in Alabama and that damages could be calculated under UCC § 2-709.
- The jury returned a verdict for Foxco in the amount of $26,000.
- Fabric World, the defendant, appealed the judgment to the United States Court of Appeals for the Fifth Circuit.
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Issue:
Is evidence of trade usage, such as standards published by a trade association, admissible to explain the meaning of an undefined contract term like 'first quality' even when one party to the contract is not a member of the association and claims to have no knowledge of its standards?
Opinions:
Majority - Tjoflat
Yes, evidence of trade usage is admissible to explain an undefined contract term even if one party lacks specific knowledge of it. Under U.C.C. § 2-202 and § 1-205, written contracts are read on the assumption that usages of trade were taken for granted when the agreement was made unless carefully negated. A 'usage of trade' is any practice with such regularity of observance in a trade as to justify an expectation that it will be observed. The standards of the Knitted Textile Association, a large industry group, could qualify as such a usage to define 'first quality,' making them admissible regardless of Fabric World's membership or knowledge. The court also held that Foxco was not 'doing business' in Alabama in a manner that would bar it from suing, as its activities of soliciting orders were interstate in nature. Finally, the jury instruction on damages under U.C.C. § 2-709 (action for the price) was proper because there was sufficient evidence for a jury to find that Foxco, after reasonable effort, was unable to resell the specially manufactured fabric at a reasonable price, particularly in a plummeting market.
Analysis:
This decision solidifies the UCC's modern approach to contract interpretation, prioritizing the actual understanding of parties within a commercial context over rigid, four-corners-of-the-document analysis. It establishes that industry standards can legally define ambiguous contract terms, effectively binding parties operating within that trade to its common practices, whether they are aware of them or not. The case serves as a strong precedent for using extrinsic evidence of trade usage to supplement contracts and highlights the risk for businesses that fail to stay informed of the customs in their industry. It also provides a clear application of the UCC's seller's remedies, confirming that an action for the full contract price is a viable option for sellers of custom or hard-to-resell goods when a buyer breaches.
