Court Should Have Looked to Course of Parties’ Dealings to Determine Fair Time to Pay Invoices

After two companies got into a dispute about the timeframe for payment of invoices, the 7th Circuit Court of Appeals found that the district court had erred in not considering the parties’ course of dealings to determine what a fair time to pay would have been.

In 1999, Valley Drive Systems, Inc. began manufacturing parts for Arctic Cat, Inc. In 2002, Driveline assumed control of Valley Drive Systems, Inc.’s assets. In June of that year, Driveline and Arctic Cat entered into a contract where Driveline would provide specifically-manufactured hubs, axels/half-shafts, outer and inner tie rods, shift shafts, and steering stops. The contract made Driveline a “just-in-time supplier” for Arctic Cat. Driveline provided its goods and filled orders daily with regular deliveries to Arctic Cat.

The production of axels/half-shafts made up the majority of Arctic Cat’s purchases from Driveline. In August 2007, Arctic Cat contacted Driveline to request a price reduction. Arctic Cat received a bid from a foreign company to manufacture these parts at a price that would have saved Arctic Cat approximately $200,000 per month. Arctic Cat and Driveline negotiated for the remainder of 2007 about the future of the half-shaft production business. During this time, the two companies proceeded normally. In January 2008, however, Driveline temporarily halted deliveries, citing the more than $600,000 owed by Arctic Cat as accounts receivable. Arctic Cat paid down the balance and the deliveries resumed. In early February 2008, Driveline again halted shipments, also citing nonpayment.

After this, Arctic Cat sent a letter to Driveline informing them that they were in breach of contract. Driveline responded with a letter informing Arctic Cat that it was in arrears. No further deliveries were made, and Arctic Cat terminated its relationship with Driveline on Feb. 15, 2008. In July 2008, Driveline filed suit for breach of contract. Arctic Cat counterclaimed. In 2015, following cross-motions for summary judgment, the district court granted judgment for Arctic Cat on all but the first count of Driveline’s complaint. The parties then went to trial on the papers on the first count and Arctic Cat’s counterclaims. The district court ruled for both Driveline and Arctic Cat, and after accounting for damages on Count I, the counterclaim, and attorney’s fees, the court entered judgment against Driveline in the amount of $8,947.49. Driveline then appealed the district court’s decision as to Count II of the complaint.

The appellate panel began by noting that the relationship between the parties was governed by a mosaic of agreements. The panel stated that Driveline’s invoices and Arctic Cat’s purchase orders contained conflicting terms, resulting in a battle of forms. The panel stated that the district court properly found that no contract was formed pursuant to § 2-207 of the Uniform Commercial Code. The panel noted that the contracts did not specify a timeframe of payment. The panel found that the district court erred in not examining the parties’ course of dealings to determine what a reasonable time frame for payment would be, given the circumstances. The panel determined that this was a genuine dispute of material fact that should have precluded summary judgment. The panel stated that, in order to find that Arctic Cat’s delay in payment was or was not a breach, the court first had to conclude what a reasonable time to pay was under the circumstances. The panel concluded by noting that there were other factual issues that the district court failed to resolve prior to issuing summary judgment. The panel, therefore, reversed the decision of the district court and remanded the case for further proceedings.

You can view the court’s decision here.

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