Lockheed v. Keronix

Citation: Lockheed Elecs. Co. v. Keronix, Inc., 114 Cal.App.3d 304,, 170 Cal.Rptr. 591 (1981).

Factual Background
Plaintiff and appellee, Lockheed Electronics Co. (LEC), contracted with defendant appellant, Keronix, for the delivery of 5 million computer cores per week (Order No. 04963). On February 15, 1974, Keronix sent to LEC a copy of its purchase order that directed LEC to begin shipment of the computer cores upon the completion of Keronix’s pending purchase order with LEC. The reverse side of Keronix’s purchase order, which was a standard order sent to LEC in all prior dealings, contained certain terms and conditions that informed LEC that “[the] order expressly limit[ed] acceptance to the terms” of the order."

Three days after receiving Keronix’s purchase order, LEC responded with a standard “quotation” regarding Keronix’s order and confirming the quantity, price and delivery rate. Much like Keronix’s purchase order, LEC’s quote stated that the order placed was by Keronix was subject to LEC’s Terms and Conditions that were printed on the reverse side of the quotation.

On May 7-8, 1974, shortly after receiving the first shipment of Order No. 04963, Keronix informed LEC that no further shipments on the order were to be made and all future shipments were to be put on hold. Although there was some discussion within Keronix that the computer cores were defective, no mention of defective cores was made to LEC. Instead, Keronix cited “component supply problems” as the reason for holding future shipments.

LEC responded by sending a letter to Keronix demanding payment on the remainder of the contract. Keronix refused and stated that the Terms and Conditions located on their purchase order, which allow the buyer to cancel upon written notice to the seller applied to the contract in this case and therefore no money was due.

As a result of non-payment on the contract, LEC sued Keronix for damages arising from an unjustifiable breach of contract.

Trial Court Proceedings
The trial court entered judgment in favor of LEC in the amount of $73,778.14 plus interest and costs. In arriving at this decision, the court reasoned that the terms and conditions that guided the contract were those set forth in the plaintiff’s acceptance rather than those set forth in the defendant’s purchase order.

Further, the court granted LEC’s motion that sought to preclude the defendant from introducing any evidence of electrical defect in the cores. In reaching this decision, the court stated that there was no “meeting of the minds” between the plaintiff and defendant regarding the additional terms found in the defendant’s purchase order that would allow Keronix to bring in such evidence. Therefore, to allow Keronix to do so would be against the Terms and Conditions that govern the Agreement.

Keronix appealed the trial court's decision.

Appellate Court Proceedings
On appeal, the appellate court reversed the trial court’s decision and remanded the cause for the limited purpose of calculating plaintiff’s damages in conformity with the terms and conditions of the defendant’s purchase order. In reaching this conclusion, the court determined that when “the terms of the offer and acceptance differ, the terms of the offer become part of a contract between merchants if the offer expressly limits acceptance to its own terms. . . ." Since Keronix’s offer “expressly limit[ed] acceptance to the terms stated [there]in]” the fact that LEC accepted but substituted their own terms and conditions is to be given no weight. When LEC accepted, they manifested their assent to the Terms of Keronix’s purchase order and effectively became bound by the Keronix’s Terms and Conditions. Therefore, the trial court erred in concluding the plaintiff’s terms and conditions governed the contract.

In addition, the sppellate court determined that Keronix was still precluded from relying on unstated defects to justify their breach. In reaching this conclusion, the court looked to Section 2605 of the California Commercial Code, which states: “. . . the buyer’s failure to state in connection with rejection a particular defect which is ascertainable by reasonable inspection precluded him from relying on the unstated defect to justify rejection or to establish breach.”

Since the defect to the computer cores was known or reasonably should have been known at the time and was never conveyed to LEC, Keronix is barred from using the existence of a defect to justify its breach. Therefore, Keronix must still pay for all completed supplies and services as established by the terms of their own agreement.