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Ole Mexican Foods, Inc. v. Hanson Staple Co. - 285 Ga. 288, 676 S.E.2d 169 (2009)

Rule:

Regarding whether the implied warranties found in the Georgia Uniform Commercial Code apply to settlement agreements involving the sale of goods, those implied warranties are applicable to such an agreement only if its predominant purpose is the sale of goods and not the settlement of litigation.

Facts:

Appellee Hanson Staple Company brought suit for breach of contract, alleging that Appellant Ole Mexican Foods, Inc. failed to purchase over $300,000 worth of packaging, which had been specially manufactured by Appellee for Appellant. Eventually, the parties reached a settlement, outside the presence of counsel, which provided, in relevant part, that Appellant would “purchase a minimum of $ 130,000 worth of current inventory from" Appellee and would "test the remainder of inventory and purchase additional inventory if it meets quality expectations." On a motion to enforce the settlement agreement, the trial court ordered Appellant to purchase a minimum of $130,000 worth of Appellee’s product inventory, and that such purchases would be governed by the Georgia Uniform Commercial Code (UCC). The trial court also held that Appellant shall retain the right to reject Appellee’s product pursuant to the Georgia UCC. On appeal, the Court of Appeals reversed, ruling that the trial court erred in applying the implied warranties of the UCC to the settlement agreement, because the primary purpose of the settlement, construed as a whole, was to resolve a dispute between the parties about whether Appellant was obligated to purchase any goods from Appellee and whether Appellee's goods were merchantable.

Issue:

Were the implied warranties of the UCC applicable to the settlement agreement between Appellee and Appellant?

Answer:

No.

Conclusion:

The Court held that implied warranties found in the UCC would apply to settlement agreements involving the sale of goods, only if its predominant purpose was the sale of goods and not the settlement of litigation. In the case at bar, the Court noted that the document at issue was labelled “agreement reached in settlement.” According to the Court, even if the label was not necessarily determinative of the agreement's predominant purpose, it was a good barometer of the parties’ intentions. Moreover, the agreement arose out the parties’ intent to settle a litigation; application of UCC warranties would frustrate the settlement purpose of the agreement. The Court averred that considering he totality of circumstances presented in the case, it can hardly be said that the settlement of the litigation was merely incidental to the contract, and because that was the predominant character of the transaction, the UCC did not apply.

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