Unpublished Disposition, 928 F.2d 408 (9th Cir. 1991)

MEMORANDUM^* 

This diversity action involves a contract dispute arising out of a shipment of steel from the seller, Persico Pizzamiglio, to the buyer, Balfour Guthrie, Inc. The action was originally filed by Persico and Balfour's purchasing agent, Wimpy International. Persico's claim against Balfour was for the amount that Persico claimed was the balance due for steel delivered under Purchase Order Number 0280 in the fall of 1985. Wimpy sought to recover unpaid commissions it claimed Balfour owed.

Persico and Balfour had an ongoing business relationship prior to the shipment of steel at issue here. After a series of disputes over the quality of previous shipments of goods, the parties had reached a written settlement agreement whereby Persico was to discount the price of future orders until the agreed-upon value of the deficiencies in the prior shipments had been set off.

The key event giving rise to this litigation was Balfour's decision that Purchase Order Number 0280 would be the last order for steel that it placed with Persico. As part of that decision, Balfour unilaterally offset the entire amount of claims for deficiencies in prior orders against the amount that Persico claimed was owed on order 0280. The disputed amount is approximately $236,000.

Persico then filed this action, claiming no such setoff was allowable under California Commercial Code Secs. 2601 & 2607, which, if applicable, would require full payment for the accepted steel. Balfour defended on the ground that the prior settlement agreement established a course of dealing which permitted the offsets. See Cal.Comm.Code Secs. 1205(1) & (3). In the alternative, it filed counterclaims against Persico in the amount of the claimed deficiencies in the prior orders.

After a bench trial, the district court agreed with Balfour that there was an established "course of dealing" allowing Balfour to offset its claims for defective goods against the contract price of order 0280. It denied Balfour's counterclaims for damages because were the counterclaims to be granted, Balfour would reap a double recovery.

Balfour contends for the first time on appeal that Texas law, and not California law, applies in this case. Where the parties fail to raise a choice-of-law issue in the trial court, the issue is deemed waived on appeal. See, e.g., Mellon Bank, N.A. v. Aetna Business Credit, Inc., 619 F.2d 1001, 1005 n. 1 (3d Cir. 1980). Because Balfour failed to raise this issue before the district court, we decline to address this contention.

It is undisputed that the steel delivered under purchase order 0280 was without defect, and there is no challenge to the district court's findings that there were in fact defects in prior orders. The crucial issue raised by Persico in its appeal is essentially an issue of law: whether the single settlement agreement between Persico and Balfour established a course of dealing permitting the offsets claimed by Balfour here. We hold that it does not.

The conduct giving rise to the claim of a course of dealing in this case was no more than a single settlement agreement comprising a good faith attempt by the parties to resolve specific controversies that had arisen over the quality of goods in some prior orders. The Code defines a course of dealing in section 1-205, Cal.Comm.Code Sec. 1205, as:

(1) ... a sequence of previous conduct between the parties to a particular transaction which is fairly to be regarded as establishing a common basis of understanding for interpreting their expressions and other conduct.

Note 2 of the U.C.C. comments to the Code states that a course of dealing "is restricted, literally, to a sequence of conduct between the parties previous to the agreement." Accordingly, we have held that a single transaction cannot constitute a "course of dealing." Kern Oil & Refining Co. v. Tenneco Oil Co., 792 F.2d 1380, 1385 (9th Cir. 1986). The single settlement agreement in this case could not have established any course of dealing permitting unilateral offsets by Balfour. It did not involve any unilateral conduct. Therefore, the district court erred in holding that there was a common course of dealing permitting Balfour to offset all the deficiencies in prior deliveries against the balance due on the order in question.

Our resolution of this issue leaves open the proper resolution of Balfour's counterclaim against Persico. Balfour seeks to recover the same $236,094 in damages stemming from order 0280 and an additional $17,000 in lost profits. Balfour argues that if we conclude that a self-help remedy was inappropriate, we must order the district court to grant the alternative remedy of judgment in favor of Balfour on its counterclaim against Persico. We disagree.

With respect to the $17,000 lost profits claim, the district court found that Balfour had failed to prove by a preponderance of the evidence that it sustained any lost profits from Persico's delivery of non-conforming goods. This finding is not clearly erroneous and we therefore affirm the district court's denial of Balfour's $17,000 lost profits claim. However, our reading of the district court's decision and of the record below demonstrates to us that the district court never reached the question of the validity of Balfour's counterclaim for the $236,094 in damages with respect to other relevant Commercial Code sections. We therefore must remand in order for it to do so.

The remaining issues concern Balfour's counterclaim against Wimpy International, which claimed that Wimpy charged excessive commissions, and Wimpy's responsive claim that Balfour owed unpaid commissions. The district court denied Wimpy's claim on the ground that the commissions were governed by the provisions of a contract between Balfour and an entity not a party to this litigation, Palmat. The district court held that Wimpy had not demonstrated that it was a third-party beneficiary to that contract. In considering Balfour's claim against Wimpy, the court looked to the merits of Balfour's claim and concluded that Balfour had no sufficient proof that excessive commissions had been charged. Therefore, it denied any relief to Balfour as well. In this appeal, Balfour has not demonstrated any basis for reversing the district court's resolution of the disputes between Wimpy and Balfour and Wimpy has not appealed.

The judgment of the district court in favor of Balfour and against Persico is REVERSED and the matter is REMANDED for determination of the merits of Balfour's $236,094 counterclaim. The judgment is otherwise AFFIRMED. Persico is to bear the costs of this appeal.

AFFIRMED IN PART, and REVERSED AND REMANDED IN PART.