Background
Living Fuel, Incorporated, a Florida company, contracted with Progressive Laboratories, Incorporated, a Texas manufacturer, to purchase nutritional supplements. Living Fuel paid a fifty percent deposit on a Super Berry order but failed to pay the final balance on a Super Green order. An imposter hacked into Progressive Laboratories’ email and sent fraudulent wiring instructions, which Living Fuel followed, paying the full amount for the Super Green products to the wrong account. Progressive Laboratories delivered only a portion of the Super Berry order and withheld further delivery until the Super Green invoices were paid. Living Fuel sued for breach of contract and negligence, alleging Progressive Laboratories failed to secure its email. The district court found Living Fuel breached the Super Green contract but not the Super Berry contract, awarding damages to Progressive Laboratories after a bench trial.
The court’s reasoning
The Fifth Circuit reviewed the district court’s findings de novo for legal issues and for clear error for factual findings. The court affirmed that Living Fuel was in the best position to prevent the fraud involving the imposter payment instructions. Under Texas Business and Commerce Code Section three point four zero four subsection d, a person who fails to exercise ordinary care in paying an instrument and contributes to the loss bears the loss. The court found Living Fuel failed to exercise reasonable care because the payment instructions contained typographical errors, oddly phrased language, and demanded a wire transfer to an out-of-state hedge fund account, unlike previous payments. Regarding the installment contract claim, the court held that the various agreements were separate transactions. The court noted that the mere expectation of future dealings does not create an installment contract and that each purchase order referenced a definite quantity without contemplating future transactions. The court also affirmed the dismissal of Living Fuel’s counterclaims for lost sales because the party failed to support or advocate for those damages in the district court.
What it means going forward
The ruling reinforces that businesses must exercise ordinary care when verifying payment instructions to avoid liability for fraud losses. It also clarifies that separate purchase orders for specific quantities are not installment contracts unless the contract language or course of dealing explicitly establishes such an arrangement.