Background
Living Fuel, Inc., a Florida nutritional supplement company, contracted with Progressive Laboratories, Inc., a Texas manufacturer, for specialty products. The parties had a successful relationship involving multiple purchase orders: Living Fuel would submit orders, pay a 50% deposit, and remit final payment within 30 days of shipment notice. Between February 2022 and October 2022, Living Fuel placed two separate purchase orders for Super Green and Vanilla Protein products ($130,159.35 due) and Super Berry Ultimate ($162,500, with a $81,250 deposit already paid).
In November 2022, Living Fuel’s General Manager received what appeared to be a payment instruction email from Progressive Laboratories. Unknown to the parties, a hacker had compromised a Progressive employee’s email account. The fraudulent email contained typographical errors and “oddly phrased language” and instructed payment to an out-of-state account labeled a “hedge fund”—departing from Progressive’s previous practice of accepting physical checks. Living Fuel paid the imposter $130,159.35, the full amount supposedly owed for the Super Green products.
Progressive Laboratories then refused to complete the Super Berry order, stating it would not deliver further units until the Super Green invoices were paid. It had delivered only $12,073.75 of the $81,250 worth of products ordered. Progressive sued for breach of the Super Green contract and incidental damages; Living Fuel counterclaimed for breach of the Super Berry contract and negligence. The district court found Living Fuel in breach of Super Green, awarded damages to Progressive, and rejected Living Fuel’s counterclaims. Both parties appealed.
The Court’s Holding
The Fifth Circuit affirmed on all issues. First, regarding Living Fuel’s counterclaims, the court held that under Texas Business & Commerce Code § 3.404(d), when a person receives an instrument (here, a payment instruction) from an imposter and the recipient fails to exercise ordinary care, the recipient may bear responsibility for losses if that failure contributed to the loss. The court found Living Fuel was “in a better position than Progressive Laboratories to avoid the loss.” The fraudulent email’s errors, suspicious language, and demand for wire transfer to an out-of-state account should have prompted reasonable inquiry. Living Fuel failed to exercise ordinary care in payment procedures.
Second, Progressive Laboratories argued that its course of dealing with Living Fuel established an installment contract, meaning breach of the Super Green order also constituted breach of the Super Berry contract. The Fifth Circuit disagreed. Under Texas law, an installment contract requires that the contract itself contemplate delivery in separate lots. Here, each purchase order was a separate transaction with a definite quantity and did not reference future transactions. The court applied the principle that parties’ intent is determined by the clear language of the contracts, not by course of dealing when the contract language is unambiguous. The various agreements were separate transactions; mere expectation of future business did not create a unified installment contract.
The district court awarded Progressive Laboratories $60,983.10 in damages—the full Super Green contract price ($130,159.35) less a credit of $69,176.25 representing what Living Fuel had paid but not received under the Super Berry contract. The court affirmed this damage calculation and found no breach of the Super Berry contract itself.
Key Takeaways
- When payment fraud involves an imposter, the party receiving the fraudulent instruction bears responsibility if it failed to exercise ordinary care—here, the buyer should have questioned an email with typos, odd language, and wire instructions departing from established payment methods.
- Course of dealing and expectation of future transactions do not create an installment contract; the contract’s written language controls, and unambiguous language precludes resort to course of dealing.
- Breach of one separate contract in a series of transactions does not automatically constitute breach of another separate contract, even if the parties have an ongoing business relationship.
Why It Matters
This decision clarifies the allocation of risk when email fraud occurs in commercial payment transactions. Rather than holding the seller liable for email security lapses, the court places responsibility on the buyer who receives the fraudulent instruction, reasoning that the buyer is best positioned to detect red flags—suspicious message content, departure from standard payment procedures, and unusual payment destinations. Businesses cannot entirely rely on payment partners’ email security; they must maintain reasonable payment verification procedures and act cautiously when payment instructions deviate from past practice.
The ruling also reinforces fundamental contract interpretation principles: written language, not course of dealing or parties’ expectations, determines contract scope. Even repeat customers with established patterns do not automatically create unified installment contracts unless the written terms expressly contemplate serial deliveries. This protects sellers from unintended liability for sequential breaches and requires buyers to address future-delivery terms explicitly in writing.