Domestic and International Sales

Domestic and International Sales Chapter 11 Meiners, Ringleb & Edwards The Legal Environment of Business, 12th Edition

History of Commercial Law • Years ago, English courts began to use lex mercatoria (“the law merchant”) • Traditionally merchants who disregarded rulings under the law merchant would be shunned by other merchants • Roman law of contracts was surprisingly sophisticated covering countries governed by the Roman Empire • In the early 20th Century, states had different laws for commercial transactions; that made it difficult to expand business into states with possibly different laws • All States have adopted the UCC (small variations) • Covers contracts for sale of goods • Most countries rely on Code Law for their basic legal framework

Uniform Commercial Code (UCC) • Governs contracts for sale of goods (not services, real estate or professional services) • If contract is a “mix” of goods and services, • Court will determine whether common law or UCC will be applied • HOWEVER, in such a contract parties can agree that UCC will apply to any disputes • Primarily state, not federal • Each state adopts some “version” of model UCC statute (book covers model act) • Purpose: “simplify, clarify, and modernize the law governing commercial contracts”

CaseParamount Contracting v. DPS Industries • Paramount needed hundreds of truckloads of dirt for a construction project. • DPS offered to sell dirt and haul it to the construction site. DPS claimed that Paramount accepted the offer; Paramount denied it did and hired another company. • Question: Was case governed by Article 2 of the UCC or common law?Easier to form a contract under Article 2. • Article 2 applies to contracts for sale of goods. Does not apply for services or labor. • When a transactions involves both goods and services, whether Art. 2 applies, depends of “predominant purpose” of the transaction. • DPS said: Sale and delivery of dirt (goods), so Art. 2 applies. • Paramount said DPS to perform services such as placing and compacting the dirt at the site. • DPS sued for breach of contract. • JURY found for DPS – awarded damages for sale of goods under UCC. • Paramount appealed. Contended no contract had ever been made – a services contract. (Continued)

CaseParamount Contracting v. DPS Industries • Paramounthad a contract for construction at Atlanta airport. It used quote of dirt and hauling by DPS in its airport bid. • Contacted DPS about the volume of dirt and # of trucks needed to haul dirt to Airport • DPS believed, at that point, there was an agreement to sell and deliver dirt. • Memorialized the understanding in a letter to Paramount • Said it was “holding approx. 45,000 cubic yards ready to be hauled” . . . “once we receive the 10-day notice from you.” • No response to writing from Paramount, and later it denied there was an agreement. • Paramount decided to buy dirt elsewhere. • HELD: Evidence is consistent that the sale of dirt was predominant purpose of the transaction. Predominantly a sales transaction. • UCC applies. Trial decision Affirmed.

Goods, Merchants, Sales and Titles under the UCC • Goods are “all things which are movable at the time of identification to contract.” Must be movable and tangible • All parties are bound to a standard of good-faith, or honest dealing • Article 2 applies to saleof goods • Title must pass to be a sale • Who holds title? Can hold title if: • (1) Goods exist • (2) Goods have been indentified to contract • Title can then pass when parties see fit • If not specified, Article 2 says title passes when: • Seller completes all obligations regarding delivery of goods • When seller delivers title documents (if goods didn’t need to be moved) • If seller sells stolen property, title does not pass to buyer

Forming a Sales Contract • Common law governs unless UCC changes or modifies the rules; that is, if parties do not specify which law governs a contract, the courts look to see if it fits under common law or under UCC, as in Paramount Contracting case • Mostly, UCC reduces the formality required • See Exhibit 11.2

Intent to Contract • Offer & Acceptance rules relaxed • Only need agreement between parties • Indefinite Offer • OK to be missing major terms like price, delivery, payment terms, if parties intended to be bound • Usually need quantity, unless 1) output contract or 2) requirements contract • But courts require good faith dealing • Don’t allow one party to profit from bad fortune of other party due to unexpected large changes in circumstances • Merchants Firm Offers – Irrevocable • Sign in writing that offer will remain open for given period. • If not stated, period is “reasonable time.”

CaseCrest Ridge Construction v. Newcourt, Inc. • John & Joe Brower worked for a construction company. They set up their own company, Crest Ridge and were awarded a subcontract to provide wall panels for a job. • Wanted to use the panels made by Newcourt. After some discussion, price was $760,000 “subject to credit department approval.” • Because Crest Ridge was a new company, not much credit info. • Over the next 6 months, detailed discussions re: panel specs and shipment was set. • Right before delivery, Newcourt demanded payment in full. Industry practice is 45 days after shipment (so subcontractor can give goods to general contractor who would pay the bill). • Crest Ridge could not make advance payment and had to find another supplier at a higher price. • Crest Ridge sued Newcourt. • Jury awarded $70,214 in damages. • Newcourt appealed. (Continued)

CaseCrest Ridge Construction v. Newcourt, Inc. • HELD: Affirmed. Breach of contract by Newcourt. • The phrase “subject to credit department approval” did not illustrate that there was no contract. Did not create a refusal to grant credit. • UCC looks at “any manner sufficient to show agreement, including conduct by both parties . . .” to recognize contract was made. • Parties exchanged price quotes and purchase order, and documents usually binding in construction industry. • For 6 months, parties exchanged designs to clarify project. Newcourt sent material samples; three revisions of shop drawing; fastening details; stipulations re: color; final drawings concerning installation. • Parties left terms of payment blank. Payment was therefore due either on delivery or according to “general usage” in the industry. To ask for full payment in advance, was a breach of the agreement by Newcourt.

Acceptance • Greater flexibility in communication of acceptance • “Any reasonable manner” under the circumstances • May be valid even if add new terms or change existing terms • Conflicting Terms – the “battle of the forms” • If offeree’s form doesn’t match offeror’s form there is an acceptance, but use offeror’s terms unless special action taken • Contract Modification • Need not provide new consideration, but must have “good faith dealing” • Modification must usually be in writing

CaseOrkal Industries v. Array Connector Corp. • Orkal (NY company) bought products from Array (Florida company). • Orkal would send purchase order forms. Array would confirm orders with “customer order acknowledgment” forms that contained a “forum selection clause”. • Clause stated that in case of disputes, Array would have to bring suit in a Florida court. • Orkal did not object to the clause. • Later Orkal sued Array in NY for breach of contract. • Array moved to dismiss due to forum selection clause. • Trial court agreed. Case was dismissed. Orkal would have to sue Array in Florida. Orkal appealed. (Continued)

CaseOrkal Industries v. Array Connector Corp. • Additional terms become a part of a contract unlessspecifically objected to within a reasonable time OR • Unlessadditional terms materially alter the contract • Party opposing inclusion of additional terms must prove that terms are material changes • Inclusion of forum selection clause constitutes a material alterationto initial contracts.

Cyber Law“SHRINKWRAP YOUR CONTRACT” • Many goods sold with “shrinkwrap” agreement. • If you buy a new computer, likely has an agreement in written materials or on box stating it is the controlling terms of the agreement. • This generally precludes “battle of the forms.” • Most courts: Say it is unreasonable to expect the seller to apprise a consumer of every term & condition at the moment purchase is made. • Minority of courtswhere “Battle of the forms” cases have arisen: • Best defense against this is that terms of agreement were clear. • Were not grossly biased against consumer. • Consumer, when viewing the product, would see the agreement so could read it and know how to return the product if not satisfied with it.

Statute of Frauds • Basic rule that sale of goods for $500 or more is not enforceable unless in writing and signed by the party against whom enforcement is sought • Sufficiency of writing under UCC is relaxed; not every material term needs to be specified. • Failure to Respond To A Writing • Section 2-201(2) says that if a writing in confirmation of the contract is received, it satisfies the writing requirements UNLESS “written notice of objection” is within 10 days after the writing was received. • Parol Evidence • More relaxed under the UCC than at common law. • 2-202 says parol evidence can’t usual be used against the writing. • BUT can explain customary trade dealings or the meaning of certain terms. • HOWEVER, if the intent that the original writing is “a complete and exclusive statement of terms,” parol evidence may not be used to change the terms.

Filling the Gaps • Filling the Gaps – UCC instructs judges to fill parts of contract left open or unclear, i.e. price, quantity or delivery terms • UCC will look to trade usageand past business dealingsof the parties in determining the outcome of unclear terms. • It will also apply “reasonableness” standard. • Regarding price, if the contracts are not clear, 2-305 tells courts to determine “a reasonable price” – fair market value, past dealings, etc. may be used. • Regarding quantity, 2-306 recognizes requirements contractsand output contracts, where quantities may not be clear. • Regarding delivery term, 2-309 states delivery must be within “a reasonable time.” • 2-311 states that seller has optionfor arrangements for shipment. • 2-308 presumes delivery at seller’s place of business.

CaseGriffith v. Clear Lakes Trout Co. • Clear Lakes, a fish hatchery, had 6-year deal with Griffith, a trout grower. Griffith would buy small trout from Clear Lakes and sell them back when they had grown to “market size”. • After 3 years, Clear Lake’s customers demanded larger fish than 12-16 oz. fish delivered by Griffith. • Clear Lakes began to take fewer fish; waited longer to get them. • Griffith was left with too many fish; Griffith deeply in debt; could not change operations easily. • Griffith sued Clear Lakes for breach of contract for not accepting the trout that Griffith had grown to “market size.” • Clear Lakes claimed no contract ever existed because the parties differed as to what was “market size.” (Continued)

CaseGriffith v. Clear Lakes Trout Co. • District court ruled in favor of Griffith. • Court held that parties knew that “market size” was 12-16 oz. when formed contract. • Clear Lakes appealed. • HELD: Affirmed. • HELD: Both parties understood the “market size”. • Parties intended to make a contract, and the contract will not fail for indefiniteness. • Course of performancebetween Griffith and Clear Lakes of 3 yrs. dealing with ~ 1 lb. trout indicates an understanding of the “market size” of trout. • There is similar trade usagepredating their contract.

International PerspectiveASSURE FOREIGN BUYERS OF PRODUCT QUALITY • When a firm is unknown, especially moving into foreign markets, it needs to demonstrate goods are of good quality. • Certification by private organization that has global acceptance is a good mechanism. Common is International Organization for Standardization (ISO): • Network of national standards institutes of 130 countries. • Coordinates the system and sets the standards. • ISO certification is required by many firms before they will consider buying goods. • Firms apply for ISO certification. Visited by a certified registrar. • Follow a complex procedure to document and organize production procedures. Firms are audited for compliance. • Firms must demonstrate how they know and follow quality-assurance procedures.

Performance and Obligations • UCC Section 2-601 deals with seller’s delivery conforming to terms of agreement. If the goods fail to conform to the contract, the buyer may: Reject the whole; Accept the whole, or Accept any commercial unit or units and reject the rest • Tender of Delivery • Valid and sufficient offer of performance under a contract • Seller obliged totender goods at buyer’s place of business • Buyer may contract to accept goods at point of production • “Perfect Tender Rule”: Seller must tender the quality, quantity & delivery method as specified in the contract • If no perfect tender, the buyer has right to reject goods and rescind contract • Seller’s Right to Cure (UCC Section 2-508): • Seller may cure if: Time for seller’s performance had not yet passed; Seller notifies buyer of intent to cure defect, and Seller properly repairs or replaces the defective goods within time allowed

Buyer’s Rights and Obligations • Buyer’s duty is to accept conforming goods and pay for them (2-507) • Buyer has right of inspection before acceptance (2-513) • Buyer may reject nonconforming goods and withhold payment (2-601; 2-602) • Buyer has duty to accept goods. If goods are nonconforming but accepted, buyer may later revoke acceptance, but only if nonconformity “substantially impairs” value of goods (2-606; 2-607; 2-608). (Parties can always negotiate a lower price.) • Buyer has duty to pay (2-507) when goods are received. Can inspect before payment is made.

Sales Warranties • Warranty of Title– Good title will be transferred free of claims against it (2-312) • Express Warranties– Created by seller’s promise as to quality, safety, performance or durability of goods. May be created: • From sample or model • By description of attributes • By seller’s statements or promises • Warranties may be disclaimed, butdisclaimersmust be specificto the type of warranty and must beconspicuous.

Implied Warranties • Merchantability- For sales by merchants: • Goods must be of quality generally acceptable in trade • Must be able to do what is expected • i.e. an umbrella will keep water off of user • Implied Warranty of Fitness for a Particular Purpose • Buyer communicates to seller, or seller “had reason to know” buyer’s particular needs; buyer relies on seller’s expertise; then may have warranty • i.e. a salesperson’s recommendation of a certain paint on a metal barn that will not chip and peel. • Seller may make disclaimers; language may need to be specific and the disclaimer must be conspicuous.

CaseLee vs. R&K Marine, Inc. • Lee bought new boat from R&K Marine. Agreement contained a disclaimer for all warranties, express or implied (including implied warranty of merchantability or fitness for particular purpose). • Three years later cracks and deterioration discovered in the hull. Appraiser determined manufacturing defects – boat was a complete loss. • Manufacturer was bankrupt; Lee sued R&K, claiming breach of warranties of merchantability and fitness for particular purpose. • Summary judgment for R&K; Lee appealed. • HELD: Affirmed. UCC 2-316(2) states to exclude these warranties, writing must be “conspicuous”. • Here writing was in capital letters. • A reasonable person would have noticed it.

Seller’s Remedies • Buyer repudiates before receiving goods • Cancel contract • ID goods; minimize losses by completing or stopping manufacture • Withhold or stop delivery • Resell goods in commercially reasonably manner • Sue buyer for losses incurred • Buyer repudiates after receiving goods • If buyer won’t pay, sue for payment & damages • If buyer wrongfully rejects, can reclaim goods & remedy as above; If can’t reclaim goods, sue for payment & damages

Buyer’s Remedies • Seller repudiates before delivery of goods • Cancel contract • Obtain goods from another supplier • Sue seller • Seller fails to deliver • Cancel contract • Obtain goods from another supplier • Called cover: price paid for substitute goods or market price for measure of damages • Sue seller

Buyer’s Remedies • Seller delivers nonconforming goods, buyer rejects • Cancel contract • Obtain goods from another supplier • Sue seller • Sell rejected goods to recover advance payments • If no advance payments, store or reship goods • Seller delivers nonconforming goods, buyer accepts • Deduct damages from price • Sue seller for damages • Sue for breach of warranty

Buyer’s Damages • Cover • Buy substitute goods and recover price difference • Incidental damages • Include: reasonable costs of inspecting, receiving, transporting and taking care of goods • Consequential damages • Foreseeable damages that result from seller’s breach • May be with third parties, not necessarily seller

CaseQVC, Inc. v. MJC America, Ltd. • QVC (TV shopping network) offered customers Soleus-brand electric heaters. Made in China for Soleus. QVC sold 19,100 heaters in 2007-2008. • Customers reported safety problems. • QVC stopped sales and had product evaluated. • Showed quality problems. • QVC ordered a recall; refunded money to customers who returned the product or returned electric cord to heater. • QVC’s contract with Soleus contained strong warranty terms. • Holding seller responsible for all costs related to defects, including recall costs. • Soleus disputed there was a problems. • QVC sued. • District Court: Soleus breached warranty so awarded damages to QVC. (Continued)

CaseQVC, Inc. v. MJC America, Ltd. • Section 4 of Purchase Orders: Soleus agreed to indemnify QVC from any “direct, special, exemplary, and consequential damages and losses of any kind” including lost profits & attorneys’ fees “based upon or resulting from . . . any alleged or actual defect” in Heaters . . . . • QVC sought damages for cost price of heaters, lost profits, refunded customer shipping costs, shipping costs and several other center processing and recall costs. • HELD: QVC receives such damages for $1,681,806.84. (see court decision for details of different kinds of damages)

The Convention on Contracts for the International Sale of Goods (CISG) • Sales covered by CISG – default rule of law for commercial sale of goods by parties in countries that have adopted CISG. • Parties can specify to exclude application of CISG and choose another law to govern the contract. • Covers only sales between merchants, not the consuming public. • Sales excluded: • Auction sales • Consumer goods bought for household use • Contracts primarily for labor or other services • Electricity • Ships and aircraft • Securities such as stock, negotiable instruments and money

CISG Similarities to UCC • Formality • Need not be formal, nor in writing; Look at circumstances for interpretation • Offers • Advertisements are not offers; Can fill in missing terms; Is “sufficiently definite if indicates goods & expressly or implicitly fixes/makes provision for determining the quantity and price”. • Acceptance • Must be made within time stated orreasonable time; Sent by reasonable means • Battle of the Forms • If differences are material, then 2nd form is counter offer, not contract • Duties of Parties • Seller must deliver goods with good title; buyer must notify seller of defects within a reasonable time • Remedies • Behave in reasonable manner and give opportunity to cure breach – Nachfrist notice (period of grace) -- notice of the problem and a chance for nonconforming party to cure before lawsuit); Duty to mitigate damages

CaseDingxiLonghai Dairy v. Becwood Technology Group • Dingxi LonghaiDairy (China) agreed to ship 612 metric tons of Inulin (dietary fiber extract) to Becwood, Minnesota company. • 4 shipments from Tianjin, China to Londonderry, New Hampshire. • Becwood received first 2 shipments. • Paid for one, but refused to pay for second – because mold on packaging. • Dingxi recalled shipments 3 and 4 before reaching destination. • Becwood sued for breach of contract. • District court held for Dingxi on second shipment. • Dismissed Dingxi’s claims for damages relating to shipments 3 and 4. • Decision appealed. (Continued)

CaseDingxi v. Becwood • Contract was governed by CISG. • The CISG structure confirms elements of breach of contract action: Formation, performance, breach and damages. • Dingxi said it delivered all 4 shipments and Becwood failed to pay for last 3 shipments. Wanted to recover $1,415,086 plus other costs and fees. • Becwood moved to dismiss claim re: shipments 3 and 4. Said seller who recalls goods before they reach buyer cannot recover damages, if it is assumed buyer breach. • The district court had agreed with Becwood. It said “Dingxi has failed to assert cognizable damages on shipments 3 and 4.” • Dingxi said there was breach of contract due to performance of its contractual duty to deliver and Becwood’s refusal to pay. • Dingxi recalled shipments before they reached buyer. This fact will likely preclude recovery of full contract price. • BUT if Dingxi proves that Becwood breach the contract for shipments 3 and 4, it is almost certain to be entitled to some monetary relief. • Reversed District Court’s order dismissing Dingxi’s breach-of-contract Claims re: shipments 3 and 4.

International Sales Disputes: The Dominance of Arbitration • United Nations encourages use of arbitration dealings through Convention on the Recognition and Enforcement of Foreign Arbitrable Awards • Most countries have adopted the Convention • Then its courts are bound to recognize and enforce arbitration decisions • If proper procedure was followed • Exception: if the procedure is in conflict with law of the nation of one of the parties OR • Has gone beyond scope of the matter covered by arbitration • In U.S., parties to a contract written under the CISG who require arbitration have little reason to be in court • Duty of arbitrators to resolve dispute under CISG Rules

Domestic and International Sales