chp10-13

Domestic and International Sales

Chapter 11

Meiners, Ringleb and Edwards

The Legal Environment of Business, 13th Edition

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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, • UCC applies if dominant value in goods; common

law applies if dominant value in services • However parties can agree that either UCC or

common law will apply to govern their contract

• States adopt model UCC statute with some variations.

• Purpose • “simplify, clarify, and modernize the law governing

commercial contracts” (§1-102)

History of Commercial Law • English courts looked to lex

mercatoria (“the law merchant”) for guidance.

• Contract law could be more formal than how businesses actually interacted.

• In the early 20th century, each state had different laws for commercial transactions

• Made it difficult to do business in different states

• UCC • Uniform Commercial Code • In 1950’s, UCC presented to the states

• All States have adopted except Louisiana has not

adopted Article 2

• Article 2 Covers contracts for sale of goods

• Most countries rely on Code Law to govern commercial transactions.

Articles of the UCC • Art. 1: General Provisions

• Purpose of the UCC: guidance and definitions • Art. 2: Sale of Goods (2A Leases)

• Sale of goods (or lease of goods) • Art. 3: Negotiable Instruments

• Use of checks, promissory notes, and other financial instruments • Art. 4: Bank Deposits and Collections (4A Fund Transfers)

• Rights and duties of banks and their clients and money transfers between banks.

• Art. 5: Letters of Credit • Guaranteed payment by a bank that extends credit on behalf of a client

• Art. 6: Bulk Transfers and Bulk Sales • Auctions and sale of large part of a company’s assets

• Art. 7: Warehouse Receipts, Bills of Lading, and Other Documents of Title • Storage and bailment of goods

• Art. 8: Investment Securities • Rights and Duties related to stock and financial assets

• Art. 9: Secured Transactions • Sales in which seller holds a security interest in goods sold

Venable v. SunTrust Bank • Venable bought a car in March 2006 from Ford Dealer in Atlanta. SunTrust

provided financing. Contract for 75 monthly payments. If Venable failed to pay, SunTrust could take the car.

• Venable quit paying in November 2007. For no clear reason: SunTrust did not seize car for more than 4 years and then sold it at auction. Sale proceeds were applied to debt owed on car.

• SunTrust sued Venable in October 2012 to collect remainder of debt owed. • Venable argued the SunTrust could not sue. The sale of the car was subject to 4-

year statue of limitations under UCC Article 2. • SunTrust claimed the contract was subject to 6-year statute of limitation that

applies to common law contracts. • District Court: Held summary judgment for SunTrust. • Venable appealed.

Continued

Venable v. SunTrust Bank, Continued

• Reversed. SunTrust’s suit is time barred. • If a contract contains a blend of sale and non-sale elements, look to

dominant purpose behind the contract. • SunTrust had a security interest in vehicle, but it was not intended to

operate only as a security transaction. • The financing provision was incidental to the sales contract. • Contract is not exempt from Article 2. • Therefore applicable statute of limitations is 4 years. • Statute of limitations began to run when breach occurred in November

2007 when Venable stopped making payments. • SunTrust did not file an action until October 2012 which was outside the

4-year statute of limitations.

Merchants Under Article 2

• Merchants are held to a higher standard of conduct than others – “good faith and honest dealing” required.

• A merchant: • 1) Regularly deals in the goods in question • 2) Presents himself as having knowledge or

skill specialized to the transaction • 3) Or has an agent who does the same

Goods, Sales and Titles Under the UCC

• Article 2 • Applies to sale of goods.

Goods must be moveable things.

• All parties are bound to a standard of good-faith, or honest dealing. Sellers cannot pass good title to stolen goods.

• Title must pass to be a sale. One can hold title if: • 1) Goods exist • 2) Goods identified to

contract

• Title can pass as parties see fit - for example when the goods:

• Arrive for shipment at a port • Arrive at the buyer’s

warehouse • Leave the seller’s warehouse • Are halfway between buyer

and seller

• UCC says if not specified then title passes when:

• Seller completes all obligations regarding delivery of goods

• When seller delivers title documents (if goods did not need to be moved)

Forming a Sales Contract

Common law governs a contract unless the UCC definitions apply to a sale as specified in Article 2.

Mostly, the UCC reduces the formality required

Creates UCC based relationships

Intent to Contract • Offer & Acceptance rules relaxed

• Only need agreement between parties

• Indefinite Offer • OK to be missing major terms such as 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 Do not allow one party to profit too much from the bad

fortune of the other due to unexpected large changes in market conditions

• Merchants Firm Offers – Irrevocable • When signed in writing that offer will remain open for given

period. • If not stated, period is “reasonable time.”

Crest Ridge Construction v. Newcourt, Inc.

• John & Joe Brower set up their own company, Crest Ridge. • Won a subcontract on job to provide wall panels. Wanted to use

panels made by Newcourt. After discussions, price set at $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 regarding panel specs

and shipment was set. • Newcourt then 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 the advanced payment. Newcourt

cancelled the order. • Crest Ridge had to find another supplier at a higher price. • Crest Ridge sued Newcourt. • Jury awarded $70,214 in damages. • Newcourt appealed. Continued

Crest Ridge Construction v. Newcourt, Inc. continued

• Affirmed. Breach of contract by Newcourt. • The phrase “subject to credit department approval” did not give

Newcourt the right to cancel at the last minute. • UCC looks at “any manner sufficient to show agreement, including

conduct by both parties . . .” to recognize that a contract existed.

• Here. the parties exchanged price quotes, the purchase order, and documents usually binding in construction industry.

• For 6 months, parties exchanged designs to clarify project. • Newcourt sent material samples; revisions of shop drawings; fastening

details; stipulations about color; and 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 under Article 2 standards.

Acceptance Under Article 2

• Greater flexibility in communication of acceptance

• “Any reasonable manner” under the circumstances

• May be valid even if add new terms or change existing terms

• If there are “material alterations” in the acceptance, they become part of the contract only if the offeror accepts the new terms

• Conflicting Terms – the “battle of the forms” • When offeree’s form does not match offeror’s form • There is an acceptance, but offeror’s terms govern unless

special action taken

• Contract Modification • Need not provide new consideration, but must have “good

faith dealing.” Modification must usually be in writing.

Orkal Industries v. Array Connector Corp.

• Orkal (New York company) bought airplane-related products from Array (Florida company).

• Orkal would send purchase order forms. • Array would confirm orders with “customer order

acknowledgment” forms. • These forms contained a “forum selection clause.” • Clause stated that in case of dispute, Array would have to bring

suit in a Florida court. • Orkal did not object to the clause. • Later Orkal sued Array (defendant) in New York 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.

Orkal Industries v. Array Connector Continued

Additional terms become a part of a contract unless specifically objected to within a reasonable time or Unless additional 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

alteration to initial contracts. Orkal never agreed to that term, so original terms held. No requirement to go to court in Florida. HELD: Reversed.

Acceptance Under Article 2 • Statute of Frauds

• Basic rule: 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, just enough writing to indicate intent.

• Failure to Respond To A Writing • Section 2-201(2): if a writing in confirmation of a contract is received, it satisfies the

writing requirements unless “written notice of objection” is within 10 days after writing was received.

• Parol Evidence • More relaxed under the UCC than at common law. • Section 2-202 says parol evidence cannot usually be used against the writing but it

can explain customary trade dealings or the meaning of terms. • However, if the intent is 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 fills parts of contract left open or unclear, i.e. price

or delivery terms, so a contract can proceed.

• UCC will look to trade usage and past business dealings of the parties in determining the outcome of unclear terms.

• It will also apply “reasonableness” standard.

• If the contract not clear about price, §2-305 tells courts to determine “a reasonable price” – fair market value, past dealings, etc. may be used.

• Regarding quantity, §2-306 (1) recognizes requirements contracts and output contracts, where quantities unclear.

• Regarding delivery term, §2-309 states delivery must be within “a reasonable time.”

• §2-311 states that seller has option to arrange shipment.

• §2-308 presumes delivery at seller’s place of business.

Griffith v. Clear Lakes Trout Co. • Clear Lakes, a fish hatchery, had a 6-year deal with Griffith, a trout grower. • Griffith would buy tiny trout from Clear Lakes and sell them back when

they had grown to “market size” • After 3 years, Clear Lake’s customers demanded fish larger than 12-16 oz.

fish delivered by Griffith. • Clear Lakes began to take fewer fish; wanted larger fish. • Griffith was left with too many fish and 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 existed because the parties differed as to

what was “market size”

Griffith v. Clear Lakes Trout Co. Continued

• District court ruled in favor of Griffith. • Court held that parties knew that market size was 12-16 oz. • Clear Lakes appealed. • Affirmed. • Both parties understood the the industry meaning of “market size.” • Parties intended to make a contract and the it will not fail for

indefiniteness. • Course of performance between Griffith and Clear Lakes over three years

with 12-16 ounce trout indicates an understanding of the “market size.” • There is similar trade usage pre-dating their contract.

Assuring Foreign Buyers of Product Quality

When a firm is unknown, especially moving into foreign markets, it needs to demonstrate products are good quality.

Certification of private organization based in Switzerland that has global acceptance is a good mechanism.

 International Organization for Standardization (ISO) often used:  Network of national standards bodies in 163 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 agreement:

• If the goods fail in any respect to conform to the contract, the buyer may: • Reject the whole, • Accept the whole, or • Accept any commercial unit or units or reject the rest

• Tender of Delivery • Valid and sufficient offer of performance under a contract • Seller obliged to tender 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, buyer has right to reject goods and rescind contract.

• Seller’s Right to Cure (UCC Section §2-508) holds if: • Time for seller’s performance had not yet passed • Seller notifies buyer of intent to cure defect, and • Seller properly repairs/replaces 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 nonconforming but accepted, buyer may later revoke acceptance, if problem “substantially impairs” value of goods. (§§§ 2-606; 2-607; 2-608). (Parties can always negotiate a lower price.)

• Buyer has obligation to pay (§2-507) when goods are received. Can inspect before payment is made.

Sales Warranties

• Warranty of Title – Good title must 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 evidenced (§2-313): • From sample or model • By description of attributes • By seller’s statements or promises

• Warranties may be disclaimed, but disclaimers must be specific to the type of warranty and must be conspicuous.

UCC Warranties Merchantability - For sales by merchants:  Goods must be of quality generally acceptable in trade  Must be able to do what is expected

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

building that will not chip and peel. Seller may make disclaimers; language may need to be

specific and the disclaimer must be conspicuous.

Lee 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. Affirmed. UCC 2-316(2) states to exclude these warranties, writing

must be “conspicuous”. Here writing was in capital letters and buyer signed contract. A reasonable person would have noticed it.

Sellers’ Remedies for Buyers’ Breach

oBuyer 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

oBuyer 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

Buyers’ Remedies for Seller Breach

o Seller repudiates before delivery of goods

• Cancel contract • Obtain goods from another supplier • Sue seller

o 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

Buyers’ 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

Buyers’ 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 a seller’s breach • May be with third parties, not necessarily seller

QVC, 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.

• Held seller responsible for all costs related to defects, including recall costs.

Soleus disputed there were problems. QVC sued.

QVC, Inc. v. MJC America, Ltd., continued

• Court: Soleus breached warranty so awarded damages to QVC.

• Section 4 of Purchase Orders: Soleus agreed to indemnify QVC for any “direct, special, exemplary, and consequential damages and losses of any kind” including lost profits and 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 decision in text for details of different kinds of damages.)

Convention on Contracts for the International Sale of Goods (CISG)

International 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 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 and expressly or implicitly fixes/makes provision for determining the quantity and price.

Acceptance: Must be made within time stated or reasonable 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

VLM Food International v. Illinois Trading Co.

• VLM (Canadian company) sold frozen potatoes to IT.

• 9 transactions without problems.

• IT ran into financial trouble; failed to pay VLM for shipments.

• Each transaction handled the same way.

• Invoice provision stated IT was liable for attorney’s fees if it breach the contract.

• VLM sued. IT admitted it owed money, but not responsible for attorney’s fees.

• District court: Agreed with IT; VLM appealed.

VLM Food International, Inc. v. Illinois Trading Co.

• CISG defines “loss” from breach of contract and does not include attorneys fees although parties can agree to that by contract.

• VLM must show the contract with IT expressly made IT liable for the attorney’s fees.

• Depends on when agreement became binding. Contract was created when IT received VLM’s confirmation e-mails.

• Attorneys fees provisions not part of the agreement described in purchase orders and e-mail confirmation.

• Term first appeared in trailing invoices mailed to IT after VLM delivered the product.

• VLM already bound itself to the contract. Any term not “mirrored” in the offer and acceptance is excluded.

• AFFIRMED: Attorneys fees not included in contracts.

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

 If a country has adopted the Convention:  Courts 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