Domestic and International Sales Chapter 11 Uniform

Domestic and International Sales Chapter 11

Uniform Commercial Code (UCC) • Governs contracts for sale of goods (not services, real estate or professional services) • 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”

Articles of the UCC • Art. 1: General Provisions – Purpose of the UCC: general guidance and definitions • Art. 2: Sale of Goods – Applies to sale of goods (focus of Ch. 11) – Art. 2 A concerns lease of goods. • Art. 3: Negotiable Instruments – Use of checks, promissory notes, and other financial instruments • Art. 4: Bank Deposits and Collections – Rights and duties of banks and their clients • Art. 5: Letters of Credit – Guaranteed payment by a bank that extends credit for a client • Art. 6: Bulk Transfers – Sale of large part of a company’s material • Art. 7: Warehouse Receipts, Bills of Lading, and Other Documents – Papers proving ownership of goods being shipped • Art. 8: Investment Securities – Rights and Duties related to stock or other ownership interests • Art. 9: Secured Transactions – Sales in which seller holds a financial interest in goods sold

Goods, Merchants, Sales & Titles Under the UCC • • • Title can pass as parties see fit Article 2 - for example when the goods: – applies to sale of – arrive for shipment at a port goods – arrive at buyer’s warehouse All parties are bound to a – leave the seller’s warehouse standard of good-faith, – are halfway between buyer or honest dealing and seller Title must pass to be a • UCC says title passes when: sale – seller completes all obligations regarding Can hold title if: delivery of goods – 1) goods exist – when seller delivers title – 2) goods ID’d to documents (if goods didn’t contract need to be moved)

Merchants Under Article 2 • Merchants are held to a higher standard of conduct than others – “good faith and honest dealing” • A merchant: – 1) regularly deals in these kinds of goods – 2) presents himself as having knowledge or skill special to the transaction, or – 3) has an agent who does the same

Forming a Sales Contract • Common law governs unless UCC changes or modifies the rules • Mostly, UCC reduces the formality required • See Exhibit 11. 2

Intent to Contract • Offer & Acceptance rules relaxed – only need evidence of 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 and don’t allow one party to profit from the bad fortune of the other due to unexpected large changes in market conditions • Merchants Firm Offers – irrevocable – Sign in writing that offer will remain open for given period. (If not stated, period is “reasonable time. ”)

Crest Ridge Construction v. Newcourt • John & Joe Brower set up Crest Ridge (CR). • Awarded a subcontract on job to provide wall panels. • Wanted to use the panels made by Newcourt. Price was $760, 000 “subject to credit department approval. ” • Because CR was a new company, little credit info. • Over the next 6 months, detailed discussions re: 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). • CR could not make advance payment; Newcourt cancelled order. CR found other supplier at a higher price. • CR sued Newcourt. • Jury awarded $70, 214 in damages. Newcourt appealed.

Crest Ridge Construction v. Newcourt • HELD: Affirmed. Breach of contract by Newcourt. • The phrase “subject to credit department approval” was in form contract but seemingly ignored by both parties. • 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, documents usually binding in construction industry. • For 6 months, parties exchanged designs to clarify project. • Newcourt sent samples; revisions of shop drawing; fastening details; stipulations re: color; final drawings concerning installation. All appeared to be moving forward. • Parties left payment terms blank. Look to “general usage” in the industry. To ask for full payment in advance at late date, was a breach of the agreement by Newcourt. • Damages were for added higher cost of alternative supplier.

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 • Conflicting Terms – the battle of the forms! – 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

Acceptance Under Article 2 • Statute of Frauds – Sale of goods for $500+ is not enforceable unless in writing and signed by the party against whom enforcement is sought. – Not every material term needs to be specified. • Failure to Respond To A Writing – § 2 -201(2): if writing in confirmation of the contract is received, it satisfies the writing requirements UNLESS “written notice of objection” is within 10 days after writing received. • Parol Evidence – More relaxed under the UCC than at common law. – § 2 -202 says parol evidence can’t be used against the writing. – BUT can explain customary trade dealings or meaning of 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 fills parts of contract left open or unclear, i. e. price, quantity, or delivery terms – UCC looks to trade usage and past business dealings of the parties to determine outcome of unclear terms. – It applies “reasonableness” standard. – Price: if contract not clear, § 2 -305 tells courts to determine “a reasonable price”–fair market value, past dealings, etc. may be used. – Quantity: 2 -306 recognizes requirements contracts and output contracts, where quantities may not be clear. – Delivery term: § 2 -309: delivery must be within “reasonable time” – § 2 -311: seller has options for shipping arrangements – § 2 -308: presumes delivery at seller’s place of business.

Griffith v. Clear Lakes Trout Co. • Clear Lakes, a fish hatchery, had a 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”. • Deal was for 6 years. • After 3 years, Clear Lake’s said customers demanded larger fish than 12 -16 oz. fish delivered by Griffith. • Clear Lakes began to take fewer fish; wanted bigger fish. • Griffith was left with too many fish; Griffith deeply in debt; could not change operations easily—costly to grow larger fish. • 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. ”

Griffith v. Clear Lakes Trout • District court ruled in favor of Griffith. • Court held that parties knew that market size was 12 -16 oz. • Clear Lakes appealed. • HELD: Affirmed. Both parties understood that “market size” referred to a range of approximately one pound live weight. • Parties intended to make a contract, and the contract will not fail for indefiniteness. • Performance between 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 usage predating their contract.

Performance and Obligations • • • UCC 2 -601 deals with seller’s delivery conforming to terms of 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, the buyer has right to reject and rescind contract. Seller’s Right to Cure (UCC Section 2 -508): • If time for seller’s performance had not yet passed • If seller notifies buyer of intent to cure defect and • If seller repairs or 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 are nonconforming but accepted, buyer may later revoke acceptance, but only if nonconformity “substantially impairs” value of goods. (2 -606; 2 -607; 2 -608) • 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, but disclaimers must be specific as to the warranties and must be conspicuous.

Sales Warranties: Implied 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 for 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; signed standard purchase agreement. • On agreement: a disclaimer for all warranties, express or implied (including implied warranty of merchantability or fitness for particular purpose). • 3 years later: big cracks in the hull. Appraiser says due to 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 that to exclude warranties, writing must be “conspicuous”. • Here writing was in capital letters. • A reasonable person would have noticed it.

Remedies (UCC Section 1 -106) • Seller’s Remedies for Buyer breach: – 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 – After receiving goods • If buyer won’t pay, sue for payment & damages • If buyer wrongfully rejects, – can reclaim goods & remedy as above – if doesn’t reclaim goods, sue for payment & damages

Remedies • Buyer’s Remedies for Seller breach: – 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 (as in Newcourt case) • sue seller

Remedies • Buyer’s Remedies for Seller breach: – 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/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

Kramer v. ATW Axtell Tech Wholesale • • • Kramer owned CIS, a local Internet service provider. Wanted to upgrade service. Kramer hired Axtell to install equipment so Kramer could offer wireless services for residential (2. 4 GHz) & commercial (5. 8 GHz) users. Believed he would have ~3, 000 new customers for service. Axtell installed equipment on towers. Service worked for 2. 4 GHz range, but had some problems. Did not work for 5. 8 GHz range. Kramer sued. Trial court found parties entered into an oral contract and Axtell had breached the contract & warranties for fitness for a particular purpose. Kramer should be compensated $95, 000: – the $50, 000 paid to Axtell; – $10, 000 personal time and service trying to make system operational; – $15, 000 for cost of tower rental he paid when system was inoperable; – $20, 000 lost profits (not lost gross revenue). Lost profits beyond this amount too speculative. Kramer appealed, saying damages were too low. Appeals Court Held: All trial court’s damages affirmed.

International Sales • U. N. Convention on Contracts for the International Sale of Goods (CISG) • Sales covered by CISG – commercial sale of goods by parties who have places of business in countries that have adopted CISG • Sales excluded: – Auction sales – Consumer goods bought for household use – Contracts primarily for labor or other services • Goods excluded: – Electricity – Ships and aircraft – Securities: stock, negotiable instruments & money

International Sales 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 • Acceptance – must be made within time stated or reasonable time • Battle of the Forms – if differences are material, then 2 nd 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 (notice of problem and a chance for nonconforming party to cure prior to lawsuit) – Duty to mitigate

Treibacher Industire, A. G. v. Allegheny Technologies, Inc. • Treibacher, of Austria, sells hard metal powders. • TDY, subsidiary of Allegheny, ordered Ta. C (tantalum carbide) for delivery “on consignment”. • Ta. C used at Alabama plant to make tungsten-graded carbide powers. • TDY received first several shipments, then cancelled the order, as it found a cheaper source of Ta. C. • Treibacher had to sell powder at lower price; sued TDY. • TDY argued that “on consignment” meant common term of no sale unless and until TDY actually used the Ta. C. • Treibacher argued that had 7 years of previous dealings and understood “on consignment” meant TDY didn’t have to immediately pay for all Ta. C ordered, but Treibacher delayed billing until TDY actually used the powder. (Continued On Next Slide)

International Sales Disputes: The Dominance of Arbitration • UN encourages use of arbitration through Convention on the Recognition and Enforcement of Foreign Arbitrable Awards • If a country has adopted the Convention – 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