Domestic and International Sales

1. Domestic and International Sales Chapter 11

2. 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”

3. 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. 2A 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

4. Title can pass as parties see fit - for example when the goods: arrive for shipment at a port arrive at buyer’s warehouse leave the seller’s warehouse are halfway between buyer and seller UCC 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) Goods, Merchants, Sales & Titles Under the UCC • Article 2 • applies to sale of goods • All parties are bound to a standard of good-faith, or honest dealing • Title must pass to be a sale • Can hold title if: • 1) goods exist • 2) goods ID’d to contract

5. 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

6. Forming a Sales Contract • Common law governs unless UCC changes or modifies the rules • Mostly, UCC reduces the formality required • See Exhibit 11.2

7. 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 goodfaith 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.”)

8. 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.

9. 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.

10. 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

11. 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.

12. 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 usageandpast business dealingsof 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. • Deliveryterm:§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.

13. 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.”

14. 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.

15. 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

16. 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.

17. 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, butdisclaimers must be specific as to the warranties and must be conspicuous.

18. 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.

19. 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.

20. 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

21. 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

22. 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

23. 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

24. 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.

25. 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

26. 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 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 (notice of problem and a chance for nonconforming party to cure prior to lawsuit) Duty to mitigate International Sales

27. Treibacher Industire, A.G. v. Allegheny Technologies, Inc. • Treibacher, of Austria, sells hard metal powders. • TDY, subsidiary of Allegheny, ordered TaC (tantalum carbide) for delivery “on consignment”. • TaC 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 TaC. • 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 TaC. • Treibacher argued that had 7 years of previous dealings and understood “on consignment” meant TDY didn’t have to immediately pay for all TaC ordered, but Treibacher delayed billing until TDY actually used the powder. (Continued On Next Slide)

28. 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