2. ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. D OMESTIC AND I NTERNATIONAL S ALES Chapter 11 Meiners, Ringleb & Edwards The Legal Environment of Business, 12 th Edition

3. ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. H ISTORY OF C OMMERCIAL L AW 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 20 th 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

4. ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. U NIFORM C OMMERCIAL C ODE (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”

5. ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. C ASE C ASE P ARAMOUNT C ONTRACTING V. DPS I NDUSTRIES 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)

6. ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Paramount had 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. C ASE C ASE P ARAMOUNT C ONTRACTING V. DPS I NDUSTRIES

7. ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. G OODS, M ERCHANTS, S ALES AND T ITLES 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 sale of 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

8. ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. F ORMING A S ALES C ONTRACT 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

9. ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. I NTENT TO C ONTRACT 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.”

10. ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. C ASE C ASE C REST R IDGE C ONSTRUCTION V. N EWCOURT, I NC. 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)

11. ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 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. C ASE C ASE C REST R IDGE C ONSTRUCTION V. N EWCOURT, I NC.

12. ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. A CCEPTANCE 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

13. ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. C ASE C ASE O RKAL I NDUSTRIES V. A RRAY C ONNECTOR C ORP. 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)

14. ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 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. C ASE C ASE O RKAL I NDUSTRIES V. A RRAY C ONNECTOR C ORP.

15. ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. C YBER L AW C YBER L AW “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 courts where “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.

16. ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. S TATUTE OF F RAUDS o 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 o 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.

17. ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. F ILLING THE G APS 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 usage and past business dealings of 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 contracts and 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 option for arrangements for shipment. 2-308 presumes delivery at seller’s place of business.

18. ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. C ASE C ASE G RIFFITH V. C LEAR L AKES T ROUT C O. 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)

19. ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 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 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. C ASE C ASE G RIFFITH V. C LEAR L AKES T ROUT C O.

20. ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. I NTERNATIONAL P ERSPECTIVE I NTERNATIONAL P ERSPECTIVE ASSURE 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.

21. ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. P ERFORMANCE AND O BLIGATIONS 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 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 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

22. ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. B UYER ’ S R IGHTS AND O BLIGATIONS 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.

23. ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. S ALES W ARRANTIES 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 to the type of warranty and must be conspicuous.

24. ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. I MPLIED W ARRANTIES 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.

25. ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. C ASE C ASE L EE VS. R&K M ARINE, I NC. 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.

26. ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. S ELLER ’ S R EMEDIES o 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 o 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

27. ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. B UYER ’ S R EMEDIES 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

28. ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 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 B UYER ’ S R EMEDIES

29. ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. B UYER ’ S D AMAGES 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

30. ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. C ASE C ASE QVC, I NC. V. MJC A MERICA, L TD. 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)

31. ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 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) C ASE C ASE QVC, I NC. V. MJC A MERICA, L TD.

32. ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. T HE C ONVENTION ON C ONTRACTS FOR THE I NTERNATIONAL S ALE OF G OODS (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

33. ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CISG S IMILARITIES 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 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

34. ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. C ASE C ASE D INGXI L ONGHAI D AIRY V. B ECWOOD T ECHNOLOGY G ROUP Dingxi Longhai Dairy (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)

35. ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 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. C ASE C ASE D INGXI V. B ECWOOD

36. ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. I NTERNATIONAL S ALES D ISPUTES : T HE D OMINANCE OF A RBITRATION 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