E X H I B I T 2 2 – 1 • A Letter-of-Credit Transaction
inquire into whether actual conditions have been sat- isfied greatly reduces the costs of letters of credit.
Remedies for Breach of International Sales Contracts
The United Nations Convention on Contracts for the International Sale of Goods (CISG) provides interna- tional sellers and buyers with remedies very similar to those available under the UCC. Article 74 of the CISG provides for money damages, including foreseeable consequential damages, on a contract’s breach. As under the UCC, the measure of damages is normally the difference between the contract price and the mar- ket price of the goods.
Under Article 49, the buyer is permitted to avoid obligations under the contract if the seller breaches the contract or fails to deliver the goods during the time specified in the contract or later agreed on by the parties. Similarly, under Article 64, the seller can avoid
obligations under the contract if the buyer breaches the contract, fails to accept delivery of the goods, or fails to pay for the goods.
The CISG also allows for specific performance as a remedy under Article 28, which provides that “one party is entitled to require performance of any obliga- tion by the other party.” This statement is then quali- fied, however. Article 28 goes on to state that a court may grant specific performance as a remedy only if it would do so “under its own law in respect of similar contracts of sale not governed by this Convention.”As already discussed, in the United States the equitable remedy of specific performance will normally be granted only if no adequate remedy at law (money damages) is available and the goods are unique in nature. In other countries, however, such as Germany, specific performance is a commonly granted remedy for breach of contract.
GFI, Inc., a Hong Kong company, makes audio decoder chips, one of the essential components used in the manufacture of MP3 players. Egan Electronics contracts with GFI to buy 10,000 chips on an installment contract, with 2,500 chips to be shipped every three months, F.O.B.
Hong Kong, via Air Express. At the time for the first delivery, GFI delivers only 2,400 chips but explains to Egan that although the shipment is less than 5 percent short, the chips are of a higher quality than those specified in the contract and are worth 5 percent more than the contract price. Egan accepts the
shipment and pays GFI the contract price. At the time for the second shipment, GFI makes a shipment identical to the first. Egan again accepts and pays for the chips. At the time for the third shipment, GFI ships 2,400 of the same chips, but this time GFI sends them via Hong Kong Air instead of Air Express.
While in transit, the chips are destroyed. When it is time for the fourth shipment, GFI again sends 2,400 chips, but this time Egan rejects the chips without explanation. Using the information presented in the chapter, answer the following questions.
1. Did GFI have a legitimate reason to expect that Egan would accept the fourth shipment? Why or why not?
2. Did the substitution of carriers in the third shipment constitute a breach of the contract by GFI?
Explain.
3. Suppose that the silicon used for the chips becomes unavailable for a period of time. Consequently, GFI cannot manufacture enough chips to fulfill the contract but does ship as many as it can to Egan.
Under what doctrine might a court release GFI from further performance of the contract?
4. Under the UCC, does Egan have a right to reject the fourth shipment? Why or why not?
Performance and Breach of Sales and Lease Contracts
455
conforming goods 438 cover 447
cure 439
installment contract 440 letter of credit 453 perfect tender rule 439
replevin 448
tender of delivery 438
22–1. Ames contracts to ship to Curley one hundred model Z television sets. The terms of delivery are F.O.B. Ames’s city, by Green Truck Lines, with delivery on or before April 30. On April 15, Ames discovers that because of an error in inventory control, all model Z sets have been sold, and the stock has not been replenished.Ames has model X, a similar but slightly more expensive unit,in stock.On April 16, Ames ships one hundred model X sets, with notice that Curley will be charged the model Z price. Curley (in a proper manner) rejects the model X sets when they are tendered on April 18. Ames does not wish to be held in breach of contract, even though he has tendered non- conforming goods. Discuss Ames’s options.
22–2.QUESTION WITH SAMPLE ANSWER Topken has contracted to sell Lorwin five hun- dred washing machines of a certain model at list price. Topken is to ship the goods on or before December 1. Topken produces one thousand washing machines of this model but has not yet prepared Lorwin’s shipment. On November 1, Lorwin repudiates the con- tract. Discuss the remedies available to Topken.
• For a sample answer to Question 22–2, go to Appendix I at the end of this text.
22–3. Lehor collects antique cars. He contracts to pur- chase spare parts for a 1938 engine from Beem. These parts are not made anymore and are scarce.To obtain the contract with Beem, Lehor agrees to pay 50 percent of the purchase price in advance.On May 1,Lehor sends the payment, which is received on May 2. On May 3, Beem, having found another buyer willing to pay substantially more for the parts, informs Lehor that he will not deliver as contracted. That same day, Lehor learns that Beem is insolvent. Discuss fully any possible remedies available to Lehor to enable him to take possession of these parts.
22–4. Remedies of the Buyer or Lessee. Mississippi Chemical Corp. (MCC) produces ammonia at its fertilizer plant in Yazoo City, Mississippi.The production of ammonia involves the compression of gas in special equipment
called a compressor train. In 1989, MCC bought from Dresser-Rand Co. a specially designed train that included a
“high-case compressor” and a “low-case compressor.” The contract expressly guaranteed that the train would be free from defects and would conform to certain technical spec- ifications, but it did not work as promised.When the high- case compressor broke in 1990,MCC wrote to Dresser,“This letter constitutes notice by MCC that [Dresser] is in breach”
of the contract.The same defects caused the low-case com- pressor to break in 1993 and 1996. In 1997, MCC filed a suit in a federal district court against Dresser, asserting a num- ber of claims based on the contract.Dresser argued,in part, that it had never received written notice of the defects in the low-case compressor and thus was entitled to judg- ment as a matter of law. Was there sufficient notice to Dresser for MCC to recover for damages caused by defects in the train? Discuss. [Mississippi Chemical Corp. v. Dresser- Rand Co.,287 F.3d 359 (5th Cir. 2002)]
22–5. Acceptance.In April 1996, Excalibur Oil Group, Inc., applied for credit and opened an account with Standard Distributors, Inc., to obtain snack foods and other items for Excalibur’s convenience stores. For three months, Standard delivered the goods and Excalibur paid the invoices. In July, Standard was dissolved and its assets were distributed to J. F. Walker Co. Walker continued to deliver the goods to Excalibur, which continued to pay the invoices until November, when the firm began to experience financial difficulties. By January 1997, Excalibur owed Walker $54,241.77. Walker then dealt with Excalibur solely on a collect-on-delivery basis until Excalibur’s stores closed in 1998. Walker filed a suit in a Pennsylvania state court against Excalibur and its owner to recover amounts due on the unpaid invoices. To suc- cessfully plead its case, Walker had to show that there was a contract between the parties. One question was whether Excalibur had manifested acceptance of the goods delivered by Walker. How does a buyer manifest acceptance? Was there an acceptance in this case? In whose favor should the court rule, and why? [J. F. Walker Co. v. Excalibur Oil Group, Inc.,792 A.2d 1269 (Pa.Super.
2002)]
22–6.CASE PROBLEM WITH SAMPLE ANSWER Eaton Corp. bought four air-conditioning units from Trane Co., an operating division of American Standard, Inc., in 1998. The contract stated in part, “NEITHER PARTY SHALL BE LIABLE FOR . . . CONSEQUENTIAL DAMAGES.” Trane was responsible for servicing the units.During the last ten days of March 2003, Trane’s employees serviced and inspected the units, changed the filters and belts,and made a materials list for repairs. On April 3, a fire occurred at Eaton’s facility, exten- sively damaging the units and the facility, although no one was hurt. Alleging that the fire started in the electric motor of one of the units, and that Trane’s faulty servicing of the units caused the fire, Eaton filed a suit in a federal district court against Trane. Eaton asserted a breach of contract, among other claims, seeking consequential damages. Trane filed a motion for summary judgment, based on the limitation-of-remedies clause.What are con- sequential damages? Can these be limited in some cir- cumstances? Is the clause valid in this case? Explain.
[Eaton Corp. v. Trane Carolina Plains,350 F. Supp.2d 699 (D.S.C. 2004)]
• To view a sample answer for Problem 22–6, go to this book’s Web site at academic.
cengage.com/blaw/clarkson, select
“Chapter 22,” and click on “Case Problem with Sample Answer.”
22–7. Perfect Tender. Advanced Polymer Sciences, Inc.
(APS), based in Ohio, makes polymers and resins for use as protective coatings in industrial applications.APS also owns the technology for equipment used to make cer- tain composite fibers.SAVA gumarska in kemijska indus- tria d.d.(SAVA), based in Slovenia, makes rubber goods.
In 1999, SAVA and APS contracted to form SAVA Advanced Polymers proizvodno podjetje d.o.o.(SAVA AP) to make and distribute APS products in Eastern Europe.
Their contract provided for, among other things, the alter- ation of a facility to make the products using specially made equipment to be sold by APS to SAVA. Disputes arose between the parties, and in August 2000, SAVA stopped work on the new facility.APS then notified SAVA that it was stopping the manufacture of the equipment and “insist[ed] on knowing what is SAVA’s intention towards this venture.” In October, SAVA told APS that it was canceling their contract. In subsequent litigation, SAVA claimed that APS had repudiated the contract when it stopped making the equipment.What might APS assert in its defense? How should the court rule? Explain.
[SAVA gumarska in kemijska industria d.d. v. Advanced Polymer Sciences, Inc.,128 S.W.3d 304 (Tex.App.—Dallas 2004)]
22–8.Remedies of the Buyer. L.V.R.V., Inc., sells recre- ational vehicles (RVs) in Las Vegas, Nevada, as Wheeler’s Las Vegas RV. In September 1997,Wheeler’s sold a Santara RV made by Coachmen Recreational Vehicle Co. to Arthur and Roswitha Waddell. The Waddells hoped to spend two or three years driving around the country, but
almost immediately—and repeatedly—they experi- enced problems with the RV.Its entry door popped open.
Its cooling and heating systems did not work properly. Its batteries did not maintain a charge. Most significantly, its engine overheated when ascending a moderate grade.
The Waddells took the RV to Wheeler’s service depart- ment for repairs. Over the next year and a half, the RV spent more than seven months at Wheeler’s. In March 1999, the Waddells filed a complaint in a Nevada state court against the dealer to revoke their acceptance of the RV. What are the requirements for a buyer’s revocation of acceptance? Were the requirements met in this case? In whose favor should the court rule? Why? [Waddell v.
L.V.R.V., Inc.,122 Nev. 15, 125 P.3d 1160 (2006)]
22–9. Additional Provisions Affecting Remedies. Nomo Agroindustrial Sa De CV is a farm company based in Mexico that grows tomatoes, cucumbers, and other veg- etables to sell in the United States. In the early 2000s, Nomo had problems when its tomato plants contracted a disease: tomato spotted wilt virus (TSWV). To obtain a crop that was resistant to TSWV, Nomo contacted Enza Zaden North America, Inc., an international corporation that manufactures seeds. Enza’s brochures advertised—
and Enza told Nomo—that its Caiman variety was resist- ant to TSWV. Based on these assurances, Nomo bought Caiman seeds. The invoice, which Nomo’s representative signed, limited any damages to the purchase price of the seeds.The plants germinated from the Caiman seeds con- tracted TSWV, destroying Nomo’s entire tomato crop.
Nomo filed a suit in a federal district court against Enza, seeking to recover for the loss. Enza argued, in part, that any damages were limited to the price of the seeds. Can parties agree to limit their remedies under the UCC? If so, what are Nomo’s best arguments against the enforce- ment of the limitations clause in Enza’s invoice? What should the court rule on this issue? Why? [Nomo Agroindustrial Sa De CV v. Enza Zaden North America, Inc.,492 F. Supp.2d 1175 (D.Ariz. 2007)]
22–10. A QUESTION OF ETHICS
Scotwood Industries, Inc., sells calcium chloride flake for use in ice melt products. Between July and September 2004, Scotwood delivered thirty-seven shipments of flake to Frank Miller & Sons, Inc. After each delivery,Scotwood billed Miller,which paid thirty-five of the invoices and processed 30 to 50 percent of the flake. In August, Miller began complaining about the quality.
Scotwood assured Miller that it would remedy the situa- tion. Finally, in October, Miller told Scotwood, “[T]his is totally unacceptable. We are willing to discuss Scotwood picking up the material.” Miller claimed that the flake was substantially defective because it was chunked. Calcium chloride maintains its purity for up to five years but chunks if it is exposed to and absorbs moisture, making it unus- able. In response to Scotwood’s suit to collect payment on the unpaid invoices,Miller filed a counterclaim in a federal district court for breach of contract, seeking to recover
457
based on revocation of acceptance, among other things.
[Scotwood Industries, Inc. v. Frank Miller & Sons, Inc.,435 F. Supp.2d 1160 (D.Kan. 2006)]
(a) What is revocation of acceptance? How does a buyer effectively exercise this option? Do the facts in this case support this theory as a ground for Miller to recover damages? Why or why not?
(b) Is there an ethical basis for allowing a buyer to revoke acceptance of goods and recover damages?
If so, is there an ethical limit to this right? Discuss.
22–11.VIDEO QUESTION
Go to this text’s Web site at academic.
cengage.com/blaw/clarkson and select
“Chapter 22.” Click on “Video Questions” and view the video titled International: Letter of Credit.Then answer the following questions.
(a) Do banks always require the same documents to be presented in letter-of-credit transactions? If not, who dictates what documents will be required in the let- ter of credit?
(b) At what point does the seller receive payment in a letter-of-credit transaction?
(c) What assurances does a letter of credit provide to the buyer and the seller involved in the transaction?
For updated links to resources available on the Web, as well as a variety of other materials, visit this text’s Web site at
academic.cengage.com/blaw/clarkson
To find information on the UCC, including the UCC provisions discussed in this chapter, refer to the Web sites listed in the Law on the Websection in Chapter 20.
For access to materials and articles concerning the United Nations Convention on Contracts for the International Sale of Goods (CISG), go to the Institute of International Commercial Law’s Web site at
www.cisg.law.pace.edu/cisg/text/cisgint.html
Legal Research Exercises on the Web
Go to academic.cengage.com/blaw/clarkson, the Web site that accompanies this text. Select “Chapter 22” and click on “Internet Exercises.” There you will find the following Internet research exercises that you can perform to learn more about the topics covered in this chapter.
Internet Exercise 22–1: Legal Perspective
International Performance Requirements Internet Exercise 22–2: Social Perspective
Lemon Laws
Internet Exercise 22–3: Management Perspective The Right to Reject Goods
Types of Warranties
Most goods are covered by some type of warranty designed to protect buyers. Articles 2 and 2A of the UCC designate several types of warranties that can arise in a sales or lease contract, including warranties of title, express warranties, and implied warranties.We discuss these types of warranties in the following sub- sections, as well as a federal statute that is designed to prevent deception and make warranties more understandable.
Warranties of Title
Title warranty arises automatically in most sales con- tracts. The UCC imposes the three types of warranties of title discussed here [UCC 2–312, 2A–211].
Good Title In most sales, sellers warrant that they have good and valid title to the goods sold and that the transfer of the title is rightful [UCC 2–312(1)(a)].
Suppose that Alexis steals goods from Camden and sells them to Ona, who does not know that they are stolen. If Camden discovers that Ona has the goods, then he has the right to reclaim them from Ona.When Alexis sold Ona the goods, Alexis automaticallywar- ranted to Ona that the title conveyed was valid and that its transfer was rightful. Because a thief has no title to stolen goods, Alexis breached the warranty of title imposed by UCC 2–312(1)(a) and became liable to the buyer for appropriate damages.(See Chapter 21 on pages 423–427 for a detailed discussion of sales by nonowners.)
No Liens A second warranty of title protects buyers who are unaware of any encumbrances (claims, law, a warranty is an assurance by
one party of the existence of a fact on which the other party can rely. Article 2 (on sales) and Article 2A (on leases) of the Uniform Commercial Code (UCC) designate several types of
warranties that can arise in a sales or lease contract.These warranties include warranties of title, express warranties, and implied warranties.We examine each of these types of warranties in this chapter.
Because a warranty imposes a duty on the seller or lessor, a breach of warranty is a breach of the seller’s or lessor’s promise.
remedies available, if the seller or lessor breaches a warranty, the buyer or lessee can sue to recover damages from the seller or lessor.
Under some circumstances, a breach of warranty can allow the buyer or lessee to rescind (cancel) the agreement.1
Breach of warranty actions are a subset of product liability claims. Product liability
encompasses the contract theory of warranty, as well as the tort theories of negligence,
and 7). Manufacturers and sellers of goods can be held liable for products that are defective or unreasonably dangerous. Goods can be defective in a number of ways, including manufacturing defects, design defects, and inadequate warnings.We examine product liability in the second part of the chapter. Because warranty law protects buyers, some of whom are consumers, warranty law is also part of the broad body of consumer protection law that will be discussed in Chapter 44.
1.Rescission restores the parties to the positions they were in before the contract was made.
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charges, or liabilities—usually called liens2) against goods at the time the contract is made [UCC 2–312(1)(b)]. This warranty protects buyers who, for example, unknowingly purchase goods that are sub- ject to a creditor’s security interest (a security interest in this context is an interest in the goods that secures payment or performance of an obligation—see Chapter 29). If a creditor legally repossesses the goods from a buyer who had no actual knowledge of the security interest,the buyer can recover from the seller for breach of warranty. (A buyer who has actual knowl- edge of a security interesthas no recourse against a seller.)
Consider an example. Henderson buys a used boat from Loring for cash. A month later, Barish proves that she has a valid security interest in the boat and that Loring, who has missed five payments, is in default.
Barish then repossesses the boat from Henderson.
Henderson demands his cash back from Loring.Under Section 2–312(1)(b), Henderson has legal grounds to recover from Loring because the seller of goods war- rants that the goods are delivered free from any secu- rity interest or other lien of which the buyer has no knowledge.
Article 2A affords similar protection for lessees.
Section 2A–211(1) provides that during the term of the lease,no claim of any third party will interfere with the lessee’s enjoyment of the leasehold interest.
No Infringements A merchant-seller is also deemed to warrant that the goods delivered are free from any copyright, trademark, or patent claims of a third person3 [UCC 2–312(3), 2A–211(2)]. If this war- ranty is breached and the buyer is sued by the party holding copyright, trademark, or patent rights in the goods, the buyer must notify the sellerof the litigation within a reasonable time to enable the seller to decide whether to defend the lawsuit. If the seller states in a writing (or record) that she or he has decided to defend and agrees to bear all expenses,then the buyer must turn over control of the litigation to the seller; oth- erwise, the buyer is barred from any remedy against the seller for liability established by the litigation [UCC 2–607(3)(b), 2–607(5)(b)].
In situations that involve leases rather than sales, Article 2A provides for the same notice of infringe- ment litigation [UCC 2A–516(3)(b), 2A–516(4)(b)].
There is an exception for leases to individual con- sumers for personal, family, or household purposes. A consumer who fails to notify the lessor within a rea- sonable time does not lose his or her remedy against the lessor for whatever liability is established in the lit- igation [UCC 2A–516(3)(b)].
Disclaimer of Title Warranty In an ordinary sales transaction, the title warranty can be disclaimed or modified only by specific languagein a contract.For example, sellers may assert that they are transferring only such rights, title, and interest as they have in the goods. In a lease transaction, the disclaimer must “be specific, be by a writing, and be conspicuous” [UCC 2A–214(4)].4
In certain situations, the circumstances surround- ing the sale are sufficient to indicate clearly to a buyer that no assurances as to title are being made.The clas- sic example is a sheriff’s sale; in this situation, buyers know that the goods have been seized to satisfy debts and that the sheriff cannot guarantee title [UCC 2–312(2)].
Express Warranties
A seller or lessor can create an express warrantyby making representations concerning the quality, condi- tion, description, or performance potential of the goods. Under UCC 2–313 and 2A–210, express war- ranties arise when a seller or lessor indicates any of the following:
1.That the goods conform to any affirmation(declara- tion) of fact or promise that the seller or lessor makes to the buyer or lessee about the goods. Such affirmations or promises are usually made during the bargaining process. Statements such as “these drill bits will easily penetrate stainless steel—and without dulling” are express warranties.
2.That the goods conform to any descriptionof them.
For example, a label that reads “Crate contains one
2. Pronounced leens. Liens will be discussed in detail in Chapter 28.
3. Recall from Chapter 20 that a merchantis defined in UCC 2–104(1) as a person who deals in goods of the kind involved in the sales contract or who, by occupation, presents himself or her- self as having knowledge or skill peculiar to the goods involved in the transaction.
4. Note that although the 2003 amendments to Articles 2 and 2A have not been adopted in any state, some states, such as Connecticut, have passed legislation that expressly allows war- ranty disclaimers via electronic record. See Connecticut Statutes Section 42a-2A-214. Even in states that have not passed such leg- islation,electronic records are likely to satisfy the writing require- ment for disclaimers (under the Uniform Electronic Transactions Act, discussed in Chapter 19).