1 Sales Contracts and Excuses for Nonperformance Chapter 4 © 2005 West Legal Studies in Business/Thomson Learning

2 The Role of the UCC in the US Art. 2 applies to transaction in goods Standardized sales law in 50 states with some individual state variation UCC has perfect tender rule

3 International need for standardized sales law Response- CISG (Convention for the International Sale of Goods) negotiated in 1980 became effective in 1988 Country differences in approach to contract law CISG a compromise: tries to keep parties in bargain (compare with perfect tender)

4 Conflict of Laws Which law applies to the transaction? Choice of law clause Choice of forum clause What is the difference?

5 Choice of Law Parties may insert their choice of law in the contract to try to avoid the conflict of laws problem

6 Comparative Law: Contract law in Developing Countries Example: China and the 1999 Contract law

7 Applicability of CISG Commercial sale of goods Between parties whose places of business are in different countries The places of business are in countries that have ratified the CISG 65 countries have ratified

8 Sales excluded from CISG Consumer goods Auction Stocks Vessels, aircraft, ships Preponderant part for labor or services Death or personal injury Opt out

9 Assante Technologies v. PMC- Sierra Facts: Assante placed order for parts through distributor in California to PMC in Canada. Assante’s order stated that laws of buyer’s address should control. PMC’s confirmation stated that the laws of Canada would apply. Assante filed suit in California state court. Case transferred to Federal court. Assante argued the case belonged in state court in California.

10 Assante Technologies v. PMC- Sierra Issue: Does the Federal Court have concurrent jurisdiction over this matter? Holding: Yes. The case involves parties from two different countries and thus the CISG applies. The parties’ order and confirmation language was not sufficient to opt out of the CISG.

11 Validity and Enforcement of International Sales Contracts Illegal Contracts: example Tarbert Trading v. Cometals (a contract calling for the delivery of a fraudulent certificate of origin is illegal and contrary to public policy)

12 Validity and Enforcement of International Sales Contracts Writing requirement: UCC requires contracts for the sale of goods $500 ($5,000 new limit) to be in writing Many countries do not have this requirement CISG does not require a writing (but Russia has not included this provision)

13 Digital signatures in E- commerce U.S., Japan, China and the EU have statutes UN preparing a model electronic signature law

14 Writing UCC: contracts for the sale of goods $500 ( $5,000 new limit) or more must be in writing to be enforceable However, there are many exceptions CISG: need not be in writing ( but Russia has elected writing requirement)

15 Parole Evidence UCC: If contract is final written expression, then parole evidence is not admissible to contradict. CISG: Court may consider all relevant circumstances. MCC Marble Ceramic v. Ceramica Nuova

16 Custom Practice and Trade Usage UCC: Allow past practice and industry practice to fill in the gaps. CISG: limited –to those which parties agree to or past dealings or those usages that the parties ought to have known are observed in trade or industry

17 Offer Both UCC and CISG allow filling in an open price term CISG: presumption that an advertisement is not an offer unless there is clear evidence of the contrary Firm Offers: UCC between merchants signed writing or record may not be revoked for 3 months. Under CISG, not revocable even if oral

18 Acceptance Under CISG may accept by sending goods or payment (article 18), if this is accepted in the trade or was a practice with the parties. Generally silence not acceptance, unless there is an established practice or if that was the terms of the acceptance.

19 Acceptance: Timing Common law: acceptance effective upon dispatch CISG: acceptance is effective when it reaches offeror (Article 16). Thus an acceptance can be withdrawn if it overtakes the acceptance

20 Chateau des Charmes Wine v. Sabaté Facts: A oral contract was negotiated for the sale of corks between a French company’s U.S. subsidiary and a Canadian company. They agreed by phone on the quantity, price, payment and shipping terms. An invoice with each shipment stated that disputes would be heard in Perpignan (France). The buyer sued alleging that the wine corks distorted the taste of wine.

21 Chateau des Charmes Wine v. Sabaté Chateau argued that they had an oral contract without a forum selection clause. Issue: Was the verbal contract binding under the CISG? Holding : Yes. Because the contract was governed by the CISG, the telephone agreement formed the contract. The subsequent confirmation with the forum selection clause did not modify the contract

22 Battle of the Forms UCC: written confirmation is acceptance even though additional terms unless acceptance is conditional on assent Special rules for merchants: new terms become part of contract unless there is an express limitation CISG:Acceptance containing new terms that do not materially alter become part of the contract unless there is a prompt objection

23 Battle of the Forms UCC cont’d Or additional terms materially alter or buyer notifies seller of objection CISG cont’d if the terms materially alter then it is rejection of the offer and a counteroffer (not a contract without the new terms) Materiality defined broadly including price, payment, quality, quantity, place and time of delivery, liability

24 Disclaiming implied warranties UCC: seller may disclaim only by conspicuous words “as is” CISG: no limitations

25 Schmitz-Werke v. Rockland Buyer relied on seller’s representations about the fabric’s fitness for transfer printing. Under CISG article 35(2)(b) the buyer need only show that it relied on the seller’s representations and that the fabric was not fit for transfer printing. The buyer need not prove the exact defect.

26 Remedies for Breach under CISG Avoidance of the contract Seller’s right to remedy or cure Seller’s additional time to perform Price reduction Money damages Specific performance

27 Remedies for Breach Avoidance: give notice Seller’s right to cure if before performance due (importance of arrival date as well as shipment date) Nachfrist Price reduction Money damages, Delchi Carrier Specific Performance- limited use in U.S.

28 Remedies for Breach UCC: perfect tender rule CISG: buyer can avoid only if fundamental breach Buyer need not take delivery- avoid the contract Avoidance: cancel contract and notify seller ( must protect goods)

29 Medical Marketing v. Internazionale Scientifica Facts: MMI planned to distribute mammography machines made in Italy by IMS in the US. The machines did not comply with U.S. law and were seized by U.S. authorities. MMI terminated the contract and the dispute went to arbitration. The arbitration panel found there had been a fundamental breach and the contract could be avoided and awarded damages to MMI.

30 Medical Marketing v. Internazionale Scientifica Issue: Did the Arbitration panel exceed its authority when it found that the breach was fundamental? Holding: No.

31 Seller’s right to remedy Seller has the right to cure or remedy and the buyer can not avoid until the time for performance expires.

32 Seller’s additional time to perform- Nachfrist Additional time to perform If it does not cause “unreasonable delay” or “unreasonable inconvenience” If seller asks for additional time and the buyer does not respond, the seller may have the additional time CISG tries to keep parties in their contract

33 Price Reduction If there is only a partial shipment or goods are nonconforming, buyer may adjust price May use whether or not breach is fundamental

34 Money Damages Article 74 – “sum equal to the loss” May include consequential damages ( lost profits) if foreseeable Delchi Carrier v. Rotorex: Plaintiff was awarded compensatory damages and lost profits that can be established by reasonable certainty. The Court will nor award lost profits which are purely speculative.

35 Specific Performance UCC: limited to special circumstances CISG: draws from civil law tradition Specific performance available Exemption for countries that do not have such a provision under their own law

36 Anticipatory Breach Either party may suspend performance after notice of anticipatory breach

37 Excuses for Performance Impossibility: supervening illegality Frustration of purpose (rare) Commercial impracticability: extreme hardship, difficulty or unreasonable expense or unforeseen events CISG: impediments beyond control exemption Force majeure (superior force)

38 Harriscom Svenska v. Harris RF( a division of Harris) appointed Harriscom (Swedish) firm to distribute radio products in Iran. The contract had a force majeure clause. The U.S. government prohibited all sales to Iran. RF agreed to voluntarily withdraw from further sales to Iran. Harriscom sued RF for breach of contract. Issue: Does the force majeure clause relieve RF/ Harris from supplying Harriscom? Holding: Yes. The summary judgment for Harris was affirmed. The force majeure clause excused Harris from performance.

39 Cultural influence in contract negotiation Different styles of the pace of negotiating American style: immediately going into the business matters Other approaches? Japanese?

40 Summary Contracts: bargain for performance What are each parties’ responsibilities? Bargain to allocate risk and price accordingly Contract needs to reflect agreement Contracts fix price and help to manage risk