Southern Tank Equipment Co. v. Zartic, Inc. (1996) p. 339

Domestic and International
Chapter 11
Uniform Commercial Code
• 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. 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
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
– arrive at buyer’s warehouse
All parties are bound to a – leave the seller’s
standard of good-faith,
or honest dealing
– are halfway between buyer
and seller
Title must pass to be a
• UCC says title passes when:
– seller completes all
Can hold title if:
obligations regarding
– 1) goods exist
delivery of goods
– 2) goods ID’d to
– when seller delivers title
documents (if goods didn’t
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
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
• 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
• Clear Lakes appealed.
• HELD: Affirmed. Both parties understood that “market
size” referred to a range of approximately one pound live
• 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
• 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
• 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
• 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 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
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
• 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)
International Sales Disputes: The
Dominance of Arbitration
• UN encourages use of arbitration through Convention on
the Recognition and Enforcement of Foreign Arbitrable
• 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
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