Chapter 4 Sales Contracts

Sales Contracts and Excuses
for Nonperformance
Chapter 4
© 2002 West/Thomson Learning
The Role of the UCC in the US
Art. 2 applies to transaction in
Standardized sales law in 50 states
with some individual state
International need for
standardized sales law
Response- CISG (UN Convention
on Contracts 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
Choice of Laws
Which law applies to the
Parties may insert their choice of
law in the contract to try to avoid
the conflict of laws problem
CISG allows parties to opt out
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
74 countries have ratified
Asante Tech. Inc v. PMC Sierra
(ND Cal 2000)
Facts: A bought electronic parts from PMC – PMC office & factory in
A placed order through UT, distributor
A’s contract forms said governed by state shown on buyers
PMC invoice said governed by law of Canada
A claimed goods not up to specs – sued in Cal state court
PMC removed case to federal court, A sought to send back to state
Issue: Does CISG apply? Does federal court have jurisdiction?
Decision: CISG applies, federal court has concurrent jurisdiction
Reasons: UT not agent, doesn’t establish PMC place of business
Look to place of business with closest connection to contract –
Contracting parties from different countries that signed CISG
PMC choice of law –Canadian law
A choice of law – Cal – but federal CISG pre-empts state law
Both Cal and Canada (BC) adopt CISG
Federal and state courts both have jurisdiction – no need to
remand to state court
Sales excluded from CISG
Consumer goods
Vessels, aircraft, ships
Contracts predominantly for labor or
No product liability for death or
personal injury
Parties to contract may opt out
Digital Signatures in
U.S., Japan, China and the EU have
UN preparing a model electronic
signature law
Comparison of UCC and CISG
Parole evidence
Custom practice and trade usage
Battle of the forms
Disclaiming implied warranties
Remedies for breach
Specific performance
This is only a partial list...
Must Contract be in
UCC: contracts for
the sale of goods
$500 or more
must be in writing
to be enforceable
However, there
are many
CISG: need not be
in writing ( but
Russia has
elected writing
China: UCL: need
not be in writing
Parole Evidence
UCC: If contract is
final written
expression, then
parole evidence is
not admissible to
Only resort to
parole evidence if
contract terms
CISG: Court may
consider all
Mcc Marble
Ceramic v.
Ceramica Nuova
(p. 127)
Custom Practice and Trade
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
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
materially alter terms, or
notifies of objection
within reasonable time, or
purchase order expressly
limited to terms in order
containing new
terms that do not
materially alter
becomes part of the
contract unless there
is a prompt objection
If the terms
materially alter then
it is rejection of the
offer and a
counteroffer (not a
contract without the
new terms)
Solae, LLC v. Hershey Canada, Inc.
(D.Del. 2008)
Facts: S sold soy lecithin to H - negotiated annual contract for
purchases for coming year
 Jan. 2006 – agreed H would order up to 250K lbs. @
$1.2526 per lb.
 June 06 – H faxed p.o. to S for 40K lbs. ; S sent order
 Sept. 06 – S ships to H, includes invoice setting
conditions of sale, forum selection clause for Delaware
 Oct. 06 – H discovers goods contaminated – triggers
recall, plant shutdown, govt. investigation
 H notifies S that it would hold S responsible; refused to
accept or pay for further shipments
 S filed suit, H moves to dismiss – no personal
Issue: Did contract include choice of forum clause?
Decision: No – under CISG, choice of forum clause not part of
Reasons: Art. 23 –contract concluded when acceptance of
offer becomes effective – agt. Reached in Jan. 06 set goods,
quantity and price – no forum selection clause
Solae, LLC v. Hershey Canada, Inc.(#2)
Reasons: Art. 23 –contract concluded when acceptance of
offer becomes effective – agt. reached in Jan. 06 set goods,
quantity and price – no forum selection clause
Art. 29 (1)– parties can modify contract
Art. 19 – attempt to include additional terms for settlement of
disputes is material alteration of terms of offer
Failure to object to unilateral attempt to alter terms is not
agreement to those terms
No evidence that H agreed to modification of terms of 2006
Multiple invoices and pre-shipment confirmations do not
modify contract to include forum selection clause
Disclaiming implied warranties
UCC: seller may
disclaim only by
words such as “as
CISG: no
limitations on
ability to disclaim
TeeVee Toons, Inc. v. Gerhard
Schubert GMBH (S.D.N.Y. 2006)
Facts: TVT and GS sign agreement – GS will build production
system for Biobox
System had severe malfunctions; TVT sued S for breach of
warranty under CISG
Art. 35 – seller obligated to provide goods as described by
TVT – GS system not fit for particular purpose – production
of Biobox
TVT notified GS of nonconformity
GS – terms of contract “T&C” disclaims Art. 35 warranties
TVT – express oral understanding that T&C would not apply
Issue: Are T&C excluded from contract?
Decision: Refuse summary judgment – must hold trial
Reasons: Art. 11 – contract need not be in writing; Art. 8 –
consider evidence of parties’ subjective intent
Statements by GS or TVT that contradict T&T or indicate
T&C not part of contract must be considered
Did parties intend that merger clause be effective
Genuine issue of material fact as to whether parties
intended to be bound by T&C
If no shared intent to be bound by T&C, TVT can rely on 17
Art. 35 warranty
Chicago Prime Packers v. Northam Food Trading Co. (N.D. Ill. 2004)
Facts: CPP sold frozen pork ribs to N for $178K
Ribs shipped to BPM – stored 3 times en route
Ribs ultimately discovered to be spoiled – USDA condemned them
NFT refused to pay, CPP sued for breach of contract
Issue: Is NFT liable for damages for cost of ribs? Did NFT satisfy
inspection and notification requirements of buyer under CISG?
Decision: Yes – NFT liable for damages, didn’t meet burden of
Reasons: NFT has burden of proving ribs were nonconforming at time
of receipt
No inspection provision in contract; Art. 38(1) applies – inspect
within as short a period as practicable
Art. 38(3) – may defer examination until goods arrive at new
destination – here, when ribs arrived at BPM
No evidence that NFT or BPM could not have inspected when
arrived at BPM
NFT also failed to prove that it gave notice to CPP within
reasonable time after it ought to have discovered nonconformity –
Art. 39
When defect easy to discover by prompt examination, time of
notice must be reduced
NFT failed to examine ribs in as short a time period as practicable;
therefore NFT also failed to give notice to CPP within reasonable
Remedies for Breach
Benefit of the bargain
Place in position would have been
had breach not occurred
Remedies for Breach
Avoidance (Art. 49)- give notice (Art. 39)
Seller’s right to cure if before performance due
(importance of arrival date as well as shipment
date) (Arts. 47 & 48)
Price reduction (Art. 50)
Money damages (Art. 74), Delchi Carrier case
 Cost of replacement goods (Art. 75)
 Duty to mitigate damages (Art. 77)
Specific Performance (Art. 46) - limited use in
U.S. (Art. 28), common under CISG
Remedies for Breach
UCC: perfect
tender rule
must match
specifics of
CISG: buyer can
avoid only if
Buyer need not
take delivery avoid the contract
Specific Performance
UCC: available as
remedy only
under special
(Goods unique
and monetary
damages not
CISG: draws from
civil law tradition
Exemption for
countries that do
not have such a
provision under
their own law
Excuses for Performance
Impossibility - supervening illegality
Frustration of purpose (rare)
Commercial impracticability
CISG - impediments beyond control
Force majeure: unforeseen events
beyond control of parties, act of God
Asante Tech. v. PMC – Sierra, Inc.
Solae, LLC v. Hershey Canada, Inc.
TeeVee Toons, Inc. v. Gerhard Schubert
Chicago Prime Packers, Inc. v.
Northaqm Food Trading Co.
Medical Mktg. Int. v. Int. Medico
Delchi Carrier v. Rotorex Corp.
Harriscom Svenska v. Harris Corp.
Cultural Influence in
Contract Negotiation
Different styles of the pace of
American style - immediately going
into the business matters
Asia: develop relationship first,
then work on deal
Contracts: bargain for performance
What are each parties responsibilities?
Bargain to allocate risk and price
Contract needs to reflect agreement
Contracts fix price and help to manage
Contract Law in China:
Uniform Contract Law (1999)
Individuals and foreigners can contract
– generally without state permission
UCL applies unless specific legislation or
regulations apply
Contracts valid when formed, even if
required registration with government
Contracts may be written or oral;
recognizes electronic media
China: UCL (#2)
Formation: contract requires offer and
Offer: Shows intent to enter contract;
specific and definite terms
Acceptance: Shows intent to accept the
offer; must accept terms of offer
Consideration not required for valid contract
Terms: should contain names &
addresses, subject matter, quantity,
quality, price, payment, performance
deadline, liability for default, dispute
resolution methods
Contracts invalid if fraud, violates law,
illegal purpose, harmful to state or
public interest
China: UCL (#3)
good faith performance required
suspension of performance justifiable
where: other party facing serious
deterioration of business operation,
has moved or withdrawn capital, has
suffered a loss of commercial credit,
or has experienced other
circumstances showing a loss of
ability to perform
Modification: parties may modify
by agreement
China: UCL (#4)
Remedies: specific performance, remedial
measures and compensation
 actual damages or liquidated damages
 consequential damages (lost profits) –
amount of loss likely resulting from breach
foreseen by breaching party at time contract
 non-breaching party can demand specific
performance unless would violate law
Remedial measures include: repair, exchange,
redo, return, and reduction of payment
Non-breaching party has general duty to
mitigate damages
UCL recognizes force majeure: “any objective
circumstance which is unforeseeable,
unavoidable and insurmountable”