Georgetown University Law Center
Examination in Commercial Law: Sales Transactions
(3 Hours)

Professor Avery Wiener Katz

Final Examination
May 6, 1997
1:30 pm — 4:30 pm


Instructions:


1. The examination consists of 6 pages, including the instruction sheet. Please check now to ensure your copy is complete.

2. This is an open book examination; any written materials may be consulted. You are encouraged to use your casebook, class notes, and especially your statute book.

3. There are two questions, each carrying equal weight in the grading. The first question should take longer to read; the second should take longer to think about. I recommend that you spend a significant portion of the suggested time for each question planning and organizing your answer. If you feel that any of your answers depend on facts not provided in the question, you should state clearly any additional assumptions you are making.

4. Please begin your answer to Question 2 in a new examination book, as I will grade each question separately.

5. Please write legibly; this will ensure that you receive due credit for your entire answer. I will read material that appears on the scrap paper if you indicate in your examination book that you wish me to, but not otherwise.

6. Unless you are told otherwise, you should assume that all hypothetical parties referred to in the questions below reside and do business in the United States.

7. Good luck on the exam; and for those of you graduating at the end of the term, best wishes.


Please do not turn the page until the exam proctor gives the signal.





Question 1 (90 minutes, 1/2 of exam)


Your client, Brittan Molding, fabricates and sells molded products for the automotive industry, such as car and truck fenders, instrument panels, and snowmobile hoods. In 1993, Brittan was approached by Shazam Inc., the owner and developer of the Marvel™ process, a unique operation used to fabricate molded plastic products. The process involves placing two liquid reactants ("Marvel liquid molding resins") into a molder, where they amalgamate and form a molded product.

In 1993 and 1994, numerous meetings between Brittan's and Shazam's representatives took place in order to familiarize Brittan with Marvel and to persuade Brittan to sign a license. At these meetings, various representations were made by Shazam's personnel. For instance, Gladstone, Shazam's marketing vice–president, represented to Disraeli, Brittan's general manager, that Marvel would enable Brittan to make high volume parts under low pressures and increase its customer base. He also characterized Marvel as an extremely versatile liquid resin that was tougher, lighter, more cost–efficient and more flexible in use than other compounds. Additional statements were made by Pitt, Shazam's marketing manager, that the cycle time for molding with Shazam's product would be 2.5 to 3.5 minutes, that secondary finishing was not required, that only minimal cleaning would be required and that the parts produced with Marvel would be easily paintable. Also, certain subordinate employees at Shazam apparently told their counterparts at Brittan that Marvel would be compatible with Brittan's zinc alloy tools. Some of these oral representations were corroborated by sales brochures and cast models prepared by Shazam and given Brittan.

Eventually, on October 11, 1994, Shazam and Brittan entered into two agreements. The first, labeled a "Codevelopment Agreement," was a one-year contract, under which Shazam was obligated to provide free of charge, a quantity of Marvel liquid molding resins (not to exceed 12,000 pounds) to be used by Brittan for the production of prototype plastic components. Pursuant to the Codevelopment Agreement, Shazam also promised to provide consulting services and other necessary design and technical assistance to Brittan, including accompanying Brittan on customer calls. For its part, Brittan was required to manufacture components with Marvel and carry out sufficient market research and testing of such components to determine the feasibility of using Marvel in its production process.

The second contract was labeled the "General Molder License Agreement," or GML agreement. This contract gave Brittan a non-exclusive license to use Marvel technology, and also obligated Brittan to purchase its entire requirement of Marvel liquid reactants from Shazam. As consideration, Brittan was to pay an initial royalty fee of $50,000, in addition to 7.5 cents per pound of Marvel liquid resin purchased. Under the GML Agreement, Shazam promised to furnish normal technical assistance of the type usually associated with the sale of polymer products, and to provide services of personnel skilled in polymerization of Marvel liquid molding resins to assist Brittan during the design and start-up of a production facility.

In 1995, Shazam began shipping Marvel liquid molding resin to Brittan. With each order Shazam received, Shazam would mail an "Order/Acknowledgment Form" to Brittan. The bottom paragraph of the front side of the form, immediately above the signature lines, concluded: ". . . acknowledgment of your order is expressly made conditional on your assent to the terms and conditions stated above and on the reverse side hereof, and we agree to furnish the material upon these terms and conditions only." Among the terms that appeared on the reverse side of the Order/Acknowledgment Form were the following:

7. Seller warrants that the materials sold hereunder shall be of Seller's standard quality, but Buyer assumes all risk and liability whatsoever resulting from the possession, use or disposition of such materials, whether used singly or in combination with other substances. Liability of Seller to Buyer, if any hereunder, for breach of contract, negligence, or otherwise, shall in no event exceed in amount the purchase price of the materials sold with respect to which any damages are claimed. Within thirty (30) days after any shipment reaches its destination (but in no event later than ninety (90) days after shipment leaves Seller's plant) the materials shall be examined and tested, and promptly thereafter and before the materials are used, Seller's shall be notified in writing or by cable in case the materials are found defective or short in any respect. Failure to so notify the Seller shall constitute a waiver of all claims with respect to the materials, and in any event the use of the materials shall be deemed to mean that the Seller has satisfactorily performed.

8. SELLER'S WARRANTY OF STANDARD QUALITY IS EXPRESSLY IN LIEU OF ANY OTHER WARRANTIES. EXPRESS OR IMPLIED, INCLUDING ANY IMPLIED WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE. SELLER NEITHER ASSUMES NOR AUTHORIZES ANY PERSON TO ASSUME FOR IT ANY OTHER LIABILITY IN CONNECTION WITH THE SALE OR USE OF THE MATERIALS SOLD HEREUNDER, AND THERE ARE NO AGREEMENTS OR WARRANTIES, EITHER ORAL OR WRITTEN, COLLATERAL TO OR AFFECTING THIS AGREEMENT. THIS CONTRACT CONSTITUTES THE PARTIES' ENTIRE AGREEMENT.

Brittan subsequently experienced various problems in utilizing Marvel. Specifically, the Marvel liquids attacked Brittan's zinc alloy tools, caused unacceptable air bubbles, warpage and pinholes in parts, required secondary finishing, required a cycle time of two to three times longer than represented by Shazam, and demanded excessive cleaning. Shazam representatives have consistently attempted to resolve these problems, but never to Brittan's satisfaction.

One of the most significant troubles Brittan has experienced while molding with Marvel resins is the emission of noxious vapors. These pungent smells annoyed the neighboring community, and the county department of health issued Brittan nine to ten citations as a result of the emissions. To subdue the odor and contain the vapors, Brittan purchased a thermal oxidizer unit from Shazam pursuant to a third agreement signed on November 13, 1995. Significant labor had to be undertaken by Brittan, including building a new room at Brittan's facility, to install the unit.

In 1996, after receiving numerous customer complaints and losing the business of two important customers, Brittan commenced negotiations with Shazam's competitor, Tirestone. In early 1997, it decided to switch to Tirestone's product and sever its ties with Shazam. On February 23, 1997, Brittan sent Shazam a letter indicating that it was terminating the GML Agreement and suspending payment on the thermal oxidizer unit. Ten days later, Shazam responded with a letter stating that it intended to hold Brittan to all agreements and threatening litigation if Brittan did not promptly enter into discussions to resolve any outstanding disputes between the parties.

Brittan's management has consulted you in preparation for a possible lawsuit against Shazam. They have asked you to advise them on their possible exposure to damages in such a suit, as well as on any counterclaims they might have. Write them a memo that evaluates their legal position and recommends a course of action.



Question 2 (90 minutes, 1/2 of exam)

You are an associate at a law firm specializing in commercial litigation. You have before you a senior partner's notes from a meeting with the firm's new client, Timberwolf Distributors, Inc. The notes indicate that Timberwolf is in the business of purchasing wood and wood pulp products for resale, including lumber, building materials, and newsprint. It is known in the industry as a "broker," and as such, it purchases from various sellers for resale to various buyers. Sometimes, it hires independent producers to cut, deliver, and process timber. While it is incorporated in and has its primary place of business in Portland, Oregon, up to 30% of Timberwolf's purchases and up to 10% of its sales, depending on market conditions, are from or to Canadian companies. Apparently there is a good deal of variability on both the demand and supply sides of the market, arising from weather, fluctuations in economic conditions, and changes in shipping costs, which make up a significant fraction of the delivered price of the final product. As a result, cancellations and modifications of contracts are relatively frequent, and it is not uncommon for goods intended to be shipped to a particular geographic location to be redirected, or for orders originally intended to be filled from a particular source of supply to be replaced by goods sited elsewhere.

The partner has included the following cover memo with the client notes:

"At a recent meeting with representatives of our new client Timberwolf (‘T'), the following issues were raised. Please address each of these in a brief memo that I can pass along to the client orally. I don't need anything lengthy right now, although if there are significant complications with any of the following I may ask you to do a follow–up memo later. Please cite any relevant statutory provisions, though, and let me know if you run across any major problems along the way.

"(1) T's management has heard about the new UN convention on sales (CISG?) and wants to know how it will affect their business. They are used to doing business under UCC Article Two and have things running relatively smoothly (with the exception of the two concerns raised below), so they would just as soon avoid any unnecessary complications. Their current standard form invoices and purchase orders contain a clause providing that all contracts T enters into will be governed by the law of the state of Oregon; and I have suggested that so long as they make sure to retain this clause, this will address any concern they might have in this regard. Is this in fact the case, and are there any specific traps they need to watch out for?"

"(2) T's marketing department has launched an anti–paperwork initiative, under which formal communications relating to purchasing and sales are to be channeled as much as possible into a few standard forms. As part of this initiative, the department is starting a pilot program under which contracts can be concluded via electronic data interchange (EDI) over the Internet; for such contracts no paper at all will be used and all records will be kept on computer disks. Again, do you foresee any potential legal problems with this plan, assuming that the computer records are adequately safeguarded against loss?"

"(3) T has experienced difficulty settling a few cases in which contracts were canceled and the underlying transaction was covered with goods at or from a different location. In these cases, oddly enough, the contract–market damage measure provided by UCC article two (and by trade usage in the industry) turned out to diverge from actual losses (netting out shipping costs) as measured after cover was completed. Because of this divergence, these sales could not be settled or closed out without substantial time and attention spent by management of both sides. Is there a way to avoid such problems in the future?"


Draft a memo responding to the partner's questions. Be concise, but be as precise as possible, and do not hesitate to make specific recommendations if you think them appropriate.




END OF EXAM
WRITE NOTHING AFTER TIME IS CALLED