Memorandum

Date: May 24, 2000
To: Sales students
From: Avery Katz
Re: Feedback on Spring 2000 exam

Here is a summary of how I thought the exam questions should have been approached. In addition, because I do not expect anyone to have produced as full an analysis as mine under exam conditions, I have also posted on the website copies of the top two student answers to each question. What made these answers the best was their coverage of arguments, detail and sophistication in use of facts, and clarity in organization and explanation. If you drew different inferences from the given facts than I did or than the top answers did, you wouldn't have lost points, unless your inferences were unsupportable.

Your individual exams are available for inspection at my office. If, after reading this memo and the top answers, you want to discuss your exam, please feel free to contact me.

It was a pleasure teaching the class and I wish you all well. Please keep in touch.

Question 1

The denim vests

The first question is how much Birla is required to pay for the denim vests This depends on whether the original contract, which provided for a price of $120,000, is still in force. Arguably, the floor prices set by the Indian government would have excused Singh from the original contract under 2-615 on grounds of impracticability (unless it could be argued that this was a risk that Singh should have known about and thus assumed the risk of). Since the goods were shipped, however, impracticability is not at issue; modification is. UCC 2-209 permits modifications so long as they are entered into in good faith. The fact that the alleged modification was necessitated by the government regulations would probably satisfy the good faith standard, although Singh could argue that the scheme, as it is intended to evade both Indian and US customs requirements, does not satisfy the "honesty in fact" standard of 2-103(1)(b).

The real problem with the modification is proving that Birla agreed to it. Under 2-204, however, (1) a contract for sale of goods may be made in any manner sufficient to show agreement, including conduct. The amendment of the letter of credit (which probably required Birla's action) along with shipment and acceptance of the goods, is probably sufficient to show agreement to the modification, though the issue is not clear-cut. There is also a possible statute of frauds problem, in that the contract as modified needs to satisfy 2-201; i.e., there needs to be some writing evidencing it, signed by Birla. The writing does not need to mention the price, however, so the original contract may suffice in this regard. Alternatively, the exception of 2-201(2) may substitute for a writing, however, assuming that Singh's first invoice adequately evidenced the modification and Birla did not object to it within ten days.

Even if the modification is effective, of course, it was made conditional on a price reduction on the Calico shirts, which we must now consider.

The Calico shirts

Singh almost certainly breached the warranty of merchantability on the Calico shirts, since shirts that cannot survive washing are unlikely to pass without objection in the trade. Birla was thus entitled to remedial action. The perfect tender rule of 2-601 does not apply here, however, so Birla does not necessarily have the right to reject the shipments or cancel the contract. Rather, this was an installment contract under 2-612, so Birla can reject only if the non-conformity substantially impairs the value of the installment and cannot be cured. Substantial impairment is probably not an issue but cure may be, since there is no indication that Birla ever gave Singh a chance to provide substitute goods. Similarly, Birla cannot cancel the contract without a substantial impairment of the whole. One might argue (and some of you did) that Calico's loss of faith in the quality of the goods itself amounts to a substantial impairment.. But of course Calico is also a merchant under the Code and itself is obligated to accept a reasonable cure. Thus Birla's attempted cancellation of the contract is probably invalid, unless it can show that cure was infeasible.

In addition, 2-612(3) states that the aggrieved party reinstates the contract if he accepts a non-conforming installment. Here, Birla's actions in retaining shipping documents may have amounted to an acceptance under 2-606(b) [failing to make an effective rejection] or 606(c) [an act inconsistent with the seller's ownership, or wrongful as against and then ratified by the seller]. If Birla has accepted the goods it can no longer reject or cancel; and its refusal to accept further shipments may constitute a repudiation under 2-610, entitling Singh to cancel and collect damages under 2-703.

Damages

If Birla is found to have accepted the Calico shirts, it can still claim damages for breach of warranty under 2-714. This would be measured by the difference-in-value between the shirts as delivered (presumably zero) and their value if conforming (presumably the original contract price, since the modified contract price reflects a substantial discount due to the Indian government's floor price regulations on vests). This would have to be offset by any damages Singh can claim for wrongful failure to accept goods. For the accepted goods this would be the price under 2-709; for the goods that were never shipped it would be market-contract damages under 2-708, or resale/contract damages under 2-706. In applying these measures, though, it would be important to use the new, lower price for the Calico shirts as provided by the modified contract, else Singh will have a windfall double recovery.

With regard to Singh's resale of the Calico shirts for 10% of contract price, there is a question regarding whether the sale was commercially reasonable, as 2-706 requires. Many of you argued that the failure to get a higher price or the failure to sell on the export market makes the sale unreasonable. If so, Singh can still get 2-708 damages for the shirts in question.
With regard to the $5 million remaining on the original framework agreement, there is unlikely to be any recovery. Recall that the framework agreement, in contrast to the individual shipment contracts, mentioned total value of shipments but not how this value would be divided up among different kinds of goods. Thus it is likely too indefinite to support a recovery under 2-204(3). Furthermore, the Statute of Frauds in 2-201 prevents any sales contract from being enforced beyond the quantity listed in the writing, and the framework agreement mentioned value, but not quantity.

Question 2

This question turned out to be trickier than I had intended, because of the applicability of both the UCC and the CISG (and on some issues, the interaction between the two.) The reason that I set it up this way was that I wanted to ask about the CISG, but didn't want to devote an entire question to it. The tricky part was that Part II on formation (Articles 14 through 24) does not apply to the case, but chapter II of part I (Articles 7 through 13) does. This means that it is arguably necessary to interpret UCC 2-204 and 2-207 in light of the general interpretative principles of Article 8, which, inter alia, directs the factfinder to give due consideration to parol evidence about the negotiations. It also means that the parties could enter into a binding oral agreement under article 11, contrary to 2-201.

Formation and interpretation

Starting with general principles of formation under 2-204, whether there is a contract is a matter of fact, so long as there is a reasonably certain basis for giving an appropriate remedy. Thus to find a contract we must conclude that the parties agreed on what kind of generators (DIG's) were to be sold — i.e., whether they had to be type 92647, as Bergen wanted, or whether they could alternatively be type 85744, as Skandis wanted. Under CISG article 8, Hilbert's knowledge of what Fleisher understood, and Fleisher's knowledge of what Hilbert understood, are relevant to this inquiry, as are all the preliminary communications. One plausible outcome is that there was no meeting of the minds on this crucial issue, and hence no contract. Another outcome, to my mind more plausible, was that Fleisher's last comments to Hilbert (that he was going to check with the manufacturer Lindgren to see what the proper model number was, and his subsequent remark that the DIG's were what he wanted) amounted to an assumption of the risk of error.

Analyzing the problem under 2-207 leaves similar room to argue for either outcome. To apply 2-207 we would need to figure out whether there was an oral agreement, whether we can identify the communications as offers and acceptances, or whether there was an agreement by conduct (and all the material referenced in Article 8 is relevant here). If we go the oral agreement route, then we need to decide what the parties agreed. Assuming they agreed on Skandis' interpretation (the DIG's could be either model), than any subsequent confirmations by Bergen requiring the goods to be model 92647 only would probably not pass muster under 2-207(2), because of their materiality. Alternatively, if we say that Bergen's purchase order was the offer and Skandis' invoice was the acceptance, then by the same argument, the terms of the first form would control and the contract would require model number 92647. Finally, if we decide that the parties' writings did not form a contract, but that their subsequent actions did, then the terms would be supplied by 2-207(3)'s knockout rule, which says that we fill in the unfinished terms of the contract with the code's supplementary terms (here superseded, of course, by the CISG). It is hard to see, however, what provision of the Code or the CISG addresses the specific model number issue, aside from the general interpretative principles measured above. Possibly trade usage, especially trade usage relating to the database on which the DIG's were originally listed, would resolve the question.

There is also room for either party to argue that the contract is voidable due to mistake. As a common-law argument, this would come in under 1-103 of the UCC; it would also be a validity issue under CISG Article 4a. Of course all the facts mentioned above are relevant to whether one party or the other assumed the risk of mistake.

Warranty

If there is a binding contract then we can then proceed to consider warranty claims by Bergen under CISG Article 35. It is unlikely that Bergen could make out a claim of non-merchantability [Article 35(2)(a)] given that there is no claim that the parts were unsuitable for their ordinary use as model number 85744 parts. Bergen could try to argue breach of the fitness warranty under Article 35(2)(b), but this is probably a loser, since Skandis could persuasively argue in response that under the circumstances Bergen did not rely (or was unreasonable to rely) on Skandis' skill and judgment in furnishing appropriate parts. Bergen's best bet is to argue that the contract required model number 92647 only and that therefore there is a breach of express warranty under 35(1).

Remedies

If Bergen could show that the goods were supposed to be model number 92647 only, then the delivering the wrong model number would likely be a fundamental breach under Article 25. This would entitle Bergen to avoid the contract entirely (Article 49) to reduce the price in proportion to a difference in value (Article 50), or if it gives notice within a reasonable time, to furnish conforming goods under Article 46. Money damages under Articles 74-77 are also a possibility.

Alternatively, if Skandis can show that the model number 85744 DIG's satisfy the contract, then it is entitled to the price under Article 62, and to any additional damages under Articles 74-77 if they can be shown (which is unlikely).

The outcome with regard to warranty breach and remedies are almost certainly the same under the CISG as they would be under the UCC, but it was still necessary to do the proper statutory analysis to get full credit.

Question 3

This was a more open-ended question that called for a fair amount of creativity. There was substantial variation in what could count as a good answer; the two top ones are supplied as examples.

In general, I was looking for answers that both attempted to apply material from the statutory text, and that also discussed larger policy concerns. Such policy concerns included fair compensation, encouraging efficient breach and mitigation, discouraging bad faith behavior, and providing clear rules that would allow parties to settle their disputes without costly litigation. The better answers recognized that these goals were in tension and would have to be balanced against one another. The best answers discussed which actors (courts, the legislature, the parties themselves) should be the ones to engage in this balancing, and how such an allocation of responsibility could be achieved.