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Business Law Chapter 22 Homework Unit Four Domestic And International Sales And

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9 pages
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6323 words
Book Title
Business Law: Text and Cases 14th Edition
Frank B. Cross, Kenneth W. Clarkson, Roger LeRoy Miller
provides that the buyer or lessee must reject goods within a “reasonable” time. The UCC makes it clear,
however, that parties who desire more certainty can include a provision in their contract specifying the time
period for rejection. UCC 1–204(1) states that “whenever this act requires any action to be taken within a
reasonable time, any time which is not manifestly unreasonable may be fixed by agreement.” Suppose,
though, that a contract states that the buyer’s right to reject the goods is limited to ten days. Even though “ten
days” is more specific than “a reasonable time,” there is still no guarantee that a dispute will not arise over the
letter of the law in this instance.
This case underscores the importance of making sure that both parties (1) understand precisely what a
certain contract term means and (2) take each contract term seriously.
a. Northwest Airline, Inc. v. Aeroservice, Inc., 168 F.Supp.2d 1052 (D.Minn. 2001).
2. Revocation of Acceptance
a. Revoking Acceptance of a Commercial Unit
Acceptance can be revoked if a nonconformity substantially impairs the value and
Acceptance was based on a reasonable assumption that the nonconformity would be
cured, and it has not been cured within a reasonable period of time [UCC 2608(1)(a),
b. Notice of Revocation
The seller or lessor must be notified within a reasonable time after the nonconformity is or
should have been discovered and before the goods have undergone any substantial change
not caused by their own defects [UCC 2608(2), 2A517(4)].
Case 22.2: Genesis Health Clubs, Inc. v. LED Solar & Light Co.
Genesis Health Clubs, Inc., contracted with LED Solar & Light Co. to “furnish the replacement lamps for
[Genesis’s] building.” When Genesis problems with the lights arose, LED Solar offered to fix or replace them,
or refund their price. Genesis responded that it would return all of the lights for a refund “in stages so the club
would not go dark” and sent an initial shipment. LED Solar accepted the return and credited Genesis’s
account, claiming that the buyer “owes more [on the contract] than the credit on the returned items.” Genesis
disputed this accounting—“You have your money for the entire order that was pre-paid. * * * We are trying to
replace the defective lights with the refund dollars”—and returned no more lights. On Genesis’s subsequent
complaint for breach of warranty, the buyer sought to recover the contract price on the ground that it had
revoked acceptance of the lights. A federal district court concluded that Genesis could not recover because it
had not effectively revoked acceptance, and issued a summary judgment in favor of LED Solar. Genesis
Notes and Questions
What circumstances might have justified Genesis’s delayed return of LED Solar’s lights? Genesis
Health Clubs, Inc.’s delayed return of the lights delivered by LED Solar & Light Company might have been
justified in several circumstances.
In this case, Genesis and LED Solar contracted for the replacement of lights in Genesis’s building. When,
according to Genesis, problems with the lights developed, LED Solar offered to fix or replace them, or refund
their price. Genesis chose to return all of the lights “in stages so the club would not go dark” and sent a first
shipment, seeking a refund.
Instead of sending “refund dollars,” LED Solar credited Genesis’s account, claiming that the buyer “owes
more [on the contract] than the credit on the returned items.” Genesis disputed this—“You have your money
for the entire order that was pre-paid. * * * We are trying to replace the defective lights with the refund
dollars”—and returned no more lights.
Genesis’s failure to return more of the lights might have been justified, and thus its recovery of at least
part of the contract price might have been possible, in any of the following circumstances.
The buyer attempted to negotiate with the seller for an accommodation with respect to the disputed
credit for the first return shipment.
Did the parties have an ethical obligation to attempt to resolve their dispute over credit for the first
returned shipment? Yes, the parties had an ethical obligation to try to resolve their dispute over the credit
for the first returned shipment before engaging in litigation if for no other reason than to save their respective
owners and others the costly expense of going to court.
Here, Genesis Health Clubs, Inc., contracted with LED Solar & Light Company to replace the lights in
3. The Right to Recover Damages for Accepted Goods
A buyer or lessee may keep nonconforming goods and recover damages, if the seller or lessor is
Case 22.3: Fitl v. Strek
At a sports card show in 1995, James Fitl of Omaha, Nebraska, met Mark Strek, doing business as Star
Cards of San Francisco. On Strek’s representation about the condition of a certain baseball card, Fitl bought it
from Strek for $17,750. In May 1997, Fitl sent the card to Professional Sports Authenticators, a sports-cards
grading service, which told Fitl that the card was ungradable. Fitl complained to Strek, who replied that Fitl
should have acted within “a typical grace period for the unconditional return of a card, . . . 7 days to 1
month” of its receipt. ASA Accugrade, Inc., another grading service, agreed that the card was ungradable. Fitl
filed a suit in a Nebraska state court against Strek, seeking damages. The court awarded Fitl $17,750, plus
his court costs. Strek appealed.
Notes and Questions
Who has the burden to show a breach, or its absence, in cases involving attempts to recover
damages for accepted goods? Under the UCC, the burden is on the buyer to show a breach with respect to
the goods accepted. Was that burden met in this case? Here, as the state supreme court noted, “Fitl
presented evidence that the baseball card was not authentic, as he had been led to believe by Strek’s
representations. Strek did not refute Fitl’s evidence.”
The Right to Recover Damages for Accepted Goods
Cases turning on notice of defects as a prerequisite to a buyer’s recovery on a seller’s breach of
warranty include the following.
Dryvit Systems, Inc. v. Stein, __ S.E.2d __ (Ga.App. 2002) (a seller of allegedly defective synthetic stucco
cladding was not liable for breach of warranty when the buyer failed to notify the seller in writing within thirty
days of the alleged defects, as required in the parties’ contract).
Hays v. General Electric Co., 151 F.Supp.2d 1001 (N.D.Ill. 2001) (a seller was not deemed to have
 
Under the UCC, a buyer or lessee who has accepted goods may be able to revoke acceptance under the
circumstances just mentioned. Provisions of the United Nations Convention on Contracts for the International
Sale of Goods (CISG) similarly allow buyers to rescind their contracts after they have accepted the goods.
The CISG, however, takes a somewhat differentand more directapproach to the problem than the
UCC does. In the same circumstances that permit a buyer to revoke acceptance under the UCC, under the
CISG the buyer can simply declare that the seller has fundamentally breached the contract and proceed to
sue the seller for the breach. Article 25 of the CISG states that a “breach of contract committed by one of the
parties is fundamental if it results in such detriment to the other party as substantially to deprive him [or her] of
what he [or she] is entitled to expect under the contract.
What is the essential difference between revoking acceptance and bringing a suit for breach of
VII. Additional Provisions Affecting Remedies
A seller and buyer can expressly provide for remedies in addition to, in lieu of, or otherwise different from
those provided in the UCC [UCC 2719(1), 2A503(1)].
Any remedy can be made exclusive (at least until it fails in its essential purpose) [UCC 2719(2), 2A
VIII. Dealing with International Contracts
Letters of credit are frequently used to facilitate international business transactions.
1. Payment under a Letter of Credit
2. The Value of a Letter of Credit
In a simple letter-of-credit transaction, the basic principle is that payment is made against the docu-
ments presented by the beneficiary and not against the facts that the documents purport to reflect.
The issuer does not police the underlying contractthe letter is independent of it. This greatly
reduces the cost.
Payment in International Transactions
Because international contracts involve greater financial risks, special care should be taken when drafting
the contract to specify both the currency in which payment is to be made and the method of payment.
Additionally, there may be difficulties in repatriating profits made in businesses in wholly owned subsidiaries
or joint ventures abroad.
Currencies are convertible when they can be freely exchanged one for the other at some specified market
rate in a foreign exchange market. The foreign exchange market is a worldwide system for the buying and
selling of foreign currencies. At any particular point in time, the foreign exchange rate is set by the forces of
supply and demand in unrestricted foreign exchange markets. The foreign exchange rate is simply the price
of a unit of one country’s currency in terms of another country’s currency.
The domestic bank of a U.S. company can often take care of the company’s international money flow
problems. Commercial banks sometimes have correspondent branches or banks in other countries which are
called correspondents. Correspondent banking makes it possible to transfer funds internationally. If a
The United Nations Convention on Contracts for the International Sale of Goods (CISG) provides inter-
national sellers and buyers with remedies similar to those available under the UCCdamages, including
consequential damages; avoiding obligations under a contract if the other party breaches; and specific
performancealthough there are some differences in the application of these remedies in other
3. In discussing the buyer’s right of inspection, emphasize that it is a right, not a duty, and that a buyer’s
4. Students may find it helpful to list the remedies discussed in this chapter and think about what the law is
attempting to do in making these remedies available. Generally, it may be said that the UCC remedies are
5. It may be pointed out that the expense and inefficiency of many of the remedies discussed in this chapter
make them commercially impractical. Thus, before, simultaneous with, or instead of employing legal reme-
6. To review the remedies available under a contract for a sale of goods, it may help to divide the remedies
into those that are available if a breach of the contract occurs before the buyer accepts the goods and those
are (1) reclaiming the gods and (2) recovering the purchase price.
7. International business transactions require students to visualize situations in which several different con-
tractual parties are involved. It may be helpful to have students engage in role-playing exercises in which
8. Other things to emphasize in your discussion of the material in this chapter include
A seller who fails to tender delivery of conforming goods is in breach of contract. Tender is also
necessary to pass the risk of loss.
Cyberlaw Link
How might electronic payment systems affect the UCC rules governing a buyer’s payment for
goods? How might these systems affect the legal principles governing letter-of-credit transactions?
If a contract involves a sale or lease of software that can be delivered, and accessed, online, what
might be the effects in terms of such rights and remedies as cure, cover, replevin, and reclaiming
1. What does “good faithmean under the UCC? Good faith means honesty in fact. The obligations of good
faith and commercial reasonableness apply to all parties throughout performance and enforcement of every contract
within the UCC. Good faith can mean that a party cannot manipulate contract terms to take advantage of another
2. What does the obligation to “tender delivery” require? Tender of delivery requires that a seller or lessor
have and hold conforming goods at a buyer or lessee’s disposal and give whatever notice is reasonably necessary for
3. What does the perfect tender rule require? At common law and under the UCC, a seller or lessor must de-
4. What are the buyer or lessee’s obligations regarding performance? Unless the parties agree otherwise, a
buyer or lessee must (1) furnish facilities reasonably suited for receipt of the goods and (2) pay at the time and place
5. When does a seller have a right to withhold delivery? Generally, sellers can withhold delivery (or discontinue
performance) when buyers are in breach. Specifically, if the breach is due to a buyer’s insolvency, a seller can refuse
6. When can a seller reclaim goods? A seller can demand return of goods, if the demand is within ten days of
the buyer’s receipt, when a seller learns that a buyer has received goods on credit while insolvent. A seller can
7. When is a seller entitled to recover damages? A seller can sue for damages if a buyer repudiates a contract
or wrongfully refuses to accept goods. What is the measure of the damages? The measure of the damages is the
8. When can a buyer cancel a contract? A buyer can cancel a contract when a seller fails to make proper
delivery or repudiates the contract. A buyer who has rightfully rejected or revoked acceptance of goods can cancel or
9. What damages can a buyer recover? If a seller fails to deliver goods or repudiates a contract, the buyer may
10. How does a simple letter of credit work? A letter of credit is designed to ensure the performance of in-
ternational contracts by enabling the seller to avoid delivering goods for which it might not be paid and by giving the
buyer the assurance that the seller will not be paid until the goods have been shipped. In a simple letter of credit
1. Ask local merchants or their representatives to discuss with your class their policies regarding goods that they
2. Have students research the status of lemon laws in their states. How many opportunities to repair must a
buyer give a seller? To what remedies is a buyer entitled if the seller fails to repair? To what arbitration
panel must the buyer complain before going to court? Is the panel’s decision binding on the seller? Is it
binding on the buyer? Is government-sponsored arbitration required? Is it binding?
Footnote 2: U.S. Golf & Tennis Centers, Inc. agreed to buy 96,000 golf balls from Wilson Sporting Goods
Co. for $20,000. Wilson stated that U.S. Golf was receiving the lowest price ($5 per two-dozen unit). Wilson shipped
conforming balls, but U.S. Golf did not pay. U.S. Golf claimed that Wilson had sold the same product to another buyer
for $2 per unit and asked for a price reduction. Wilson refused, and filed suit to collect the full price. The court entered
a judgment in Wilson’s favor. U.S. Golf appealed
Does the outcome in this case mean that the other buyer has to pay the same price for its balls that
U.S. Golf was ordered to pay? No. In the facts of this case, neither party’s contract has any bearing or effect on the
other party’s contract.
Suppose that U.S. Golf had presented as evidence a contract between Wilson and another buyer a
month after this shipment was delivered to U.S. Golf. In that contract, Wilson agreed to sell the same golf
balls for $4.00 per unit to a different buyer. Would the court have ruled differently in this dispute? Why or
why not? Most likely, the court would not have ruled differently under this circumstance. The second contract would
Under what circumstances might Wilson have agreed with U.S. Golf to reduce the contract price?
When a seller tenders conforming goods, the buyer is obligated to accept and pay for the goods. But when a seller
tenders nonconforming goods, the buyer has other options. The buyer can insist that the goods be replaced with
conforming goods, or if that is not possible, the parties may agree to a price reduction or other change in terms.
In this case, what provision in the parties’ contract was at the heart of their dispute? The provision in the
contract between Wilson Sporting Goods Co. and U.S. Golf & Tennis Centers, Inc., that was at the heart of their
dispute was the price term. Arthur Bell, one of the owners of U.S. Golf, sought confirmation that his company was
paying the “lowest price” for an order of 96,000 “second-hand” golf balls. In response, Wilson confirmed that U.S. Golf
was buying the balls for the lowest price “that Wilson offered to any one in the market.”
What did the court rule on the dispute between these parties? Why? In Wilson’s suit filed in a Tennessee
state court against U.S. Golf to recover the price for the 96,000 second-hand golf balls, the court entered a judgment in
favor of Wilson and awarded the seller $33,099.28, including interest, attorney's fees, and other expenses. On U.S.
Golf’s appeal, a state intermediate appellate court affirmed the judgment and award.
The defendant argued that the goods in this case failed to conform to the contract because, according to the
defense, Wilson did not charge U.S. Golf the “lowest price” for the order. This gave the buyer the right to reject the
goods and cancel the contract, which is what occurred.
The appellate court did not agree with this line of argument. “Nothing in the evidence before us shows or even
suggests that the defendants ever rejected delivery of the shipment of the golf balls or that it ever had the right to do
so.” The terms of the contract were clear. The golf balls that U.S. Golf received conformed to the contract in “quantity
Footnote 3: Maple Farms, Inc., agreed to supply the City School District of Elmira with all of the milk the
district needed for the school year. The parties agreed to a fixed pricethe June market price. By December, the
market price was 23 percent higher than the contract price. Because it had similar contracts with other school
In Maple Farms, Inc. v. City School District of Elmira, the court ruled in favor of the district. An increase in
the price of milk was not unexpected because the previous year the price had risen 10 percent and the price of milk
Does the outcome in this case mean that Maple Farms has to fulfill all of its contracts with other
school districts? Apparently, Maple Farms would be required to honor its contracts. Had the court decided in Maple
Farm’ favor, perhaps the company could have renegotiated the terms of its contracts with the other parties.
In this case, due to severe inflation that was caused by factors beyond the plaintiff’s control, the plaintiff was
unable to meet its contractual obligations without losing a great deal of money. Why were these facts insufficient
to persuade the court that the plaintiff’s performance was commercially impracticable? The key factor here
was that inflation in the market price for milk was foreseeable at the time the contract was entered into, given the
knowledge that was available to the parties.
If the severe inflation would have caused Maple Farms to go bankrupt, would that have been enough
to release it from its obligations under the contract? Why or why not? Maybe. This set of circumstances would
most likely be seen as unforeseeable, because Maple Farms would probably not enter into a contract if there was a
Suppose that the court had ruled in the plaintiff’s favor. How might that ruling have affected the
plaintiff’s contracts with other parties? The actual outcome of the case meant that Maple Farms had to fulfill all of

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