1 professor of law loyola law school, los angeles chapter 1 introduction
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- Problem 37
- Problem 38
- Problem 39
- MEDICAL MARKETING INTERNATIONAL v. INTERNAZIONALE MEDICO SCIENTIFICA
- Notes and Questions
- 3. Disclaimers of Warranties
- BORDEN, INC. v. ADVENT INK COMPANY
- I. Disclaimer of Warranties
- BORDEN PRINTING INKS ZERO DEFECTS: THATS OUR GOAL These are followed by three centered lines, spaced as shown: FOR INDUSTRIAL USE ONLY
Problem 36 - Contract for the sale of ballasts for light fixtures. Five percent of the ballasts are defective. Is it relevant for the seller to argue that the accepted failure rate in the industry is 10%? See UCC § 2-314(2)(a), (b) & (d); Episcopal Church Home of Western New York v. The Bulb Man, 274 A.D.2d 961, 710 NYS 2d 503 (2000). Should a buyer be held to an industry failure rate of which it is unware? Problem 37 - You are hanging out in a casino in Las Vegas, watching the gamblers but not yet gambling yourself, and are offered a “free” cocktail by one of the servers in the casino. While drinking the cocktail, the glass shatters in your hand, cutting you sufficiently so as to require stitches. Assume that you had gripped the glass in a normal fashion. Is there a breach of the implied warranty of merchantability? Is this a sale of goods case? See UCC § 2-314(2)(e). See Levondosky v. Marina Assocs., 731 F. Supp. 1210, 11 UCC Rep. Serv. 2d 487 (D.N.J. 1990). Problem 38 – You order a chicken tostada in a restaurant and that you choke on a chicken bone. Is the restaurant liable for breach of implied warranty of merchantability or fitness? Would it make a difference if you broke your tooth on a rock that was in the beans? See Mexicali Rose v. Superior Court, 1 Cal. 4th 617, 822 P.2d 1292, 4 Cal. Rptr. 2d 145 (1992). Problem 39 - A large clothing manufacturer has a number of different computers that it uses in its business. Some of the computers are more high-powered than others. The business decides that it is going to purchase some new computers, and offers some of the existing computers for sale through advertisement in the newspaper. It has never sold computers before. A small business owner responds to the advertisement, and describes specifically her needs for a computer to perform bookkeeping and inventory control functions to the clothing manufacturer’s office manager. The office manager shows the business owner one of the machines and tells her that it should be adequate for the business owner’s purposes. The business owner buys the computer, but it turns out to have insufficient memory and speed to perform the bookkeeping and inventory functions, although it could be used for word processing. What, if any, warranties were given by the clothing manufacturer to the small business owner that might have been breached? See UCC §§ 2-313 – 2-315. If more than one warranty is given, does one warranty take priority over another? MEDICAL MARKETING INTERNATIONAL v. INTERNAZIONALE MEDICO SCIENTIFICA United States District Court, Eastern District of Louisiana 1999 W.L. 311945 (1999) DUVAL, District J. Before the court is an Application for Order Conforming Arbitral Award and Entry of Judgment, filed by plaintiff, Medical Marketing International, Inc. ("MMI"). Having considered the memoranda of plaintiff, and the memorandum in opposition filed by defendant, Internazionale Medico Scientifica, S.r.l. ("IMS"), the court grants the motion. FACTUAL BACKGROUND Plaintiff MMI is a Louisiana marketing corporation with its principal place of business in Baton Rouge, Louisiana. Defendant IMS is an Italian corporation that manufactures radiology materials with its principal place of business in Bologna, Italy. On January 25, 1993, MMI and IMS entered into a Business Licensing Agreement in which IMS granted exclusive sales rights for Giotto Mammography H.F. Units to MMI. In 1996, the Food and Drug Administration ("FDA") seized the equipment for noncompliance with administrative procedures, and a dispute arose over who bore the obligation of ensuring that the Giotto equipment complied with the United States Governmental Safety Regulations, specifically the Good Manufacturing Practices (GMP) for Medical Device Regulations. MMI formally demanded mediation on October 28, 1996, pursuant to Article 13 of the agreement. Mediation was unsuccessful, and the parties entered into arbitration, also pursuant to Article 13, whereby each party chose one arbitrator and a third was agreed upon by both. An arbitration hearing was held on July 13-15, July 28, and November 17, 1998. The hearing was formally closed on November 30, 1998. The arbitrators rendered their decision on December 21, 1998, awarding MMI damages in the amount of $357,009.00 and legal interest on that amount from October 28, 1996. The arbitration apportioned 75% of the $83,640.45 cost of arbitration to MMI, and the other 25% to IMS. IMS moved for reconsideration on December 30, 1998, and this request was denied by the arbitrators on January 7, 1999. Plaintiff now moves for an order from this court confirming the arbitral award and entering judgment in favor of the plaintiff under 9 U.S.C. § 9. JURISDICTION The Federal Arbitration Act ("FAA") allows parties to an arbitration suit to apply to the "United States court in and for the district within which such award was made" for enforcement of the award. 9 U.S.C. § 9. As the arbitration in this case was held in New Orleans, Louisiana, this court has jurisdiction over petitioner's Application under 9 U.S.C. § 9. This court also has diversity jurisdiction over the case, as the amount in controversy exceeds $75,000 and the parties are a Louisiana corporation and an Italian corporation. ANALYSIS The scope of this court's review of an arbitration award is "among the narrowest known to law." Denver & Rio Grande Western Railroad Co. v. Union Pacific Railroad Co., 119 F.3d 847, 849 (10th Cir.1997). The FAA outlines specific situations in which an arbitration decision may be overruled: (1) if the award was procured by corruption, fraud or undue means; (2) if there is evidence of partiality or corruption among the arbitrators; (3) if the arbitrators were guilty of misconduct which prejudiced the rights of one of the parties; or (4) if the arbitrators exceeded their powers. Instances in which the arbitrators "exceed their powers" may include violations of public policy or awards based on a "manifest disregard of the law." See W.R. Grace & Co. v. Local Union 759, 461 U.S. 757, 766, 103 S.Ct. 2177, 2183 (1983), Walcha v. Swan, 346 U.S. 427, 436-37, 74 S.Ct. 182, 187-88 (1953), overruled on other grounds, 490 U.S. 477, 109 S.Ct. 1917 (1989). IMS has alleged that the arbitrators' decision violates public policy of the international global market and that the arbitrators exhibited "manifest disregard of international sales law." Specifically, IMS argues that the arbitrators misapplied the United Nations Convention on Contracts for the International Sales of Goods, commonly referred to as CISG, and that they refused to follow a German Supreme Court Case interpreting CISG. MMI does not dispute that CISG applies to the case at hand. Under CISG, the finder of fact has a duty to regard the "international character" of the convention and to promote uniformity in its application. CISG Article 7. The Convention also provides that in an international contract for goods, goods conform to the contract if they are fit for the purpose for which goods of the same description would ordinarily be used or are fit for any particular purpose expressly or impliedly made known to the seller and relied upon by the buyer. CISG Article 35(2). To avoid a contract based on the non-conformity of goods, the buyer must allege and prove that the seller's breach was "fundamental" in nature. CISG Article 49. A breach is fundamental when it results in such detriment to the party that he or she is substantially deprived of what he or she is entitled to expect under the contract, unless the party in breach did not foresee such a result. CISG Article 25. At the arbitration, IMS argued that MMI was not entitled to avoid its contract with IMS based on non-conformity under Article 49, because IMS's breach was not "fundamental." IMS argued that CISG did not require that it furnish MMI with equipment that complied with the United States GMP regulations. To support this proposition, IMS cited a German Supreme Court case, which held that under CISG Article 35, a seller is generally not obligated to supply goods that conform to public laws and regulations enforced at the buyer's place of business. Entscheidunger des Bundersgerichtshofs in Zivilsachen (BGHZ) 129, 75 (1995). In that case, the court held that this general rule carries with it exceptions in three limited circumstances: (1) if the public laws and regulations of the buyer's state are identical to those enforced in the seller's state; (2) if the buyer informed the seller about those regulations; or (3) if due to "special circumstances," such as the existence of a seller's branch office in the buyer's state, the seller knew or should have known about the regulations at issue. The arbitration panel decided that under the third exception, the general rule did not apply to this case. The arbitrators held that IMS was, or should have been, aware of the GMP regulations prior to entering into the 1993 agreement, and explained their reasoning at length. IMS now argues that the arbitration panel refused to apply CISG and the law as articulated by the German Supreme Court. It is clear from the arbitrators' written findings, however, that they carefully considered that decision and found that this case fit the exception and not the rule as articulated in that decision. The arbitrators' decision was neither contrary to public policy nor in manifest disregard of international sales law. This court therefore finds that the arbitration panel did not "exceed its powers" in violation of the FAA. Accordingly, IT IS ORDERED that the Application for Order Conforming Arbitral Award is hereby GRANTED. Notes and Questions 1) This case is an instructional one for a couple of reasons. One is that it shows how an arbitration award is enforced and the deference that courts pay to such awards. Does the limited scrutiny that courts give to arbitral awards make it advantageous or disadvantageous to have an arbitration provision included in the contract of sale? Do you think, however, that the case would have been decided the same way even if the court had applied a more strict standard of review? Another reason why the case is instructional is that it shows the persuasive authority of cases decided from all over the world. This case involved U.S. and Italian parties, and yet the seller was asserting a German court decision. Use of authority from around the world seems to be encouraged by CISG Article 7(1), which states that in interpreting the Convention, “regard is to be had to its international character and the need to promote uniformity in international trade.” 2) As to the substance of the rule itself, do you agree that the seller should generally not be responsible for its goods conforming to the regulatory rules of the buyer’s place of business? If the seller knows that goods will be delivered and used in another nation, shouldn’t the seller make certain that its goods are in conformity with standards for such goods in the country in question? 3. Disclaimers of Warranties Under both the UCC and the CISG, sellers of goods are free to disclaim the implied warranties of merchantability and fitness in their contracts with buyers. Under the UCC, disclaimers must comply with the technical requirements of § 2-316. The CISG has no specific technical requirements. Article 6 of the CISG is a broad provision permitting parties to the contract to derogate from provisions of the CISG (or the entire CISG for that matter) and Article 35’s implied warranties apply “except where the parties have agreed otherwise.” The following case demonstrates application of UCC § 2-316. BORDEN, INC. v. ADVENT INK COMPANY Superior Court of Pennsylvania 701 A.2d 255, 33 UCC Rep. Serv. 2d 975 (1997) SAYLOR, Judge. Plaintiff/appellee, Borden, Inc. ("Borden"), sued defendant/appellant, Advent Ink Company ("Advent"), in the Court of Common Pleas of Lancaster County to recover moneys owed for goods delivered but not paid for. Advent counterclaimed for damages allegedly sustained as a result of a previous shipment of defective goods. The trial court granted Borden's motion for summary judgment on the counterclaim. Advent, a Pennsylvania corporation, manufactured water-based inks for printers. Among those inks was a black ink that was sold to R.R. Donnelley & Sons Company ("Donnelley") for the printing of its telephone directories. In producing this ink, Advent used a water-based black dispersion, "Aquablak," which it purchased from Borden. In 1992, Borden sued Advent to recover the sum of $16,227.50 on a book account for merchandise sold and delivered to Advent. In response, Advent asserted that it had rejected the shipments in question because prior shipments had failed to comply with implied warranties of merchantability and fitness for a particular purpose. Specifically, Advent alleged that Borden's failure to age the Aquablak resulted in material defects which, when the Aquablak was incorporated into the black ink, caused the ink to separate and to clog Donnelley's presses. As a result, Donnelley ceased buying water-based black ink from Advent. In its counterclaim Advent argued that it was "entitled to recover from Borden the profits which [it] lost and which [it had] reasonably expected to continue from the Donnelley contract which was cancelled solely as a result of Borden's failure to provide a merchantable black dispersion for use in the black ink." Late in 1992, Advent filed for bankruptcy under Chapter 11. A stipulation was entered lifting the automatic stay so that Advent could proceed on its counterclaim. Following discovery, Borden filed a motion for summary judgment on the counterclaim. In its motion Borden argued that it was entitled to summary judgment on either of two bases: first, it had validly and conspicuously disclaimed the implied warranties of merchantability and of fitness for a particular purpose, as it was allowed to do under the Uniform Commercial Code ("UCC"), § 2-316, by means of language included in its sales invoices and in labels affixed to each drum of Aquablak that was shipped to Advent; second, by the same means it had validly excluded any liability for consequential damages such as lost profits, as it was allowed to do under section 2-719 of the UCC.21 By order entered January 2, 1997, the trial court granted Borden's motion for summary judgment and dismissed the counterclaim. The trial court reasoned that Borden had conspicuously disclaimed the implied warranties of merchantability and fitness for a particular purpose. The court did not address Borden's alternative argument on the limitation of damages. In this appeal, Advent contends that summary judgment was not warranted on either of the two grounds advanced by Borden. As to the disclaimer of warranties on the invoices and drum labels, Advent argues that the disclaimer was inoperative because it was inconspicuous. Advent asserts that the limitation of remedies clause was also inoperative because it failed of its essential purpose and was unconscionable. Therefore, Advent argues, we should vacate the award of summary judgment and allow the case to proceed to trial. I. Disclaimer of Warranties In order to resolve Advent's first issue (namely, its challenge to the disclaimer of warranties), we turn first to the pertinent provisions of the UCC as adopted in this Commonwealth. The implied warranty of merchantability, as set forth in the UCC, is "a warranty that the goods will pass without objection in the trade and are fit for the ordinary purposes for which such goods are used." Moscatiello v. Pittsburgh Contractors Equipment Company, 407 Pa.Super. 363, 368, 595 A.2d 1190, 1193 (1991), citing UCC § 2-314, appeal denied, 529 Pa. 650, 602 A.2d 860 (1992). Such a warranty "serves to protect buyers from loss where the goods purchased are below commercial standards." Hornberger v. General Motors Corporation, 929 F.Supp. 884 (E.D.Pa.1996). The Superior Court has observed that "this warranty is so commonly taken for granted that its exclusion from a contract is recognized as a matter threatening surprise and therefore requiring special precaution." Moscatiello, 407 Pa.Super. at 369, 595 A.2d at 1193, citing Comment 11 to UCC § 2-314. The implied warranty that goods shall be fit for a particular purpose exists, under the UCC, where the seller at the time of contracting has reason to know of such purpose and of the buyer's reliance upon the seller's skill or judgment to select or furnish goods that are suitable for such purpose. See UCC § 2-315. The UCC sets forth the following requirements for excluding or modifying these implied warranties: Subject to subsection (c) [not relevant here], to exclude or modify the implied warranty of merchantability or any part of it the language must mention merchantability and in case of a writing must be conspicuous, and to exclude or modify any implied warranty of fitness the exclusion must be by a writing and conspicuous. Language to exclude all implied warranties of fitness is sufficient if it states, for example, that "There are no warranties which extend beyond the description on the face hereof." UCC § 2-316(b). In the present case, the attempted exclusions of both warranties appear in writings, and, as will be shown infra, the writings mention merchantability. The question to be decided, therefore, is whether those attempted exclusions are conspicuous. This is a question of law for the court. UCC § 1-201. The UCC provides the following definition of the critical term "conspicuous": A term or clause is conspicuous when it is so written that a reasonable person against whom it is to operate ought to have noticed it. A printed heading in capitals ... is conspicuous. Language in the body of a form is conspicuous if it is in larger or other contrasting type or color. But in a telegram any stated term is conspicuous. UCC § 1-201. As explained in Comment 10 to Section 1-201, the definition of "conspicuous" is "intended to indicate some of the methods of making a term attention calling. But the test is whether attention can reasonably be expected to be called to it." Under Pennsylvania law, factors to be considered in determining whether a reasonable person should have noticed a warranty disclaimer include: 1) the disclaimer's placement in the document, 2) the size of the disclaimer's print, and 3) whether the disclaimer was highlighted by being printed in all capital letters or in a type style or color different from the remainder of the document. Hornberger, 929 F.Supp. at 889. The reasonableness test accords with the primary purpose of the conspicuousness requirement, which is "to avoid fine print waiver of rights by the buyer[,]" Moscatiello, 407 Pa.Super. at 369, 595 A.2d at 1193. In the present case, the trial court concluded on the basis of the invoices and drum labels that Borden had met these waiver requirements. On the front of Borden's standard invoice, in red capital letters, is the phrase "SEE REVERSE SIDE." On the reverse side is the heading "CONDITIONS OF SALE," followed by 19 conditions, the first of which is the following: 1. WARRANTIES AND DISCLAIMERS. SELLER MAKE [sic] NO WARRANTY, EXPRESS OR IMPLIED, CONCERNING THE PRODUCT OR THE MERCHANTABILITY OR FITNESS THEREOF FOR ANY PURPOSE, except: (a) that the product shall conform to the Seller's specifications, if any, and (b) that the product does not infringe any valid United States patent. Seller does not warrant, however, that the use of the product or articles made therefrom, either alone or in conjunction with other materials, will not infringe any United States patent. At the top of the label affixed to each drum of dispersion is the Borden logo. Beneath the logo are two centered lines: BORDEN PRINTING INKS ZERO DEFECTS: THAT'S OUR GOAL These are followed by three centered lines, spaced as shown: FOR INDUSTRIAL USE ONLY EMERGENCY TELEPHONE [NUMBER] FOLLOW USE DIRECTIONS FROM BORDEN INC. Below these lines is the centered heading "DISCLAIMER" and the following text: SELLER MAKES NO WARRANTY, EXPRESS OR IMPLIED, CONCERNING THE PRODUCT OR THE MERCHANTABILITY OR FITNESS THEREOF FOR ANY PURPOSE OR CONCERNING THE ACCURACY OF ANY INFORMATION PROVIDED BY BORDEN, except that the product shall conform to contracted specifications....Buyer's exclusive remedy shall be for damages and no claim of any kind, whether as to product delivered or for non- delivery of product, and whether based on contract, breach of warranty, negligence or otherwise shall be greater in amount than the purchase price of the quantity of product in respect of which damages are claimed. In no event shall Seller be liable for incidental or consequential damages.... All of the type on the drum label appears to be boldfaced. The trial court, reasoning as follows, found that both disclaimers were conspicuous as a matter of law: The disclaimer on the drums was on the front and center of the drum labels in bold face. The disclaimer is the only paragraph on the drum label. The heading and disclaimer are typed in all capitals, all the rest of the paragraph is not. Similarly conspicuous, the disclaimer on Borden's invoice appears in the very first paragraph of the "CONDITIONS OF SALE" which is set apart from all other paragraphs and is in all capitals. Although the disclaimer is on the reverse side of the invoice, the front of the invoice states in red type face, "SEE REVERSE SIDE." The red color is in contract [sic] with all surrounding type face. Relying principally upon this Court's decision in Moscatiello, supra, Advent contends that the trial court erred in concluding that the disclaimers were conspicuous. The issue in Moscatiello was whether the seller's exclusion of warranties clause, located on the reverse side of a standard sales contract, was conspicuous. The Superior Court analyzed the issue as follows: The front of the form contains blank lines in which are typed a customer's name, shipping instructions, detailed description of the machine, price breakdown, and payment terms. All of the information is individually typed on separate lines at least one quarter of an inch wide. Toward the bottom of the form, inside the margins for the price breakdown, is the phrase in capital letters: "TERMS AND CONDITIONS ON REVERSE SIDE ARE AN INTEGRAL PART OF THIS ORDER." Immediately below is a sentence containing the clause, in smaller type, "subject to the provisions hereof and conditions contained on reverse side hereof." By contrast, the reverse side of the form contains eighteen numbered paragraphs which fill the page, top to bottom and side to side, in extremely small type, approximately one-sixteenth inch in height and one-fourth the size used on the front. The capital letters are slightly larger, but of the same color and in the same type style as the rest of the printing. The type used on the front of the contract is much larger and bolder than that used on the reverse side. The warranty disclaimer is buried in paragraph number sixteen at the bottom of the page. Though the operative language of the disclaimer is set forth in capital letters, the size of the type of even the capital letters is so minute that it simply does nothing to attract attention to the clause. As Moscatiello aptly observes, "to say that the print is 'fine' is an understatement." Appellee's brief at 12. Id., 407 Pa.Super. at 369-70, 595 A.2d at 1193-94. On the basis of these facts, the Superior Court affirmed the trial court's finding that the disclaimer was not adequate to put the buyer, Moscatiello, on notice that substantial rights were being relinquished. The disclaimer itself, according to the Superior Court, "was set forth in some of the 'finest' print this court ever has read." Id., 407 Pa.Super. at 370, 595 A.2d at 1194. Moreover, the court noted, the language on the front of the invoice, referring to terms and conditions on the reverse side, suffered from two defects: 1) it was inconspicuous, being buried in the middle of the invoice, and 2) it was misleading, as it referred only to "terms" and "conditions" on the reverse side and not to a limitation of warranties. The court concluded that "[t]his language clearly does not meet the letter or the spirit of the U.C.C. requirements." Id. In addition, the court noted that the seller had failed to notify Moscatiello of the exclusion of warranties despite having had numerous opportunities to do so. We agree with Advent that the sales invoice in the present case is equally ineffective as a disclaimer of warranties. Advent asserts, and this court confirms, that the print on the reverse side of the invoice is no larger than one-sixteenth inch in height. All of the type appears to be bold-faced. Although the disclaimer of warranties is the first of nineteen numbered paragraphs, as was not the case in Moscatiello, nevertheless there is nothing to indicate that the first paragraph is any more significant than, for example, the seventh ("WEIGHTS") or the tenth ("CARRIER AND ROUTING"). Even more important, the reference on the front of the invoice to the terms on the reverse side is even less informative, albeit more noticeable, than that in Moscatiello. The reference in Moscatiello at least served to indicate that the terms and conditions on the reverse side of the invoice were an integral part of the order. The reference in the present case simply states "SEE REVERSE SIDE"; there is absolutely no indication that among the terms on the reverse side is an exclusion of warranties, including a warranty (namely, the implied warranty of merchantability) "so commonly taken for granted that its exclusion from a contract is recognized as a matter threatening surprise...." Id., 407 Pa.Super. at 368-69, 595 A.2d at 1193. In Moscatiello the Superior Court observed that "[w]hile ... the location of a disclaimer on the reverse side of a contract alone does not render the disclaimer inconspicuous, the disclaimer itself must be conspicuous and the front of the document must contain noticeable reference to the terms on the reverse side." Id., 407 Pa.Super. at 370 n. 2, 595 A.2d at 1194 n. 2 (emphasis in original). If the language in Moscatiello lacked "noticeable reference to the terms on the reverse side," so much more pronounced was the lack of such reference in the present case. According to the trial court, the Superior Court's decision in Moscatiello rested, inter alia, upon two factors which are not present in this case: 1) the seller was a merchant and a dealer of equipment, while the buyer was neither; and 2) the buyer and the seller had had no previous dealings with each other. As Advent points out, however, the Superior Court did not consider these factors in connection with the exclusion of warranties issue, but rather took them into account in its analysis of the seller's limitation of damages clause. These factors, therefore, do not serve to distinguish Moscatiello from the present case. Accordingly, we conclude that the disclaimer stated on Borden's invoice was inconspicuous and, consequently, ineffective. Borden's argument that it disclaimed the warranties at issue therefore rests upon the language appearing on the drum labels. The trial court found this disclaimer to be conspicuous because it appeared "front and center" on the labels, it was boldfaced, it was the only paragraph on the label, and the heading "DISCLAIMER" and the disclaimer itself were printed in capitals, unlike the rest of the paragraph. As Advent points out, however, the disclaimer is printed in very small type. In fact, it appears to this Court that the typeface, like that of the disclaimer on the back of the invoice, is one- sixteenth of an inch high. Moreover, all of the print on the label appears to be boldfaced; thus, the fact that the disclaimer and accompanying paragraph are boldfaced does not make them stand out. Finally, while the heading "DISCLAIMER" and the disclaimer itself are printed in capitals, so too are the preceding lines of text, and they are printed in larger sizes of type. Taking into account all of these factors, we conclude that this disclaimer, like that on the invoice, is inconspicuous and therefore ineffective. Download 1.49 Mb. Share with your friends:
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