1 professor of law loyola law school, los angeles chapter 1 introduction



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UNITED STATES AND INTERNATIONAL SALES. LEASE & LICENSING LAW: CASES &

PROBLEMS
BY
BRYAN D. HULL1

PROFESSOR OF LAW

LOYOLA LAW SCHOOL, LOS ANGELES
CHAPTER 1
INTRODUCTION

  1. The Sales Transaction

This book considers laws governing sales of goods, both entirely within the borders of the United States and between a party in the United States and a party in another nation. Assume, for example, that XYZ Manufacturing Company, located in Texas, agrees to sell a printing press that it has manufactured to ABC Printing Company, located in California. Numerous legal questions might arise concerning this transaction. For example, has an enforceable contract been formed? Do the goods conform to warranties given by the seller? In the event of breach, which remedies are available to the injured parties? These questions would be covered by the Uniform Commercial Code (“UCC”) as enacted in Texas and California. Assume instead that XYZ is located in the United States but that ABC is located in Mexico. Now the UCC may not apply, but instead the Convention on Contracts for the International Sale of Goods (“CISG”) may govern much of the transaction. Some of the legal questions raised in the transaction may be covered by the domestic sales law of Texas and Mexico, which will fill gaps left by the CISG. As we will see, difficult choice- of-law questions are sometimes raised when sales transactions are conducted over national borders.


A long-distance sales transaction may also include third parties, such as carriers (e.g. truckers or airlines that are transporting the goods from seller to buyer) and banks, who agree to pay the seller via a letter of credit upon proof that the goods have been shipped. This book covers laws governing the duties of carriers and banks involved in sales transactions.
This book does not cover real estate transactions or service contracts, which are the subject of myriad non-uniform laws (and which are covered in other law school courses). Difficult questions may exist, however, in mixed goods/services transactions as to whether the law governing sales applies or the law governing services. These “scope” questions will be considered in the next Chapter.

B. Leases and Licenses
This book also has materials dealing with transactions that in some ways are similar to sales of goods, i.e. leases of goods and licenses of information (including software). The transactions are sufficiently similar that courts have sometimes applied sales law in resolving disputes involving leases of goods or licenses of software. The transactions are sufficiently dissimilar, however, that uniform laws have been developed that would apply to leases and licenses instead of sales law. In Chapters __ & ___, infra, the similarities and differences of lease and license law to sales law are considered.
C. The Uniform Commercial Code
1. Background and Content
The Uniform Commercial Code (“UCC”), in particular Article 2, will cover most (if not all) of the aspects of a sale of goods transaction if the buyer and the seller are located in the United States (other than in Louisiana). The UCC was first promulgated in the 1940’s by the American Law Institute (“ALI”) and the National Conference of Commissioners on Uniform State Laws (“NCCUSL”). ALI and NCCUSL are organizations that are dedicated to law reform efforts and its members consist of lawyers, judges, law professors and other public officials. When ALI and NCCUSL draft model legislation, they then encourage the states to enact it. The UCC was enacted by all of the states but Louisiana during the 1950’s and 1960’s.2
The chief architect of the Code was Professor Karl Llewellyn, one of the leaders of the legal realism movement. Professor Llewellyn’s goal was to provide uniform and certain rules to govern commercial transactions throughout the United States, thus reducing the costs of transacting business over state boundaries. He sought to make the UCC flexible, so that courts would be able to react to changing business practices. He was not so much interested in drafting rules that would cause business people to conform their business practices to the rules but instead sought to draft rules that reflected the way that people transacted business.3 The UCC replaced some prior uniform laws, such as the Uniform Sales Act and Negotiable Instruments Law, and other non-uniform state laws. Originally, the UCC covered sales of goods (Article 2), negotiable instruments (Article 3), bank collections (Article 4), letters of credit (Article 5), bulk sales (Article 6), documents of title (Article 7), investment securities (Article 8) and secured transactions in personal property (Article 9). Subsequently, articles were added covering leases of goods (Article 2A) and wire transfers of funds (Article 4A). Article 1 of the UCC contains general provisions applicable to the other articles.
The UCC is a “living organism” in that it is constantly subject to study and revision by its sponsors. All of the articles have been the subject of significant revisions over the last 20 years or have been first added to the Code during that time (Articles 2A and 4A). Once the ALI and NCCUSL agree on changes to the UCC, they are submitted to the states for adoption. Most of the states have adopted the most recent versions of the various UCC articles, except for the changes to Articles 1, 2 and 7 which have just recently been revised and are currently before state legislatures for consideration. Citations in these materials are generally to the official text of the UCC as existing before the revision of Article 1 in 2001 and the amendments to Article 2 in 2003; citations to the 2001 revision to Article 1 are to “Revised UCC § 1-“ and citations to the 2003 approved amendments to Article 2 are to “Amended UCC § 2-.”
2. Using the UCC


  1. Does the UCC Apply?

In using the UCC, the first question that a practitioner must ask is whether it applies to a given transaction. While the UCC is a very comprehensive statute, it does not cover all contractual relationships. It does not cover real estate transactions and it also does not cover service transactions. Those types of transactions are left to other contract law. In this book, we will primarily study sales transactions, which are covered by Article 2 of the UCC. We will also cover leases of goods, which are covered by Article 2A of the UCC. The scope of UCC Article 2 will be considered in more detail in the next chapter.


b. Which State’s Version of the Code Applies?
Once it is determined that the contract is within the scope of the UCC, the practitioner must consider which state’s version of the UCC is applicable. While the UCC purports to be a “uniform” code, all states have adopted their own versions of the Code with varying degrees of non-uniformity. In addition, the courts in the various states have given their own interpretations of the law. How courts deal with choice of law problems is considered in the next chapter. Once the practitioner has determined the appropriate state, the practitioner must consult that state’s version of the UCC and its court decisions to see if the law in that state is different from that adopted in other states.


  1. The Role of Article 1

The practitioner must be aware that Article 1 of the UCC will apply together with the specific UCC Article covering the transaction. For example, in a sale of goods case, Article 1 will apply along with Article 2. Article 1 contains the general provisions that apply to all of the UCC articles. The practitioner should first look to the specific Article of the UCC for the applicable rule and then should also consider the rules in Article 1. In case of conflict, the rule from the specific Article controls.




  1. Defined Terms

In using the UCC, the practitioner must not assume that words used have the meaning that would be attached by a layperson. The UCC is full of special definitions for terms. Each Article of the UCC contains its own set of definitions; for example, the definitions for Article 2 are contained in Part 1 of that Article. Section 1-201 contains general definitions that are applicable to all articles (unless the specific article has a more specialized definition that trumps it). At the end of many of the UCC sections, there is a cross-reference table for definitions. While this is useful, the practitioner must be careful because not all defined terms are cross-referenced! When in doubt, a reader of the UCC should check to see if a particular term is defined.


e. Official Comments
Another useful tool in interpreting the UCC is its official commentary. The comments provide insight as to the intent of the drafters of the Code. It must be kept in mind, however, that the comments do not carry the same weight as the statutes themselves; state legislatures enact the statutes, not the comments. Nevertheless, because the comments are often easier to read than the statutes, practitioners and courts may be tempted to put greater weight on them than the statutes. Theoretically, however, where there is conflict between comment and statute, the statute should control.


  1. Case Law

As it has been over 40 years since the UCC has been enacted, there is a large body of case law interpreting it. Lower courts in a particular jurisdiction are bound by interpretations of the UCC from higher courts in that jurisdiction. Since the enactments of the UCC are largely uniform, decisions by a court in one state interpreting a section of the UCC will be influential on courts of another state interpreting the identical section.




  1. Other Applicable State and Federal Law

The practitioner must realize, however, that the UCC will not necessarily answer all questions in cases that are within its scope. First of all, applicable federal statutes will govern to the extent that they are inconsistent with the UCC by virtue of the Supremacy Clause of the United States Constitution.4 In the sales area, examples of federal statutes that apply are the Magnuson-Moss Consumer Warranty Act5 and the Federal Bills of Lading Act.6 Both of these federal laws will be discussed later in the book.


In addition, the UCC does not supply all of the state law that might apply to a commercial transaction. Section 2-102 states that the UCC does not impair or repeal state consumer protective statutes. An example of state consumer protective law is the “lemon law” that many states have adopted permitting consumers to return defective automobiles after the seller has had a specified number of opportunities to repair defects.
UCC section 1-103 indicates that certain general principles of law and equity “supplement” the provisions of the Code. This provision can be viewed as a bit of a “wild card” provision in that it gives license to courts to look outside the UCC to resolve disputes. It should be noted, however, that general principles of law and equity are not to be used if displaced by a particular provision of the UCC. The official comments to Revised UCC § 1-103 indicate that general principles of law and equity should not be used if they are inconsistent with the purposes and policies of the applicable provisions of the Code.

D. The Convention on Contracts For the International Sale of Goods (CISG)
In this book, we will also study the United Nations Convention on Contracts for the International Sale of Goods (CISG). In its most basic application, the CISG will apply to a sale of goods transaction if the buyer is located in a nation that has adopted the CISG, the seller is located in another nation that has adopted the CISG, and the parties have not opted out of the CISG in their contract. We will study the scope of the CISG in more detail in the next chapter.


  1. Background

The CISG was promulgated by the United Nations through its Commission on International Trade Law (UNCITRAL) in 1980. It came into force on January 1, 1988 following adoption by eleven states. As of Summer, 2005, the CISG is in force in 63 nations, including the United States. Noteworthy among those nations that have not adopted the CISG is the United Kingdom. For a complete listing of those nations that have adopted the CISG, see the UNCITRAL website, www.uncitral.org.


The CISG is part of an overall effort by UNCITRAL and other international organizations, such as the International Institute for the Unification of Private Law (UNIDROIT) and the Hague Conference on Private International Law (the Hague Conference), to provide international commercial law covering many of the same areas that are covered by the UCC in the United States. The purpose of these organizations is similar to the purpose of the original drafters of the UCC, namely to provide uniformity and certainty to law governing commercial transactions. Without a unifying international convention in place, an international commercial transaction would be subject to the myriad non-uniform laws of the nations involved in the transaction. From time-to-time, the book will refer to other international commercial laws.7


  1. Interpretation of the CISG

In comparing the UCC to the CISG, a couple of differences may be particularly obvious to the reader. One difference is that the UCC is a much more detailed set of rules. Another difference is that the CISG has few defined terms. The CISG had to be drafted in a way that was acceptable to many different nations and must be understandable by people who speak many different languages. At times the CISG is written in a broad, vague way, leaving implementation to courts and arbitral tribunals.



One area where there is ambiguity is whether there exists an implied covenant of good faith and fair dealing in international contracts for the sale of goods. CISG Article 7 states that judges and arbitrators should have regard for the CISG’s “international character and to the need to promote uniformity in its application and the observance of good faith in international trade.” Unlike the UCC, the CISG does not provide that there is an implied covenant of good faith and fair dealing in sales contracts. Because of disagreement among nations as to the role of good faith in sales contracts, Article 7 was drafted ambiguously. Taken literally, it appears that Article 7 brings good faith into play only in the interpretation of the CISG: when in doubt regarding the meaning of a provision, the judge or arbitrator should adopt the meaning that promotes good faith in international trade. On the other hand, the provision could be read broadly to imply an obligation on the part of parties to a sales contract to act in good faith.
Another command of Article 7 is that decision makers should have regard for the CISG’s “international character and the need to promote uniformity.” Decisions by tribunals in one nation should thus be influential on decisions made by tribunals in other nations. CISG case law can be found on a website maintained by Pace University School of Law, www.cisg.law.pace.edu (referred to as the Pace Website). Likewise, international commentary on the CISG by scholars should be influential, as shall be discussed more fully below.
CISG Article 7 also notes that if the CISG does not decide an issue, it should be settled in conformity with the general principles on which it is based (e.g. the desire to promote good faith in international trade). In trying to determine these principles, one might refer to the UNIDROIT Principles of International Commercial Contracts, which can be viewed at www.unidroit.org. The UNIDROIT Principles were most recently revised in 2004. The UNIDROIT Principles can be likened to an international restatement of contract law. They are more detailed than the CISG, and were promulgated after the CISG. Many of the same people who drafted the CISG were also prominent in the drafting of the UNIDROIT Principles. The UNIDROIT Principles may thus be helpful in filling in the blanks of the CISG. For a discussion of when it is appropriate to use the UNIDROIT Principles, see http://www.cisg.law.pace.edu/cisg/text/matchup/general-observations.html.
If no such principle can be determined that helps to fill the gap, then recourse is made to the law applicable by virtue of the rules of private international law. This rule means that it may at times be necessary to refer to applicable domestic law to resolve a dispute that is otherwise within the scope of the CISG. A court or arbitral tribunal will need to use choice of law rules to determine which nation’s domestic law should fill the gap. For example, Article 4 of the CISG indicates that the CISG does not deal with questions of title to goods. If we have a seller located in France, a buyer located in the United States and a question regarding title to goods is raised, the tribunal would have to use choice of law rules to determine if French law, U.S. law or some other law is appropriate to determine if the seller had title to convey to the buyer. Choice of law rules will be discussed in the next chapter.
In doing research on the CISG, the practitioner should be aware of the existence of a number of documents that were prepared during the drafting of the CISG and that provide its legislative history. A useful source containing these documents is J. Honnold, Documentary History of the Uniform Law for International Sales (1989). The Pace Website is also a useful source.
Of the legislative history, the closest thing to the UCC official comments is the Secretariat Commentary on the 1978 draft of the CISG. In using the Secretariat Commentary, it is important to note changes that were made to the CISG after the 1978 draft. Among other things, the numbers of the Articles were changed. The Pace Website correlates the Secretariat Commentary to the relevant current CISG section and shows the changes that were made after 1978 to the section.
Perhaps more useful in interpreting the CISG than in interpreting U.S. domestic law are commentaries written by legal scholars. Because of the international character of the CISG, courts and arbitrators may be more impressed by a thoughtful commentary written by an internationally renowned expert on the CISG than by a single court decision handed down in one nation. Among the most important commentaries are J. Honnold, Uniform Law for International Sales Under the 1980 United Nations Convention (3d ed. 1999); P. Schlectriem (ed.), Commentary on the UN Convention on the International Sale of Goods (2d ed. 1998); C.M. Bianca & M.J. Bonell (eds.), Commentary on the International Sales Law (1987). There are also numerous law review articles, citations to which can be found on the Pace Website.



  1. Arbitration

At this point it is worth noting that many international sales transactions will be decided by arbitration rather than by courts. Arbitration is a means of alternate dispute resolution where the parties to a contract decide that disputes between them should be settled by the decision of a private individual or individuals rather than by the courts. The private individuals are normally lawyers, but they don’t have to be. The arbitration process tends to be less formal than a judicial process.


Parties to a sales transaction may prefer to settle a dispute by arbitration rather than through the national courts of one of the parties. The reasons for this can include a lack of knowledge of the civil procedure of foreign nations, a fear of favoritism for the party that resides in the nation where the matter is being adjudicated and general preference for the flexible arbitration format over the more rigid procedures of national courts. Parties may prefer the expertise of professional arbitrators over the lack of expertise of juries or judges who are more familiar with criminal law. If parties desire arbitration, they must agree to it either in the sales contract or subsequently. They will typically opt to have the arbitration conducted according to the rules of an organization such as the American Arbitration Association or the International Chamber of Commerce. Through the course, we will study some arbitration awards, which are sometimes published. The Pace Website is a good source of published arbitral awards. Arbitral awards are not binding precedent on courts or on other arbitration tribunals, but they may be influential, especially given the mandate of CISG Article 7 to try to bring about uniformity in rules governing international trade.

CHAPTER 2
CHOICE OF LAW


  1. Is the Contract For the Sale of Goods?

Any contractual dispute raises a choice of law question regarding which set of rules govern the contract. Different types of contracts are governed by different rules. For example, real estate contracts are governed by the rules governing real estate contracts, while contracts for services are governed by their own rules (depending on the type of service). Contracts for the sale of goods are covered by UCC Article 2 if it has been enacted in the relevant jurisdiction. In an international sale, they may be covered instead by the CISG. If the contract is not for the sale of goods, it is outside the scope of this course.


So our first inquiry will be whether the contract in question is for the sale of goods. If not, our inquiry has ended. If so, we move on to whether the UCC, the CISG or some other law applies. UCC section 2-102 states that Article 2 applies to “transactions in goods.” Look at the definition of “goods” in UCC § 2-105(1). Note that goods are defined as things that are movable at the time of identification to the contract, with some exceptions. Section 2-106 limits the scope of Article 2 by indicating that “contract” and “agreement” refer only to contracts or agreements to sell goods. So by these definitions we see that Article 2 applies only to sales of tangible personal property.
The CISG in Article 1 states that it applies to contracts for the sale of goods, provided that the internationality component is met as discussed later in this chapter. It does not contain a definition of “goods.” CISG Article 2 provides for some specific exclusions. Please look to CISG Article 2.
Many times it will be abundantly clear as to whether the contract is for a sale of goods. For example, the purchase of a hammer at the local hardware store is clearly a sale of goods. Likewise, it will often be abundantly clear that a contract is not for the sale of goods. When you enter into a contract to represent your first client, that attorney/client contract is not a sale of goods contract and will not be subject to the UCC or CISG. A contract for the sale of a 50 story office building is also not a contract for the sale of goods.
The issue can become less clear in hybrid real estate/sales transactions and hybrid service/sales transactions. See the following two cases in which two courts differ over the application of UCC Article 2 to the same type of transaction.
EPSTEIN v. GIANNATTASIO
Court of Common Pleas of Connecticut

197 A.2d 342, 25 Conn.Supp. 109, 1 UCC Rep.Serv. 114 (1963)
LUGG, Judge.
On or about 5 October, 1962, the plaintiff visited a beauty parlor, conducted by the defendant Giannattasio, for the purpose of receiving a beauty treatment. During the course of that treatment, Giannattasio used a product called “Zotos 30-day Color,” manufactured by defendant Sales Affiliates, Inc., and a prebleach manufactured by defendant Clairol, Inc. The plaintiff claims that as a result of the treatment she suffered acute dermatitis, disfigurement resulting from loss of hair, and other injuries and damages.
The complaint sets forth two causes of action against each defendant, the first sounding in negligence and the second in breach of warranty. Each of the defendants demurs to the second cause of action on the ground that the transaction does not amount to a contract for the sale of goods.
UCC §2-102 provides: “[T]his article [Sales] applies to transactions in goods….” The word “transaction” is not defined in the act. “Goods” is defined in §2-105 as follows: "’Goods' means all things, including specially manufactured goods, which are movable at the time of identification to the contract for sale ….” Section 2-106 limits the words “contract” and “agreement,” as used in the article, to the present or future sale of goods. “Contract for sale” includes a present sale of goods. §2-106. “A ‘sale’ consists in the passing of title from the seller to the buyer for a price as provided by section 2-401.” § 2-106.
There is a dearth of case law construing the statutes so far as concerns the claims made by the plaintiff. In Connecticut, only those cases which deal with the sale of food under the former Sales Act are relevant. It has been held repeatedly that in Connecticut the service of food in a restaurant for immediate consumption on the premises does not constitute a sale. The only thing that is “sold” is the personal service rendered in the preparation and presentation of the food, the various essentials to its comfortable consumption or other facilities provided, and the privilege of consuming so much of the meal ordered as the guest may desire. Service is the predominant feature of the transaction. If there is a transfer of title to the food actually consumed, it is merely incidental and does not constitute a sale or goods and there is therefore no implied warranty of its quality under the law of sales.
Whether a contract is for services or for sale of tangible personal property is to be found in the intention of the parties to the contract. That intention is to be ascertained from the language used, interpreted in the light of the situation of the parties and the circumstances surrounding them.
As the complaint alleges, the plaintiff asked Giannattasio for a beauty treatment, and not for the purchase of goods. From such language, it could not be inferred that it was the intention of either party that the transaction be a transaction in goods within the meaning of the code. This claim of the plaintiff is hence distinguished more by the ingenuity of its conception than by the strength of its persuasion.
There is another line of cases which involves blood transfusions received by patients in the course of medical care and treatment in hospitals. These concern the claim that injuries caused by such transfusions ground a recovery under the Sales Act. This claim has been universally rejected. Such a contract is clearly one for services, and, just as clearly, it is not divisible. It has long been recognized that, when service predominates, and transfer of personal property is but an incidental feature of the transaction, the transaction is not deemed a sale within the Sales Act. Building and construction transactions which include materials to be incorporated into the structure are not agreements of sale.
When this plaintiff made her arrangement with the beauty parlor, she did so as the complaint sets forth: “for the purpose of receiving a beauty treatment.” Obviously, the subject of the contract was not a sale of goods but the rendition of services. The materials used in the performance of those services were patently incidental to that subject, which was a treatment and not the purchase of an article.
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