- U.S. Bankruptcy Court for the District of Oregon
- In re: Siskiyou Evergreen, Inc. Debtor
LACK OF CONFORMITY - SELLER'S KNOWLEDGE OF LACK OF CONFORMITY - LOSS OF RIGHT BY SELLER TO RELY ON ARTS. 38 AND 39 CISG (ART. 40 CISG)
LOST PROFITS (ART. 74 CISG) – RECOVERABLE IF FORESEEABLE AT THE TIME OF CONTRACT CONCLUSION
A US seller contracted with a Mexican buyer for the sale of Christmas trees grown in the seller’s plantation in Oregon. After a shipment of goods that met the contract requirements, the buyer ordered a much larger amount of the same product for the next season. Unable to fulfill the order in its entirety, the seller ordered four truckloads of trees from another US farm. After delivery, the buyer rejected the goods on account of lack of conformity; in addition, about 40% of the trees supplied by the other US farm were found to be of a low quality by the US Department of Agriculture (USDA) officers. Moreover, all the buyer’s contracts to resell the trees to other private companies in Mexico were rejected because of the low quality of the goods. As a result, the buyer brought an action against the seller.
As to the applicable law, the Court found that CISG was applicable as both parties had their place of business in Contracting States (Art. 1 (1)(a) CISG).
As to the merits, the Court held that the seller could not rely on the provisions of Arts. 38 and 39 CISG, since it could not have been unaware of the non-conformity of the goods (Art. 40 CISG). Moreover, notice of lack of conformity by the buyer would have been in any case useless, given that, because of the lateness of season, the seller could not have cured the defects.
Furthermore, the Court held the buyer entitled to recover the amount paid for the goods, including shipping and handling costs. The Court also awarded to the buyer damages for loss of profits under Art. 74. In doing so, the Court approved the buyer's decision not to claim for the losses resulting from contract rejection by its final customers (as those losses could not have been foreseeable at the time of contract conclusion) and reduced the amount of damages by the price the buyer had already obtained for the goods actually sold.
Siskiyou Evergreens, Inc. is the Debtor-in-Possession in this Chapter 11 case. Manuel Barroso, a customer, filed a proof of claim for $478,604 as damages for breach of the parties' sale agreement. Siskiyou objects to the claim, alleging that the claim is unfounded, and that it is entitled to a set-off for amounts owed to it.
The matter was tried over the week of November 3, 2003. After considering the evidence, testimony, and arguments of the parties, the Court concludes that:
Siskiyou failed to deliver trees conforming to the contract;
Barroso failed to honor an agreement to pay for trees previously purchased; and
After allowing for his remaining debt to Siskiyou, Barroso is entitled to an allowed claim in the sum of $122,969.
Siskiyou Evergreens is in the business of growing and selling Christmas trees from its plantation in Josephine County, Oregon. Mr. Barroso is a merchant in Mexico City whose business includes Christmas tree sales. There is a considerable market for Christmas trees in Mexico. Most trees are grown in the United States, exported to Mexico, and sold at the wholesale level at large urban markets, such as the Central de Abastos in Mexico City.
The Central de Abastos is, in the words of one witness, "a tough place." It is certainly imposing. It is the largest general marketplace in the country, where a variety of goods, including agricultural products, are sold. The site consists of several hundred individual bodegas, or stalls, each said to be "about the size of a courtroom."
The market community is both closely knit and highly competitive. Products shipped in from wherever they are grown are received early each morning. Merchants fan out to determine what their competitors have to sell, and then set the day's prices accordingly. It is especially important to sell goods quickly: there is a continual flow of new produce (including, in season, Christmas trees), and unsold merchandise is soon replaced by fresher goods. Buyers will avoid the older goods, or require severe price concessions. One witness gave as an example jalapenos, which had to be sold within four hours of arrival. The market requires sophisticated planning, especially respecting timing of shipments. If more product arrives than can be sold promptly, the merchant will be forced to make drastic cuts in price, or be stuck with unsold, and sometimes unsaleable, goods. While not so delicate as jalapenos, Christmas trees are perishable, and need to be sold within a day or so of arrival.
Christmas tree sales are conducted in November and December in several bodegas, including those maintained by Mr. Barroso and other sellers he was associated with. Sales from the central marketplace were generally to retailers or resellers.
Siskiyou and Barroso first did business in 1998. The season was, by his own account, a profitable one for Barroso. Nevertheless, not all of the trees shipped by Siskiyou were paid for. The lack of payment created financial problems for Siskiyou, and its principal lender eventually required it to limit future shipments to cash sales. By this time the parties were well into the 1999 season. On October 11, 1999 the parties made an agreement providing for immediate payment of $50,000, and fixing the balance due for 1998 at $47,076.17. In return, Siskiyou continued shipment of trees under the 1999 contract. The $50,000 payment was made by check, which Siskiyou immediately deposited. The balance was paid with a wire transfer on October 21. In January 2000, Siskiyou was notified by its bank that the check had been dishonored. The record does not reveal whether this was because of insufficient funds, or a stop order.
At trial, Barroso testified that the wire transfer was intended to replace the check, which he instructed Siskiyou to return or destroy. The reason, he says, was that funds would become available more quickly if delivered by wire. This does not explain why the transfer was for less than the amount of the check. Barroso also testified that the amount agreed to as the 1998 balance, and set out in Ex. L, - $47,076.17 - was the amount due before any credit for the contemporaneous payment, and that the amount eventually paid by wire was the entire balance. This does not explain why a $50,000 check was delivered to pay a $47,000 balance. In any event, Barroso's closing argument concedes that the $ 50,000 represented by the dishonored check remains payable, at least as a credit against the amount now claimed.
Buoyed by the success of the 1998 season, Barroso embarked on a more ambitious program for 1999. His plan was to purchase significantly more trees from Siskiyou and sell roughly half of these trees at the Central de Abastos in Mexico City. He contracted to sell the remaining trees to several private companies in Mexico. The contract between Siskiyou and Barroso specified delivery of plantation cut, USDA # 1 or better trees. The grade refers to the system for grading Christmas trees established by the U.S. Department of Agriculture. 7 C.F.R. 51.3085 et seq. (1989).
Siskiyou was unable, at first, to deliver all of the trees called for in the contract. To cover the contract, Siskiyou's owner went to Blue Heron Trees, where he purchased for delivery to Barroso four truckloads of trees graded as # 3. After they were delivered, the trees were rejected by Barroso as non-conforming. In addition, about 40% of three loads subsequently sent from Siskiyou's plantation were found by USDA inspectors at the border to be of a lower grade than # 1. At the same time, Barroso's contracts to sell to the private companies in Mexico were all rejected by the buyers, ostensibly because of the quality of the trees imported from Siskiyou. The season ended badly for Barroso, with a number of trees sold at extremely low prices, or not at all.
1. Controlling Law
Contracts for the sale of goods between parties whose places of business are in different countries are governed by the Convention on Contracts for the International Sale of Goods ("Convention", or "CISG"). CISG Art. 1. Both Mexico and the United States are signatories. Pertinent provisions of the Convention include:
(1) The seller must deliver goods which are of the quantity, quality and description required by the contract and which are contained or packaged in the manner required by the contract.
(2) Except where the parties have agreed otherwise, the goods do not conform with the contract unless they: (a) are fit for the purposes for which goods of the same description would ordinarily be used; (b) are fit for any particular purpose expressly or impliedly made known to the seller at the time of the conclusion of the contract, except where the circumstances show that the buyer did not rely, or that it was unreasonable for him to rely, on the seller's skill and judgment; (c) possess the qualities of goods which the seller has held out to the buyer as a sample or model; (d) are contained or packaged in the manner usual for such goods, or, where there is no such manner, in a manner adequate to preserve and protect the goods.
(3) The seller is not liable under subparagraphs (a) to (d) of the preceding paragraph for any lack of conformity of the goods if at the time of the conclusion of the contract the buyer knew or could not have been unaware of such lack of conformity.
(1) The seller is liable in accordance with the contract and this Convention for any lack of conformity which exists at the time when the risk passes to the buyer, even though the lack of conformity becomes apparent only after that time.
(2) The seller is also liable for any lack of conformity which occurs after the time indicated in the preceding paragraph and which is due to a breach of any of his obligations, including a breach of any guarantee that for a period of time the goods will remain fit for their ordinary purpose or for some particular purpose or will retain specified qualities or characteristics.
(1) The buyer must examine the goods, or cause them to be examined, within as short a period as is practicable in the circumstances.
(2) If the contract involves carriage of the goods, examination may be deferred until after the goods have arrived at their destination.
(3) If the goods are redirected in transit or redispatched by the buyer without a reasonable opportunity for examination by him and at the time of the conclusion of the contract the seller knew or ought to have known of the possibility of such redirection or redispatch, examination may be deferred until after the goods have arrived at the new destination.
(1) The buyer loses the right to rely on a lack of conformity of the goods if he does not give notice to the seller specifying the nature of the lack of conformity within a reasonable time after he has discovered it or ought to have discovered it.
(2) In any event, the buyer loses the right to rely on a lack of conformity of the goods if he does not give the seller notice thereof at the latest within a period of two years from the date on which the goods were actually handed over to the buyer, unless this time-limit is inconsistent with a contractual period of guarantee.
The seller is not entitled to rely on the provision of articles 38 and 39 if the lack of conformity relates to facts of which he knew or could not have been unaware and which he did not disclose to the buyer.
If the goods do not conform with the contract and whether or not the price has already been paid, the buyer may reduce the price in the same proportion as the value that the goods actually delivered had at the time of the delivery bears to the value that conforming goods would have had at that time. However, if the seller remedies any failure to perform his obligations in accordance with article 37 or article 48 or if the buyer refuses to accept performance by the seller in accordance with those articles, the buyer may not reduce the price.
(1) If the seller delivers only a part of the goods or if only a part of the goods delivered is in conformity with the contract, articles 46 to 50 apply in respect of the part which is missing or which does not conform.
(2) The buyer may declare the contract avoided in its entirety only if the failure to make delivery completely or in conformity with the contract amounts to a fundamental breach of contract.
2. 1998 Season
On October 11, 1999 the parties agreed that the balance owed by Barroso to Siskiyou on account of the 1988 season was $97,076.17 - or, more precisely, $47,076.17 after application of the $50,000 check tendered that day. Under Oregon law an account is stated when the parties agree that a certain amount is owing and will be paid, based on the previous monetary transactions of the parties. See Hulse v. Ocwen Federal Bank, FSB, 195 F. Supp. 2d 1188 (D. Or. 2002). The October 1999 agreement fixes the balance due on the 1998 season, and is binding on the parties. The sum of $98,221 was paid, $50,000 by check and $48,221 by wire. The check was subsequently dishonored. The balance still due for 1998 is $48,885, plus interest at the contract rate of 18% per annum from October 21, 1999, the date of the wire transfer. Claimants claim should be reduced by the principal balance plus interest to September 12, 2002 the date the petition in bankruptcy was filed.
3. 1999 Season: Blue Heron Trees
Four truckloads of trees Blue Heron Farms were delivered to Barroso at Siskiyou's directions. Since they were not graded "USDA # 1 or better" they did not conform to the contract.
The U.S. Department of Agriculture's Agricultural Marketing Service establishes uniform standards for evaluating the quality of agricultural goods, including Christmas trees. Trees are assigned grades of Premium, # 1 and # 2. Trees below # 2 are variously referred to as # 3 or "culls." The grades are based on an elaborate system taking into account a number of characteristics, including absence of gaps, fullness of foliage, shape, overall health, and freshness. See U.S. Standards for Grading Christmas Trees, 7 C.F.R. 51.3086 et seq. (1989).
The mission of the USDA's marketing service, and the purpose of the grading system, is to facilitate commerce by providing buyers and sellers with a uniform standard used for identifying the quality of trees bought and sold. Use of the standards assures the parties to a contract, and any subsequent buyers, of the nature and quality of the goods, without the need for elaborate or expensive reinspection. A buyer contracting for a particular grade is entitled to receive trees conforming to the standard defined for such grade by the USDA, and nothing less. Siskiyou argues that Blue Heron's standards are more rigorous than those of most growers, and that their # 3 trees are, in fact, as good or better than # 1 trees grown and sold by others. The evidence supporting this contention is weak. Siskiyou points to Blue Heron's reputation for high quality (which is undisputed) and to two witnesses' evaluation of photographs of two dozen trees grown (actually, still growing) at the same plantation from which the trees shipped to Baroso were harvested. As both witnesses observed, it is not possible to grade a tree from a photograph, since grading necessarily requires evaluation of the entire circumference. Even with that proviso, the witnesses said that a considerable number of the trees they were shown were of a lower grade than USDA # 1.
The Congress and the USDA have established a uniform and objective standard for grading trees, and the contract called for trees conforming to that standard. The buyer was entitled to delivery of trees graded as conforming to that standard, particularly where he intended to sell them to others with the representation that they conform. That some of the goods in question may in fact be of a higher quality than the grade assigned is irrelevant. Without the assurance provided by the desired grade, the goods will not move through the marketplace, at least not without reinspection and regrading. The result is that the buyer is deprived of what he has bargained for, which are goods readily saleable as having the prescribed quality. The subjective rule contemplated by Siskiyou would undermine the grading system by holding that a tree's grade is determined not in light of objective standards, but the practices of its grower. This would render the grading system meaningless. Moreover, an overseas buyer cannot be assured of his ability to sell the lower-grade trees to his customers by relying on the reputation or practices of a remote grower.
In short, delivery of trees assigned a lower grade than that contracted for constituted a material breach of the agreement, notwithstanding the actual quality of the trees.
4. 1999: Siskiyou Trees
Inspection of three loads of trees at the border by the USDA revealed that roughly 40% of the loads were not # 1 or better. For the reasons discussed in the preceding section, these trees did not conform to the contract, and their delivery constituted a material breach of the agreement.
5. Notice to Seller of Non-conformity
Siskiyou points to Art. 39 of the Convention, claiming that Barroso never notified it of the non-conformity, and is therefore not entitled to damages. The argument fails with respect to the Blue Heron trees because Art. 40 of the Convention relieves the buyer of a duty to notify when the seller knew, or should have known, of the non-conformity. The evidence is unequivocal that Siskiyou knew the Blue Heron trees were # 3 grade.
As for the remaining trees, the evidence shows that Barroso made several complaints regarding the number and quality of the trees. Siskiyou does not deny that there were a number of complaints, but believed they were limited in scope to minor shortages in the number of trees delivered. In any case, Siskiyou maintains that the notice was insufficiently detailed to satisfy the Convention.
Under the Uniform Commercial Code, notice of non-conformity is required to afford the seller an opportunity to correct the breach. No particular form is required, and notice is sufficient if it is enough to alert the seller to the fact that there is a problem with the contract. See UCC §§ 2-602 and 1-201(26). UCC § 2-605, however, provides that, where a buyer does not particularize defects upon which a rejection is premised, he may not rely on those defects to justify rejection "where the seller could have cured it if stated seasonably." European cases construing the Convention have required the notice to describe the claimed non-conformity with enough detail to allow the seller to identify and correct the problem without further investigation. A more practical interpretation would hold that the notice must given in time, and in sufficient detail, to allow the seller to cure the defect in a manner allowing the buyer the benefit of his bargain.
The Convention relieves the buyer of the duty to give notice if the seller "could not have been unaware" of the non-conformity. CISG Art. 40. Arguably, this language sets a lower standard of awareness than the phrase "his reason to know" usually found in American law. See UCC § 1-201(25)(c). However, the Debtor is chargeable with an understanding of the uniform standards for Christmas trees established by the USDA, and could not have been unaware that the quality of nearly half the trees its own employees harvested and shipped failed to meet those standards.
Another factor in the equation is whether there was time to cure. Here, the selling season in Mexico had run its course by the time the defects were discovered, and little or no time remained to remedy the non-conformity by delivery of new trees. The purpose of the notice provision could not have been served in any event.
The evidence is sufficient to establish that Barroso called Siskiyou many times to complain about the quality of the trees. It is not necessary, as Siskiyou suggests, that the notice be in writing, or any particular form. The seller could not have, as the Convention put it, been unaware of the nature of the non-conformity, both as to the grade of the Blue Heron trees or the grade or quality of the Siskyou trees. Finally, notice, especially respecting the last shipments, was futile in any case, given the lateness of the season. It follows that Siskiyou cannot successfully defend on the basis of lack of notice.
Barroso is entitled to recover the amount paid for each non-conforming load. CISG Art. 50. This means the entire amount paid for the non-conforming loads. In addition, he is entitled to recover money expended for shipping and handling.
A buyer is also entitled to recover an amount equal to the profit he would have made had the goods conformed to the contract, to the extent such losses are reasonably foreseeable. CISG Art. 74. At trial, Barroso conceded that the rejection of the several contracts he had with customers in Mexico was wrongful. It follows that the events could not have been foreseen by the seller. He does not, therefore, seek damages relating to these contracts. In addition, Claimant's damages are reduced by the amount received for trees actually sold.
Claimant seeks over $21,000 in attorney's fees incurred pre-petition. The original invoice provides that, in the event of a breach, buyer shall pay seller's reasonable expenses, including attorney's fees. Oregon law makes such clauses reciprocal. ORS 20.096(1).
Claimant's original claim was greatly inflated, to be reduced to realistic levels only at the eve of trial. Testimony at trial, including discovery, reveals that significant time and effort - and legal fees - were expended on both sides dealing with the abandoned claims. Moreover, claimant himself was in breach of the 1998 contract, having failed to make good on the $50,000 check.
Under the circumstances, the claim for attorney's fees is unreasonable, and none will be awarded here.
Based on this analysis, the claim may be calculated as follows:
1. Abastos is Spanish for "provisions", especially food. Oxford Spanish Dictionary, 2d Ed.
2. There was testimony to the effect that there were more urgent demands on Barroso's cash reserves at the time. The reason for nonpayment, if unrelated to the contract, is not important.
3. It is not clear why the amount transferred was somewhat larger than the amount agreed to
4. In fact, testimony revealed that Siskiyou's owner went the Blue Heron plantation looking for # 3 trees. Blue Heron's prices for # 3s were less than the amount Siskiyou quoted to Baroso for # 1 trees; its # 1 trees were more costly. Covering the order with Blue Heron # 3 trees increased Siskiyou's potential profit; using # 1 trees would have diminished it.
5. These damages might have been considerable, since Barroso had contracted to sell the trees to the companies for a huge profit. This might have had something to do with why the companies refused to honor the contracts, as well as their claims that the trees were of poor quality.}}
Original in English:
-available at the University of Pace website, www.cisg.law.pace.edu}}