Data

Date:: 19-08-2010
Country:: USA
Number:: 4:09cv00318 SWW
Court:: U.S. District Court, Eastern District of Arkansas, Western Division
Parties:: Electrocraft Arkansas, Inc. v. Super Electric Motors, Ltd and Raymond O’Gara

Keywords

NON-CONFORMITY OF GOODS - BUYER'S OBLIGATION TO EXAMINE THE GOODS (ART. 38 CISG)

NON-CONFORMITY OF GOODS - BUYER'S OBLIGATION TO GIVE SELLER NOTICE OF LACK OF CONFORMITY WITHIN A REASONABLE TIME (ART. 39 CISG)

Abstract

Since approximately 2002, a Delaware corporation commenced purchasing electric refrigerator motors from a Hong Kong manufacturer with a view to reselling them. After having received complaints from numerous customers who returned about 300,000 of the delivered motors, the buyer filed a lawsuit asserting, inter alia, that the seller had been unwilling or unable to cure the defects, while not only had it sustained significant expenses to remedy customers’ complaints but its business reputation had also been damaged. The seller counterclaimed that the buyer had failed to pay for the goods supplied and that it had neither inspected the goods nor given the seller notice thereof within a reasonable time according to Arts. 38-39 CISG.

In a previous decision (see U.S. District Court, Eastern District of Arkansas, Western Division, 23.12.2009, in UNILEX) the Court ruled that CISG was applicable to the merits of the dispute according to its Art. 1(1)(a), except for the buyer’s claim regarding tortious interference with business relations.

In the present decision, after having reaffirmed the applicability of CISG, the Court denied the parties’ motions for summary judgment, founding that there were genuine issues of material fact as to whether the buyer had properly inspected the goods, the goods at issue were non-conforming and the buyer had timely given notice of the lack of conformity.

Fulltext

[Buyer] brings this action against [Seller] asserting the following claims in connection with allegedly defective refrigerator motors that [Buyer] purchased from [Seller]: violations of the United Nations Convention on Contracts for the International Sale of Goods (CISG); violations of Article 2 of the Uniform Commercial Code (UCC), codified in Ark.Code Ann. § § 4-2-101 et seq. breach of express warranty; breach of implied warranty of merchantability; negligence/strict liability; violations of the Arkansas Deceptive Trade Practices Act (ADTPA), codified in Ark.Code Ann. §§ 4-88-101 et seq. tortious interference with a business expectancy; and unjust enrichment and restitution. [Seller] has counterclaimed against [Buyer] under the CISG and seeks judgment against [Buyer] for unpaid invoices in the amount of $1,126,077.92 and lost profits in excess of $1,000,000.

By Memorandum and Order entered December 23, 2009 [doc.# 23], the Court granted in part and denied in part a motion of [Seller] to dismiss [Buyer]'s complaint. The Court determined that (1) the CISG is the applicable law in this action; (2) [Buyer]’s complaint, asserting violations of the CISG, sets forth sufficient facts to state a claim upon which relief can be granted under the CISG; (3) the CISG preempts and subsumes the breach of express and implied warranty claims under Article 2 of the Arkansas UCC contained in counts two and three of [Buyer]'s complaint; (4) the CISG preempts and subsumes the negligence/strict liability claim in count four of [Buyer]'s complaint; (5) the ADTPA claim in count five of [Buyer]'s complaint is not preempted by the CISG and the ADTPA is not limited to actions brought by consumers; (6) the tortious interference with business expectancy claim in count six of [Buyer]'s complaint is not preempted by the CISG and [Buyer] has pled facts to meet the elements of such a cause of action; and (7) the unjust enrichment and restitution claims in count seven of [Buyer]'s complaint are preempted and subsumed by the CISG. See Electrocraft Arkansas, Inc. v. Super Electric Motors, Ltd, No. 4:09cv00318 SWW, 2009 WL 5181854 (E.D.Ark. Dec. 23, 2009).

Now before the Court are the following motions: (1) motion of [Seller] for summary judgment on its counterclaim under the CISG [doc.# 30]; (2) motion of [Buyer] for summary judgment on its CISG claims [doc.# 43]; and (3) motion of [Seller] for leave to take the deposition of Stephen Draper of Whirlpool Corporation and/or Whirlpool's custodian of records concerning John Arico's letter of January 14, 2009 and related communications, and to subpoena related documents [doc.# 64]. [Buyer] has responded in opposition to [Seller]'s motion for summary judgment on its counterclaim, [Seller] has filed a reply to [Buyer]'s response, and [Buyer], with leave of the Court, has filed a sur-reply to [Seller]'s reply.[2] [Seller], in turn, has responded in opposition to [Buyer]'s motion for summary judgment on its CISG claims and [Buyer] has filed a reply to [Seller]'s response. [Buyer] has also responded in opposition to [Seller]'s motion for additional discovery. Having carefully considered the matter, the Court denies [Seller]'s motion for summary judgment on its counterclaim under the CISG, denies [Buyer]'s motion for summary judgment on its CISG claims, and denies [Seller]'s motion for additional discovery.

I. [Buyer] is a Delaware corporation doing business in the State of Arkansas and supplies electric refrigerator motors to manufacturers of refrigerators. [Seller] is a company engaged in the manufacture of refrigerator motors. [Seller] was formed under the laws of Hong Kong and its manufacturing facilities are located in Shenzhen, China.

Beginning in approximately 2002, [Seller] manufactured electric motors pursuant to purchase orders received from [Buyer] based upon the designs and specifications submitted to [Seller] by [Buyer]. According to [Buyer], the motors were able to be utilized for their intended purpose (incorporated into refrigerators to make the refrigerators cool) after being inspected by [Buyer] and would then be delivered to [Buyer]'s customers, including Whirlpool and other manufacturers, where they were incorporated into refrigerators. After the manufacture of the electric motors pursuant to [Buyer]'s purchase orders, [Seller] submitted invoices that specified the number of motors shipped, the type of motor shipped, and [Buyer]'s purchase order number.

The parties originally conducted business pursuant to a written agreement entered into in 2000 but in 2002 the written agreement expired by its own terms. [Buyer] states that after the agreement expired, the parties continued to operate as though the agreement was still in place, stating that in 2006, [Seller] expressly agreed to continuation of the parties' purchase and sale of [Buyer]'s requirements for the electric motors. [Seller] denies this, stating that after the agreement terminated, the parties' "course of dealing" was for [Buyer] to issue purchase orders for motors and for [Seller] to manufacture those motors pursuant to [Buyer]'s design and specifications, and issuing an invoice for each group of motors delivered to [Buyer]. [Seller] states that [Buyer] accepted delivery of the motors FOB Hong Kong and took them to its facility in Arkansas where it inspected them to ensure that they met [Buyer]'s specifications and then issued rejections and debits as to those motors and paid the balance of the invoices in accordance with the terms of the invoices.

[Buyer] states that in July 2008, it began to receive notices from its customers that the motors supplied by [Seller] were failing at an unacceptable rate. [Buyer] states that it confirmed there were incurable problems with the motors as a result of manufacturing defects and that due to their failure to operate in the intended fashion, the defective motors have been returned to [Buyer] by the end user, causing [Buyer] to be unable to fulfill its contractual obligations to its customers. [Buyer] states it is currently in possession of approximately 300,000 defective motors manufactured and delivered by [Seller] without having any productive use.

[Buyer] states that [Seller] confirmed that the motors were defective but still demanded payment for the motors that had been delivered. [Buyer] states that despite demand, [Seller] has been unwilling or unable to cure the situation, to refund for paid invoices, or to void the unpaid invoices for the defective motors, and that [Seller] has caused it damage by way of the loss of existing customers, being forced to pay significant amounts to resolve customer claims and remedy customer complaints, and damage to its business reputation.

[Seller], in turn, claims that for the period beginning with invoices dated July 15, 2008 and all invoices generated thereafter, there remains due and owing to [Seller] from [Buyer] amounts for goods in the possession of [Buyer] pursuant to its purchase orders and for which [Buyer] has refused to remit payment. [Seller] states that the motors manufactured and sold to [Buyer] identified by the invoices were all manufactured after [Seller] received purchase orders and that it was assured by [Buyer] that it would pay for the motors, but that [Seller] never received rejections of the specific motors identified by these invoices, much less timely rejections.

[Seller] states that in addition to the electric motors delivered to [Buyer] pursuant to the purchase orders, [Seller] manufactured other electric motors for [Buyer] pursuant to purchase orders, and [Buyer] either refused to take delivery of the motors or has wrongfully attempted to cancel its acceptance of delivery. As to those motors for which [Buyer] has either refused to take delivery or has attempted to cancel its acceptance of delivery, [Seller] states that there remains an amount due and owing to [Seller] for goods manufactured by [Seller] pursuant to [Buyer]'s purchase orders but for which [Buyer] has wrongfully failed to take delivery or has wrongfully attempted to cancel its acceptance of delivery.

[Seller] claims that valid contracts for the sale of motors within the meaning of Articles 14-24 of the CISG exist between [Seller] and [Buyer], that it has manufactured motors pursuant to [Buyer]'s purchase orders which have not been paid, and that pursuant to the parties' course of dealing and course of performance of their agreements, both oral and written, and in accordance with the provisions of [Buyer]'s purchase orders and the CISG, [Buyer] has fundamentally breached the contracts between [Seller] and [Buyer] within the meaning of Article 25 of the CISG. [Seller] states it has delivered goods to [Buyer] in accordance with the parties' course of dealing and course of performance of their agreements, and in accordance with the provisions of [Buyer]'s design specifications and purchase orders, and that it has delivered goods to [Buyer] in accordance with Article 35 of the CISG. [Seller] states that following the delivery of the motors, [Buyer] inspected the motors but did not reject them in a timely manner and, in fact, approved them as meeting [Buyer]'s specifications and available for re-sale.

[Seller] states that pursuant to Article 39 of the CISG, [Buyer] has waived any right to declare a lack of conformity, or to reject, the motors in its actual or constructive possession, including all motors resold to Whirlpool or other manufacturers by [Buyer], and that [Buyer] may not reject goods that have already been sold to third parties. With respect to motors manufactured by [Seller] pursuant to [Buyer]'s purchase orders, [Seller] states that [Buyer] has waived the right to declare the purchase orders and the parties' contracts avoided pursuant to Article 49 of the CISG for failure to provide notice to [Seller] within a reasonable time.

[Seller] additionally states that [Buyer] proposed that [Seller] provide brackets to [Buyer] to rework motors returned to [Buyer] by Whirlpool in Monterrey, Mexico, and that as an accommodation to [Buyer], [Seller] provided replacement brackets to [Buyer] for its use in returning the motors to Whirlpool with the understanding that [Buyer] would remit the amounts owed for the motors to [Seller]. [Buyer] failed to honor its agreement, states [Seller], and is liable to [Seller] in the amount of $105,200.76 for the cost of the brackets it provided to [Buyer].

II. Before turning to the parties' motions for summary judgment, the Court first revisits the applicability of the CISG to this action. In previously concluding that the CISG is the applicable law, the Court determined, based on the reasoning of the Northern District of Illinois in CNA International v. Guangdon Kelon Electronical Holdings, et al., No. 05 C 5734 (N.D.Ill. filed Sept. 3, 2008), that the Peoples Republic of China ratified the CISG in 1986 and that Hong Kong is a Contracting State under the CISG. The Court ruled as follows:

The CISG is an international treaty, ratified by the United States in 1986, that sets out substantive provisions of law to govern the formation of international sales contracts and the rights and obligations of the buyer and seller. Caterpillar, Inc. v. Usinor Industeel, 393 F.Supp.2d 659, 673 (N.D.Ill.2005) (citation omitted). The aim of the CISG is to promote worldwide uniformity in dealing with sales disputes arising from international sales. Peter Schlechtriem, The Borderland of Tort and Contract: Opening a New Frontier?, 21 Cornell Int'l L.J. 467, 472 (1988). The CISG applies to international sales contracts between parties that are located in signatory countries, and who have not opted out of CISG coverage at the time of contracting. Caterpillar, 393 F.Supp.2d at 673. The Peoples Republic of China ratified the CISG in 1986 and Hong Kong is a Contracting State under the CISG. See CNA International v. Guangdon Kelon Electronical Holdings, et al., No. 05 C 5734 (N.D.Ill. filed Sept. 3, 2008). Neither [Buyer] nor [Seller] have opted out of the CISG with respect to the contract at issue in this action and both parties have their places of business in different Contracting States under the Convention. Accordingly, the Court finds that the CISG is the applicable law in this action.

Electrocraft, 2009 WL 5181854, at *3.

After this Court drafted its Memorandum and Order in Electrocraft (but prior to its entry), the Northern District of Georgia, utilizing reasoning in direct contrast to that of the Northern District of Illinois in CNA International, determined that Hong Kong is not a Contracting State under the CISG and therefore the CISG did not apply to the plaintiff's breach of contract action. See Innotex Precision Limited v. Horei Image Products, Inc., 679 F.Supp.2d 1356, 1358-59 (N.D.Ga.2009) [3] Given these conflicting authorities, the Court directed that the parties address the impact, if any, of Innotex Precision on these proceedings. The parties have responded with a joint statement regarding choice of law in which both parties submit that notwithstanding Innotex Precision, Hong Kong is a Contracting State under the CISG and the CISG therefore applies to this action. Having reviewed the parties' joint statement, the Court reaffirms that the CISG is the applicable law.

Neither [Buyer] nor [Seller] contests the application of the CISG to this action and the court in CNA International engaged in both a detailed consideration of whether Hong Kong is a Contracting State and a comprehensive review of applicable authority. In addition, the court's opinion in CNA International is bolstered by strong policy considerations regarding the CISG's aim to promote worldwide uniformity in dealing with sales disputes arising from international sales. Regardless of whether the court in Innotex Precision would have agreed with CNA International had it been aware of that decision, the Court agrees with and adopts the reasoning and conclusions of CNA International, finding nothing in Innotex Precision that compels this Court to reconsider its earlier decision that Hong Kong is a Contracting State.[4]

III. Having reaffirmed that the CISG is the applicable law in this action, the Court now turns to the parties' motions for summary judgment. [Seller] moves for summary judgment under the CISG on its counterclaim on grounds that [Buyer] breached the parties' contract by failing to pay for the electric motors manufactured pursuant to the purchase orders, [Buyer] did not make a proper and timely rejection of any of the motors covered by the invoices that are the subject of the counterclaim, and [Buyer] did not make an inspection of the motors within a reasonable time. [Buyer], in turn, moves for summary judgment on its CISG claims on grounds the motors were nonconforming upon reaching the end user ([Buyer]'s customers) and [Seller] is not insulated from liability because [Buyer] inspected the motors. Both parties argue there are no genuine issues of material fact with respect to these issues and that each is entitled to summary judgment on its CISG claims as a matter of law.

A. Summary judgment is appropriate when "the pleadings, the discovery and disclosure materials on file, and any affidavits show that there is no genuine issue as to any material fact and that the movant is entitled to a judgment as a matter of law." Fed.R.Civ.P. 56(c). As a prerequisite to summary judgment, a moving party must demonstrate "an absence of evidence to support the non-moving party's case." Celotex Corp. v. Catrett, 477 U.S. 317, 325 (1986). Once the moving party has properly supported its motion for summary judgment, the nonmoving party must "do more than simply show there is some metaphysical doubt as to the material facts." >Matsushita Elec. Indus. Co. v. Zenith Radio, 475 U.S. 574, 586 (1986). The nonmoving party may not rest on mere allegations or denials of his pleading, but "must come forward with 'specific facts showing ... a genuine issue for trial.' " Id. at 587 (quoting Fed.R.Civ.P. 56(e) and adding emphasis). See also Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 256 (1986). The inferences to be drawn from the underlying facts must be viewed in the light most favorable to the party opposing the motion. Matsushita, 475 U.S. at 587 (citations omitted). However, "[w]here the record taken as a whole could not lead a rational trier of fact to find for the nonmoving party, there is no 'genuine issue for trial.' " Id. (citation omitted). "Only disputes over facts that might affect the outcome of the suit under the governing law will properly preclude the entry of summary judgment." Anderson, 477 U.S. at 248. "Factual disputes that are irrelevant or unnecessary will not be counted." Id.

B. The primary points of contention between the parties are whether [Buyer] properly inspected the motors, whether the motors at issue were nonconforming upon reaching the end user (and the reason for any non-conformity), whether [Buyer] timely rejected the motors, and the nature of the course of conduct between the parties. In addressing these issues, the parties differ significantly on both the facts and the application of the CISG to those facts.

[Seller] argues there are no genuine issues of material fact that [Buyer] failed to timely inspect the particular motors and failed to timely and properly provide the required notice of rejection as to those motors. [Seller] notes that the following provisions of the CISG required [Buyer] to inspect and reject motors that did not meet its specifications and purchase orders:

Article 38
(1) The buyer must examine the goods, or cause them to be examined, within as short a period as is practicable in the circumstances.

Article 39
(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.

Article 49
...
(2) ... [I]n cases where the seller has delivered the goods, the buyer loses the right to declare the contract avoided unless he does so:

...

(b) in respect of any breach other than late delivery, within a reasonable time:

(i) after he knew or ought to have known of the breach; ... .

While seemingly acknowledging that there were problems with at least some of the motors, [Seller], in arguing a lack of proper notice pursuant to Articles 38 and 39, argues that [Buyer] never identified which specific motors it contends are defective or nonconforming to the end user and that without knowing which specific motors are at issue, the Court cannot possibly determine whether they are nonconforming. [Seller] further notes that it suggested as early as January 2007 that the design of the motors needed to be changed to increase the clearance between the shaft and bearing but that [Buyer] refused to allow that change in the design. [Seller] goes on to state that "perhaps more importantly from a design standpoint," it is undisputed that the motors were not designed to meet at least one of the Whirlpool tests.

[Buyer], however, argues that the nonconformity of the motors was not the fault of the design as the same design had provided working motors for years prior to 2008; rather, the nonconformity was due to issues with the quality control in [Seller]'s manufacturing process, i.e. faulty manufacturing and assembly. [Buyer] notes that while [Seller] suggested a change in the design of the motors (in order to make to easier for it to produce the motors alleges [Buyer]), the changes were not necessary and did not result in a motor that worked. [Buyer] further argues the nonconformity was a latent defect not capable of easy detection.[5]

In response to [Seller]'s argument that [Buyer] never identified which specific motors it contends are defective or nonconforming, [Buyer] argues that the nonconforming nature of a substantial number within a lot or installment or among several lots is a fundamental breach and that courts have found liability when it is undisputed that at least some of the goods were defective, citing Delchi Carrier SpA v. Rotorex, 71 F.3d 1024, 1028 (2nd Cir.1995) (finding no genuine issue of material fact regarding liability where it was admitted that "some of the compressors ... did not conform to the nominal performance information."). [Buyer] argues that Articles 38 and 39 do not require specification of the particular goods that are defective; rather, Article 39 only requires notice of the specific nonconformity--not the individual items that are nonconforming.[6] [Buyer] argues that it notified [Seller] of the nonconformity of the goods as soon as it learned of the nonconformity from customers (and that [Seller] confirmed the goods' nonconformity), and that given that, any dispute concerning the notice presents genuine issues of material fact as to whether [Buyer]'s inspection was timely under the CISG (Article 38), and whether the notice specifying the nature of the lack of conformity was given within a reasonable time after the buyer discovered or ought to have discovered the nonconformity (Article 39). See Chicago Prime Packers, Inc. v. Northam Food Trading Co., 320 F.Supp.2d 702, 711-12 (N.D.Ill.2004) (the determination of what period of time is "practicable" under Article 38(1) is a factual one and depends on the circumstances of the case). [Buyer] argues that it satisfied its legal obligation to inspect goods to insure their apparent conformity under Article 38, and that [Seller] was not relieved of its responsibilities to provide a defect-free product, which it was not doing in 2008.

The parties additionally dispute the nature of their course of conduct. Specifically, [Seller] argues that each purchase order constituted a new and distinct contract, while [Buyer] argues there was a continuing flow of motors from [Seller] to [Buyer] with no substantive distinction between one purchase order and the next that would create separable contracts; rather, each purchase order was just another installment to fill the ongoing need for products.

The Court has considered the record and arguments of [Seller] and [Buyer] and is unable to resolve at this time the issues of whether [Buyer] properly inspected the motors, whether the motors at issue were nonconforming upon reaching the end user (and the reason for any non-conformity), whether [Buyer] timely rejected the motors, and the nature of the course of conduct between the parties. These issues are intertwined with genuine factual disputes and are not appropriate for summary judgment.[7]]

IV. The Court now turns to [Seller]'s motion for leave to take the deposition of Stephen Draper of Whirlpool Corporation and/or Whirlpool's custodian of records concerning John Arico's letter of January 14, 2009 and related communications, and to subpoena related documents [doc.# 64]. [Seller] seeks to dispose Draper about the January 14, 2009 letter and its relationship to an offer from [Buyer] to Whirlpool to settle [Buyer]'s dispute with Whirlpool. [Seller] argues that the settlement between [Buyer] and Whirlpool gives rise to the largest component of the damage claim by [Buyer] in this case, and [Seller] believes the settlement is also contrary to the position taken by [Buyer] in communications with [Seller].

[Seller]'s motion is denied as Rule 408 of the Federal Rules of Evidence expressly provides that evidence of furnishing, offering, promising, or accepting a settlement is not admissible to prove the validity of any claim, and that evidence of conduct or statements made in settlement negotiations is likewise not admissible. Williams v. Security Nat. Bank of Sioux City, Iowa, 358 F.Supp.2d 782, 789 (N.D.Iowa 2005) (internal quotation marks omitted); see also Phan v. Trinity Regional Hosp., 3 F.Supp.2d 1014, 1018 (N.D.Iowa 1998) (evidence of settlement offers, demands, or negotiations generally not admissible).[8] [Seller] has not cited any authority suggesting such evidence would be admissible. The Court notes as well that the discovery deadline has long since passed and dispositive motions have been filed and today ruled upon; this matter is now ready for trial.

V. For the foregoing reasons, the Court denies [Seller]'s motion for summary judgment on its counterclaim [doc.# 30], denies [Buyer]'s motion for summary judgment on its claims under the CISG [doc.# 43], and denies [Seller]'s motion for leave to take the deposition of Stephen Draper of Whirlpool Corporation and/or Whirlpool's custodian of records concerning John Arico's letter of January 14, 2009 and related communications, and to subpoena related documents [doc.# 64].

IT IS SO ORDERED.}}

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