INTERNATIONAL BUSINESS TRANSACTIONS

FINAL EXAMINATION


GOLDEN GATE UNIVERSITY SCHOOL OF LAW

PROFESSOR HELEN E. HARTNELL

DECEMBER 19, 2001


INSTRUCTIONS


1. This is an open-book examination. You are permitted to refer to the casebook, documents supplement, class handouts, class notes, and an outline prepared by you or your study group. Students whose native language is not English may also use an English-foreign language dictionary. USE DURING THE EXAMINATION OF ANY OTHER MATERIALS IS PROHIBITED.

2. WRITE YOUR EXAMINATION NUMBER ON THE TOP OF THIS PAGE, AS WELL AS ON EACH BLUE BOOK YOU USE. PLEASE NUMBER YOUR BLUE BOOKS IF YOU USE MORE THAN ONE (E.G. "1 OF 2, 2 OF 2").

3. Your answers should be written in ink or typed. DO NOT USE PENCIL. Write your answers in the blue books provided. No credit will be given for arguments which may appear on this examination sheet but not in your blue book(s).

4. WRITE ON ONLY ONE SIDE OF EACH BLUE BOOK PAGE.

5. PLEASE DO NOT SKIP LINES.

6. Questions may be answered in any order, but be sure to start the answer to each question at the top of a new page, and to label your answers clearly.

7. You have three hours to complete this examination, which consists of four questions arising out of an interrelated set of fact patterns. The suggested times correspond to the importance (and point value) of each question or part. Thus, a question where I suggest 60 minutes is twice as important (and worth twice as many points) as a question where I suggest only 30 minutes. Take 15 minutes to read over the entire exam.

8. At the end of the exam, you must turn in this exam, your blue book(s), and all scratch paper.

 

 

 

 

TAKE 15 MINUTES TO READ OVER ENTIRE EXAM !

BASIC FACT PATTERN

Dressy Bessy Inc. ("DB") is a U.S. company that deals in women's knitted clothing ("knitwear"). DB's principal customers are large U.S. department stores, such as Saks Fifth Avenue and Nordstrom's. DB, which has its main office in New York City, imports knitwear into the U.S. from around the world. In the year 2000, DB imported more than $200 million worth of knitwear into the U.S. DB faces a constant struggle to keep up with the latest fashion trends in the women's clothing market. In order to stay on top of this volatile market, DB is developing a network of local "agents" who are based in more than forty cities outside the U.S. The role of each local agent is to inform DB about new fashion trends, to identify suppliers of high-quality knitwear, and to help arrange for DB to purchase knitwear from such suppliers. In most cases, DB just has one agent per country, who is usually based in the capital city. In some countries, however, DB works with more than one agent (e.g. Italy, India and China). All of DB's agents work on a commission basis.

DB has retained you to advise it on a variety of international legal issues. Be sure to read ALL of the following questions before beginning to answer any one of them.

 

 

QUESTION 1 (75 MINUTES):

Up to now, DB has relied on informal oral agreements with its "agents" around the world. Recently, however, DB has decided that it should formalize these agreements by reducing them to writing. In this connection, DB hires your law firm to draft a form contract that it can use with its "agents" around the world. As a preliminary step towards drafting such a contract, you should prepare a memorandum in which you analyze the key issues that will need to be addressed in the contract. At the very least, your memorandum should discuss the following issues: scope of the appointment; obligations of DB; obligations of the "agent"; payment of commissions to "agent"; and intellectual property issues. (Note: There are no patents involved in this business.) Do not spend time on "boilerplate" (i.e. generic) clauses that you would find in any contract (e.g. choice of law or choice of forum clauses). Rather, focus on the provisions that you consider necessary for structuring this unique contractual arrangement. You should also address the issues that will arise in connection with the sale transactions that the "agent" will help DB to arrange. In this regard, you should think concretely about how the "agents" will help to arrange the actual contracts of sale between DB and its suppliers, and explain how you would reflect these mechanics in the contracts DB is planning to conclude with its "agents".  

At this stage of the process, your objective is to analyze legal questions that arise in connection with each of the listed issues, and to make recommendations about how to structure such an agreement to best protect your client's interests. You may (but need not) suggest actual language to be included in the contract. Right now it is more important for you to explain the importance of various issues -- and to figure out how to make DB's network of international business transactions work -- than it is to produce (or reproduce) actual contractual language. Think about this memorandum as a "road map" that you will send to your client and the senior lawyer for whom you work, and that the three of you will use as the framework for discussion when you meet next week. Be sure to note the questions you want to ask your client in order to gather all the information that you will need to finalize the draft form contract. 

 

 

MODIFIED FACT PATTERN

Assume for purposes of the following questions that DB has not yet concluded any of the proposed new contracts with its "agents" that were discussed under Question 1. Thus, the following questions arise in the context of DB's existing informal agreements with its "agents".

Knitwear, like other clothing, is normally sold on an "advance season" basis. Here is an overview of the schedule of the clothing seasons for North America:

 

CLOTHING STYLE WHOLESALE (TO IMPORTER) RETAIL (TO CONSUMERS)
SPRING July 1 - September 30 January 1 - March 31
SUMMER October 1 - December 31 April 1 - June 30
AUTUMN January 1 - March 31 July 1 - September 30
WINTER April 1 - June 30 October 1 - December 31

This schedule shows that DB purchases knitwear a full two seasons (i.e., 6 months) before it actually needs to import the goods and deliver them to its customers in the U. S. If clothing is delivered late, DB's customers will often refuse to accept delivery.

 

QUESTION 2 (30 MINUTES):

Jack Squat, the principal shareholder and general manager of DB, attended an international fashion fair in Berlin, Germany, in April 2001. On that occasion, Mr. Squat placed an order with Hayastan Knitwear, an Armenian supplier of novelty knitted items, for 20,000 Christmas holiday pullover sweaters with a New York City theme, at $5.00 per sweater, for a total contract price of $100,000. Each of these sweaters was to have the Manhattan skyline knitted into it, with battery-operated Christmas lights adorning the buildings. The skyline included the World Trade Center which was destroyed on September 11, 2001. Mr. Squat was deeply affected by the events of September 11, as were so many people. By the time he had recovered from the shock of September's events, it was too late for DB to cancel the order or to instruct the Armenian supplier to change the design of the sweaters. Mr. Squat's customers have canceled their orders for these goods bearing the image of the World Trade Center on them, and Mr. Squat believes that DB will be unable to resell the sweaters or otherwise recover any of the $100,000 purchase price.

Hayastan, the Armenian supplier, shipped the holiday-theme sweaters to DB on October 1, 2001, as required by the contract of sale. The contract calls for delivery "CIF Yerevan Airport." On October 5, 2001, the Armenian seller, Hayastan, obtained payment of the full purchase price of $100,000 from the confirming bank in Yerevan, pursuant to a documentary letter of credit issued by Citibank (New York).

Unfortunately, the cargo plane carrying these goods was hijacked by persons engaged in armed struggle in Central Asia, who dumped the sweaters into the sea in order to make room in the plane for a cargo of guns. Mr. Squat contacted the insurance company, seeking reimbursement for the loss of the $100,000 cargo. He was disappointed to learn that the insurance policy exempted the insurance company from liability for damage caused in connection with terrorist activity.

Mr. Squat calls and asks you to explain the legal implications of this situation to him, and to advise him if you see any way for DB to get out of the contract with Hayastan or otherwise to recover this loss. Mr. Squat wants you to know that, under normal circumstances, DB would not be too distressed over a $100,000 loss. However, business has been difficult since September 11, and Mr. Squat is worried about the solvency of his company.

 

 

QUESTION 3 (40 MINUTES)

In May 2001, Mr. Squat traveled to Mexico, in search of reliable suppliers of knitted hats and gloves. Mr. Squat met separately with four independent Mexican manufacturers: A, B, C and D. Mr. Squat was impressed by each of the four managing directors he met, and found that he was unable to choose among them. He therefore decided to give all four producers a chance, and placed an order with each for approximately $25,000 worth of knitted goods.

The written agreements between DB and each of the four Mexican knitwear suppliers required that each of the sellers would ship the designated quantity of knitted hats and gloves to DB "by November 31, 2001." This is a very late shipment date for winter clothing, but DB decided to take a chance, since the goods offered by these four suppliers were unusual and expected to sell very quickly. Mr. Squat made it clear in his negotiations with each Mexican supplier that the goods had to be in U.S. stores before Christmas. Each contract was a C.I.F. contract for carriage of goods by road, so it was up to each manufacturer to decide which trucking line would carry the goods from its production facility to DB's warehouse in Texas.

Each contract required DB to open a confirmed, irrevocable letter of credit in favor of the respective manufacturer. Upon his return to New York, Mr. Squat asked Citibank to issue four documentary letters of credit in the amount of $25,000 each, one each for A, B, C and D.  Banca Muyrica (Mexico City) confirmed each of the four letters of credit, and advised the beneficiaries.  All four letters of credit incorporated by reference the terms of the I.C.C. (International Chamber of Commerce) Uniform Customs and Practice for Documentary Credits (UCP). Each letter of credit called for payment upon presentation of: (1) A clean on board bill of lading showing that the goods had been delivered by November 31, 2001 to a road carrier that was authorized to cross the Mexico-U.S. border; (2) An original commercial invoice; and (3) A certificate of inspection signed by Supervigilancia S.A.

Time passed, and Mr. Squat forgot about the hats and gloves, since his attention was focused on the events in New York after September 11. Recent world events (including the recession) have seriously affected DB's business. Indeed, DB has been losing money lately, not least because some of its customers have canceled large orders recently. Mr. Squat is not certain how much longer DB will be able to continue paying its debts.

On the evening of December 17, 2001, Mr. Squat received a FAX from DB's "agent" in Mexico, Carla Chica, who was acting as DB's liaison with the new Mexican suppliers. According to Ms. Chica's FAX, Mexican supplier A had shipped the goods on December 1, but convinced the clerk at the trucking company to cover up this fact by backdating the bill of lading to November 31, the date mentioned in the letter of credit. On top of that, Ms. Chica informed Mr. Squat that the customs authorities at the U.S.-Mexican border had told her that the boxes shipped by supplier B contained used (not new) hats or gloves, as called for under the contract. Early on the morning of December 18, Mr. Squat called Citibank, and told the clerk (Mr. Bucks) to dishonor the presentation made by the confirming bank (Banca Muyrica) on behalf of suppliers A or B. Mr. Bucks informed Mr. Squat that Banca Muyrica had already paid all four of the Mexican manufacturers, and had that very morning made a demand on Citibank for full payment of all four drafts. Mr. Bucks said that Citibank had not yet honored the confirming bank's demand for payment, but added that he saw no reason not to honor within the next day or two. At the end of this telephone conversation, Mr. Bucks told Mr. Squat that supplier C had presented a bill of lading marked "SHIPPER'S LOAD, WEIGHT AND COUNT", and that supplier D's certificate of inspection was neither signed nor dated.

Mr. Squat calls you asks if you can help DB, which does not want to accept or pay for any of the goods or documents tendered by the four Mexican suppliers.  Advise him.

 

 

QUESTION 4 (20 MINUTES)

Stefano S.A. is an Italian company that manufactures high-quality knitted clothing. DB has been purchasing knitwear from Stefano since 1990. Stefano's sales manager, Molto Bene, attended the Berlin fashion fair in July 2001, where he displayed Stefano's latest line of clothing. DB's European purchaser, Eva Szabo, also attended the Berlin fair in July 2001, in order to purchase knitwear for the 2002 winter season. As in previous years, Ms. Szabo was impressed with Stefano's new line of knitwear, and told Mr. Berle over coffee to ship 25,000 knitted dresses to DB before Christmas 2001, which he agreed to do.

After returning to New York, Ms. Szabo learned that Stefano would manufacture the knitted dresses in her native Hungary. The Hungarian producer, Kotode Kft., is a joint venture company that is partly owned by a U.S. company (Fruit of the Loom). Kotode manufactures knitwear under license -and strict quality supervision --from Stefano. Kotode sells its entire output to Stefano, which resells the goods that Kotode produces for Stefano, to its customers (including DB). As a practical matter, Kotode ships the knitted dresses directly from Hungary to Stefano's customers. Kotode's knitted dresses incorporate Cuban raw materials.

Ms. Szabo calls you with some questions arising out of DB's purchase of knitted dresses from Stefano. What (if any) are the legal implications of the facts that the knitted dresses: (a) are manufactured in Hungary instead of in Italy, and (b) incorporate Cuban raw materials?