Business the American Way – “Really, do we have a contract already?” A Cautionary Tale to Moldovan, Romanian, and U.S. Traders
By Sergiu Gherman
One of the principles underlying the Uniform Commercial Code (“UCC”) is to interpret business agreements in favor of their validity. Generally, a valid contract has four elements: (1) offer, (2) acceptance, (3) consideration, and (4) lack of valid defenses, such as illegality or one of the parties is a minor. Under the UCC, the shipment of goods sent in response to a purchase order creates a binding contract, regardless of whether a formal document with the an fancy word “contract” or “agreement” was signed by the parties, or whether there was a seal or a handshake.
Foreign companies trading with the U.S. partners sometimes do not even imagine that their business deal matured into a fully-fledged binding agreement in the eyes of the law, while both sides are still working on the provisions to the formal document entitled “CONTRACT.” Examples to such conduct galore. A recent one involves a company from Romania’s neighboring Turkey.
In the case Onuss Ortak Nokta v. Terminal Exchange Inc., a Turkish company desired to sell Verifones (payment terminals for credit cards) to a Florida company. The parties settled on the essential terms of the purchase and pursued to formalize the deal with a written contract. Before such a written contract was drafted in its final form, the American company dispatched a purchase order, and the Turkish company responded by a prompt shipment of the goods along with an invoice for approximately half million dollars.
The goods were already in Florida, but the parties were still trying to figure out when and how to pay for the goods, and when the risk of loss would transfer from the buyer to seller. Suddenly, the company in Florida decided that it would not pay for the order until some undetermined time in the future. The contract was never signed, and there was no formal agreement as both parties have envisioned. The foreign company alleged to have incurred freight, customs, warehousing charges, import charges, and expenses in trying to find another buyer.
The position of the Floridian company was that there was no formal agreement and therefore they could not be held in breach of a contract that did not exist and that no claims associated with shipping of the goods, custom clearing and storage at a Florida warehouse could be brought against them.
The Turkish business filed a claim in the Miami federal court. The district court disagreed with the arguments advanced by the local company and decided that in fact a binding contract existed. The court explained that all the elements of a contract formation were present. The offer occurred when the Florida company placed a purchase order. Acceptance occurred when the Turkish company shipped the goods with the invoice to Miami. Additionally, the court reasoned, under to the UCC the shipment of goods pursuant to a purchase order constituted acceptance, which created a binding contract. While defendant argued that the absence of a signed “contract” clearly indicates that there was no agreement, the court rejected such argument and stated such facts do not undo the contract that already came into existence by operation of law.
The reader may be curious to know that while the lawsuit was originally filed in May of 2009, it now barely comes to an end. Apparently, an excessive fondness for traditional contractual formalities and a strong desire to dive into what looked like a good deal at first, hurt both parties. While the transaction was estimated at half million dollars worth of goods, at the end of the litigation process the legal fees may approximate that same amount. Under the American rule, each side pays its own legal costs – except in some limited circumstances. Therefore, unless the legal costs are shifted to the opponent, the winning side may face the Pyrrhic victory.
The lesson is not an easy one. On the one hand, there is a strong enticement to be the first to profit from a lucrative opportunity which may be unique. On the other, not knowing your trading partner well, not knowing the legal principles underlying the deal, lack of insurance, neglecting your own level of risk tolerance, lack of thinking through the worst-case scenario – all are the considerations that are often left to chance. Yet that chance may later await and punish both traders.
