Read the Focus on Ethics feature found in the textbook at page 457. Choose one of the discussion threads and post a two paragraph response to the question presented.

UNIT FOUR FOCUS ON ETHICS Domestic and International Sales & Lease Contracts SJIH OCUS ON Transactions involving the sale or lease entire output. Then, after buying all of the seller's output of goods make up a great deal of the at the contract price (which is substantially below the business activity in the commercial and manufactur market price), the buyer could turn around and sell ing sectors of our economy. Articles 2 and 2A of the the goods that she does not need at the higher market Uniform Commercial Code (UCC) govern the sale or price. Under the UCC, this type of unethical behavior is lease of goods in every state except Louisiana. Many of prohibited, even though the buyer in this instance has the UCC's provisions express our ethical standards. not technically breached the contract. Good Faith and Commercial Reasonableness Bad Faith Not Required for Breach Aparty can breach the obligation of good faith under the UCC The concepts of good faith and commercial reason even if the party did not show "bad faith"-that is, even ableness permeate the UCC and help to prevent when there is no proof that the party was dishon- unethical behavior by businesspersons. These two est. For example, in one case a large manufacturer of key concepts are read into every contract and impose recreational boats, Genmar Holdings, Inc., purchased certain duties on all parties. Additionally, reasonability Horizon, a small company that produced a particu- in the formation, performance, and termination of con lar type of fishing boat. At the time of the purchase, tracts underlies almost all of the UCC's provisions. Genmar executives promised that Horizon boats would As an example, consider the UCC's approach to be the company's "champion" and vowed to keep open terms. Section 2311(1) states that when a Horizon's key employees on as managers. The contract term is to be specified by one of the parties, "any such required Genmar to pay Horizon a lump sum in cash specification must be made in good faith and within and also to pay "earn-out consideration" under a limits set by commercial reasonableness." The require specified formula for five years. The "earn-out" amount ment of commercial reasonableness means that the would depend on the number of Horizon brand boats term subsequently supplied by one party should not sold and on annual gross revenues. come as a surprise to the other. The party filling in the One year after the sale, Genmar renamed the missing term may not take advantage of the opportu Horizon brand boats "Nova" and told employees to nity to add a term that will be beneficial to himself or give priority to producing Genmar brand boats over herself (and detrimental to the other party) and then the Nova boats. Because the Genmar boats were demand a contractual performance that the other party more difficult and time consuming to make than the totally failed to anticipate. Under the UCC, the party fill Nova boats, gross revenues and production decreased, ing in the missing term is not allowed to deviate from and Genmar was not required to pay the "earn-out" what is commercially reasonable in the context of the amounts. Eventually, Genmar fired the former Horizon transaction. Courts frequently look to course of dealing, employees and stopped manufacturing the Nova boats usage of trade, and the surrounding circumstances entirely. The former employees filed a suit alleging that in determining what is commercially reasonable in a Genmar had breached the implied covenant of good given situation. faith and fair dealing. Genmar argued that it could not have violated good faith because there was no proof Good Faith in Output and Requirements Contracts that it had engaged in fraud, deceit, or misrepresenta- The obligation of good faith is particularly important tion. The court held for the plaintiffs, however, and the in so-called output and requirements contracts. UCC decision was affirmed on appeal.' It is possible for a 2-306 states that "quantity" in these contracts "means party to breach its good faith obligations under the such actual output or requirements as may occur in UCC even if the party did not engage in fraud, deceit, good faith." For example, Mandrow's Machines, which or misrepresentation. assembles personal computers, has a requirements contract with Advanced Tech Circuit Boards, under Commercial Reasonableness Under the UCC, the which Advanced Tech is to supply Mandrow's with all concept of good faith is closely linked to commercial of the circuit boards it needs. If Mandrow's suddenly reasonableness. All commercial actions-including the quadruples the size of its business, it cannot insist that performance and enforcement of contract obligations- Advanced Tech supply all of its requirements, as speci must display commercial reasonableness. A merchant fied in the original contract. is expected to act in a reasonable manner according As another example, assume that the market price to reasonable commercial customs. The reliance of of the goods subject to a requirements contract rises the UCC's drafters on commercial customs, or usage rapidly and dramatically because of an extreme shortage of materials necessary to their production. The buyer could claim that her needs are equivalent to the seller's 1. OTool v. Genmar Holdings, Inc, 387 F.3d 1188 (10th Cir. 2004). FOCUS ON ETHICS CONTINUES 457 UNIT FOUR FOCUS ON ETHICS Domestic and International Sales & Lease Contracts SJIH OCUS ON Transactions involving the sale or lease entire output. Then, after buying all of the seller's output of goods make up a great deal of the at the contract price (which is substantially below the business activity in the commercial and manufactur market price), the buyer could turn around and sell ing sectors of our economy. Articles 2 and 2A of the the goods that she does not need at the higher market Uniform Commercial Code (UCC) govern the sale or price. Under the UCC, this type of unethical behavior is lease of goods in every state except Louisiana. Many of prohibited, even though the buyer in this instance has the UCC's provisions express our ethical standards. not technically breached the contract. Good Faith and Commercial Reasonableness Bad Faith Not Required for Breach Aparty can breach the obligation of good faith under the UCC The concepts of good faith and commercial reason even if the party did not show "bad faith"-that is, even ableness permeate the UCC and help to prevent when there is no proof that the party was dishon- unethical behavior by businesspersons. These two est. For example, in one case a large manufacturer of key concepts are read into every contract and impose recreational boats, Genmar Holdings, Inc., purchased certain duties on all parties. Additionally, reasonability Horizon, a small company that produced a particu- in the formation, performance, and termination of con lar type of fishing boat. At the time of the purchase, tracts underlies almost all of the UCC's provisions. Genmar executives promised that Horizon boats would As an example, consider the UCC's approach to be the company's "champion" and vowed to keep open terms. Section 2311(1) states that when a Horizon's key employees on as managers. The contract term is to be specified by one of the parties, "any such required Genmar to pay Horizon a lump sum in cash specification must be made in good faith and within and also to pay "earn-out consideration" under a limits set by commercial reasonableness." The require specified formula for five years. The "earn-out" amount ment of commercial reasonableness means that the would depend on the number of Horizon brand boats term subsequently supplied by one party should not sold and on annual gross revenues. come as a surprise to the other. The party filling in the One year after the sale, Genmar renamed the missing term may not take advantage of the opportu Horizon brand boats "Nova" and told employees to nity to add a term that will be beneficial to himself or give priority to producing Genmar brand boats over herself (and detrimental to the other party) and then the Nova boats. Because the Genmar boats were demand a contractual performance that the other party more difficult and time consuming to make than the totally failed to anticipate. Under the UCC, the party fill Nova boats, gross revenues and production decreased, ing in the missing term is not allowed to deviate from and Genmar was not required to pay the "earn-out" what is commercially reasonable in the context of the amounts. Eventually, Genmar fired the former Horizon transaction. Courts frequently look to course of dealing, employees and stopped manufacturing the Nova boats usage of trade, and the surrounding circumstances entirely. The former employees filed a suit alleging that in determining what is commercially reasonable in a Genmar had breached the implied covenant of good given situation. faith and fair dealing. Genmar argued that it could not have violated good faith because there was no proof Good Faith in Output and Requirements Contracts that it had engaged in fraud, deceit, or misrepresenta- The obligation of good faith is particularly important tion. The court held for the plaintiffs, however, and the in so-called output and requirements contracts. UCC decision was affirmed on appeal.' It is possible for a 2-306 states that "quantity" in these contracts "means party to breach its good faith obligations under the such actual output or requirements as may occur in UCC even if the party did not engage in fraud, deceit, good faith." For example, Mandrow's Machines, which or misrepresentation. assembles personal computers, has a requirements contract with Advanced Tech Circuit Boards, under Commercial Reasonableness Under the UCC, the which Advanced Tech is to supply Mandrow's with all concept of good faith is closely linked to commercial of the circuit boards it needs. If Mandrow's suddenly reasonableness. All commercial actions-including the quadruples the size of its business, it cannot insist that performance and enforcement of contract obligations- Advanced Tech supply all of its requirements, as speci must display commercial reasonableness. A merchant fied in the original contract. is expected to act in a reasonable manner according As another example, assume that the market price to reasonable commercial customs. The reliance of of the goods subject to a requirements contract rises the UCC's drafters on commercial customs, or usage rapidly and dramatically because of an extreme shortage of materials necessary to their production. The buyer could claim that her needs are equivalent to the seller's 1. OTool v. Genmar Holdings, Inc, 387 F.3d 1188 (10th Cir. 2004). FOCUS ON ETHICS CONTINUES 457