1. Corby, an experienced tire broker in Wales, offered to sell tires to Chappell, a tire broker in California. Chappell contacted two U.S. tire distributors, Jenkins in Tennessee and Hein in Ohio, and agreed to act as their agent in negotiations with Corby. Corby claimed that he had a large client who had negotiated an arrangement directly with Michelin to handle all of its overstock blemished tires from France and who could offer 50,000 to 70,000 Michelin tires per quarter at 40-60 percent below the U.S. market price on an exclusive and ongoing basis. Corby faxed a list of tires, showing that the tires bore the designation "DA/2C." Chappell faxed the list to Jenkins and Hein. They knew that the "DA" meant "defective appearance." When Chappell asked Corby about the "/2C" he was told that it meant the tires were located at a different warehouse. Chappell told Corby on several occasions that since it was October 1998, the season for selling winter tires was almost over and that he required summer tires as well, to bundle with the winter tires. A second list showed no summer tires and nowhere near the 50,000 tires promised. In November and December, Corby pressured Chappell and Jenkins to open the letter of credit, asserting that if they did not do so the deal would be ended, thus preventing the buyers from being able to procure the requested summer tires. In late December, Jenkins began having reservations regarding the deal because Corby's representations were becoming suspicious. Jenkins requested to speak to Corby's source. Corby put him in touch with Evans, a tire distributor in England. In January, Evans sent the following fax to Jenkins:
There are large stocks of Michelin summer pattern tyres being made available within the next 7/10 days and we will be pleased to offer these to you when an acceptable Letter of Credit is received for the winter pattern tyres. We will be very happy to work with you on Michelin tyres on a long term basis and give you first option on offers. May we once again stress the urgency of letting us have the Letter of Credit for the Michelin winter tyres so that we can commence business on a long term basis?
Evans faxed a pro forma invoice requesting a letter of credit in favor of PTZ Trading Company in Guernsey as the beneficiary. Evans said that the letter of credit had to be sent immediately. The buyers felt that they had to comply as a show of good faith. An irrevocable credit was issued by an Ohio bank according to the terms of the pro forma invoice and stated:
Covering shipment of: "14,851 Michelin tyres at usd 34.83 per tire in accordance with seller's pro forma invoice 927-98 dated 11-19-98. Shipping terms: EXWORKS any European location. The credit is subject to UCP Publication 500. Expiry date April 2, 1999. The credit was advised to the sellers through Barclays Bank.
Shortly later, the negotiations broke down over the issue of summer tires, and the parties became hostile. In February, Corby sent a list of summer tires that had fewer units than promised, contained sizes not used in the United States, included various tires not manufactured by Michelin, and specified prices that were often higher than the cost of purchasing the tires one at a time from most dealers in the United States. In March, the buyers discovered that the "DA/2C" designation, attached to many of the tires, actually meant that the U.S. Department of Transportation serial numbers had been buffed off those units, rendering them illegal for import to or sale in the United States. Just before the letter of credit expired, Jenkins was informed by Sievers, a German tire distributor who was shipping the tires for PTZ Trading Co., that the tires were about to ship. Jenkins protested that he had not given permission to ship the tires because there was no agreement on summer tires. He threatened legal action. Sievers responded that he did not need permission and proceeded to ship. Sievers obtained a bill of lading and presented all documents to Barclays Bank for payment. The documents strictly complied with the credit. Jenkins petitioned an Ohio court for a restraining order preventing the issuing bank from honoring the credit. Barclays Bank learned of the order and refused Sievers' presentment. The carrier billed Jenkins for the ocean freight, and the tires remained in a warehouse in Savannah, Georgia. After a hearing in July, the court denied the buyer's petition for the restraining order. The Ohio Court of Appeals reversed, and the buyer appealed to the Ohio Supreme Court.
a. What are the buyer's legal arguments supporting its petition for a restraining order? How do the facts support that argument? What precedent can it cite?
b. What are the seller's arguments opposing the petition for a restraining order?
c. What do you think about the way the buyer handled this from the beginning? What does this say about its level of expertise in international business? Explain.
d. If you had been in the buyer's position, what would you have done differently?
e. If the documents had not strictly complied with the credit, would this case have turned out differently?
f. This court's decision only addressed the petition for a restraining order. How will the parties finally resolve the dispute on the underlying sales contract? What do you think will happen to the tires? Who is responsible for their warehousing fees?