COURSE Number BUSA 391

You are the President, Sole Director and Sole Shareholder of MGT Food Brokers Inc. (“MGT”).   MGT is in the business of buying and selling Congealed food products on the international market. Generally, customers of MGT, either in Canada or elsewhere around the world, request that you source Congealed food products for them. You do this through your wide knowledge of Congealed food packaging companies around the world and by purchasing the required products for MGT’s account. MGT purchases the products and then resells them to its customer. MGT arranges for the products to be shipped directly to its customer.

One of MGT’s deals just went sour. Here is the background: On May 15, 2014 you received a telephone call from a company base in California USA known as HypoAllergenic Foods Products Inc. (“HypoAllergenic”). HypoAllergenic specializes in selling foods, which are guaranteed not to have traces of peanuts, insecticides or other substances, which are known to cause allergic reactions. HypoAllergenic has ordered from you for delivery to them twenty-five (25) containers of Congealed carrots. Deliveries are to be made to HypoAllergenic’s plant facility in Los Angeles, California. HypoAllergenic has requested one (1) container to be delivered on the last day of each month for twenty-five (25) months commencing September 30, 2014. The price agreed to per container is US$150,000.00. An essential condition of the transaction is that the carrots be free of any traces of peanuts or pesticides. If there are any traces MGT agrees in writing with HypoAllergenic that HypoAllergenic could immediately cancel the contract with MGT.

Upon receipt of the order MGT immediately contacted Congealed Vegetables Limited. (“Congealed Vegetables”), a Congealed food wholesaler operating out of England, but selling vegetables from farms around the world, and negotiated to purchase from them the required quantities of Congealed carrots for a price per container of US$100,000.00 DDP Los Angeles, California. The only pertinent terms and conditions of the written agreement between MGT and Congealed Vegetables are:

  • By no later than July 1, 2014 a letter of credit, in favour of Congealed Vegetables, having the following provisions, will be issued by MGT’s banker, National Bank, Main Branch, Montreal Quebec:
  1. the letter of credit will be for a total amount of US$2,500,000.00;
  1. the letter of credit will be irrevocable;
  1. the letter of credit will permit twenty-five (25) monthly draws, commencing in the month of October, 2014 of US$100,000.00 each provided that in each instance the following documents are delivered to the nominated bank no later than the 23rd day of the month:
  • a duplicate original of onboard clean marine bill of lading relating to that month’s shipment; and
  • an attestation by the carrier that delivery of the container of Congealed carrots had been made to HypoAllergenic on the 1st day of the current month.
  1. Each draw is payable on the 23rd of each calendar month commencing October 23rd, 2014.
  • An arbitration clause, which reads as follows:

“All disputes arising out of work in connection with the present contract shall be subject to arbitration under the Rules of Arbitration of the International Chamber of Commerce by 3 arbitrators appointed in accordance with the said Rules. The said arbitration shall be conducted in English in the Churchill Hotel, London, England.”

  • This contract shall be interpreted and construed in accordance with the laws of Quebec, Canada. For greater certainty, the CISG will apply.

On June 30, 2014 MGT arranged for the requisite letter of credit to be issued by the National Bank to Congealed Vegetables. In order to persuade the National Bank to issue the letter of credit MGT had to put up security of CDN$150,000.00. As MGT and you personally were already tapped out, unknown to your spouse, you persuaded your mother-in-law to put up, as security, her last CDN$150,000.00, which she kept in cash in her mattress.

On October 1, 2014 HypoAllergenic advised MGT that the first container of Congealed carrots had arrived on September 30, 2014 as required. HypoAllergenic indicated to MGT that it would start to process the Congealed carrots and would be paying for the first container load of carrots by electronic transfer to MGT’s bank account on October 22, 2014

On Friday, October 10, 2014, National Bank telephoned you to tell you that the nominated bank in England had received all of the documents from Congealed Vegetables and that consequently the National Bank intended to pay Congealed Vegetables, via the nominated bank on October 23, 2014. You assured MGT’s account manager that the requisite US$100,000.00 to cover the letter of credit would in fact be in MGT’s bank account no later than the close of business October 22, 2014. He told you that if it was not, the bank would take your mother-in-law’s $150,000.00 which she put as guarantee.

Today, October 22, 2014 you felt like you were the Thanksgiving Day turkey being carved up for dinner. MGT has just received a written notice from HypoAllergenic advising you that it has discovered traces of peanuts in the Congealed carrots and therefore has decided to:

  1. Reject the first container of goods;
  2. Not make the payment as promised on October 22, 2014; and
  3. Cancel the balance of the contract.

After a few telephone calls you have been given to understand the source of the problem. Congealed Vegetables obtained the first shipment of carrots from organic growers. However, because the organic growers did not use pesticides they frequently rotated their crops. As a result, some of the carrots that were shipped to HypoAllergenic were from fields where peanuts had been grown in the previous season.

In order to get your thoughts together on how to deal with this problem, and before calling you advisors, such as your lawyer, you have decided to put together a memorandum in the form of a term paper of approximately 3000 words dealing with the following issues:

  1. What could you have done to avoid getting into this mess?
  1. Now that you are in this mess, what strategy would you adopt include in your discussion:
  • indicate any alternatives which you have considered and rejected, explaining why you have rejected them; and
  • your evaluation of the strengths and weaknesses of the strategy that you have chosen as well as the likelihood of success.