Banco International Inc. v. Goodys Family Clothing,United States District Court, Tennessee Northern Division (1995)

FACTS: In April 1994, Goody’s Family Clothing entered into a contract with Banco International Inc. to purchase 62,748 private label windsuit clothing goods in exchange for letters of credit ($749,103.60). In the contract, the two parties agreed that the first shipment, which contained 26,640 windsuits, would be delivered to Goody’s distribution center in Knoxville, Tennessee on September 15th, 1994 or the order was subject to cancellation. In addition, a production run of the garments was needed to be approved by Goody’s before Banco could be paid under the terms of the letter of credit. On July 13th, 1994, Tom Baatz, the boy’s wear buyer at Goody’s, contacted Muhammad Akhtar, the president and owner of Banco, about modifying the delivery date of the first shipment to September 30th, 1994. During this conversation, Baatz expressed concern over Akhtar’s excitement for the modified delivery date while Akhtar was excited as he would be saving $40,000-$50,000 in air freight charges if he was going to meet the original delivery date. On August 10th, 1994, Akhtar sent a letter to Goody’s stating that Banco was 25 days behind schedule due to a one month delay in opening the letter of credit. In addition, Banco had purchased $450,000.00 in piece goods, lining, and accessories for the shipment, which they had begun production on. The next day, Banco sent another letter to Goody’s, requesting to push back the delivery date of the second shipment from October 5th, 1994 to October 16th, 1994 or October 17th, 1994 to give Banco “breathing room.” On August 19th, 1994, Goody’s approved a production run made by Attune Garments, LTD, a subcontractor of Banco. The next day, on August 20th, 1994, Rubin, Hodge, and Baatz, got together to discuss this concern about the delays Banco was experiencing. When Goody’s entered into this contract, they believed that the materials would be produced in Banco’s factory and only their factory. However, after a few days of waiting, on August 23, 1994, Attune alleged Banco owed them $70,000 and wouldn’t ship Goody’s order through Banco until paid otherwise. Already feeling concerned about the delayed shipment of windsuits, Goody’s got wind of this dispute, which they were unaware of, when the Managing Director of Attune, Towhid Islam Ratan, called Goody’s to inform Goody’s that Banco’s letter of credit had been canceled. At this point, Attune, having possession of the raw materials, stated their position of refusing to manufacture or giving the raw materials back to Banco unless Goody’s opened a letter of credit with Attune directly. Once Goody’s received this communication from Attune, they began realizing that Akhtar’s letters, dated August 10th, were untrue and proceeded to cancel the contract with Banco. Akhtar’s bank, at the time, would not issue a letter of credit to Attune for Banco to receive all fabric and necessary raw materials to the contract. Before canceling the contract on August 23, 1994, Banco, being in a position to extend their letter of credit to Attune, attempted to continue with the contract, however, Goody’s decided to cancel the contract. 

PROCEDURAL HISTORY: In 1997, Banco International, Inc. sued Goody’s Family Clothing alleging wrongful cancellation of contract and seeked recovery of damages after incurring considerable expenses. Banco contends that they were assured by Goody’s that letters of credit would be appropriately amended on or about August 23, 1994 in exchange for private label goods delivered on September 30th, 1994. In addition, Banco claims that Goody’s refused to accept Banco’s assurances, failed to attend meetings, and canceled the contracts by written correspondence even after Banco took steps to mitigate the late delivery date, procuring Banco an expense of $418,197.00. Goody’s contended that they entered into a contract with Banco for the purchase of private label goods, however, canceled the contract by written correspondence correctly on or about August 29, 1994. 

ISSUE(S): 

• Whether a delivery date later than the agreed upon date listed in a bilateral contract’s consideration is justifiable for termination of a whole contract?

HOLDING:

• A delivery date later than the agreed upon date listed in a bilateral contract’s consideration is justifiable for termination of a whole contract. 

REASONING: The court held that under Article 2 of the Uniform Commercial Code, all contracts are subject to a continuing obligation of good faith and reasonableness. When Goody’s discovered that Banco had not been truthful with the production status of the seasonal windsuits, this led them to believe that Banco not only didn’t have production samples, but also didn’t have the raw materials. In the ensuing days, Goody’s refused to accept Banco’s proffering of “reasonable assurances” stating they consisted of more promises from Akhtar, whose credibility had been damaged since Akhtar said Goody’s had no business in the production planning. In addition, the court also held that because Banco could not deliver the seasonal windsuits, which the court considered to be a timely good to coincide within the last three months of the calendar year, by its scheduled delivery date, Goody’s had the right to cancel its contract with Banco, since the value of the goods would be lowered if Goody were to wait for a later delivery date of the seasonal windsuits. Therefore, the court held that Goody’s Family Clothing did not breach the contract and is not liable to Banco in damages. 

JUDGMENT: The United States District Court of the Northern District of Tennessee ruled in favor of Goody’s cancellation of the contract and Banco taking nothing on its claim.