With this decision we hopefully end, in all but a minor respect, an amphibious imbroglio and commercial law practitioner's nightmare involving three shiploads of enriched wheat flour. By a coincidence in this confusing case, each shipload of flour became infested, to varying degrees, with confused ( triboleum confusam) and red rust ( triboleum casteneum) flour beetles (sometimes called weevils). None of the parties involved-seller, buyer, and carrier-acted faultlessly over the course of the transaction. All brought their differences to the able District Judge for resolution. The District Judge carefully considered five weeks of testimony presented by the parties, their numerous pleadings, motions, briefs and arguments, scores of interlocking mixed law-fact issues, and difficult questions of federal civil procedure, state commercial, and admiralty law. The Judge's careful and lengthy opinion, 449 F. Supp. 84 (S.D. Ala. 1976), resolved the imbroglio but failed to fully convince the parties. The District Judge convinced us, however, and we affirm in almost all respects. Without pause to reflect on the complications that simple insects-confused flour beetles or otherwise — can create in the lives of men and Courts, we proceed to explain our decision.

One of the shiploads consisted of the res in this lawsuit, the 81,193 bags of flour.

I. The Life-Cycle Of This Appeal: Inception, Growth, And Development A. The Documents

In April 1974 the Republic of Bolivia entered into two contracts for the purchase of 26,618 metric tons of American enriched wheat flour from ADM Milling Co. ADM owns a number of mills throughout the Midwest. Bolivia sought the flour for distribution to her citizens. The contracts were prepared on ADM's standard form, with quantity, chemical specifications, price, mode of shipment, payment terms, and delivery details filled in. The contracts required packing the flour in 100 pound capacity cotton bags and delivering it to Mobile, Alabama. Railcar shipment was contemplated to Mobile, followed by ocean carriage to South America. This was to take place from May to September 1974. The contracts contained the following delivery terms: "F.A.S. MOBILE, ALABAMA, for export;" and "Delivery of goods by SELLER to the carrier at point of shipment shall constitute delivery to BUYER. . . ." Upon satisfactory delivery, the price was payable by irrevocable letter of credit.

For the convenience of all, the following is a partial list of entities, organizations, and individuals referred to, as adapted from the District Court opinion:



The letter of credit was opened with First City National Bank of New York in ADM's favor for a total amount of $6,651,017.10, payable in specified installments. Payment under the letter of credit required presentation of commercial and consular invoices showing that the flour met certain chemical composition specifications and was "fit for human consumption."

Each contract contained an express warranty of merchantability:

Except as provided on the reverse side, SELLER MAKES NO WARRANTY, EXPRESS OR IMPLIED, THAT EXTENDS BEYOND THE DESCRIPTION ON THE FACE HEREOF, expect that the product sold hereunder shall be of merchantable quality. . . .

There was also an express warranty clause on the reverse side of each contract:

WARRANTY: SELLER expressly warrants that any goods contracted for herein will be representative of the brand or grade specified herein to be sold, and will comply with all of the applicable provisions of the Federal Food, Drug and Cosmetic Act and of any applicable State Pure Food and Drug Act.

But that warranty clause also contained the following notice requirements:

BUYER hereby waives any claim or defense based on the quality of the goods specified herein, unless (1) within ten (10) days after BUYER learns by use or otherwise of the defect complained of, but in any event within twenty (20) days after receipt of notice of arrival of said goods at destination, BUYER sends SELLER at SELLER'S main office a letter by registered mail specifying the nature of the complaint and (2) within said twenty (20) days send by parcel post or express prepaid to SELLER'S said office a five (5) pound sample of the goods alleged to be defective or inferior . . .

The contracts further contained a merger and parol evidence clause and specified that Illinois law would govern construction of the terms and conditions.



TRADE CUSTOMS: A final, complete and exclusive statement of the entire contract is contained herein, and no parol evidence, course of dealing or performance, or usage of the trade shall be relevant to supplement or explain it. There shall be no modification or alteration without written consent signed by both SELLER and BUYER. . . .

In order to arrange ocean carriage of the flour, Bolivia engaged the services of St. John International, Inc., a Washington, D.C., shipping broker. St. John eventually contacted T. J. Stevenson Co., a company furnishing transportation through tramp steamers. Stevenson and Bolivia entered into a booking note on April 27, 1974, specifying that Stevenson would present ships at Mobile between May and October 1974 and transport the flour to South America. The booking note expressly provided that the Carriage of Goods by Sea Act, 46 U.S.C.A. §§ 1300 et seq. ("COGSA"), "shall govern throughout the entire time the goods are in the custody of the carrier." The booking note also contained two provisions governing payment of freight to Stevenson. The first stated that payment of each vessel's freight would be by irrevocable letter of credit, which in turn required presentment of "clean" bills of lading. It was also provided that Stevenson's freight would be deemed paid, though not by irrevocable letter of credit, as soon as the ship was fully loaded: "Freight to be prepaid in full . . on delivery of original bill of lading. . ." Under that provision, it is agreed, Stevenson was entitled to freight on issuance of bills of lading whether or not the ship actually sailed.

The booking note incorporated by reference Stevenson's usual bill of lading, which contained provisions largely identical, in relevant part, to those of the booking note.

The letter of credit was opened with First National City Bank of New York in Stevenson's favor for a maximum amount of $1,923,120.00, payable in specified installments. In addition to the requirement that clean "on board" bills of lading be presented, certain commercial invoices were required.

B. The Flour: Manufacturing And Delivery To Mobile

Seven flour mills scattered throughout the Midwest manufactured the flour involved in this case. Because of a strike at ADM's largest mill, four of the seven were independent mills subcontracted by ADM to provide large portions of the flour. The remaining three mills were of course ADM owned and operated.

Reference to the flour involved in this case means the flour included in the last three shiploads taken aboard the Arizona, Southwall, and Nedon. The first five shiploads, constituting most of the 26,618 metric tons of flour bought by Bolivia involved no significant problems between the parties. See 449 F. Supp. at 88.

The District Judge found, and the evidence supports, that ADM's subcontracting for the Bolivian flour was an accepted practice and did not breach the flour contracts. 449 F. Supp. at 90-91 n. 7. The parties do not contest this finding on appeal.

In each of the mills, a number of sieves having various degrees of fineness are part of the production process. The very last step in that process takes the flour through a "rebolt" sifter, which is usually clothed with a fabric sieve fine enough to remove even the microscopic eggs of flour beetles. Thereafter, the flour is packed for shipment. Sometimes there is little or no delay between manufacturing and packing the flour. At other times, however, the flour is stored in bins for a substantial period prior to packing. Sanitation programs, including inspection of the flour and plant fumigation, are also a part of the production process of each plant. During the relevant period, however, the record discloses that the programs and their implementation varied amongst the mills. For example, the three ADM mills tested the flour far more frequently than did three out of four of the independent mills.

Packing the flour in cotton bags does not ensure freedom from external insect contamination. Adult flour beetles are capable of entering a cotton bag through the seams, and if present in large numbers are likely to do so. In addition, flour beetle larvae which happen to hatch near the surface of a cotton bag can work their way through the weave. If this occurs, the larvae will eventually mature into adult beetles, which may produce more eggs and internally infest the bags of flour. Of course, flour beetles can also get out of bags which they have infested, crawl or fly to other bags, and infest those. Consequently, the mills took a number of precautions against insect infestation even after the flour was packed and during its shipment by railcar to Mobile. The railcars, for example, were generally inspected, cleaned, fumigated, and lined with paper.

The flour involved in this case was shipped from the mills to Mobile by railcar during a period from early August to early October 1974. As the flour reached Mobile, it was taken from the railcars, put on pallets, and stored in waterfront warehouses operated by the Alabama State Docks Department. Checkers from the State Docks and from Stevenson's local agent, Page Jones, Inc., observed the external appearance of the flour as it was unloaded. The State Docks then issued receipts noting the flour's apparent condition, which were signed by Page Jones checkers. Except for some wet, torn, and damaged bags, no insect contamination was noticed outside of the bags during unloading. However "no internal inspection or sampling was made at this point for the presence of infestation . . . ." 449 F. Supp. at 92.

C. Events In Mobile: Part I

While the flour was in the State Docks warehouses, ADM employed Superintendence, Inc., to sample and test-weigh the flour and to prepare Certificates of Quality which ADM needed to collect payment of the purchase price. One of the tests employed by Superintendence involved taking a small amount of grain out of 2% of the bags, by means of a grain probe. The grain samples were then sent to Superintendence laboratories for testing.

Less than 1% of the contents of each hundred pound bag selected was sampled by the grain probe. Since 2% of all bags were probed, less than .02% (one part in every 5,000) of the entire amount of flour was in fact tested by Superintendence. See 449 F. Supp. at 94.

On September 19, 1974, Stevenson presented the M/V Arizona for loading at Mobile. Loading began the following morning. A second Stevenson vessel, the M/V Southwall, began loading three days later, on September 23. In preparation for these loadings, Superintendence took, between September 4 and September 20, 1974, samples of the flour intended for the ships. As each sample was drawn, it was sent to a Superintendence laboratory to be analyzed. However, none of the samples were analyzed until September 24, several days after loading of the ships had begun. Although during loading, no one "observed any apparent infestation" of the flour, id. at 96, late on September 24, Superintendence's laboratory announced that it had found evidence of live internal infestation by flour beetles in 36 and 1/2 railcar lots, 19 of which had already been loaded. Stevenson immediately declared a temporary halt to the loading. At that point, the Southwall was almost completely loaded while the Arizona was considerably less complete, perhaps only half-loaded.

A number of conversations between agents of Stevenson, of ADM, St. John personnel (representing Bolivia), and Superintendence, among others, ensued. ADM instructed Superintendence to fumigate the 17 and 1/2 infested lots which had not been loaded and to hold those lots in the warehouses until the next shipment. Nothing was agreed concerning the 19 infested lots aboard the ships, however. Stevenson resumed loading of the ships, with apparently clean flour, but also decided that "on board" fumigation of the flour would be necessary before the ships sailed. During these events, the various parties or their agents were in nearly continuous communication with one another, both orally and by telex, concerning the infestation discovered, fumigation, and related matters. On September 26, the Southwall (with 5 and 1/2 of approximately 37 lots known to be infested) was fumigated. The next day, the Arizona (with 13 and 1/2 of approximately 90 lots known to be infested) was similarly fumigated.

One important subject of the discussions between the parties during this period concerned the extent to which the "on board" bills of lading should be claused by Stevenson. In order for ADM to collect its purchase price and Stevenson its freight under their respective irrevocable letters of credit, Stevenson had to issue "clean" bills of lading-bills of lading declaring the shipments "in apparent good order and condition." Stevenson's first inclination was to clause the bills of lading to indicate live infestation of the flour. Even after fumigation of the ships, Stevenson initially took the position that it could not issue clean bills of lading unless ADM provided Stevenson with a letter of indemnity holding Stevenson harmless. ADM refused, however, reiterating that it had delivered only good, clean flour to Mobile and was not in any way responsible for the infested flour. Subsequently, Stevenson obtained a report from the fumigating company indicating that all infestation had been killed. ADM, moreover, assured Stevenson that flour containing dead infestation met the contracts' specifications. Consequently, after informing the parties or their agents of those developments, Stevenson released clean bills of lading for the Arizona and Southwall cargoes. On September 30, 1974, the ships set sail for South America. Shortly thereafter, ADM received its purchase price and Stevenson its freight under their respective letters of credit.

ADM's letter of credit did not specify that clean bills of lading were required, but in actual practice these documents were required by ADM to obtain payment. Ultimately, of course, Stevenson could sue for its freight under the booking note's prepaid freight clause while ADM had similar legal rights to the purchase price of the flour. Practically, however, issuance of other than claused bills of lading would have brought the entire transaction to a halt—as later events between the parties demonstrate.

D. Detention In Arica

As a landlocked country, Bolivia imports much of its ship-carried goods by way of Chile. A treaty between Bolivia and Chile permits free importation of goods to Bolivia by way of the Port of Arica in Chile. 449 F. Supp. at 89 n. 5.

The Arizona and Southwall arrived at Arica on October 12, 1974. The vessels began to discharge their cargoes on October 14, 1974. Soon after unloading began, live insect infestation on both ships' cargoes was detected. Further examination revealed internal infestation was present in moderate amounts throughout almost all of the flour on both ships. A port official immediately advised Sub-Secretary Heran Landivar of the Bolivian Ministry of Industry, Commerce, and Tourism of the infestation. As the District Judge found, Landivar immediately instructed the port official "to refuse the shipment of flour aboard the SOUTHWALL and ARIZONA . . . and then Landivar confirmed his order by telex . . the following day." 449 F. Supp. at 105. Neither the telex nor the substance of Landivar's later testimony were revealed to Stevenson or ADM, however, until Landivar appeared at trial. Consequently, when Arica port officials refused to allow the Arizona and Southwall to discharge their cargoes, it was not readily apparent whether that refusal stemmed from Bolivia's dissatisfaction with the quality of the cargoes or from the port officials' fear that their port would be contaminated by the infested flour.

From October 14 to November 5, 1974, Stevenson arduously negotiated with Arica port officials, Landivar, and others to obtain permission to unload the two ships. During this period the infested cargoes were surveyed by experts, and it was indicated by some that with fumigation, shifting, and repackaging the flour could be made fit for human consumption. After unloading resumed on November 5, 1974, these procedures were in fact followed by a local salvage firm. Eventually, the Arizona and Southwall flour was shipped by rail to Bolivia and sold at a reduced price to consumers.

E. Events In Mobile: Part II

Just following the discovery in Arica of infestation aboard the Arizona and Southwall, Stevenson presented the M/V Nedon at Mobile for loading the last shipment of flour. The remaining flour was of suspicious quality, however, because of its close ties to the troubled cargoes of the Arizona and Southwall: the flour was stored in the same two State Docks warehouses; many of the railcar lots of flour came from the same three independent mills that had been linked with the previous infestation problems; and the 17 and 1/2 railcar lots held back from the Arizona and Southwall were among the flour in this last shipment. Moreover, despite the intervening fumigation of the 17 and 1/2 railcar lots held back from the previous shipments, between October 12 and 17 an additional 13 car lots of flour were found to be infested. Unfortunately, when Superintendence arranged for the fumigation of those 13 car lots, one car lot was omitted. Subsequently, therefore, that car lot was loaded aboard the Nedon without being fumigated. Compounding these problems was the fact that at no time was the entire warehouse fumigated. Rather, the 17 and 1/2 and 12 car lot groups were simply "pulled some several feet from the other cargo and fumigated." 449 F. Supp. at 106.

Seeking to avoid the problems of the Arizona and Southwall, Stevenson required Superintendence to clear in writing all cargo to be loaded on the Nedon. In addition, the Nedon's holds were cleaned, though not fumigated, and then inspected by the National Cargo Bureau. On October 15, 1974, loading of car lots cleared by Superintendence began.

On the following day, Stevenson took the added precaution of having its own tests run on the flour not yet loaded aboard the Nedon. Near the end of the October 16 loading day, the test results came back from the laboratory. The results indicated "that there was no live [flour beetle] infestation, but remains [of beetles] were noted." 449 F. Supp. at 107. Later that evening, Stevenson received further information that several more of the samples contained dead infestation. Id. at 107. Also that evening, apparently because of its underwriters' insistence that a London surveyor examine the Nedon cargo, Stevenson decided to "hold" the Nedon in Mobile "until further notice." Id. at 108. The District Judge also found, however, that "Stevenson was awaiting the full [laboratory] report which was to be released on October 17." Id.

The decisions were made largely by Mr. Ivan Ellis, Stevenson's Vice President of Operations, since Mr. Thomas J. Stevenson, the President, was negotiating in South America during this period.

The final report showed no indication of live infestation. One of the twelve samples contained two large, dead flour beetles; another sample contained beetle larvae; and four additional samples contained marginal indications of dead infestation. Apparently the information Stevenson received late in the evening of October 16 closely corresponded to that in the final report released on the following day.

Despite the discoveries and its decisions on the evening of October 16, the following morning Stevenson resumed loading the Nedon. By the end of the day, loading was complete, with some 81,193 bags of flour on board. No external live infestation had been observed by anyone during loading.

Consistent with the "hold" decision made on the evening of October 16, the fully-loaded Nedon did not, however, set sail for South America. Besides waiting for the London surveyor to reach Mobile, Stevenson was grappling with the necessity of clausing the Nedon bill of lading. Stevenson's underwriters were unhappy that the bills of lading for the Arizona and Southwall had not been claused and threatened to refuse claims connected with the Nedon unless that ship's bill of lading was claused. Although it is not clear when the Nedon bill of lading was actually issued, the record shows that issuance occurred sometime after the October 17, 1974, date indicated on the bill of lading. See 449 F. Supp. at 109-10 (bill of lading issued only after it was determined that Nedon was infested and after Bolivia refused the Nedon cargo). As finally issued, the bill of lading was claused to indicate: "Cargo infested by insects prior to loading."

The underwriters eventually refused to pay claims by Stevenson connected with the Arizona and Southwall.

On October 19, 1974, the London surveyor arrived. The surveyor examined the Nedon cargo and found live and dead infestation, especially in the No. 1 hold. The infestation was very largely due to flour beetles. The surveyor recommended that the cargo be fumigated before entering into tropical South American waters. He further advised that the bill of lading be claused "with respect to such infestation and/or fumigation as requisite." The surveyor also inspected the State Docks warehouses which appeared "comparatively clean." 449 F. Supp. at 109.

Because of the infestation problems in the last three shipments of flour, on October 24, 1974, Bolivia took steps to prevent further payments to ADM under the irrevocable letter of credit. On October 25, 1974, Bolivia told Stevenson not to permit the Nedon to leave for South America. In the course of a meeting on October 31, Bolivia notified ADM that it "rejected" the Nedon flour. ADM, however, replied, as it had all along, that it had no interest in the flour since risk of loss had passed to Bolivia at the time the flour was delivered to the warehouses.

Because of this aptly described "hands off policy," 449 F. Supp. at 111, Stevenson was left with: a fully-loaded Nedon; a shipper-consignee which refused to permit shipment or accept delivery of the cargo; and a supplier without interest in regaining its goods. Despite Stevenson's ensuing attempts, neither Bolivia nor ADM could be persuaded to take responsibility for the flour. Stevenson tried to sell the flour itself but was unsuccessful. Efforts to discharge the Nedon cargo were similarly unsuccessful because of legal and other restrictions. 449 F. Supp. at 123. Stevenson made no attempt to fumigate the flour aboard vessel, however. The record shows that Stevenson felt, in light of its experience with the Arizona and Southwall cargoes, that fumigation aboard ship was futile. The Nedon's cargo was tightly stowed and the holds were full, so that the fumigant gas would be unlikely to penetrate very far into the flour. Stevenson felt that fumigation could only be successful after the flour was taken ashore and spread out.

On November 11, Bolivia requested the United States Department of Agriculture ("USDA") to inspect the Nedon cargo. The USDA inspected on November 12 and found "pretty heavy" infestation throughout the flour. Only the flour in the No. 1 hold was found so infested that it was unfit for human consumption, however; the infested flour in the Nos. 2, 3 and 4 holds was found fit for human consumption if fumigated.

Finally, Stevenson broke the impasse by filing this lawsuit against the cargo in rem on November 21, 1974. Surveyors examined the cleanliness of the Nedon itself, as well as the cargo, on December 2, 1974. On December 10, ADM entered a claim of ownership as to the cargo, and posted bond. The Nedon was finally unloaded in Mobile on December 14 and 15, 1974. The flour was then placed in a State Docks warehouse, and fumigated.

ADM subsequently attempted to sell the Nedon flour but found it difficult to do so. On February 7, 1975, the flour was finally sold at a substantial discount for use in the manufacture of ceiling boards.

After setting out findings much lengthier than our summary of the facts, the District Judge awarded Stevenson and Bolivia substantial damages. Stevenson was awarded $92,014.82 against Bolivia for the detention of its ships Arizona and Southwall in Arica; and $310,067.25 against ADM as claimant of the Nedon cargo, for prepaid freight, detention, and other charges incurred by that ship. Bolivia was awarded $325,960.51 for breach of contract damages against ADM for the Arizona and Southwall flour. In addition, the loss resulting from the salvage sale of the Nedon flour was left on ADM, and the cost of fumigating the Arizona and Southwall flour was left on Stevenson.

From that judgment, every party appeals. In sum, over a score of errors are asserted. ADM's complaints against Bolivia mostly involve issues concerning the flour quality and sales contracts' interpretation, especially with respect to the Arizona and Southwall flour. Bolivia appeals issues relating to the detention in Arica. ADM's complaints against Stevenson concern the care of all of the flour involved, as well as the award for freight and damages connected with the Nedon. Stevenson argues for an increase in the Nedon award, and for reimbursement from ADM of fumigating expenses. Our tasks delineated, we began our labors.

II. Flour Beetle Confusion

One issue permeates this case. The issue is central to evaluating the performance by ADM and Bolivia of their flour contract obligations; determination of the party responsible for loss after the flour left ADM's custody and before it reached the custody of Bolivia or the Court; and sorting out the rights and duties of ADM, Bolivia, and Stevenson regarding care and transportation of the flour.

The issue is: what was the source of the flour infestation? This issue was the focus of proceedings in the District Court. After hearing the sometimes conflicting testimony of 49 witnesses during five weeks of trial, considering hundreds of exhibits, and evaluating the extensive arguments by counsel, the District Judge concluded that infestation began either on the rail cars or at three independent mills supplying substantial amounts of the flour. Neither of the warehouses nor the ships were the source of any significant infestation. ADM now asks us to hold the District Judge's infestation findings clearly erroneous.

By explicitly evaluating the milling operations of three out of four of the independent mills only, the District Judge implied that the ADM operated mills were not the source of infestation. On appeal, the parties concede that ADM operated mills were not the source of the infestation.

Specifically, the District Judge made five findings:

This fact, together with others, leads the Court to believe that the infestation was brought to the warehouses instead of originating in the warehouses. Accordingly, the Court is of the opinion that there is insufficient evidence to support the contention that live infestation existed in Warehouses 3 and 4 prior to the arrival of the ADM flour. On the contrary, the Court finds that the infestation of the flour in question did not come from the Alabama State Docks' Warehouses 3 and 4.



Having considered the evidence presented at trial, the Court finds that widespread infestation, involving some 40 to 50,000 bags was found by Superintendence on September 24, 1974, prior to the loading of the flour aboard the ARIZONA, SOUTHWALL and NEDON and therefore, the evidence clearly establishes that these vessels were not the source of the infestation found by Superintendence on September 24, 1974.

Moreover, the evidence presented at trial supports a finding by the Court that there was no live infestation in State Docks Warehouses 3 and 4 prior to the arrival of the ADM flour.

Id. at 118.

The preponderance of the evidence supports the finding by the Court that the source of infestation first discovered by Superintendence in Mobile on September 24, 1974, was either the rail cars or one or more of the seven mills that shipped the Bolivian flour.

Id. at 119.

The Court is unable to agree with ADM's argument in that the preponderance of the evidence supports the finding that the flour in question did not arrive in Mobile in a clean and uninfested condition.

Id. at 121.

The Court finds that some of the flour loaded aboard the NEDON was infested when it arrived at the State Docks warehouses . . . .

Id. at 126. Contrary to ADM's assertion, we do not find these fact findings the least bit inconsistent with one another. 449 F. Supp. at 94 (footnote omitted).at 118.at 119.at 121.at 126. Contrary to ADM's assertion, we do not find these fact findings the least bit inconsistent with one another.

We have repeatedly sought, but without too much success, to teach counsel

"that in this kind of controversy [the] functions of the courts in the judicial hierarchy are distinct and different" and we would "undermine the vitality of the system by a too-quick meddling in the principal business of a trial court. * * A trial of a hotly contested, sharply disputed case is the task of a trial court" and reviewing courts "even in admiralty * * * should be slow to overturn fact decisions made by the judge before whom the facts are annealed through the hammering, heating process of vigorous, running advocacy."

Grigsby v. Coastal Marine Service of Texas, Inc., 412 F.2d 1011, 1020, 1969 A.M.C. 1513, 1523-24 (5th Cir. 1969) (quoting Ohio Barge Line v. Oil Transport Co., 280 F.2d 448, 449, 1961 A.M.C. 375, 376 (5th Cir. 1960)). Factual findings grounded on a correct legal standard "come here well armed with the `buckler and shield of F.R.Civ.P. 52(a).'" Horton v. United States Steel Corp., 286 F.2d 710, 713 (5th Cir. 1961). "We do not retry the case." Smith v. United States, 287 F.2d 299, 301 (5th Cir. 1961). "It is well settled that in order for a reviewing court to set aside findings of fact by a trial court sitting without a jury, it must be clearly demonstrated that such findings are without adequate evidentiary support in the record, or were induced by an erroneous view of the law, and the burden of showing that the findings are clearly erroneous is on the one attacking them." Chaney v. City of Galveston, 368 F.2d 774, 776 (5th Cir. 1966) (footnote omitted).

ADM's attempt to demonstrate the District Judge clearly erroneous begins with evidence that the flour mills operated sanitation programs and shifting machinery which precluded flour beetle infestation. With slight equivocation, ADM's expert entomologist testified that mill conditions could not have been the source of infestation: the rebolt sifters remove even beetle eggs and the sanitation programs were adequate. Testimony was also introduced to show that no insects were observed on the outside of the bags during the rail car unloading. ADM also alludes to evidence that the rail cars were prepared in a sanitary fashion and to the discovery at Arica, Chile, of limited numbers of insects other than flour beetles in or around the Arizona and Southwall flour. In sum, ADM theorizes that the flour became infested by means of a massive external attack, either at the warehouses or aboard ship.

There is, however, abundant, substantial evidence, much of it expressly accepted by the District Judge in various subsidiary findings of fact, which counters that proffered by ADM. For example, flour from three of the independent mills was found to be infested to a significantly greater extent than flour from the other four mills. 449 F. Supp. at 116. ADM does not explain how a massive external attack could selectively infest the flour. The three independent mills also have less stringent sanitation programs and fewer inspections than ADM operated mills. Flour in the three independent mills was sometimes stored for substantial periods following sifting but before bagging, making infestation more possible. The sieve material on rebolt sifters sometimes tore, possibly allowing flour beetles into the bags of flour. Id. at 114-17. In addition, the fact that no insects were observed on the bags during the unloading of the rail cars does not preclude infestation of an unobservable nature inside of the bags of flour.

Perhaps the most telling evidence concerns the extent and character of the infestation first discovered in samples taken in Mobile by Superintendence from September 4 to September 20, 1974. Car lots totalling between 40,000 and 50,000 bags of flour were found infested at that time. Id. at 118. Flour beetles at various stages of development were found inside the bags. At the time of sampling, the flour had been in the warehouses for, on the average, less than a month. The biological facts concerning flour beetles, as found by the District Judge and not disputed by the parties, are that flour beetles under the relevant conditions mature from egg to larvae to pupa to adult in six weeks. Id. at 118. In addition, while egg, larvae, and pupa have little or no mobility, the adult flour beetle is very mobile and can easily reach all areas of an enclosed space. Comparing these biological facts with (i) the limited period that the sampled flour had been in the Mobile warehouses and (ii) the discovery of widespread infestation inside the bags of flour and at various stages of development, it is easily inferable that the infestation began and even had multiplied in the flour before it reached the state docks warehouses. Indeed, at trial an expert entomologist so conceded. See id.

Finally, there was substantial evidence that neither warehouses nor ships were the source of infestation. Flour from previous shipments had been recently stored in the warehouses without problem and there was evidence that ships and warehouses were relatively clean. 449 F. Supp. at 93-94.

As this summary of the record demonstrates, substantial evidence abounds in support of the District Judge's finding of infestation prior to arrival in Mobile. We hold that the Judge's finding was not clearly erroneous. In so doing we also point out our view, and that of the District Judge, of the nature of flour beetle infestation of flour. The presence of "only" partial infestation is roughly the equivalent of being only "a little bit pregnant." Adult flour beetles are quite capable of moving between bags of flour and penetrating previously clean bags. The red rust flour beetle is especially mobile since it is a strong flyer. 449 F. Supp. at 118 n. 51. The adult female beetle will lay "better than an egg a day," id., causing rapid growth in the infestation. These characteristics in sum render even clean flour susceptible to total infestation if it is stored in unprotected proximity to infested flour. Consequently we view partial infestation of flour with the understanding that all nearby and vulnerable flour is in a sense also "infested."

III. A Visit To Illinois

The next group of issues we consider requires interpretation of the flour contracts between ADM and Bolivia. The contracts state that Illinois law governs their interpretation, so we look in the first instance to that state's statutes and Court decisions. Cf. Sperry Rand Corp. v. Industrial Supply Corp., 337 F.2d 363 (5th Cir. 1964). Because in all relevant respects Illinois has adopted without change the Uniform Commercial Code (1972 ed.) ("UCC" or "Code"), Ill.Ann.Stat. ch. 26, §§ 1-101 et seq. (Smith-Hurd), we are also aided by precedent in the 48 states outside of Illinois which have in almost identical fashion adopted the Code.

Throughout the opinion, citations to the UCC should be taken to refer to the Illinois enactment of the Code. The cited section numbers are identical to those in Chapter 26 of the Illinois statutes.

As our analysis of these issues unfolds, it will become apparent that we, like the District Judge, refer to a limited amount of evidence extrinsic to the contracts. Such evidence was presented at trial by all of the parties for the purpose of interpreting the flour contracts. All of the parties presented extrinsic evidence despite the flour contracts' attempt to exclude such evidence by means of a merger and parole evidence clause. On appeal, the merger and parole evidence clause is invoked only as to selected evidence relating to two issues. Since we resolve those issues without need to refer to the disputed evidence, we have no need to construe the parole evidence questions raised in this appeal.

The issues relate to the interpretation of the flour contracts' warranty provision and F.A.S. delivery term.

A. The Warranty

The District Judge held that the flour in each of the three shipments failed to meet the express warranty provisions of the contracts. ADM expressly warranted that the bagged flour would be "of merchantable quality" and that it would "comply with all of the applicable provisions of the Federal Food, Drug and Cosmetic Act [`FDA']." The District Judge decided that the infested flour breached both warranties. We, however, pretermit analysis of the FDA warranty since it is difficult to interpret and unnecessary to our resolution of this case. Instead we examine only ADM's warranty of merchantability.

Part of the difficulty is that § 801(d) of the Federal Food, Drug and Cosmetic Act, 21 U.S.C.A. § 381(d), declares that:

(d) A food, drug, device, or cosmetic intended for export shall not be deemed to be adulterated or misbranded under this chapter if it (1) accords to the specifications of the foreign purchaser, (2) is not in conflict with the laws of the country to which it is intended for export, and (3) is labeled on the outside of the shipping package to show that it is intended for export.

Since the flour in this case was intended for export, arguably the above section of the Act applies. If so, the adulteration requirements of the Act,

Difficult questions arise even if United States v. 484 Bags, More or Less, Id. at 842. See Since the flour in this case was intended for export, arguably the above section of the Act applies. If so, the adulteration requirements of the Act, 21 U.S.C.A. § 342 , may not be incorporated into the FDA warranty. Rather, the warranty may require mere compliance with "the specifications of the foreign purchaser." If so, the FDA warranty becomes essentially superfluous.Difficult questions arise even if 21 U.S.C.A. § 342 's adulteration provisions are a part of the FDA warranty. In particular, our leading decision in 423 F.2d 839 (5th Cir. 1970), leaves open the possibility that the standard for adulteration established by a Court will be stricter than the norm accepted by the industry or even promulgated by the responsible administrative agency.at 842. 449 F. Supp. at 128 n. 71 (elaborating on this point). We are therefore hesitant to enter such an uncharted and commercially significant area where it is not necessary to the resolution of the case.

The Code defines the minimum standards required of "merchantable" goods:

Goods to be merchantable must be at least such as

(a) pass without objection in the trade under the contract description; and

(b) in the case of fungible goods, are of fair average quality within the description and

(c) are fit for the ordinary purposes for which such goods are used; and

(d) run, within the variations permitted by the agreement, of even kind, quality and quantity within each unit and among all units involved; and

(e) are adequately contained, packaged, and labeled as the agreement may require; and

(f) conform to the promises or affirmations of fact made on the container or label if any.

UCC § 2-314(2) (emphasis supplied). Like the District Judge we consider only the subsection (c) portion of that definition, and do not reach the arguably applicable standards of subsections (a) and (b). The question is therefore whether the flour at various critical points in time was "fit for the ordinary purposes for which such goods are used."

Official Comment No. 7 to UCC § 2-314 states in this regard:

Paragraphs (a) and (b) of subsection (2) are to be read together. Both refer, as indicated above, to the standards of that line of the trade which fits the transaction and the seller's business. "Fair average" is a term directly appropriate to agricultural bulk products and means goods centering around the middle belt of quality, not the least or the worst that can be understood in the particular trade by the designation, but such as can pass "without objection." Of course a fair percentage of the least is permissible but the goods are not "fair average" if they are all of the least or worst quality possible under the description.

Official Comments 2 and 8 provide helpful clues to divining the parties' intent (emphasis supplied):

2. The question when the warranty is imposed turns basically on the meaning of the terms of the agreement as recognized in the trade. Goods delivered under an agreement made by a merchant in a given line of trade must be of a quality comparable to that generally acceptable in that line of trade under the description or other designation of the goods used in the agreement.

* * * * * *

8. Fitness for the ordinary purposes for which goods of the type are used is a fundamental concept of the present section and is covered in paragraph (c). As stated above, merchantability is also a part of the obligation owing to the purchaser for use. Correspondingly, protection, under this aspect of the warranty, of the person buying for resale to the ultimate consumer is equally necessary, and merchantable goods must therefore be "honestly" resalable in the normal course of business because they are what they purport to be.

These comments amplify what is implicit in the statute: "fit for ordinary purposes" merchantability is an ambiguous phrase which has little meaning unless trade usage and other extrinsic evidence is considered. A substantial amount of extrinsic evidence was accordingly admitted and considered by the District Judge in evaluating ADM's warranty of merchantability.

In a curious attempt to bolster the District Judge's conclusion that the warranty of merchantability had been breached, Bolivia now argues that the Judge should not have considered one out of all of the many bits of extrinsic evidence that was considered. Bolivia asserts that the specifications of its letter of credit in favor of ADM cannot be considered because of the flour contracts' merger and parole evidence clause. That letter's quality requirement, besides grade specifications, was only that the flour be "fit for human consumption." The District Judge made no specific finding that the flour was unfit for human consumption. His discussion of United States v. Cassaro, Inc., 443 F.2d 153 (1st Cir. 1971) (infested flour "could be deemed adulterated even though it was fit for human consumption"), does however imply that he found adulteration, merchantability, and fitness for human consumption to be different and progressively less pure standards in the trade. See 449 F. Supp. at 127. But the District Judge considered the letter of credit's standard along with a great deal of other evidence. See 449 F. Supp. at 89 n. 4. We believe that to the extent that the letter's standard favored ADM's position, the District Judge necessarily discounted the standard's importance relative to the other evidence in the course of determining the flour at all critical points unmerchantable. See id. at 126. Finding that we agree with the District Judge's ultimate conclusion, we need not consider Bolivia's parole evidence contention.

Before reviewing the facts, we observe that finding what the parties meant by "merchantability" requires some evaluation of standards in the commercial market and the state of the art in flour manufacturing. The merchantability of infested flour to be sold to consumers is a question of degree and kind. We have often recognized that no food is completely pure. The FDA has long permitted very small amounts of insect fragments and other dead infestation in food products. To declare that any contamination of flour — even by small amounts of insect fragments, renders the flour unmerchantable would no doubt be out of step with commercial reality and would wreak havoc on food manufacturers and distributors while affording little or no additional protection to the consumer. What this case involves, however, is significant amounts of live infestation, by flour beetle eggs, larvae, pupae, and adults. Here the question is: How much live infestation renders consumer-destined flour unfit for the ordinary purposes for which it is used?

Merchantability is a concept similar to strict tort liability; some of the same questions may be appropriate. For example, how difficult is it for manufacturers to produce flour at different levels of quality? Are small amounts of live or dead infestation more easily removed by sellers, by buyers, or is removal too difficult to be done at all? Should the costs of infestations occurring at random be spread among all buyers or be borne by the hapless few who take delivery of the flour? Cf. J. White R. Summers, Handbook of the Law Under the Uniform Commercial Code § 9-6, at 286 (2d ed. 1972).

"A scientist with a microscope could find its filthy, putrid, and decomposed substances in almost any canned food we eat." United States v. 484 Bags, More or Less, supra, 423 F.2d at 841 (quoting United States v. 1,500 Cases, More or Less, 236 F.2d 208, 211 (7th Cir. 1956)).

Such contamination has been informally permitted by the exercise of the FDA's broad discretion to prosecute violators of the Federal Food, Drug and Cosmetics Act pursuant to 21 U.S.C.A. § 336. See United States v. 449 Cases, 212 F.2d 567 (2d Cir. 1954); United States v. 484 Bags, More or Less, supra; United States v. General Foods Corp., 446 F. Supp. 740 (N.D.N.Y.), aff'd, 591 F.2d 1332 (2d Cir. 1978).

The record in this case contains a number of relatively undisputed facts that shed light on the meaning of "merchantable" flour. First, flour beetle infestation in flour mills is an ever present and difficult to eliminate problem. Some flour buyers, such as the United States Government, have however been able to keep infestation problems in their flour to a bare minimum by using their own inspectors to test the flour during its manufacture and at various points thereafter. Also, the relatively stringent precautions taken in ADM-operated mills have reduced infestation problems in their flour to a very great degree. The record further shows that flour containing live infestation, though possibly not dead remains, must be completely fumigated before it can be sold to consumers. Such fumigation is, however, not a normal preparation undertaken by flour buyers. In this context, the fact that the flour involved in the instant case had to be fumigated takes on great significance. Cf. UCC § 1-205(1). As the District Judge stated, "Clearly, if wheat flour found to be infested with beetles would have passed the above [merchantable quality] test . . ., there would have been no need for the flour to have been fumigated. . . ." 449 F. Supp. at 126. We believe that the District Judge's observation closely tracks the Official Comments' statement that goods intended for resale to consumers, as here, are not merchantable unless "`honestly' resalable in the normal course of business." The evidence in sum indicates that consumer-intended flour containing substantial amounts of live infestation is not merchantable under prevailing standards.

Official Comment 8 to UCC § 2-314 (set out above).

We are not aware of any precedent, in Illinois or elsewhere, which considers the issue of merchantability under circumstances similar to the instant case. Several factually distinguishable cases do tend to support our conclusion, however. A provocative example is Cunningham v. MacNeal Memorial Hospital, 47 Ill.2d 443, 266 N.E.2d 897 (1970), in which the Illinois Supreme Court held that hepatitis present in transfused blood breached a warranty of merchantability, even though the disease was impossible for the manufacturer or hospital to detect and eliminate. In contrast, it is clear that with large numbers of inspections live infestation can be detected in and eliminated from flour. Also distinguishable but supporting our conclusion is the decision of a Michigan Court that applesauce that tastes or smells bad but is nonetheless fit for human consumption is under some circumstances unmerchantable. Martel v. Duffy-Mott Corp., 15 Mich. App. 67, 166 N.W.2d 541 (1968). Under Missouri law, cheese containing bacteria " capable of" producing a harmful condition was found unmerchantable since it was "not suitable for the ordinary purpose for which it is used; namely, for consumption by the consumer." Safeway Stores, Inc. v. L. D. Schreiber Cheese Co., 326 F. Supp. 504, 508 n. 10 (W.D. Mo. 1971). Moreover, in dictum adopted by our Court en banc, we have observed that in "cases . . . where the product contained mice, flys, slime, mud, bugs, roaches and worms, . . . [l]ittle doubt exists that the presence of such articles in a product intended for human consumption renders said product . . unmerchantable as a matter of law", Green v. American Tobacco Co., 391 F.2d 97, 106, 112 (5th Cir. 1968) (Fla.) (dissenting opinion), adopted as the opinion of the Court en banc, 409 F.2d 1166 (1969).

In an early case under the Federal Food, Drug and Cosmetics Act, it was recognized that the visible presence of live worms in tomatoes would offend "the aesthetic tastes and sensibilities of the consuming public." United States v. 133 Cases of Tomato Paste, 22 F. Supp. 515, 516 (E.D. Pa. 1938).

The result of this case was subsequently altered by statute, Ill.Rev.Stat.Ann. Ch. 91, § 181 (Smith-Hurd). But its interpretation of Illinois warranty law is still valid. See also Stanton v. Shakofsky, 2 Ill.App.2d 527, 119 N.E.2d 812 (1954) (diseased hogs); Vlases v. Montgomery Ward Co., Inc., 377 F.2d 846 (3d Cir. 1967) (Pa.) (diseased chickens).

Judicial interpretation, trade usage, and course of dealing point to but one conclusion as to flour infested with significant amounts of live flour beetles: although the flour may be "fit for human consumption" in the sense that it can be eaten without causing sickness, it is nonetheless not of merchantable quality. Such flour is not what is normally expected in the trade. It is not what ADM agreed to supply to Bolivia. Our holding is a narrow one. We do not say, for example, that one live beetle egg in a batch of 10,000 bags of flour renders that flour unmerchantable. Nor do we decide the merchantability of flour containing dead infestation in large or small amounts. Furthermore, we construe only the merchantability standard for flour which will be resold to consumers, not for flour sold directly to consumers. Finally, we emphasize that merchantability is an evolving standard, so that what is unmerchantable at one time and on one record may not be so in another case. In sum, we conclude that the District Judge was not erroneous in finding that the infested flour was not in conformity with ADM's warranty of merchantability.

B. Risk Of Loss

Since it has been established that consumer-intended flour containing substantial amounts of live infestation is unmerchantable and that the infestation in this case began before the flour reached the State Docks warehouses, we are confronted with the issue of which party is to be responsible for the further infestation of the flour as it stood in the warehouses or lay in Stevenson's ships. The UCC's concept of risk of loss allocates responsibility for the further infestation between the buyer and the seller, leaving the responsible party free, however, to try to recover its loss from the carrier.

The Code does not precisely define the concept of risk of loss. Even if the Code's risk of loss concept does not apply, we are confident that ADM would nonetheless be liable for deterioration of the flour because of the flour's defective condition as delivered to the carrier. See UCC § 1-103 (supplemental bodies of law including those of estoppel, invalidating cause, and other equitable principles continue to apply unless explicitly displaced by the UCC).

The parties in this case have vigorously argued the point of "delivery" of the flour by ADM: whether it was at the State Docks warehouses or at the later loading of the ships. In part, this point has been argued because in most cases, determining whether buyer or seller bears the risk of loss involves only identification of the Code's "delivery" point:

Risk of Loss in the Absence of Breach.

(1) Where the contract requires or authorizes the seller to ship the goods by carrier

(a) if it does not require him to deliver them at a particular destination, the risk of loss passes to the buyer when the goods are duly delivered to the carrier even though the shipment is under reservation (Section 2-505); but

(b) if it does require him to deliver them at a particular destination and the goods are there duly tendered while in the possession of the carrier, the risk of loss passes to the buyer when the goods are there duly so tendered as to enable the buyer to take delivery.

UCC § 2-509(1) (emphasis supplied). Thus the parties have focused their attention on the meaning of the flour contracts' "F.A.S. MOBILE, ALABAMA for export" delivery term and the District Judge's somewhat ambiguous finding that delivery occurred as the flour was loaded aboard the ships. ADM quite naturally makes much of the slight ambiguity in the Judge's finding and argues that when certain extrinsic evidence is disallowed, we must conclude that delivery occurred before the flour was even placed in the State Docks warehouses.



There was conflicting testimony as to the meaning of the term "free alongside" commonly referred to as F.A.S. in the Port of Mobile. ADM's position is that the State Docks tariff demonstrates that as between shipper and the State Docks, the delivery to the warehouse places the cargo at the risk of the vessel. On the contrary, Stevenson introduced the Rules and Regulations for the Port of Mobile (TJS Ex. 24) relying primarily on Rule # 8 which provided:

"The phrases `alongside' and `within reach of ship's tackle' when applied to the receipt of and delivery of cargo, shall be construed literally, and the responsibility of the vessel shall commence and cease at the end of the tackle used by the ship."

As will be noted below, the Court is of the opinion that the activities and circumstances surrounding these F.A.S. contracts along with the actions of ADM's appointee, Superintendence, considerably altered the meaning of this contractual provision.

449 F. Supp. at 121 n. 60. Apparently, the District Judge inadvertently omitted the further discussion on this point to which he refers by the words "noted below."

But we need not decide in this context whether the Judge's "delivery" point finding was correct, and we assume without so deciding that ADM's delivery point is the correct one. We do so because of the clear applicability of a provision of the UCC which was specifically drafted to cover situations in which defective goods are delivered to a carrier and further deterioration ensues. Section 2-510(1) provides:

However, we do decide a very closely related delivery issue when assessing Stevenson's rights and duties as a carrier of the flour under its shipping contract with Bolivia.

See generally Peters, Remedies for Breach of Contract Relating to the Sale of Goods Under the Uniform Commercial Code: A Roadmap for Article 2, 73 Yale L.J. 199, 246-47 (1963); J. White R. Summers, supra, § 5 5, at 149-50; R. Nordstrom, supra, § 135.

Effect of Breach on Risk of Loss.

(1) Where a tender or delivery of goods so fails to conform to the contract as to give a right of rejection the risk of their loss remains on the seller until cure or acceptance.

This provision is not difficult to apply. First, we assume that delivery occurred just before the flour was placed in the warehouses. We secondly have decided that the District Judge correctly found the flour substantially infested at that point. Third, we have decided that such infestation breaches the contracts' merchantability provision. The only question, then, is whether delivery of unmerchantable flour gave Bolivia a "right of rejection." If so, risk of loss remained on ADM until Bolivia "accepted" the flour.

Determining Bolivia's "right of rejection" requires us to assume, contrary to what actually occurred, that Bolivia inspected the flour and discovered the live infestation at the time that the flour arrived in Mobile and was unloaded into the warehouses. The question then becomes whether Bolivia could have then rejected the flour. Section 2-601 permits the buyer to reject if the tendered goods "fail in any respect to conform to the contract." This "perfect tender rule" has not been strictly applied, however. Moreover, UCC § 2-612 says that in installment contracts such as this, only material nonconformities justify rejection. Even considering those qualifications of the perfect tender rule, we know of no case holding that substantially unmerchantable goods must be accepted. The flour in this case was substantially infested when it arrived in Mobile and became more infested thereafter. Since it was materially nonconforming at the time it arrived in Mobile, the four could have been rejected by Bolivia at that time. Thus Bolivia had a "right of rejection."

Buyer's Rights on Improper Delivery

Subject to the provisions of this article on breach in installment contracts (Section 2.612) and unless otherwise agreed under the sections on contractual limitations of remedy (Sections 2.718 and 2.719), if the goods or the tender of delivery fail in any respect to conform to the contract, the buyer may





(3) accept any commercial unit or units and reject the rest.





In practice the harsh edges of the perfect tender rule have been smoothed down in cases where the goods themselves are tendered: either a clause in the contract or trade custom or the past practice of the parties will be construed to permit minor discrepancies and an innocent delay of a day or two will not necessarily be fatal.

G. Gilmore C. Black, The Law of Admiralty § 3 10, at 112-13 (2d ed. 1975). See also J. White R. Summers, supra, § 8-2. G. Gilmore C. Black, The Law of Admiralty § 3 10, at 112-13 (2d ed. 1975).J. White R. Summers,§ 8-2.

"Installment Contract"; Breach

(a) An "installment contract" is one which requires or authorizes the delivery of goods in separate lots to be separately accepted, even though the contract contains a clause "each delivery is a separate contract" or its equivalent.

(b) The buyer may reject any installment which is non conforming if the non-conformity substantially impairs the value of that installment and cannot be cured or if the non conformity is a defect in the required documents; but if the non conformity does not fall within Subsection (c) and the seller gives adequate assurance of its cure the buyer must accept that installment.

(c) Whenever non conformity or default with respect to one or more installments substantially impairs the value of the whole contract there is a breach of the whole. But the aggrieved party reinstates the contract if he accepts a non-conforming installment without seasonably notifying of cancellation or if he brings an action with respect only to past installments or demands performance as to future installments.



At no point did ADM provide any assurances of cure of the flour's infestation. Thus for this reason alone § 2-612 may not be applicable, though we have not so decided See G. Gilmore C. Black, supra, § 3-10, at 112 n. 66.

We therefore conclude that under § 2-510(1)'s plain language, the risk of loss of the infested flour remained on ADM "until . . . acceptance" by Bolivia. For the Nedon flour, it is uncontested that Bolivia never accepted; the flour was rejected before the ship left Mobile harbor. For that flour, risk of loss was always on ADM. But Bolivia did accept the Arizona and Southwall flour. ADM and Bolivia now take the position that acceptance of that flour occurred while the ships were in Mobile, though at slightly different times. Like the District Judge, we however disagree. We decide below that Bolivia did not accept the Arizona and Southwall flour until it reached South America. Our conclusion means that ADM bore the risk of loss of the Arizona and Southwall flour until those vessels arrived in South America and their cargoes were inspected and "accepted by" agents of Bolivia. Because our conclusion concerning the point of acceptance of the Arizona and Southwall flour is important to several of the issues in this case, we now proceed to explain our determination of that point.

C. Point Of Acceptance: Arizona Southwall Flour

In the Court below, Bolivia argued that it did not accept the Arizona and Southwall flour until it reached South America. Now, for apparently tactical reasons best known to its counsel, Bolivia has changed its position and argues that acceptance occurred before the ships left Mobile. But the District Judge found in Bolivia's favor on its breach of contract claim and in so doing adopted Bolivia's original position that acceptance occurred in South America, not Mobile. The District Judge's implicit finding is revealed by his assessment of damages, which depended on the point of acceptance.



Finally, ADM argues that even if Bolivia was entitled to damages on the SOUTHWALL and ARIZONA cargoes there can be no recovery as there is complete lack of evidence as to the value of the goods in their actual condition in Mobile, Alabama, in that Bolivia's measure of damages for breach of warranty is the difference between the value of the flour at the time and place of acceptance (Mobile) and the value they would have had if they had been in the condition warranted in the contract. The statute governing this question is Section 2-714(2), which provides in part as follows:

(2) The measure of damages for breach of warranty is the difference at the time and place of acceptance between the value of the goods accepted and the value they would have had if they had been as warranted, unless special circumstances show proximate damages of a different amount.

Bolivia's theory of damages (Bol. Ex. 47) is based on the premise that Bolivia had no reasonable opportunity to inspect the cargo in Mobile and therefore the damages should be based on the official wholesale price of such flour established by the Republic of Bolivia.

Having considered the matter, the Court finds that the Ministry having accepted the non-conforming flour aboard the ARIZONA and SOUTHWALL is entitled to damages against ADM in the amount of $325,960.51, together with interest at the legal rate of six percent (6%) per annum from the date of this judgment until paid.

Footnote 77 sets out the basis for the Judge's calculation of damages.

The Ministry claims that although the total cost per 100 pound bag of flour at the time such flour arrived in Bolivia was approximately $17.00, the official wholesale price of such flour fixed by the Republic of Bolivia was only $14.7059 per bag in La Paz and Oruro, and $14.9388 per bag in Cochabamba, Bolivia.

The best wholesale price obtainable by the Ministry for the infested flour in Bolivia was $12.7206 in La Paz and Oruro and $12.9221 in Cochabamba. Therefore, the Ministry contends that it is entitled to recover the difference between the price for good flour and the price for infested flour. Since the Ministry's national plan of supply had allocated 64.872 bags to La Paz, 54,990 bags to Cochabamba and 5,330 bags to Oruro, the Ministry could have obtained $1,603,597.84. Accordingly, the Ministry's damages are $250,270.36 (Bol. Exs. 46, 47).

In addition to said sum of $250,270.36, the Ministry is entitled to recover $75,690.15 for the additional expenses incurred due to the infestation of the flour. (Bol. Exs. 48, 49, 51).

Footnote 77 sets out the basis for the Judge's calculation of damages. 449 F. Supp. at 129-30 (emphasis supplied).

By computing damages using Bolivian prices, the District Judge clearly rejected ADM's argument that acceptance occurred in Mobile and adopted Bolivia's argument (at that time) that there had been no reasonable opportunity to inspect and hence no acceptance in Mobile, but rather that acceptance occurred in South America.

Neither Bolivia nor anyone else argued to the District Judge that UCC § 2-714(1)'s "special circumstances" exception justified use of Bolivian damages even if acceptance occurred in Mobile. For the first time, Bolivia now argues that the District Judge awarded Bolivian damages because of special circumstances. In contradistinction, ADM's brief fully recognizes that the District Judge adopted Bolivia's original argument that acceptance occurred in South America rather than in Mobile. ADM's brief in fact specifically attacks the implied finding of acceptance in South America. Consequently, we are not misled by Bolivia's change of position on appeal.

Proceeding to the correctness of the District Judge's finding of acceptance, the Code provides that the buyer has a right to inspect the goods before he is deemed to have accepted:

Unless otherwise agreed and subject to Subsection (3), where goods are tendered or delivered or identified to the contract for sale, the buyer has a right before payment or acceptance to inspect them at any reasonable place and time and in any reasonable manner. When the seller is required or authorized to send the goods to the buyer, the inspection may be after their arrival.

UCC § 2-513(1) (emphasis supplied). Nor does the fact that ADM received payment for the flour prior to its arrival and acceptance in South America affect the determination of the proper point of acceptance:

Payment pursuant to Subsection (1) does not constitute an acceptance of goods or impair the buyer's right to inspect or any of his remedies.

UCC § 2-512(2).

Official Comment 2 to UCC § 2-606 (defining acceptance) states that "acceptance of title is not material under this Article to the detailed rights and duties of the parties." Section 2-401 reinforces this concept:

Each provision of this Article with regard to the rights, obligations and remedies of the seller, the buyer, purchasers or other third parties applies irrespective of title to the goods except where the provision refers to such title.

See also UCC §§ 2-513(3)(b) 2-310(c); Official Comments 5 7 to § 2-513. Cf. 2-512(1)(a) exception not applicable because no one had any awareness of live infestation as of time that the ships departed for South America, since the flour had been recently and apparently effectively fumigated. UCC §§ 2-513(3)(b) 2-310(c); Official Comments 5 7 to § 2-513.2-512(1)(a) exception not applicable because no one had any awareness of live infestation as of time that the ships departed for South America, since the flour had been recently and apparently effectively fumigated.

Instead, the point of acceptance turns on the buyer's right to inspect the goods:

What Constitutes Acceptance of Goods

(a) Acceptance of goods occurs when the buyer

(1) after a reasonable opportunity to inspect the goods signifies to the seller that the goods are conforming or that he will take or retain them in spite of their non-conformity; or

(2) fails to make an effective rejection (Subsection (1) of Section 2.602), but such acceptance does not occur until the buyer has had a reasonable opportunity to inspect them; or

(3) does any act inconsistent with the seller's ownership; but if such act is wrongful as against the seller it is an acceptance only if ratified by him.

(b) Acceptance of a part of any commercial unit is acceptance of that entire unit.

UCC § 2-606 (emphasis supplied). A reasonable opportunity to inspect the goods is of course determined in light of the surrounding facts and circumstances. It is undisputed that no one representing Bolivia examined the Arizona and Southwall flour in Mobile. The flour was not in fact inspected by Bolivian agents until it reached the South American port of Arica, Chile. The Code recognizes that the existence of payment-related documents such as the quality certificates and bills of lading (which were used by ADM to obtain payment under the letter of credit) do not affect the point of acceptance, nor the buyer's right to inspect. There is further evidence that although Bolivia, through St. John, was aware of the live infestation discovered by Superintendence in Mobile, news of the ensuing fumigation of the flour gave Bolivia every reason to believe that all of the flour beetles had been killed and that inspection could wait until the flour reached South America. Given these facts and circumstances, we cannot say that Bolivia's decision to inspect the flour in Arica was outside of the zone of "reasonable opportunity."

Official Comment 3 to UCC § 2-513 states in part:

Any reasonable time, place or manner is available to him and the reasonableness will determined by trade usages, past practices between the parties and the other circumstances of the case.

The last sentence of subsection (1) makes it clear that the place of arrival of shipped goods is a reasonable place for their inspection.

As the Arizona and Southwall began unloading in Arica, Bolivian agents began inspecting the flour and found live infestation. Bolivia immediately instructed port officials to prevent further discharge of the cargoes, a situation which lasted from October 14 until November 5, 1974. From approximately October 14, ADM was made well aware of Bolivia's dissatisfaction with the cargoes and of Bolivia's feeling that ADM was responsible. But ADM was never clearly told that Bolivia would not accept the flour. Moreover, when the ships were finally allowed to unload on November 5, Bolivia took the flour, salvaged it, and resold it to its regular distributors.

These facts indicate that following the flour's inspection in Arica, Bolivia must be deemed to have accepted the flour. The Code presumes that the buyer accepts goods unless, following a reasonable opportunity to inspect the goods, the seller is unequivocally and seasonably notified that the buyer is rejecting the goods. UCC § 2-606(1)(b); Stamm v. Wilder Travel Trailers, 44 Ill. App.3d 530, 3 Ill.Dec. 215, 358 N.E.2d 382 (5th Dist. 1976). See also UCC § 2-602(1). Bolivia's conduct in obstructing discharge of the cargoes while not clearly indicating that it rejected (or accepted) the flour brings the Code's presumption of acceptance into effect. The application of that presumption is a largely factual matter. See Cook Industries, Inc. v. Community Grain, Inc., 614 F.2d 978, 980 (5th Cir. 1980) ("Although the interpretation of a contract is normally a question of law . . . . that interpretation frequently depends heavily on the resolution of factual disputes."). The District Judge thoroughly evaluated Bolivia's conduct in this regard. 449 F. Supp. at 103-05. His subsidiary findings certainly support an ultimate finding of § 2-606(1)(b) acceptance in Arica. We therefore find that the District Judge was correct in concluding that acceptance of the Arizona and Southwall flour was effected in Arica, not in Mobile.

We do not decide whether Bolivia's conduct also amounted to acts "inconsistent with the seller's ownership," which under UCC § 2-606(1)(c) is another way that Bolivia might be deemed to have accepted the flour.

D. Notice Of Breach

By accepting the Arizona and Southwall flour, Bolivia is of course not prevented from seeking breach of warranty damages from ADM. UCC § 2-607(2) ("acceptance does not of itself impair any other remedy provided by this Article . . ."); Gillespie v. Werner Co., 43 Ill.App. 947, 2 Ill.Dec. 760, 357 N.E.2d 1203 (1976). Some "notice" to ADM concerning the flour is, however, a requisite of Bolivia's breach of warranty claim. Berry v. G.D. Searle Co., 56 Ill.2d 548, 309 N.E.2d 550 (1974). Section 2-607(3)(a) sets out the UCC's notice requirement (emphasis supplied):

Where a tender has been accepted

(a) the buyer must within a reasonable time after he discovers or should have discovered any breach notify the seller of breach or be barred from any remedy; . . . .

A provision of the flour contracts adds to the UCC's requirement the following contractual requirement (emphasis supplied):

BUYER hereby waives any claim or defense based on the quality of the goods specified herein, unless (1) within ten (10) days after BUYER learns by use or otherwise of the defect complained of, but in any event within twenty (20) days after receipt of notice of arrival of said goods at destination, BUYER sends SELLER at SELLER'S main office a letter by registered mail specifying the nature of the complaint and (2) within said twenty (20) days send by parcel post or express prepaid to SELLER'S said office a five (5) pound sample of the goods alleged to be defective or inferior . . .

ADM contends that under both § 2-607(3)(a) and the contractual provision, it never received adequate notice of the defects of the Arizona and Southwall flour. ADM accordingly asserts that Bolivia's breach of contract remedy is barred and that the damages awarded to Bolivia must be reversed.

(i) Notice Under § 2-607(3)(a)

In Illinois it is well-established that § 2-607(3)(a)'s requirement of notification of breach of warranty need not be in any particular words and is ordinarily a question of fact, looking to all the circumstances of the case. Notice need not be written. It may be given in a single communication or derived from several. It is also well-established that "notice under section 2-607 need not be a specific claim for damages or an assertion of legal rights." Eastern Air Lines, Inc. v. McDonnell Douglas Corp., 532 F.2d 957, 976 (5th Cir. 1976) (Calif.) (citing 2 R. Anderson, Uniform Commercial Code § 2-607:25, at 218 (1971)).

There is widespread agreement as to this aspect of the notice requirements. Reviewing precedent from various jurisdictions, we stated in Eastern Air Lines, Inc. v. McDonnell Douglas Corp., 532 F.2d 957, 973 (5th Cir. 1976):

As will be demonstrated below, the adequacy and timeliness of notice under section 2-607 typically depend upon the reasonableness of the buyer's efforts to communicate his dissatisfaction. See United States v. Crawford, 5 Cir., 1971, 443 F.2d 611, 614. Therefore, whether the notice requirement has been complied with is a question which is particularly within the province of the jury. See Pritchard v. Liggett Myers Tobacco Company, 3 Cir., 1961, 295 F.2d 292, 298; L. A. Green Seed Company of Arkansas v. Williams, Ark., 1969, 438 S.W.2d 717; 2 R. Anderson, Uniform Commercial Code § 2-607:24 (1971). As was noted by the Third Circuit:

Where more than one inference may be drawn from undisputed facts, or the facts are disputed, the timeliness and sufficiency of a notice of breach . . . are questions for the jury to resolve. The question of reasonableness must be determined from the circumstances in the individual case.

Pritchard v. Liggett Myers Tobacco Company, supra (applying Uniform Sales Act); see Columbia Axle Co. v. American Automobile Ins. Co., 6 Cir., 1933, 63 F.2d 206, 208.

See also E. C. Ernst v. General Motors Corp., 537 F.2d 105, 108 (5th Cir. 1976) (Ga.).

Beyond these principles, however, Courts have disagreed in their interpretations of § 2-607(3)(a)'s notification requirement. A few decisions, largely from the Eighth Circuit and from Oregon, have held that the seller need only be informed that "the transaction is still troublesome and must be watched." And if the troublesome nature of the transaction is moreover apparent or already known to the seller, no notice at all is required. In Eastern Air Lines, Inc. v. McDonnell Douglas Corp., supra, however, this Court decided that for merchant buyers § 2-607(3)(a) requires something more than the minimal notification endorsed by those Courts. 532 F.2d at 970-80. We held that the dual policies of "encouraging compromise" and "promoting good faith in commercial relations," id. at 972, underlay the notice requirement of § 2-607(3)(a). Notice consequently must fulfill those policies; merely indicating that the transaction is troublesome is not enough. One way in which the policies are fulfilled is by notice informing the seller that the buyer regards the contract as breached by the seller, though specific legal rights need not be invoked. Id. at 973, 976.

This quotation is from a portion of Official Comment 4 to § 2-607. The Comment in its entirety states:

4. The time of notification is to be determined by applying commercial standards to a merchant buyer. "A reasonable time" for notification from a retail consumer is to be judged by different standards so that in his case it will be extended, for the rule of requiring notification is designed to defeat commercial bad faith, not to deprive a good faith consumer of his remedy.

The content of the notification need merely be sufficient to let the seller know that the transaction is still troublesome and must be watched. There is no reason to require that the notification which saves the buyer's rights under this section must include a clear statement of all the objections that will be relied on by the buyer, as under the section covering statements of defects upon rejection (Section 2-605). Nor is there reason for requiring the notification to be a claim for damages or of any threatened litigation or other resort to a remedy. The notification which saves the buyer's rights under this Article need only be such as informs the seller that the transaction is claimed to involve a breach, and thus opens the way for normal settlement through negotiation.

In Eastern Air Lines, Inc. v. McDonnell Douglas Corp., supra, In 532 F.2d at 975-76 , we observed that the last sentence of this comment was the principal basis for the Eighth Circuit's decisions, of which we disapproved.

The Eastern Air Lines interpretation of § 2-607(3)(a) has been adopted by the vast majority of Courts which subsequently have considered the issue. It is also significant that the Eighth Circuit, which decided three cases which we declined to follow in Eastern Air Lines, recently decided a case under Illinois law and adopted the Eastern Air Lines view of notification. Southern Illinois Stone Co. v. Universal Engineering Corp., 592 F.2d 446, 452 (8th Cir. 1979). Because we regard the Eighth Circuit as very knowledgeable concerning Illinois law and considering the wide acceptance of Eastern Air Lines' view of notification, we hold that Illinois law requires application of the Eastern Air Lines principles to this case.

There are no decisions by Illinois Courts that are on point, In Overland Bond Investment Corp. v. Howard, supra, a case involving a consumer's defective automobile, the Illinois Court did, however, state the notice requirement in terms similar to that of Eastern Air Lines:

There are no particular words which must be used to constitute an adequate form of notice. See Wainwright v. Elgin Windmill Co., 9 Ill.App.2d 574, 134 N.E.2d 44, and Uniform Commercial Code Comment SHA, ch. 26, par. 2-607, p. 454 (1963). Certainly by having the car towed to the dealer's place of business, by informing its employees that the car was again in need of major repair, thus clearing implying that it could not be operated in a safe manner until such repairs were completed, was sufficient notice to the dealer that its implied warranties had been breached.

9 Ill.App.3d at 357-58, Eastern Air Lines approach is a pre-Code case interpreting Illinois law. In Charles v. Judge Dolph, Ltd.,

It is well established that notice of defects is not a notice of breach of warranty. In an opinion by Judge Hand in American Mfg. Co. v. United States Shipping Board Emergency Fleet Corp., 2 Cir., 7 F.2d 565, 566, the court said: "The notice `of the breach' required is not of the facts, which the seller presumably knows quite as well as, if not better than, the buyer, but of the buyer's claim that they constitute a breach. The purpose of the notice is to advise the seller that he must meet a claim for damages, as to which, rightly or wrongly, the law requires that he shall have early warning."

Remarkably, in Eastern Air Lines, we found that § 2-607(3)(a) continued many of the policies of § 49 of the Uniform Sales Act; and in so doing we quoted the same portion of Judge Learned Hand's opinion. See 532 F.2d at 971-72. 292 N.E.2d at 176 (emphasis supplied). Also supporting theapproach is a pre-Code case interpreting Illinois law. In 263 F.2d 864, 868 (7th Cir. 1959), the Court interpreted § 49 of the Uniform Sales Act, Ill.Rev.Stat. Ch. 121 1/2, § 49:Remarkably, inwe found that § 2-607(3)(a) continued many of the policies of § 49 of the Uniform Sales Act; and in so doing we quoted the same portion of Judge Learned Hand's opinion.

Our Eastern Air Lines decision grew out of McDonnell Douglas's late delivery over a period from 1965-1969 of aircraft ordered by Eastern. The contract required a high degree of cooperation and communication between the parties. Beginning even before the expected time of the first aircraft's delivery, Eastern continuously expressed dissatisfaction with the delivery schedule. Finally, Eastern sued for damages. The District Judge found that that evidence of Eastern's communications with McDonnell Douglas was sufficient to permit a directed verdict that § 2-607(3)(a) notice had been given. A jury then considered other issues and returned a verdict in Eastern's favor. We reversed, ruling that examination of the "entire course of conduct during the years 1965-1969" revealed enough doubt concerning notification to preclude a directed verdict for either party and to require evaluation by the jury as factfinder. 532 F.2d at 978. We emphasized that Eastern's expressions of dissatisfaction were less than unequivocal in view of the parties' cooperative arrangement and Eastern's failure to cancel future aircraft deliveries. It was not clear to a reasonable certainty that Eastern's alleged notice was sufficient to encourage compromise by McDonnell Douglas. Furthermore, there was evidence which created a jury question concerning the second policy of notification, the encouragement of commercial good faith. For example, Eastern at times praised McDonnell Douglas's performance and made public statements that might "well have led McDonnell to believe that it was not in breach of the agreement." Id. at 978. During the 1965-1969 period encompassing the alleged breaches of contract, Eastern negotiated several new contracts with McDonnell Douglas without attempting to raise or settle its claims under the original contract. Added to this were the assurances by Eastern during 1968 that it would not seek delay damages from McDonnell Douglas. All of this, we held, created a question of the adequacy of Eastern's notification which was fact question calling for resolution by the fact-finder.

Eastern Air Lines therefore teaches two concepts. First, the factfinder's determination of the mixed law-fact issue of notice, if based on a correct understanding of the law, is to be given great weight. Second, § 2-607(3)(a) notice must be evaluated from the perspective of the policies which it seeks to encourage: compromise by the parties; and conduct within the bounds of commercial good faith.

E. g., E. C. Ernst, Inc. v. General Motors Corp., supra, 537 F.2d at 110-11 (upholding jury finding).

E. g., Southern Illinois Stone Co. v. Universal Engineering, supra, 592 F.2d at 452 (encouraging compromise); Clow Corp. v. Metro Pipeline Co., supra, 442 F. Supp. at 589 (encouraging good faith); Kopper Glo Fuel, Inc. v. Island Lake Coal Co., supra, 436 F. Supp. at 96 (encouraging good faith conduct). While endorsing the Eastern Air Lines approach, Standard Alliance Indust., Inc. v. Black Clawson Co., supra, seemingly reinterprets the second of § 2-607(3)(a)'s underlying policies:

Notice of breach serves two distinct purposes. First, express notice opens the way for settlement through negotiation between the parties. Comment four, supra; Eckstein v. Cummins, 41 Ohio App.2d 1, 321 N.E.2d 897, 901 (1974). Second, proper notice minimizes the possibility of prejudice to the seller by giving him "ample opportunity to cure the defect, inspect the goods, investigate the claim or do whatever may be necessary to properly defend himself or minimize his damages while the facts are fresh in the minds of the parties."

Notice of Breach and the Uniform Commercial Code, 25 U.Fla.L. Rev. 520, 522 (1973)). But, as J. White R. Summers, supra, § 11-9, at 344, point out, this articulation of the second policy is just the equivalent of the commercial good faith policy, in that "if the court senses that a merchant buyer is lying in the Johnson grass with the thought of increasing his damages, it will not hesitate a moment to cut him off." 587 F.2d at 826 (quoting Note,25 U.Fla.L. Rev. 520, 522 (1973)). But, as J. White R. Summers,§ 11-9, at 344, point out, this articulation of the second policy is just the equivalent of the commercial good faith policy, in that "if the court senses that a merchant buyer is lying in the Johnson grass with the thought of increasing his damages, it will not hesitate a moment to cut him off."

Applying these concepts to the instant case, we first observe that while the District Judge did not make elaborate findings concerning notice, he did treat it as a fact question and recognized that Eastern Air Lines requires more than minimal notice:

A purpose of section 2-607 notice requirement is to inform the seller that his tender is non-conforming, but also to open the way for settlement through negotiations between the parties.

449 F. Supp. at 129 (emphasis supplied). Because of this appreciation for the appropriate legal standard, we give great weight to the District Judge's conclusion that "the facts are sufficient to find that Bolivia gave adequate notice under [§] 2-607(3)(a) to ADM. . . ." Id.

Second, the record reveals a number of specific communications, as well as additional inferable ones, between Bolivia and ADM, which must be evaluated for adequacy under the § 2-607(3)(a) policies. Soon after Superintendence first discovered the infestation of the flour, ADM agreed to pay for fumigation of the car lots still in the warehouses, although it did not agree to fumigate the flour already loaded aboard the Arizona and Southwall. St. John, as agent for Bolivia, telexed ADM to request that ADM take responsibility for fumigating the flour loaded aboard the Arizona and Southwall:

RE: WEEVILS INFESTATION IN BAGGED FLOUR VESSELS "SOUTHWALL" AND "ARIZONA".

PER OUR TELEPHONE CONVERSATION THIS MORNING WE HAVE NOW RECEIVED THE FOLLOWING TWX FROM STEVENSON, THE OPERATORS OF BOTH REFERENCED VESSELS.

QUOTE

WEEVILS HAVE BEEN FOUND IN THE FLOUR LOADED ON BOTH M/S ARIZONA AND M/S SOUTHWALL. THIS NECESSITATES FUMIGATING BOTH VESSELS WHICH IS FOR SUPPLIERS ACCT. ALSO ANY VESSEL TIME LOST ACCT FUMIGATING IS FOR SUPPLIERS ACCT. INCLUDING LODGING AND FEEDING OF THE CREW IF THEY MUST BE REMOVED FROM THE VESSEL DURING FUMIGATING.

UNQUOTE

ADDITIONALLY WE QUOTE BELOW NOTICE SENT YESTERDAY BY VESSELS' MOBILE AGENTS TO ADM MOBILE AGENTS.

QUOTE

SEPTEMBER 24, 1974

ON BEHALF OF OUR PRINCIPALS, OWNERS AND/OR OPERATORS OF THE M/S SOUTHWALL AND M/S ARIZONA, WE HAVE TO ADVISE YOU THAT YOUR PRINCIPALS, THE SUPPLIERS AND/OR SHIPPERS OF CARGOES OF BAGGED FLOUR BEING LOADED ONTO SAID VESSELS, WILL BE HELD LIABLE FOR ANY AND ALL LOSSES, DELAYS OR DAMAGES, BROUGHT ABOUT BY THEM AND/OR THEIR AGENTS HAVING RELEASED SAME FOR LOADING ON BOARD VESSELS POSSIBLY INFESTED WITH WEEVILS OR OTHERWISE NOT IN ORDER TO LOAD. WE MUST ADVISE THAT BOTH YOU AND YOUR PRINCIPALS WERE WELL AWARE THAT BOTH VESSELS ARE IN PORT AND HAVE BEEN LOADING FOR THE PAST SEVERAL DAYS AND NO ADVERSE CONDITIONS WERE REPORTED UNTIL LATE THIS PM.

UNQUOTE

ON BEHALF OUR PRINCIPALS, THE EMBASSY OF BOLIVIA, WE REQUEST YOU ADVISE US AS SOON AS POSSIBLE REGARDING ARRANGEMENTS BEING MADE TO FUMIGATE THE VESSELS AS PER THE ABOVE TERMS AND CONDITIONS.

See 449 F. Supp. at 99. Within hours, ADM replied:

RE: WHEAT FLOUR FOR ARIZONA AND SOUTHWALL

WE ARE CONTINUING TO DELIVER CLEAN FLOUR FOR LOADING ABROAD SAID VESSELS.

Following these written communications, a series of telephone conversations and meetings ensued between agents of ADM, Bolivia, and Stevenson. These informal communications continued throughout the time that there were problems with the flour, eventually including the problems of the Nedon as well as the Southwall and Arizona. Some of the informal communications were specifically described at trial; many others were only generally revealed.

Within days of the start of these informal communications, ADM, both informally and formally, made clear what was apparent from its reply telex of September 25: it had delivered only uninfested flour to the State Docks warehouses and under the F.A.S. term of the flour contracts "any and all claims with respect to insect infestation" were not ADM's concern. Bolivia, on the other hand, clearly did not want to accept flour containing live infestation. Finally, Stevenson resolved the impasse by itself arranging for fumigation of the Arizona and Southwall flour. After informally telling ADM and Bolivia of this action, Stevenson then allowed the ships to depart for South America.

This quote is from a telex sent from ADM to Stevenson on September 30, 1974, reproduced at 449 F. Supp. at 101 n. 22.

When the ships arrived in Arica, Bolivia inspected the cargoes, found live infestation, but nevertheless accepted the flour. As these events unfolded on October 14-15, the Nedon was loading in Mobile. From the informal communications around this period — involving ADM and its agents — it is easily inferable that Bolivia indicated that live infestation such as that found in the Arizona and Southwall violated ADM's contractual responsibilities and furthermore would be unacceptable if found in the Nedon flour. Supporting that inference is the fact that all parties were in "continuous communication" with one another from the time that infestation problems were found in Mobile. See Automated Controls, Inc. v. MIC Enterprises, Inc., 27 U.C.C.Rep. 661, 674 (U.S.D.Neb. 1978), aff'd per curiam, 599 F.2d 288 (8th Cir. 1979). In addition, Bolivia's actions were consistent with its communications, since it initially refused to allow the discharge of the Arizona and Southwall cargoes, mistakenly thinking that the breach of contract gave it the right to prevent the ships from unloading.

The continuous communications between the parties in this case are different from those in Eastern Air Lines, supra, in several respects. Most importantly, in this case the communications arose only after problems with the goods began and were exclusively focused on those problems.

Upon discovery of the Nedon flour's infestation, Bolivia added to its informal communications another written one. On October 24, 1974, Bolivia (through its bank) telexed ADM that no further payments would be permitted under the "irrevocable" letter of credit. The reason stated to ADM was that "your . . . merchandise found contaminated from origin. . . ." Finally, Bolivia formally rejected the Nedon flour on October 31, to which ADM, as before, replied that its responsibilities had ended as of the time of delivery of the flour to the State Docks warehouses.



SHIPMENTS MADE UNDER LETTERS OF CREDIT 9090-9115 YOUR CCF 047628 AND CCF 48548 MERCHANDISE FOUND CONTAMINATED FROM ORIGIN IN ACCORDANCE CERTIFICATE FROM SUPERINTENDENCE COMPANY INC. NO. 18625 IN VIEW OF THIS DEFECT AND DESPITE THE IRREVOCABILITY OF LETTER OF CREDIT BUYERS REQUEST THAT NO PAYMENT BE MADE WITHOUT PRIOR APPROVAL ADVISE BENEFICIARIES AND CABLE US UNQUOTE WIRE US YOUR AGREEMENT TO ABOVE PROCEDURE ON FUTURE SHIPMENTS STOP CREDIT 48548 REFERS TO STEVENSON LINE OCEAN FREIGHT CREDIT.

From this review of the parties' course of conduct concerning the Arizona and Southwall flour, it is apparent that the District Judge was entitled to draw a number of inferences. First, viewing Bolivia's September 25 telex in light of the "not responsible" reply it elicited from ADM, and considering the other informal communications, it may be inferred that the telex made ADM aware: (i) of Bolivia's dissatisfaction with the flour containing live infestation and (ii) of Bolivia's position that the infestation breached the flour contracts. See Eastern Air Lines, supra, 532 F.2d at 979 (letters complaining of delays could be inferred by jury to constitute adequate notice). The telex certainly can be inferred to have encouraged compromise, even though ADM steadfastly refused to settle. But while the September 25 telex is significant, it alone cannot constitute adequate notice. Section 2-607(3)(a) is most sensibly read to require notification after acceptance, while the telex was sent before Bolivia accepted the flour in Arica. Furthermore,

Cf. Standard Alliance Industries, Inc. v. Black Clawson Co., supra (notice of one breach insufficient as notice of a subsequent breach); Davis v. Vintage Enterprises, Inc., 23 N.C. App. 581, 209 S.E.2d 824 (1974).

[e]ven though adequate notice may have been given at one point in the transaction, subsequent actions by the buyer may have dissipated its effect. The buyer's conduct, then, taken as a whole, must constitute timely notification that the transaction is claimed to involve a breach.

Id. at 978 (footnote omitted).

We find four aspects of the record which indicate that Bolivia gave proper notice after accepting the flour in Arica: (i) the fact that, as stated above, communications concerning the flour problems were ongoing; (ii) prior communications, including the September 25 telex, indicated Bolivia's staunch position with respect to live infestation; (iii) Bolivia's action in refusing to allow the flour to be discharged in Arica, an action consistent with a position that the contract had been breached; and (iv) Bolivia's October 24, 1974, telex stopping further letter of credit payments and asserting that the flour was contaminated when it left ADM's hands. From these facts and inferences, the District Judge was entitled to conclude that Eastern Air Lines' first policy of encouraging compromise was fulfilled, since ADM had full knowledge that the flour was infested and that Bolivia regarded live infestation as a breach of contract.

Similarly, the second policy of encouraging commercial good faith is fulfilled under the facts and permissible inferences of this case. Bolivia acted in good faith. There was nothing about its conduct that was unreasonable with respect to ADM, although the same may perhaps not be said with respect to Stevenson and the detention of the ships in Arica. For example, Bolivia complained to ADM in Mobile and again after the flour reached South America and was found "reinfested." Unlike the buyer in Eastern Air Lines, Bolivia did not try to continue its relationship with ADM; to the contrary, it rejected the Nedon flour and stopped payments under the letter of credit. Bolivia never gave ADM any assurances that ADM would not be liable. In contrast, ADM acted less reasonably. For example, the speed with which ADM declared that it had delivered uninfested flour suggests a lack of actual investigation into the condition of its deliveries. That ADM made its declaration recklessly and possibly with knowledge different from that it represented is moreover suggested by its immediate fumigation of the warehouse flour (although ADM now claims that it took that step solely to promote good customer relations).

We therefore have a situation converse to that in Eastern Air Lines. In the instant case, there is a factfinding, not a directed verdict, of adequate notice based on all the evidence. The notice encouraged compromise, notwithstanding ADM's adamant refusal to even consider doing so. And the buyer acted in commercial good faith in contrast to the seller's questionable conduct — as compared to the reverse situation in Eastern Air Lines. We cannot say that the District Judge was wrong in finding that Bolivia gave adequate notice of breach to ADM under § 2-607(3)(a). Bolivia's claim for damages for the Arizona and Southwall flour is therefore not barred under the UCC's notice requirement.

(ii) The Contractual Notice Provision

The remaining aspect of the notice of breach issue is the contract provision requiring written notice to be sent within 10 days by registered mail and the forwarding of a sample of the nonconforming flour within 20 days. From our discussion of notice under § 2-607(3)(a), it is clear that Bolivia met only the ten-day time period requirement. What Bolivia clearly did not do was

give notice by registered mail specifying the nature of the complaint. Moreover, the Ministry forwarded no sample of the non-conforming cargo as required in its contract with ADM.

449 F. Supp. at 128 (emphasis supplied). Since the contract states that the failure to comply with these two requirements bars recovery, we must decide whether the District Judge's refusal to enforce the words of the contract was proper.

"[P]arties may by agreement determine the standards by which the performance of [the Code's] obligations is to be measured if such standards are not manifestly unreasonable." UCC § 1-102(3). Clearly, the contracts' additional notice requirements fall within this provision.

See also UCC § 1-204(1) (specifically providing that a reasonable time may be fixed by agreement; the time provision of the instant contract is not specifically at issue here, however).

It was not argued below that the registered mail and sample requirements were manifestly unreasonable when judged from the time of the contracts' formation. Nor, judged from the time of contracting, do we perceive those requirements to be manifestly unreasonable. But neither do we believe that the District Judge's holding was based upon § 1-102(3)'s manifestly unreasonable test.

Although the District Judge's refusal to give effect to the additional notice requirements is not extensively explained, we believe his refusal was based upon permissible equitable grounds, specifically those included in the Code's waiver provisions. The combination of §§ 2-208(3) and 2-209(4) establishes that the parties' course of performance after execution of the contract can operate as a waiver of specific contractual provisions. The reason for the Code's waiver provisions is well-stated by R. Nordstrom, supra, § 50, at 151 (emphasis supplied):

UCC § 1-103; Summers, General Equitable Principles Under Section 1-103 of the Uniform Commercial Code, 72 Nw.U.L.Rev. 906 (1978).



Subject to the provisions of the next section on modification and waiver, such course of performance shall be relevant to show a waiver or modification of any term inconsistent with such course of performance.



Although an attempt at modification or rescission does not satisfy the requirements of Subsection (b) or (c) it can operate as a waiver.

The Code rejects the notion that just because the parties have entered into a "contract" something magical has occurred which prevents any change of that con