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Words Matter, Choose Them Wisely

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In the recently decided case of Semi-Materials Co., Ltd. v. MEMC Electronic Materials, Inc., et al., the United States Court of Appeals for the Eighth Circuit reminded us that the words businesses choose when entering into a contract matter, a lot. Between July 2003 and April 2004, Semi-Materials entered into two “International Sales Representation Agreements” with MEMC, wherein it would serve as MEMC’s “exclusive sales representative” in South Korea and China, respectively.  Under the agreements, Semi-Material was “authorized to solicit and promote, but not consummate sales of polysilicon and saline gas (raw materials used to manufacture semiconductor chips and solar cells) in China and South Korea.”  In return, Semi-Materials was paid a commission on the net sales of products purchased from MEMC by the Chinese or South Korean end users.  Specifically: The compensation paid to [Semi-Materials] by [MEMC] will be a percentage of the NET SALES PRICE of PRODUCTS that are purchased from [MEMC] by the user of the PRODUCTS and delivered by [MEMC] to a site within the TERRITORY.  The compensation percentage rates are listed in Appendix A. However, in many of contracts between MEMC and the Chinese and South Korean buyers, products were sold under “ex works” shipping terms, meaning that MEMC only had to place the goods at the buyer’s disposal either at its location, or some other agreed upon location.  Several other contracts involved “free carrier” terms whereby MEMC delivered goods to a carrier chosen by the buyer.  MEMC did not pay Semi-Materials a commission for contracts MEMC entered into with Chinese and South Korean buyers containing the “ex works” or “free carrier” shipping terms. Semi-Materials subsequently brought a breach of contract action against MEMC asserting that it had sold polysilicon and saline gas in China and South Korea with paying commissions to Semi-Materials.  MEMC argued that Semi-Materials was not due commissions for the goods sold under the “ex works” or “free carrier” contracts because those products were not delivered by MEMC to a site in China or South Korea.  Semi-Materials, on the other hand, argued that the delivered by language was intended to mean that it was entitled to a commission whenever a sale between MEMC and a buyer in Chinese or South Korean was consummated.

The lower court agreed with MEMC and entered summary judgment in its favor. On appeal, the circuit court interpreted the agreements between MEMC and Semi-Materials under Texas law (pursuant to the agreed upon choice of law provision in the agreements), and tried “to ascertain the true intent of the parties as expressed in the instrument.”  See, Nat’l Union Fire Ins. Co. v. CBI Indus., Inc. 907 S.W.2d 517, 520 (Tex. 1995).  Ultimately, the court found the language was “subject to two or more reasonable interpretations” (MEMC’s and Semi-Materials’) and, was therefore, “ambiguous.” It remanded the case back to the lower court for trial. It is very likely that one or two additional sentences clarifying whether or not Semi-Materials was entitled to commissions under “ex works” or “free carrier” contracts would have saved the parties a significant portion of their litigation costs and fees.  Especially since there may now be a trial on what the words “delivered by” mean.

 WORDS MATTER

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