Sales ContractsSales Contracts The Uniform Commercial CodeThe Uniform Commercial Code Formation of Sales ContractsFormation of Sales Contracts Ownership and RiskOwnership and Risk Warranties Product LiabilityWarranties Product Liability Performance and RemediesPerformance and Remedies

Class 4

Purposes of the UCCPurposes of the UCCTo simplify, clarify and modernize the law To simplify, clarify and modernize the law governing commercial transactions;governing commercial transactions;

To permit the continued expansion of To permit the continued expansion of commercial practices through custom, commercial practices through custom, usage and agreement of the parties;usage and agreement of the parties;

To make uniform the laws among the To make uniform the laws among the various jurisdictions.various jurisdictions.

UCC Article 2 - SalesUCC Article 2 - SalesGoverns contracts for the sale of goods.Governs contracts for the sale of goods.

§2-201 says the UCC§2-201 says the UCC– Preempts common lawPreempts common law– The contract generally governsThe contract generally governs– If it is not in the contract, apply the UCCIf it is not in the contract, apply the UCC– If the UCC is silent, common law governsIf the UCC is silent, common law governs

Scope of Article 2Scope of Article 2Applies only to the sale of goods.Applies only to the sale of goods.– What is a sale?What is a sale?– What are goods.What are goods.

MerchantsMerchants

The UCC 2 creates two sets of rulesThe UCC 2 creates two sets of rules– One for “merchants”One for “merchants”– One for other buyers and sellersOne for other buyers and sellers

Good FaithGood FaithThe UCC imposes a duty of good faith in The UCC imposes a duty of good faith in the performance of all contracts.the performance of all contracts.– For merchants this means honesty in fact For merchants this means honesty in fact and and

the exercise of reasonable commercial the exercise of reasonable commercial standards of fair dealing.standards of fair dealing.

In addition to good faith, the UCC employs In addition to good faith, the UCC employs a second principle – unconscionability – a second principle – unconscionability – to encourage fair play and just results.to encourage fair play and just results.

Contract FormationContract FormationUCC is more flexible than common law.UCC is more flexible than common law.– Allows for open pricing, payment, and delivery Allows for open pricing, payment, and delivery

termsterms– The parties may make a contract in any The parties may make a contract in any

manner sufficient to show agreement.manner sufficient to show agreement.

The OfferThe OfferDefiniteness is not requiredDefiniteness is not required– One or more terms may be left open.One or more terms may be left open.– This “indefiniteness” is OK as long as the This “indefiniteness” is OK as long as the

parties parties intendedintended to make a contract and there to make a contract and there is a reasonable basis for a court to grant a is a reasonable basis for a court to grant a remedy.remedy.

AcceptanceAcceptance

Any reasonable means of communicating Any reasonable means of communicating acceptance is permissible.acceptance is permissible.

ConsiderationConsideration

Article 2 requires consideration for a Article 2 requires consideration for a contract to be validcontract to be valid– Modifications do not require consideration if Modifications do not require consideration if

they are made in good faith (must be in they are made in good faith (must be in writing if required by Statute of Frauds)writing if required by Statute of Frauds)

Statute of FraudsStatute of FraudsSale of goods over $500 must be signed Sale of goods over $500 must be signed by the party to be charged (defendant) and by the party to be charged (defendant) and be in writing to be enforceable.be in writing to be enforceable.

Exceptions to this rule:Exceptions to this rule:– Specially manufactured goods.Specially manufactured goods.– Admissions by breaching party.Admissions by breaching party.– Partial performance.Partial performance.– Merchant doesn’t object within 10 days. Merchant doesn’t object within 10 days.

International SalesInternational SalesUnited Nations Convention on Contracts United Nations Convention on Contracts for the Sale of Goods (CISG) governs for the Sale of Goods (CISG) governs contracts for the sale of goods where the contracts for the sale of goods where the buyer and seller are from different buyer and seller are from different countriescountries

Primary differences in CISGPrimary differences in CISG– Mirror image rule appliesMirror image rule applies– No Statute of FraudsNo Statute of Frauds– Necessity of a Price TermNecessity of a Price Term

Who Owns What When?Who Owns What When?

A legal interest in goods is a right to A legal interest in goods is a right to possess and use those goodspossess and use those goods

Ownership or title also determines who Ownership or title also determines who suffers the loss of goodssuffers the loss of goods

Passage of TitlePassage of TitleTitle may pass in any manner the parties Title may pass in any manner the parties agree uponagree upon

The parties can decide if title passes when The parties can decide if title passes when the goods leave the manufacturer’s the goods leave the manufacturer’s factory, or when they reach the shipper factory, or when they reach the shipper who will deliver themwho will deliver them

Existence & IdentificationExistence & IdentificationFor any interest (or title) to pass to the For any interest (or title) to pass to the buyer, the goods must be:buyer, the goods must be:– In existence.In existence.– Identified as the specific goods referred to in Identified as the specific goods referred to in

the contract.the contract.

Sales by Non-OwnersSales by Non-OwnersIf a non-owner sells the goods to a third If a non-owner sells the goods to a third party, the risk of loss depends on whether party, the risk of loss depends on whether the non-owner had the non-owner had – Void TitleVoid Title: true owner gets goods back or: true owner gets goods back or– Voidable TitleVoidable Title: good faith (bona fide) : good faith (bona fide)

purchaser keeps goods. purchaser keeps goods.

Bona Fide PurchaserBona Fide PurchaserA person with voidable title has power to A person with voidable title has power to transfer valid title for value to a good-faith transfer valid title for value to a good-faith purchaser (a bona fide purchaser or BFP)purchaser (a bona fide purchaser or BFP)

Transfer of Void TitleTransfer of Void TitleOwnerOwner Bad GuyBad Guy BuyerBuyer

Owner has good titleOwner has good title

Bad guy steals goods (void interest – no Bad guy steals goods (void interest – no title)title)

Buyer pays value, good faith (acquires a Buyer pays value, good faith (acquires a void title – nothing)void title – nothing)

– Owner will get the goods backOwner will get the goods back

Transfer of Voidable TitleTransfer of Voidable Title

OwnerOwner Bad GuyBad Guy BuyerBuyer

Owner has good titleOwner has good titleBad guy uses fraud to purchase goods Bad guy uses fraud to purchase goods (Voidable title)(Voidable title) Buyer pays value and acts in good faith Buyer pays value and acts in good faith (receives good title)(receives good title)

– Buyer gets to keep the goodsBuyer gets to keep the goods

EntrustmentEntrustmentIf an owner If an owner voluntarilyvoluntarily leaves goods with a leaves goods with a merchant and the merchant wrongfully merchant and the merchant wrongfully sells the goods to a BFP in the ordinary sells the goods to a BFP in the ordinary course of business, title passes to the BFPcourse of business, title passes to the BFP– This is so even though the merchant did not This is so even though the merchant did not

have title based on “purchase.” have title based on “purchase.”

Creditor’s RightsCreditor’s RightsThe Seller’s creditors – The Seller’s creditors – – The UCC generally permits a buyer in the The UCC generally permits a buyer in the

ordinary course of business to take goods ordinary course of business to take goods free and clear of any security interest a free and clear of any security interest a creditor has in the goodscreditor has in the goods

The Buyer’s creditors – The Buyer’s creditors – – The UCC generally protects goods from the The UCC generally protects goods from the

buyer’s creditors until the buyer accepts the buyer’s creditors until the buyer accepts the goods (and acquires an ownership interest)goods (and acquires an ownership interest)

Risk of LossRisk of LossParties may allocate risk of loss any way Parties may allocate risk of loss any way they wishthey wish

If the parties fail to specify when the risk If the parties fail to specify when the risk passes from seller to buyer, the UCC passes from seller to buyer, the UCC provides the answerprovides the answer

When making the agreement, the parties When making the agreement, the parties may allocate the risk by using may allocate the risk by using common common shipping termsshipping terms defined by the UCC defined by the UCC

Common Shipping TermsCommon Shipping TermsFOB Place of ShipmentFOB Place of Shipment

FOB Place of Destination FOB Place of Destination

FAS a Named VesselFAS a Named Vessel

CIFCIF

C&FC&F

UCC Warranties UCC Warranties A warranty is a contractual assurance A warranty is a contractual assurance that goods will meet certain standards. that goods will meet certain standards. – Warranty of titleWarranty of title– Express warrantyExpress warranty– Implied warranty of merchantabilityImplied warranty of merchantability– Implied warranty of fitness for a particular Implied warranty of fitness for a particular

purposepurpose– Implied warranty arising from the course of Implied warranty arising from the course of

dealing or trade usagedealing or trade usage

Warranty of TitleWarranty of TitleSeller promises (warrants)Seller promises (warrants)

– Good titleGood title

– No liensNo liens

– No infringementsNo infringements

Disclaimer:Disclaimer: Warranty of title can generally Warranty of title can generally be disclaimed only with specific language be disclaimed only with specific language in contractin contract

Express WarrantiesExpress WarrantiesA warranty that the A warranty that the seller createsseller creates with his with his words or actionswords or actions– The words or actions must be part of the The words or actions must be part of the

“basis of the bargain”“basis of the bargain”– The buyer must rely on warranty when he The buyer must rely on warranty when he

enters into the contract.enters into the contract.– Does not include “puffing”Does not include “puffing”

Implied WarrantiesImplied WarrantiesThese are warranties created by the UCC, These are warranties created by the UCC, itself, not by any act or statement of the itself, not by any act or statement of the sellerseller

Implied WarrantiesImplied WarrantiesImplied Implied warranty of merchantabilitywarranty of merchantability is in is in every contract for sale of goods every contract for sale of goods – Unless specifically excluded or modifiedUnless specifically excluded or modified

If If the seller is a merchant with respect to the seller is a merchant with respect to the kind of goods soldthe kind of goods sold

UCC UCC § 2-314 § 2-314

Implied WarrantiesImplied WarrantiesImplied Implied warranty of fitnesswarranty of fitness for a particular for a particular purpose arises when sellerpurpose arises when seller– Knows the particular purpose for which the Knows the particular purpose for which the

goods are being bought goods are being bought andand– Knows the buyer is relying on seller’s skill and Knows the buyer is relying on seller’s skill and

judgment to select suitable goods.judgment to select suitable goods.

DisclaimersDisclaimersThis is a statement that a particular This is a statement that a particular warranty does not applywarranty does not apply– Express WarrantiesExpress Warranties can be disclaimed with a can be disclaimed with a

clear written disclaimer with specific, clear written disclaimer with specific, unambiguous language and called to the unambiguous language and called to the buyer’s attention (i.e., buyer’s attention (i.e., BOLD CAPS BOLD CAPS UNDERLINEDUNDERLINED).).

– Implied WarrantiesImplied Warranties can be disclaimed: can be disclaimed:Merchantability - “As Is,” “With All Faults.”Merchantability - “As Is,” “With All Faults.”

Fitness - in writing and conspicuous.Fitness - in writing and conspicuous.

Other RemediesOther RemediesRemedies in tort or statutes protecting Remedies in tort or statutes protecting consumers of goodsconsumers of goods– Federal and state laws regulating advertising Federal and state laws regulating advertising

(consumer protection laws)(consumer protection laws)– Negligence claimsNegligence claims– Lemon lawsLemon laws– Product liabilityProduct liability– Strict liabilityStrict liability

Performance and BreachPerformance and BreachThe terms of the contract are what the The terms of the contract are what the parties have agreed to. The parties’ parties have agreed to. The parties’ “duties and obligations” are“duties and obligations” are– Those specified in the agreementThose specified in the agreement– Those reflected by customThose reflected by custom– Those required by the UCC Art. 2Those required by the UCC Art. 2

Performance ObligationsPerformance ObligationsGood Faith is the foundation of every UCC Good Faith is the foundation of every UCC commercial contract.commercial contract.

Good faith means honesty in fact.Good faith means honesty in fact.

For a merchant, it means honesty in fact For a merchant, it means honesty in fact and observance of reasonable commercial and observance of reasonable commercial standards of fair dealing in the trade.standards of fair dealing in the trade.– Merchants are held to a higher standard of Merchants are held to a higher standard of

care than non-merchants.care than non-merchants.

Seller’s Obligations Seller’s Obligations Seller’s primary duty is to “tender” delivery Seller’s primary duty is to “tender” delivery of “conforming goods.”of “conforming goods.”

Tender means “delivery” to agreed place:Tender means “delivery” to agreed place:– With reasonable noticeWith reasonable notice– At a reasonable hourAt a reasonable hour– In a reasonable mannerIn a reasonable manner– ExactlyExactly, unless otherwise agreed., unless otherwise agreed.

Perfect Tender RulePerfect Tender RuleIf goods, or tender of delivery, fail in any If goods, or tender of delivery, fail in any respect to conform to the contract, the respect to conform to the contract, the buyer can:buyer can:– Accept the goodsAccept the goods– Reject the entire shipment orReject the entire shipment or– Accept part and reject part.Accept part and reject part.

Exceptions to the RuleExceptions to the RuleAgreement of the partiesAgreement of the partiesCureCureSubstitution of carriersSubstitution of carriersInstallment contractsInstallment contractsCommercial impracticalityCommercial impracticalityPartial performancePartial performanceDestruction of identified goodsDestruction of identified goodsAssurance and cooperationAssurance and cooperation

Buyer’s Obligations Buyer’s Obligations The buyer’s primary obligation is to accept The buyer’s primary obligation is to accept conforming goods and pay for them.conforming goods and pay for them.– Generally has the right to inspect the goods Generally has the right to inspect the goods

before paying.before paying.

The buyer must also provide adequate The buyer must also provide adequate facilities to receive the goods.facilities to receive the goods.

Breach by SellerBreach by SellerGenerally breaching party bears the risk of Generally breaching party bears the risk of loss.loss.Seller’s breach (i.e., delivery of Seller’s breach (i.e., delivery of nonconforming or defective goods):nonconforming or defective goods):– Buyer can reject the goods – risk stays with Buyer can reject the goods – risk stays with

seller until defect is cured or buyer acceptsseller until defect is cured or buyer accepts– Buyer can revoke acceptance of goods if Buyer can revoke acceptance of goods if

defect is not discovered at time of delivery – defect is not discovered at time of delivery – risk passes back to seller to the extent that risk passes back to seller to the extent that buyer’s insurance does not cover the lossbuyer’s insurance does not cover the loss

Breach by BuyerBreach by BuyerIf the buyer breaches, the risk immediately If the buyer breaches, the risk immediately passes to buyer, passes to buyer, howeverhowever – Goods must have been identifiedGoods must have been identified– Risk passes to buyer after seller learns of the Risk passes to buyer after seller learns of the

breachbreach– Risk passes only to the extent that seller’s Risk passes only to the extent that seller’s

insurance does not cover lossinsurance does not cover loss

Remedies Remedies Two remedies are available to Two remedies are available to bothboth the the buyer and seller. They are:buyer and seller. They are:– Assurance:Assurance: A party may demand written A party may demand written

assurance of performance from the other party assurance of performance from the other party and may suspend his own performance until and may suspend his own performance until the assurance is receivedthe assurance is received

– Repudiation: Repudiation: If either party repudiates the If either party repudiates the contract, the other may suspend performance contract, the other may suspend performance and await performance for a reasonable time, and await performance for a reasonable time, or immediately pursue any remedy for breach. or immediately pursue any remedy for breach.

Seller’s RemediesSeller’s RemediesIf a buyer breaches the contract, the If a buyer breaches the contract, the seller’s remedy will depend on who has seller’s remedy will depend on who has the goods and what steps the seller took the goods and what steps the seller took after the buyer breached. May:after the buyer breached. May:– Stop delivery of the goodsStop delivery of the goods– Resell and recover damagesResell and recover damages– Obtain damages for nonacceptance orObtain damages for nonacceptance or– Obtain the contract priceObtain the contract price

The seller can always cancel the contract.The seller can always cancel the contract.

Buyer’s RemediesBuyer’s RemediesWhen a seller fails to deliver goods or if the When a seller fails to deliver goods or if the buyer rightfully rejects the goods, the buyer buyer rightfully rejects the goods, the buyer is entitled to cancel the contractis entitled to cancel the contract

If he has accepted If he has accepted non-conformingnon-conforming goods, goods, buyer may:buyer may:– Sue for breach of warrantySue for breach of warranty– Sue for ordinary damagesSue for ordinary damages– Deduct damages (including consequential Deduct damages (including consequential

damages) from purchase pricedamages) from purchase price

LimitationsLimitationsParties can elect or limit UCC remedies in Parties can elect or limit UCC remedies in the contract.the contract.

Contracts can exclude or include Contracts can exclude or include consequential damages that are not consequential damages that are not unconscionable.unconscionable.

Statute of limitations is Statute of limitations is fourfour years after years after breach of contract.breach of contract.