Sales Contracts
The Uniform Commercial Code
Formation of Sales Contracts
Ownership and Risk
Warranties Product Liability
Performance and Remedies
Class 4
Purposes of the UCC
To simplify, clarify and modernize the law
governing commercial transactions;
To permit the continued expansion of
commercial practices through custom,
usage and agreement of the parties;
To make uniform the laws among the
various jurisdictions.
UCC Article 2 - Sales
Governs contracts for the sale of goods.
§2-201 says the UCC
– Preempts common law
– The contract generally governs
– If it is not in the contract, apply the UCC
– If the UCC is silent, common law governs
Scope of Article 2
Applies only to the sale of goods.
– What is a sale?
– What are goods.
Merchants
The UCC 2 creates two sets of rules
– One for “merchants”
– One for other buyers and sellers
Good Faith
The UCC imposes a duty of good faith in
the performance of all contracts.
– For merchants this means honesty in fact and
the exercise of reasonable commercial
standards of fair dealing.
In addition to good faith, the UCC employs
a second principle – unconscionability –
to encourage fair play and just results.
Contract Formation
UCC is more flexible than common law.
– Allows for open pricing, payment, and delivery
terms
– The parties may make a contract in any
manner sufficient to show agreement.
The Offer
Definiteness is not required
– One or more terms may be left open.
– This “indefiniteness” is OK as long as the
parties intended to make a contract and there
is a reasonable basis for a court to grant a
remedy.
Acceptance
Any reasonable means of communicating
acceptance is permissible.
Consideration
Article 2 requires consideration for a
contract to be valid
– Modifications do not require consideration if
they are made in good faith (must be in
writing if required by Statute of Frauds)
Statute of Frauds
Sale of goods over $500 must be signed
by the party to be charged (defendant) and
be in writing to be enforceable.
Exceptions to this rule:
– Specially manufactured goods.
– Admissions by breaching party.
– Partial performance.
– Merchant doesn’t object within 10 days.
International Sales
United Nations Convention on Contracts
for the Sale of Goods (CISG) governs
contracts for the sale of goods where the
buyer and seller are from different
countries
Primary differences in CISG
– Mirror image rule applies
– No Statute of Frauds
– Necessity of a Price Term
Who Owns What When?
A legal interest in goods is a right to
possess and use those goods
Ownership or title also determines who
suffers the loss of goods
Passage of Title
Title may pass in any manner the parties
agree upon
The parties can decide if title passes when
the goods leave the manufacturer’s
factory, or when they reach the shipper
who will deliver them
Existence & Identification
For any interest (or title) to pass to the
buyer, the goods must be:
– In existence.
– Identified as the specific goods referred to in
the contract.
Sales by Non-Owners
If a non-owner sells the goods to a third
party, the risk of loss depends on whether
the non-owner had
– Void Title: true owner gets goods back or
– Voidable Title: good faith (bona fide)
purchaser keeps goods.
Bona Fide Purchaser
A person with voidable title has power to
transfer valid title for value to a good-faith
purchaser (a bona fide purchaser or BFP)
Transfer of Void Title
Owner 
Bad Guy
 Buyer
Owner has good title
Bad guy steals goods (void interest – no
title)
Buyer pays value, good faith (acquires a
void title – nothing)
– Owner will get the goods back
Transfer of Voidable Title
Owner 
Bad Guy
 Buyer
Owner has good title
Bad guy uses fraud to purchase goods
(Voidable title)
Buyer pays value and acts in good faith
(receives good title)
– Buyer gets to keep the goods
Entrustment
If an owner voluntarily leaves goods with a
merchant and the merchant wrongfully
sells the goods to a BFP in the ordinary
course of business, title passes to the BFP
– This is so even though the merchant did not
have title based on “purchase.”
Creditor’s Rights
The Seller’s creditors –
– The UCC generally permits a buyer in the
ordinary course of business to take goods
free and clear of any security interest a
creditor has in the goods
The Buyer’s creditors –
– The UCC generally protects goods from the
buyer’s creditors until the buyer accepts the
goods (and acquires an ownership interest)
Risk of Loss
Parties may allocate risk of loss any way
they wish
If the parties fail to specify when the risk
passes from seller to buyer, the UCC
provides the answer
When making the agreement, the parties
may allocate the risk by using common
shipping terms defined by the UCC
Common Shipping Terms
FOB Place of Shipment
FOB Place of Destination
FAS a Named Vessel
CIF
C&F
UCC Warranties
A warranty is a contractual assurance
that goods will meet certain standards.
– Warranty of title
– Express warranty
– Implied warranty of merchantability
– Implied warranty of fitness for a particular
purpose
– Implied warranty arising from the course of
dealing or trade usage
Warranty of Title
Seller promises (warrants)
– Good title
– No liens
– No infringements
Disclaimer: Warranty of title can generally
be disclaimed only with specific language
in contract
Express Warranties
A warranty that the seller creates with his
words or actions
– The words or actions must be part of the
“basis of the bargain”
– The buyer must rely on warranty when he
enters into the contract.
– Does not include “puffing”
Implied Warranties
These are warranties created by the UCC,
itself, not by any act or statement of the
seller
Implied Warranties
Implied warranty of merchantability is in
every contract for sale of goods
– Unless specifically excluded or modified
If the seller is a merchant with respect to
the kind of goods sold
UCC § 2-314
Implied Warranties
Implied warranty of fitness for a particular
purpose arises when seller
– Knows the particular purpose for which the
goods are being bought and
– Knows the buyer is relying on seller’s skill and
judgment to select suitable goods.
Disclaimers
This is a statement that a particular
warranty does not apply
– Express Warranties can be disclaimed with a
clear written disclaimer with specific,
unambiguous language and called to the
buyer’s attention (i.e., BOLD CAPS
UNDERLINED).
– Implied Warranties can be disclaimed:
Merchantability - “As Is,” “With All Faults.”
Fitness - in writing and conspicuous.
Other Remedies
Remedies in tort or statutes protecting
consumers of goods
– Federal and state laws regulating advertising
(consumer protection laws)
– Negligence claims
– Lemon laws
– Product liability
– Strict liability
Performance and Breach
The terms of the contract are what the
parties have agreed to. The parties’
“duties and obligations” are
– Those specified in the agreement
– Those reflected by custom
– Those required by the UCC Art. 2
Performance Obligations
Good Faith is the foundation of every UCC
commercial contract.
Good faith means honesty in fact.
For a merchant, it means honesty in fact
and observance of reasonable commercial
standards of fair dealing in the trade.
– Merchants are held to a higher standard of
care than non-merchants.
Seller’s Obligations
Seller’s primary duty is to “tender” delivery
of “conforming goods.”
Tender means “delivery” to agreed place:
– With reasonable notice
– At a reasonable hour
– In a reasonable manner
– Exactly, unless otherwise agreed.
Perfect Tender Rule
If goods, or tender of delivery, fail in any
respect to conform to the contract, the
buyer can:
– Accept the goods
– Reject the entire shipment or
– Accept part and reject part.
Exceptions to the Rule
Agreement of the parties
Cure
Substitution of carriers
Installment contracts
Commercial impracticality
Partial performance
Destruction of identified goods
Assurance and cooperation
Buyer’s Obligations
The buyer’s primary obligation is to accept
conforming goods and pay for them.
– Generally has the right to inspect the goods
before paying.
The buyer must also provide adequate
facilities to receive the goods.
Breach by Seller
Generally breaching party bears the risk of
loss.
Seller’s breach (i.e., delivery of
nonconforming or defective goods):
– Buyer can reject the goods – risk stays with
seller until defect is cured or buyer accepts
– Buyer can revoke acceptance of goods if
defect is not discovered at time of delivery –
risk passes back to seller to the extent that
buyer’s insurance does not cover the loss
Breach by Buyer
If the buyer breaches, the risk immediately
passes to buyer, however
– Goods must have been identified
– Risk passes to buyer after seller learns of the
breach
– Risk passes only to the extent that seller’s
insurance does not cover loss
Remedies
Two remedies are available to both the
buyer and seller. They are:
– Assurance: A party may demand written
assurance of performance from the other party
and may suspend his own performance until
the assurance is received
– Repudiation: If either party repudiates the
contract, the other may suspend performance
and await performance for a reasonable time,
or immediately pursue any remedy for breach.
Seller’s Remedies
If a buyer breaches the contract, the
seller’s remedy will depend on who has
the goods and what steps the seller took
after the buyer breached. May:
– Stop delivery of the goods
– Resell and recover damages
– Obtain damages for nonacceptance or
– Obtain the contract price
The seller can always cancel the contract.
Buyer’s Remedies
When a seller fails to deliver goods or if the
buyer rightfully rejects the goods, the buyer
is entitled to cancel the contract
If he has accepted non-conforming goods,
buyer may:
– Sue for breach of warranty
– Sue for ordinary damages
– Deduct damages (including consequential
damages) from purchase price
Limitations
Parties can elect or limit UCC remedies in
the contract.
Contracts can exclude or include
consequential damages that are not
unconscionable.
Statute of limitations is four years after
breach of contract.
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Sales and Lease Contracts - University of Washington