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.