Business Law Chapter 16

Merchantable

-Be able to pass without objection in the trade or market for similar goods. -In the case of fungible goods, be of fair average quality within the description. -Be fit for the ordinary purposes for which such goods are used. -Be produced, within the variations permitted by the agreement, with even kind, quality, and quantity in each unit and among all units involved. -Be adequately contained, packaged, and labeled as the agreement may require. -Conform to the promises or affirmations made on the container or label, if any.

Problems on Acceptance

-When all goes well, UCC Sections 2-606(1) and 2A-515(1)(a) indicate that the buyer or lessee, after inspecting, signifies agreement to the seller or lessor that the goods are either (1) conforming or (2) acceptable even though they are nonconforming. UCC 2-602(1), 2-606(1), and 2A-515(1)(b) allow the seller or lessor to presume acceptance if the buyer or lessee fails to reject the goods within a reasonable period of time. UCC 2-601(c) and 2A-509(1) allow the buyer or lessee to make a partial acceptance when the goods are nonconforming and the seller or lessor has failed to cure the defects. -When goods are nonconforming, the buyer or lessee is allowed to revoke or withdraw acceptance of the goods. The previous section on specific obligations of sellers/lessors discussed this concept under the topic of substantial impairment. From the buyer's/lessee's perspective, the buyer or lessee may revoke acceptance if the nonconformity substantially impairs the value of the goods, but only if he or she had a legitimate reason for the initial acceptance.

Cure

A breaching party's right to provide conforming goods when nonconforming goods were initially delivered; subject to a reasonable time test

Warranty Disclaimer 3

A buyer may also waive her warranty rights under the contract by failing to comply with the statute of limitations. Under the UCC, the buyer or seller must bring a lawsuit on a breached contract within four years of when the breach occurred or when the nonbreaching party became aware of it. The buyer and seller are free to negotiate contractually a shorter time period (as long as it is not less than one year), but they are not free to negotiate a longer time period than the four years.

Cover

A buyer's right to substitute goods for those due under a sales or lease agreement when the seller provides nonconforming goods.

Substantial Impairment

A concept, used to modify the perfect tender rule, whereby a buyer can revoke acceptance of goods and, with installment contracts, a buyer/lessee can reject an installment of a particular item only if the defects substantially impair the value of the goods. Two sections of the UCC use the concept of substantial impairment to modify the perfect tender rule. The first applies when a buyer revokes acceptance of goods. UCC Section 2-608 indicates that a buyer who has accepted goods may later revoke the acceptance only if the buyer can show that the defects substantially impair the value of the goods. The second applies when the buyer and seller have entered into an installment contract. UCC 2-612(2) and 2A-510(1) indicate that a buyer/lessee may reject an installment of a particular item only if the defects substantially impair the value of the goods and cannot be cured.

Magnusen Moss Act

Although the UCC remains the primary codification of both state and federal laws regarding sellers' warranties, there has also been specific legislation pertaining to this issue. The 1975 federal law known as the Magnuson-Moss Act requires that if a seller decides to issue a written warranty for a consumer good (the seller is not required to do so), the seller must indicate whether that warranty is a full warranty or a limited warranty. This applies to any consumer good sold for more than $10. If the written warranty is silent, it is presumed to be a full warranty, which means that if the good fails or is defective, the good or its defective part will be replaced. If replacement cannot be timely effected, the buyer has the right to a refund or a full replacement. If the good is sold for more than $15, the written warranty must disclose a number of items of information—names and addresses of the warrantors, any limitations on the warranty, and the procedures required to activate the warranty remedies—all in readable and easily understood language, in other words, not in legalese.

Warranties

An assurance, either express or implied, by one party that the other party can rely on its representations of fact; in sales, a binding promise regarding a product in the event that the product does not meet the manufacturer's or seller's promises.

Warranty of Title

An assurance, inferred in every UCC sales transaction, that the seller has good and valid title to the goods and has the right to transfer the title free and clear of any liens, judgments, or infringements of intellectual property rights of which the buyer does not have knowledge.

Implied Warranty of Merchantability

An assurance, inferred in every sale unless clearly disclaimed, that merchantable goods will conform to a reasonable performance expectation. The purchaser must have purchased or leased the good from a merchant.

Implied Warranty of Trade Usage

An assurance, inferred in the context of certain UCC sales, depending on the circumstances, that can be created through a well-accepted course of dealing or trade usage.

Specific Performance

An order of a court which requires a party to perform a specific act, usually what is stated in a contract.

Implied Warranty of Fitness for a Particular Purpose

Another important UCC implied warranty is the implied warranty of fitness for a particular purpose. This warranty comes about when a seller or lessor knows or has reason to know (1) why the buyer or lessee is purchasing or leasing the goods in question and (2) that the buyer or lessee is relying on him or her to make the selection. Under this warranty, a seller or lessor does not have to be a merchant. An implied warranty of fitness for a particular purpose should not be confused with an express warranty. If the buyer walks into a store and the salesclerk says, "This saw will cut through metal," the seller has created an express warranty. However, if the buyer comes into the store and asks the salesclerk for a saw to cut through some copper tubing and the salesclerk refers the customer to a wall of different saws, it is reasonable for the buyer to assume that all the saws on the wall will satisfy the particular purpose that the buyer has indicated. Thus, an implied warranty of fitness for a particular purpose has been created.

Express Warranty

Any description of a good's physical nature or its use, either in general or specific circumstances, that becomes part of a contract.

Usage of Trade

Any practice that members of an industry expect to be part of their dealings.

Liquidated Damages

Damages specified as a term of the contract, before a breach of contract occurs.

Conforming Goods

Goods that conform to contract specifications.

Good Faith

Honesty in fact

Avoidance

However, Article 49(1) of the CISG allows avoidance (the term used for the buyer's refusal to accept nonconforming goods) only if there is substantial and foreseeable nonconformity of the goods.

Problems on Inspection

If all goes well in a transaction over the sale or lease of goods, the buyer or lessee inspects the goods and then pays by any means the parties have agreed on, including payment by cash, check, or credit card. Unless the parties have agreed otherwise, the buyer or lessee typically inspects the goods before paying. Under UCC Sections 2-513(1) and 2A-515(1), the seller or lessor must provide an opportunity for inspection before enforcing payment.

Sue to Get the Benefit of the Bargain

In trying to give the seller or lessor the benefit of the bargain, and nothing more, courts often grant damages to recover the purchase price or lease payments due.

Contract Remedies

Of course, laying out these various contractual obligations gives rise to the question of what remedies are available if those obligations are breached. The obligations of sellers/lessors and buyers/lessees are determined by (1) terms the parties outline in agreements, (2) custom, and (3) rules outlined by the Uniform Commercial Code, such as the various implied warranties described previously.

Course of Dealing

Previous commercial transactions between the same parties

Commercial Reasonableness

Reasonable commercial standards of fair dealing, required of merchants in addition to honesty in fact.

Perfect Tender Rule

Requirement that the seller deliver the goods in conformity with the contract, down to the last detail. UCC Sections 2-601 and 2A-509 embrace the perfect tender rule. These sections indicate that if goods or tender of delivery fails in any respect to conform to the contract, the buyer/lessee has the right to accept the goods, reject the entire shipment, or accept part and reject part. Common law usually substitutes perfect tender with the doctrine of substantial performance.

Tender of Delivery

Requirement that the seller or lessor have and hold conforming goods at the disposal of the buyer or lessee and give the buyer or lessee reasonable notification to enable him or her to take delivery

Resell or Dispose of the Goods

Sellers or lessors are also allowed to resell or dispose of the goods when the buyer is in breach and the goods have not yet been delivered. The seller or lessor then holds the buyer or lessee liable for any loss. UCC Section 2-706 allows the seller to recover the difference between the resale price and the contract price, plus incidental damages and minus expenses saved. Although buyers are liable for these damages, the seller gets to keep any profits it makes on the resale. UCC 2A-527(2) outlines a similar rule for lease agreements. The lessor is allowed to lease the goods to another party and recover unpaid lease payments and any deficiency between the lease payments due under the original lease contract and those due under the new contract. The lessor can also seek incidental damages

Withold Delivery

Sometimes a buyer breaches the contract or lease before the seller has delivered the goods. For instance, the buyer or lessee might fail to pay according to the terms of the agreement. UCC Sections 2-703(a) and 2A-523(1)(c) allow sellers or lessors to withhold delivery of goods when the buyer or lessee is in breach.

Exceptions Outlined in the Parties' Agreement

Sometimes, language in the parties' agreement limits the rigidity of the perfect tender rule.

Cancel the Contract (buyer)

Sometimes, sellers or lessors fail to deliver the goods or to deliver conforming goods and thus are in breach. UCC Sections 2-711(1) and 2A-508(1)(a) allow buyers and lessees to cancel the contract and then seek remedies that give them the benefit of the bargain.

Consequential Damages

Special damages that compensate for a loss that is not direct or immediate (for example, lost profits). The special damages must have been reasonably foreseeable at the time the breach or injury occurred in order for the plaintiff to collect them.

Warranty Disclaimer 2

The buyer may also waive both implied and express warranties. A buyer may waive these rights by (1) failing to examine goods for which an express warranty was created by a sample or model or (2) failing to comply with the seller's request to inspect the goods. Suppose, for example, that a printer asks the buyer to come into the shop to proof letterhead and envelopes. The buyer refuses, claiming that he is too busy, and tells the printer to go ahead and run the stationery. On receipt of the stationery, the buyer discovers that the numbers in the phone number are transposed, making the stationery useless. Unfortunately, the buyer has indeed waived his rights due to his failure to inspect.

Course of Performance

The history of previous conduct of the parties regarding the contract in question.

Recover the Goods

The parties are free to negotiate, as part of the contract, a liquidated-damage clause in which the parties agree in advance what the damages will be for each party if a breach occurs. Generally speaking, a court will enforce a liquidated-damage clause as long as it is not so far out of reasonable range as to be punitive in nature. Liquidated-damage clauses that are deemed punitive in nature are not enforceable. UCC Section 2-718 pertains to liquidated damages and allows the nonbreaching seller to claim against a breaching buyer 20 percent of the purchase price or $500, whichever is less, as liquidated damages.

Third Party Beneficiaries of Warranties

The states are given the following three choices regarding third-party beneficiaries of warranties: -Seller's warranties extend to the buyer's household members and guests. -Seller's warranties extend to any reasonable and foreseeable user. -Seller's warranties extend to anyone injured by the good. Most states have adopted the second option.

Warranty Disclaimer 1

To avoid potential liability, a seller of corn for feed, for example, might decide to include in any sales contract for feed corn a clause that states, "No guarantees are made, either expressly or implied, that this feed corn has not been contaminated by mold or the toxin Fumonisin. Buyer is advised to test the corn to determine the presence of these potential contaminants." Of course, such a disclaimer might certainly have a negative impact on the sales of one's product.

Reject Nonconforming Goods

UCC Sections 2-601 and 2A-519 allow the buyer or lessee to reject nonconforming goods. The buyer or lessee may then obtain cover or cancel the contract.

Revoke Nonconforming Goods

UCC Sections 2-608 and 2A-517 sometimes allow the buyer or lessee to revoke acceptance of nonconforming goods.

Commercial Impracticability

UCC Sections 2-615(a) and 2A-405(a) state that a delay in delivery or nondelivery, in whole or in part, is not a breach in circumstances in which performance has been made impracticable because a contingency has occurred that was not contemplated when the parties reached an agreement.

Cancel the Contract

UCC Sections 2-703(f) and 2A-523(1)(a) allow a seller or lessor to cancel the contract if the buyer or lessee is in breach. The UCC requires sellers/lessors to notify buyers/lessees of the cancellation. Then the seller or lessor pursues remedies available under the UCC. Remember, these remedies give the seller/lessor the benefit of the bargain and no more.

Stop Delivery

UCC Sections 2-705(1) and 2A-526(1) allow a seller or lessor to stop delivery of goods that are in transit. In transit means that the seller or lessor has delivered the goods to a carrier or bailee but the carrier or bailee has not yet turned them over to the buyer. Of course, the seller/lessor must give timely notice to the carrier/bailee so that the carrier/bailee is able to stop delivery. Also, the rules are different for insolvent and solvent buyers and lessees. If the buyer/lessee is insolvent, the carrier/bailee can stop delivery regardless of the quantity shipped. If the buyer/ lessee is solvent, however, the carrier/bailee can stop delivery only if the quantity shipped is a large shipment (e.g., a carload or truckload).

Accept the Nonconforming Goods and Seek Damages

Under UCC Sections 2-607, 2-715, and 2A-519, buyers or lessees are allowed to accept nonconforming goods and then seek monetary damages to give them the benefit of the bargain. The buyer or lessee must give the seller or lessor reasonable notice of the defect.

Destroyed Goods

Under UCC Sections 2-613 and 2A-221, if goods are identified at the time the parties entered into a contract and the goods are destroyed through no fault of the parties before risk passes to the buyer or lessee, the parties are excused from performance. If the goods are only partially destroyed, the buyer can inspect the goods and decide whether to (1) treat the contract as void or (2) ask the seller for a reduction of the contract price and then accept the damaged goods.

Reclaim the Goods

Under UCC Sections 2-709(1) and 2A-529(1), if the buyer or lessee has possession of the goods and is in breach, the seller or lessor can sue for the purchase price of the goods or for the lease payments due, plus incidental damages. In some circumstances, the UCC allows the seller or lessee to reclaim the goods. UCC 2-702(2) allows a seller to reclaim goods when the seller discovers the buyer is insolvent. UCC 2A-525(2) allows a lessor to reclaim goods when the lessee fails to make payments according to the lease terms.