Business law terms chapter 12

Installment Contract

A contract that requires or authorizes delivery in two or more separate lots to be accepted and paid for separately.

Tender of delivery

A seller's or lessor's act of placing conforming goods at the disposal of the buyer or lessee and providing whatever notification is reasonably necessary to enable the buyer or lessee to take delivery.

Substitution of Carriers

An agreed-on manner of delivery (such as which carrier will be used to transport the goods) may become impracticable or unavailable through no fault of either party. In that situation, if a commercially reasonable substitute is available, this substitute must be used and will constitute sufficient tender to the buyer [UCC 2-614(1)]. The seller or lessor is required to arrange for the substitute carrier and normally is responsible for any additional shipping costs (unless the contract states otherwise).

Right of Assurance

Another exception to the perfect tender doctrine is the UCC's right of assurance. If one party to a contract has "reasonable grounds" to believe that the other party will not perform as contracted, he or she may "demand adequate assurance of due performance" from the other party. The demand must be made in writing or in an electronic record. Until such assurance is received, he or she may "suspend" further performance (such as payments due under the contract) without liability.

Exceptions to the Perfect Tender Rule:

Because of the rigidity of the perfect tender rule, several exceptions to the rule have been created, some of which are discussed here.

Agreement of the Parties

Exceptions to the perfect tender rule may be established by agreement. If the parties have agreed, for instance, that defective goods or parts will not be rejected if the seller or lessor is able to repair or replace them within a reasonable period of time, the perfect tender rule does not apply.

Conforming goods

Goods that conform to contract specifications.

Destination contracts

In a destination contract, the seller agrees to deliver conforming goods to the buyer at a particular destination. The seller must give the buyer appropriate notice about the delivery and hold the goods at the buyer's disposal for a reasonable length of time. The seller must also provide the buyer with any documents of title necessary to enable the buyer to obtain delivery from the carrier [UCC 2-503].

Delivery via carrier

In many instances, circumstances or delivery terms in the contract (such as F.O.B. or F.A.S. terms, which were shown in Exhibit 11-4) make it apparent that the parties intended the goods to be moved by a carrier. In carrier contracts, the seller fulfills the obligation to deliver the goods through either a shipment contract or a destination contract.

Shipment contracts

Recall that a shipment contract requires or authorizes the seller to ship goods by a carrier, rather than to deliver them at a particular destination [UCC 2-319, 2-509(1)(a)]. Under a shipment contract, unless otherwise agreed, the seller must do the following: 1. Put the goods into the hands of the carrier. 2. Make a contract for their transportation that is reasonable according to the nature of the goods and their value. (For instance, certain types of goods require refrigeration in transit.) 3. Obtain and promptly deliver or tender to the buyer any documents necessary to enable the buyer to obtain possession of the goods from the carrier. 4. Promptly notify the buyer that shipment has been made [UCC 2-504].

Destruction of Identified Goods

Sometimes, an unexpected event, such as a fire, totally destroys goods through no fault of either party and before risk passes to the buyer or lessee. In such a situation, if the goods were identified at the time the contract was formed, the parties are excused from performance [UCC 2-613, 2A-221]. If the goods are only partially destroyed, however, the buyer or lessee can inspect them and either treat the contract as void or accept the goods with a reduction of the contract price.

Duty of Cooperation

Sometimes, the performance of one party depends on the cooperation of the other. The UCC provides an exception to the perfect tender doctrine if one party fails to cooperate. When cooperation is not forthcoming, the other party can suspend her or his own performance without liability and hold the uncooperative party in breach or proceed to perform the contract in any reasonable manner [UCC 2-311(3)].

Place of delivery

The UCC provides for the place of delivery under a contract only if the contract does not indicate the place where the buyer or lessee will take possession. If the contract does not indicate where the goods will be delivered, then the place for delivery will be one of the following: 1. The seller's place of business. 2. The seller's residence, if the seller has no business location [UCC 2-308(a)]. 3. The location of the goods, if both parties know at the time of contracting that the goods are located somewhere other than the seller's business [UCC 2-308(b)].

Commercial Impracticability

The doctrine of commercial impracticability does not extend to problems that could have been foreseen, such as an increase in cost resulting from inflation. Commercial impracticability arises only when the parties, at the time the contract was made, had no reason to anticipate that the event would occur.

Obligations of the Buyer or Lessee

The main obligation of the buyer or lessee under a sales or lease contract is to pay for the goods tendered in accordance with the contract. Once the seller or lessor has adequately tendered delivery, the buyer or lessee is obligated to accept the goods and pay for them according to the terms of the contract.

Obligations of the Seller or Lessor

The major obligation of the seller or lessor under a sales or lease contract is to deliver or tender delivery of conforming goods to the buyer or lessee.

Good Faith provision

The obligations of good faith and commercial reasonableness underlie every sales and lease contract. The UCC's good faith provision, which can never be disclaimed, reads as follows: "Every contract or duty within this Act imposes an obligation of good faith in its performance or enforcement" [UCC 1-304]. Good faith means honesty in fact. For a merchant, it means honesty in fact and the observance of reasonable commercial standards of fair dealing in the trade [UCC 2-103(1)(b)]. In other words, merchants are held to a higher standard of performance or duty than are nonmerchants. The principle of good faith applies to both parties to a sales contract and provides a framework for the entire agreement. If a sales contract leaves open some details of performance, for instance, the parties must exercise good faith and commercial reasonableness when later specifying the details.

The Right to Cure

The seller or lessor can attempt to cure a defect when the following are true: 1. A delivery is rejected because the goods were nonconforming. 2. The time for performance has not yet expired. 3. The seller or lessor provides timely notice to the buyer or lessee of the intention to cure. 4. The cure can be made within the contract time for performance. Even if the contract time for performance has expired, the seller or lessor can still cure if he or she had reasonable grounds to believe that the nonconforming tender would be acceptable to the buyer or lessee

Perfect Tender Rule

Under the common law, the seller was obligated to deliver goods that conformed to the terms of the contract in every detail. This was called the perfect tender doctrine. The UCC preserves the perfect tender doctrine by stating that if the goods or tender of delivery fail in any respect to conform to the contract, the buyer or lessee has the right to accept the goods, reject the entire shipment, or accept part and reject part [UCC 2-601, 2A-509].