Law of Commercial Transactions Midterm
Offer: Revocation
•Offeror withdraws the offer •Communicates the withdrawal •Must be done before acceptance •Public offers require public revocation •Revocations are effective when received
Parol Evidence Rule
•Oral representations or promises made prior to the contract's formation or at the time the contract was created, may not be admitted in court to change the terms. •Exceptions: -To prove fraud, duress, or other lack of assent -To prove an oral condition to performance -To explain ambiguous terms •UCC - allows provisions of K to be explained or supplemented by -Course of dealing, course of performance, usage of trade
Offer: Counteroffer
•Rejection of original offer and new offer by offeree •Material change, additions, deletions are considered counteroffers •Turns the tables - original offeror becomes offeree •"Mirror Image Rule" •Acceptance must match offer exactly
Sales on Approval
•The buyer is taking the goods primarily for personal or household use. •If the goods meet the buyer's expectations, then the buyer will retain the goods and pay the contract price. If not, the buyer has the right to return the goods to the seller. •In general, the seller retains both title and risk of loss during the approval period.
UCC Article 2: "Unless Otherwise Agreed": Open Price Terms
•The parties if they so intend can conclude a contract for sale even though the price is not settled. In such a case the price is a reasonable price at the time for delivery if -nothing is said as to price; or -the price is left to be agreed by the parties and they fail to agree; or •The price is to be fixed in terms of some agreed market or other standard as set or recorded by a third person or agency and it is not so set or recorded.
Course of Dealing
-A "course of dealing" is a sequence of conduct concerning a previous transaction between the parties to a particular transaction that is fairly regarded as establishing a common basis of understanding for interpreting their expressions and other conduct. [§ 1-303(b)].
UCC Article 2: Definiteness
-A contract (K) must have definite terms that are expressed or reasonably inferred: 1. Identity of parties 2. Identification of object or subject matter •Quantity, work to be performed 3. Consideration to be paid 4. Time of payment, delivery, performance
Insurable Interest
-A property interest in sold or leased goods that is sufficiently substantial to permit a party to insure against damage to the goods identified to the sale or lease contract. -Both buyers and sellers can have an insurable interest at the same time.
UCC Article 2: Definition of Goods
"Goods" means all things (including specially manufactured goods) which are movable at the time of identification to the contract for sale other than the money in which the price is to be paid, investment securities, and things in action. - "Goods" also includes the unborn young of animals and growing crops and other identified things attached to realty. [§ 2-105].
Contract Formation: Bilateral
"Promise for a promise" -Offeree need only promise to perform E.g. I promise to pay you $50 if you promise to rake my leaves.
UCC Article 2: Sale of Goods
"Sale" consists in the passing of title from the seller to the buyer for a price. [§2-106(1)].
Contract Formation: Unilateral
"promise for an act" -Offeree must perform E.g. I promise to pay you $50 if you paint my car. -Revocation issue (modern view) -Cannot revoke if substantially performed
Offer: Irrevocable Offers
(Cannot be revoked) •Option contract: Offer open for period of time •Detrimental reliance: Promissory estoppel - offeror barred from revoking an offer •Partial performance
Seller Breach
- If the breach is by the seller, a buyer's duty to mitigate is Cover.
Buyer Breach
- In the context of a breach by the buyer, a seller's duty to mitigate is Resale.
Additional Performance Provisions: Assurances of Performance
- Under UCC 2-610, an anticipatory repudiation is a repudiation of contract obligations before they become due. - However, A/R s must be unequivocal, i.e. clear statements of a parties refusal to perform when performance is due. Often, a party, either by his statements or conduct, equivocates, i.e. gives the other side reason to worry, but doesn't anticipatorily repudiate. - Under 2-609, if a party has reasonable grounds for insecurity because of the other sides statements or conduct, then the insecure party may demand in writing that the other side provide assurances of performance consistent with the K. - If the receiving party doesn't provide those assurances within a reasonable period of time not to exceed 30 days, then the insecure party may treat that failure as a repudiation of the K. ***In both cases, the insecure party has the right to demand assurances of performance. No Assurances = Repudiation.
Usage of Trade
-"Usage of trade" is any practice or method of dealing having such regularity of observance in a place, vocation, or trade as to justify an expectation that it will be observed with respect to the transaction in question. [§ 1-303(c)].
Insurable Interest of the Seller/Lessor
-A seller has an insurable interest in goods as long as she/he retains title to the goods. Even after title passes to a buyer, a seller who has a security interest in the goods still has an insurable interest [UCC 2-501(2)].
Insurable Interest of the Buyer/Lessee
-Allows the buyer or lessee to obtain the necessary insurance coverage for identified goods before the risk of loss has passed [UCC 2-501(1), 2A-218(1)].
Perfect Tender Rule Exceptions: Commercial Impracticability
-Although the common law and the UCC are very reluctant to excuse a party's performance, both will do so, but only under extreme circumstances. 1. UCC 2-615 will excuse a seller's formation if: some event occurs after contract performance that renders the seller's performance impossible or commercially impracticable; 2. The seller could not reasonably have foreseen the event at the time of contract formation. -Something that is going to occur after the formation of the contract and HAS to be unforeseen
Firm Offers
-An offer by a merchant to buy or sell goods in a signed writing, which by its terms gives assurance that it will be held open, is not revocable, for lack of consideration, during the time stated or if no time is stated for reasonable time, but in no event more than three months. [§ 2-205].
UCC: Article 2
-Applies to transactions in goods -Does not apply to security interests and is not intended to impair or repeal any statute regulating sales to consumers, farmers, or other specified classes of buyers. [§2-102] -Does not apply to transactions in real estate, services, patents and copyrights. KEY POINT: ITEMS HAVE TO BE MOVEABLE AND TANGIBLE TO BE CONSIDERED GOODS.
Battle of the Forms
-Between merchants such terms become part of the contract, unless: -The offer expressly limits acceptance to the terms of the offer; -They materially alter it; or -Notification of the objection to them has already been given or is given within a reasonable time after notice of them is received. [§ 2-207(2)]
Why Do We Need Contract Law?
-Ensures promises are kept -Defines excuses society will accept for breaking promises -Defines types of promises that cannot be enforced -Business world could not function without contract law
Perfect Tender Rule Exceptions: Right to Cure
-Even if the buyer has the right to reject a tender, the seller reserves the right to cure (i.e., send a conforming tender with no adverse legal consequences) -if: a) There is still time left under the contract to cure; b) If the seller reasonably believed that the buyer would accept the tender, but the buyer does not.
Good Faith Purchaser
-Good Faith Purchaser: A buyer without knowledge of circumstances that would make an ordinary person inquire about the validity of the seller's title to the goods. -The original owner normally cannot recover goods from a good faith purchaser for value [UCC 2-403(1)].
UCC Article 2: "Unless Otherwise Agreed": Open Payment Terms
-If no payment terms specified, payment is due at the time and place which the buyer is to receive the goods.
UCC Article 2: "Hybrid" Transactions and Goods and Services Rule
-If the "predominant purpose" of the whole transaction was the sale of goods, Article 2 will be applied to the whole (if goods are involved, most courts apply Article 2).
Buyer's Remedies: Market Damages
-If the buyer doesn't cover or tries, but fails to do so, then the buyer has the right to recover damages based on the: Market Price - Contract Price + Incidental/Consequential Damages
Buyer's Remedies: Liquidated Damages
-If the contract explicitly states the buyer's damages in the event of the seller's breach, then that "liquidated damages" provision will apply if the agreed-upon measure reasonably approximates the actual measure of buyer's damages.
Seller's Remedies: Liquidated Damages
-If the contract explicitly states the seller's damages in the event of the buyer's breach, then that "liquidated damages"provision will apply if the agreed-upon measure reasonably approximates the actual measure of seller's damages.
Seller's Remedies: Market Damages
-If the seller cannot resell, or makes reasonable efforts to do so and fails, the seller has the right to recover damages based on the: Contract price - Market price + any incidental damages -Expenses saved in consequences of breach
Elements of a Valid K
-Must have mutual assent 1. Agreement 2. Consideration 3. Contractual Capacity 4. Legality
Express Warranties: Basis of the Bargain
-No need to use formal words; only necessary that the buyer believes the warranty is the basis of the bargain •Sellers needn't use words such as "guarantee" or "warrant" to establish express warranties, but must be sufficiently definite in their assertion to lead a reasonable buyer to believe that the goods will conform to the seller's statements. •Simple opinions ("this car drives really well"; "it's been a great car!") or "puffing of wares" ("the car is in A1 condition!") are not express warranties. •Statements of fact, however, can be. For example, statements like "this car has 8000 actual miles" or "the car hasn't been wrecked" do create express warranties •The key to whether the seller's words or actions create express warranties is whether they become part of the basis of the bargain. •Basis of the bargain doesn't necessarily mean that the buyer must rely on the seller's words or actions but does suggest that a reasonable person would assume that the goods will conform to seller's assertions made or samples or models shown.
Anticipatory Repudiation
-Occurs when a party communicates intention she/he will not perform when performance due. -Suspension of Performance Obligations: Nonbreaching party may suspend performance and treat the AR as material breach and pursue a remedy; or wait a reasonable time. -A Repudiation May Be Retracted: The UCC permits breaching party to "retract" repudiation by any method that clearly indicates their intent. - However, no retraction if the nonbreaching party has materially changed their position.
Parol (Extrinsic) Evidence Rule and Express Warranties
-Of course, express warranties arise only if the buyer can prove them. The Parol Evidence Rule can certainly affect the buyer's ability to prove that the seller made statements or used samples or models to encourage a purchase.
Adequacy of Consideration
-Pre-existing Duty: Promise to do what one already has legal or contractual duty to do •E.g. pay a debt, capture a criminal -Exception: "unforeseen difficulties" -Past Consideration: Promises relating to past events -Moral Consideration: Obligation/gratitude -Nominal Consideration: $1
Seller's Remedies: Action for the K Price
-The Code liberalizes specific performance by making it available to both the seller and buyer. The seller may specifically enforce a K (i.e. bring an action for the K price) in two cases: 1. The obvious: to the extent that the buyer has accepted goods; 2. and if the seller has made reasonable efforts to resell identified goods and fails.
Obligations of the Buyer: Partial Acceptance
-The buyer may accept any commercial unit and reject the rest if she wants to. - A commercial unit means: "such a unit of goods as by commercial usage is a single whole for purposes of sale and division of which materially impairs its character or value on the market or in use." UCC, Sections 2-105 and 2A103(1).
Identified in the Contract
-The parties can agree in their contract on the timing of identification. -If the parties do not so specify, then identification happens at the time of contract if the goods exist at that time and parties designate the goods. [UCC 2-501(1), 2A- 217]. -Otherwise, identification happens when the goods are designated as those destined for the buyer.
Obligations of the Seller/Lessor
-The seller must make timely delivery of conforming goods [UCC 2-301, 2A-516(1)].
Altering Clauses
-Typical clauses that would normally "materially alter" the contract: -Warranty limitations, including merchantability and fitness -Terms deviating from usage of trade -Reservation of Seller to cancel if any invoice is not paid when due -Arbitration clause -Clause requiring complaints be made in a time materially shorter than customary or reasonable
Non-Altering Clauses
-Typical clauses which would not normally "materially alter" the contract: -Slightly enlarging force majeure clause -Clause fixing reasonable time for complaints within customary limits -In case of a purchase for sale to another, providing for inspection by the third party -Interest on overdue invoices -A clause altering remedies within customary trade usage **The idea is to avoid clauses that would result in hardship or surprise to other party if incorporated without knowledge of that party.
Natural Gas Contracts, Title and Risk of Loss:
-Typically, the contract for sale will specify a transfer or delivery point, and title or risk of loss to the gas will transfer from the seller to the buyer at that point. The delivery or transfer point may be the seller's gas production facility, the buyer's reception facility, or the point of entry of exit of a multi-user pipeline. An example follows: - "Seller will deliver Customer's natural gas supply to the transfer point where gas first enters the interstate pipeline. Title to and risk of loss for the gas will transfer from the Seller to the Customer at the transfer point."
Who wrote the Uniform Commercial Code
-Written by The American Law Institute and the National Conference of Commissioners on Uniform State Laws
Why do you go to federal court?
-You go to federal court for: admiralty, federal crimes, bankruptcy, federal statutes, constitutional matters, treaties, or diversity of citizenship.
Why do you go to state court?
-You go to state court for: contracts, torts, state criminal cases, family law, or a federal question.
Express Warranties: Statements that Create Express Warranties
-goods conform to any affirmation of fact or promise that the seller makes to the buyer about the goods -goods conform to any description of them -goods conform to any sample or model of the goods shown to the buyer
Entrusting Goods to a Merchant
1. First, BOCBs cannot always assume they will receive good title when they purchase from a merchant. If the entrustor is a thief or a fence, then the merchant has the power to transfer the rights of a thief, i.e. void or no title. 2. On the other hand, if a person with title entrusts goods to a merchant (willingly transfers possession of goods to a merchant - e.g. takes stereo into dealer for repairs; consigns goods etc.), then the merchant can transfer the entrustor's rights, in this case title, to a BOCB. 3. This entrustment provision attempts to balance interests and is based primarily on the risks assumed by any title holder who entrusts to one who deals in goods like those entrusted. If a merchant rightfully, negligently, or maliciously sells those goods, the BOCB receives title. In such a case, the entruster's only recourse is against the merchant. 4. One additional note: A person cannot be a BOCB if he purchases from a pawnbroker.
Defenses to Enforcement
1. Genuineness of Assent -Mutual agreement to enter a K must be genuine -Can't be induced by mistake, fraud, or duress 2. Form -Must be in the form required by law to be enforceable -Example: Sales of real property must be in writing.
Offer: Termination by Law
1. Lapse of time •Time period expires •No time specified (reasonable time period) 2. Destruction of subject matter 3. Death or incompetence •Does not apply to irrevocable contracts 4. Subsequent illegality
Breach of Warranty
1. Post acceptance, expectation remedy 2. The buyer can recover damages based on the difference between what the goods are worth as warranted and what they're actually worth.
Post-Acceptance Remedy
1. Revocation of acceptance 2. An atypical remedy allowed after a buyer has accepted goods 3. A buyer has a right to reverse the transaction (i.e. give the goods back and get back the purchase price)
UCC Article 1 Purpose
1. To simplify, clarify, and modernize the law governing commercial transactions 2. To permit the continued expansion of commercial practices through custom, usage, and agreement of the parties 3. To make uniform the laws among the various jurisdictions.
Warranty Disclaimers and Limitations of Liability: Statute of limitations:
4 years from breach of contract; for warranty it accrues upon tender of delivery even if unaware of breach at the time and once discover must notify the breaching party of the defect within a reasonable time.
When Title Passes: General Rule
: Without an explicit agreement to the contrary, title passes to the buyer at the time and the place the seller performs by delivering the goods [UCC 2-401(2)].
Definition of Contracts
A contract is a promise the breach of which the law gives a remedy, or the performance of which the law recognizes a duty. (Basically, an agreement that can be enforced in court).
Warranties of Title: No infringements
A merchant-seller warrants that the buyer takes the goods free of infringements from any copyright, trademark, or patent claims. If buyer subsequently sued, buyer must notify seller within a reasonable time and seller can defend suit or can let buyer do so and pay
UCC Article 2: Definition of a merchant
A person who deals in goods of a kind, or by his occupation holds himself out as having knowledge or skill peculiar to the practices or goods involved in the transaction, or to whom such knowledge or skill may be attributed by his employment as an agent or broker or other intermediary who, by his occupation, holds himself out as having such knowledge or skill. [§2-104(1)]
Offer and its Required Elements
A promise or commitment to perform or refrain from doing some specified future act •3 Required Elements: 1. Offeror must seriously intend to be bound by the offer. -Intent: Offeror's serious, objective intention. 2. Terms must be Reasonably certain or definite. •K must have definite terms •Expressed or reasonably inferred •Identity of parties •Identification of object or subject matter •Quantity, work to be performed •Consideration to be paid •Time of payment, delivery, performance 3. Communication of the offer to the offeree. •Offeree must have knowledge of the offer •Gives offeree the power to form a valid, binding k •What about rewards?
Voidable Title
A seller has a voidable title to the goods if he acquired the goods by: -Fraud. -Deceiving his identity -Paying by a check that was later dishonored. -Promising to pay for the goods with cash but hasn't paid for them yet. -If the transfer occurs by fraud, the transferee acquires a voidable title. A later good faith purchaser for value can acquire good title, and the original owner cannot recover the goods.
Mirror Image Rule
Acceptance must match offer exactly
Risk of loss when goods stay in a warehouse in which the seller stored them, but that buyer will assume title and risk of loss (delivery w/o movement of goods). OR seller has stored the goods in a third-party warehouse and the buyer is to obtain title and risk of loss while the goods remain at the warehouse
According to the contract, if the goods are identified when the buyer receives a document of title (e.g. warehouse receipt or when bailee (warehouseman) acknowledges buyer's right to the goods)
Statute of Limitations
An action for breach of contract under the UCC must be commenced within four years after the cause of action accrues (occurs) [UCC 2-725(1)].
Future Goods
Any goods that are not in existence at the time of contracting. Identification of Future Goods -If a sale or lease involves unborn animals to be born within twelve months after contracting, identification takes place when the animals are conceived. -If a sale involves crops that are to be harvested within twelve months (or the next harvest season after contracting—whichever is longer), identification takes place when the crops are planted. Otherwise, it takes place when the crops begin to grow. -In a sale or lease of any other future goods, identification occurs when the seller or lessor ships, marks, or otherwise designates the goods as those to which the contract refers.
Breach
Breaking a promise in a contract; not performing
Warranty Disclaimers and Limitations of Liability: Express Warranties
Can disclaim all oral express warranties by including in the written contract. It must be clear and conspicuous and called to buyer's attention
Warranty Disclaimers and Limitations of Liability: Implied Warranties
Disclaimed when K says "as is" or "with all faults" [2-316]; however, to be safe: -To specifically disclaim implied warranty of merchantability must say "merchantability" -Disclaimer for implied warranty of fitness for particular purpose must be in writing and conspicuous, but doesn't have to say "fitness"
The Entrustment Rule
Entrusting goods to a merchant who deals in goods of that kind gives the merchant the power to transfer all rights to a buyer in the ordinary course of business [UCC 2-403(2)].
UCC Article 2: "Unless Otherwise Agreed"
Explains why gap fillers are often called "default terms" •These apply by default, unless overridden -Option Price Term -Open Payment Term -Options/Cooperation with regard to Performance
Perfect Tender Rule Exceptions: Good Faith
For merchants, good faith requires that they act in "a commercially reasonable manner." Arguably, attempting to reject an entire shipment because a small percentage of the units are nonconforming may not be commercially reasonable.
UCC Article 2: Gap Fillers
Gap Fillers -Implied Terms: terms that courts will "read into" a K. (But not terms the parties have expressly agreed on) -Example: Gap Filler •No time and place of delivery specified •See UCCGap Fillers -Implied Terms: terms that courts will "read into" a K. (But not terms the parties have expressly agreed on) -Example: Gap Filler •No time and place of delivery specified •See UCC
Void K
Has no legal effect and neither party is liable.
Basic Tiers of the State Court: Highest Tier
Highest Tier: State Supreme Court (State Court of Last Resort): Ex: Texas Supreme Court and is the last place you can go to. If you want to appeal the decision from the court of appeals you go here.
Basic Tiers of the Federal Court: Highest Tier
Highest Tier: Supreme Court (Court of Last Resort): state court can also go here only if there is a federal issue in it.
Void Title
If a buyer unknowingly purchases goods from a seller who is not the owner of the goods, the seller's title is void, and the real owner can reclaim the goods from the buyer. (Same applies if the goods are leased.) -If goods are transferred from their owner to another by theft, the thief acquired no ownership rights. Because the thief's title is void, a later buyer can acquire no title, and the owner can recover the goods.
Additional Performance Provisions: Duty of Cooperation
If one party is not cooperating, the other party has the right to suspend performance and hold the first party in breach.
Existing Goods
If the contract calls for the sale or lease of goods that already exist in their final form, then identification occurs at the time the contract is made.
Delivery w/o Movement of Goods: If Title of Document is Not Required
If the goods are identified to the contract, title passes at the time and place that the sales contract was made. If they have not been identified, title does not pass until identification occurs.
Tender of Delivery: Delivery without Movement of Goods
If the goods are in the possession of a bailee and are not to be moved (and the parties don't stipulate otherwise) the UCC, Section 2-503 says delivery is accomplished: 1. When the seller gives the buyer a negotiable document of title, 2. Or if none, when the bailee acknowledges the buyer's right to take the goods.
Perfect Tender Rule Exceptions: Defect in manner of delivery
If the nonconformity is to the manner of delivery, not the goods, then the buyer may reject the shipment only if "material loss or delay occurs" as a result of the nonconformity. For example, if the seller uses a different carrier or the goods arrive a day late, then the buyer could not reject unless he can show that these deviations from the contract caused him material loss or delay. (2-504)
Obligations of the Seller/Lessor: Time of Delivery
If the parties do not stipulate in their contract when delivery is to occur, the UCC fills the gap. Section 2-309 of the UCC says, "The time for shipment or any other action under a contract if not provided for in this Article or agreed upon shall be a reasonable time."
Implied Warranties: Fitness
Implied warranty of fitness for a particular purpose arises in the sale of goods when a seller knows both •The particular purpose for which a buyer will use the goods •The buyer is relying on the skill and judgment of the seller to select suitable goods [2-315, 2A-213]
Obligations of the Seller/Lessor: Place of Delivery
Parties can agree on goods tendered at a particular destination for buyer to take possession. If the contract does not specify, then place is the seller's place of business, the seller's residence, or the location of the goods (if both parties know in advance that the goods will be there). [UCC 2-308]
Goods must be:
In existence and identified to the contract
Exclusive Remedies
In sales and lease contracts, an agreed-on remedy is in addition to those provided in the UCC unless the parties expressly agree that it is exclusive of all others [UCC 2-719(1), 2A-503(1),(2)].
Warranty Disclaimers and Limitations of Liability: Disclaimers and unconscionability:
Lack of bargaining power, take it or leave it, and buyer's failure to understand or know of a warranty disclaimer will be relevant
Basic Tiers of the State Court: Lowest Tier
Lowest Tier: County District Court (Trial Court): Ex: Cleveland County court in Norman, OK
Basic Tiers of the Federal Court: Lowest Tier
Lowest Tier: U.S. District Court (Trial Court) Ex: in every state and has a directional name: Northern District Of Oklahoma
Valid K
Meets all 4 requirements (agreement, consideration, capacity, legality). Enforceable.
Implied Warranties: Merchantability
Merchantability: if in business of selling the equipment, make an implied warranty [2-314, 2A-212] •Merchantability of goods: goods must be reasonably fit for the ordinary purposes for which such goods are used and at least medium-grade quality and adequately packaged and labeled •Merchantability of food: treated as a sale of goods when to be consumed on or off premises. It must be fit to eat based on consumer expectations
Basic Tiers of the Federal Court: Middle Tier
Middle Tier: Circuit Courts of Appeals: EX: 13 court of appeals in the U.S.
Basic Tiers of the State Court: Middle Tier
Middle Tier: Intermediate State Appellate Court Ex: if you lose lower court, you go here. Texas State Court of Appeals
Elements of Valid K: Contractual Capacity
Must have "right mind" -Law must recognize parties as competent to K •Can't be underage, mentally incompetent
Warranty Disclaimers and Limitations of Liability: Buyer's examination or refusal to inspect:
No implied warranty for defects that can be seen if reasonably evident
Offeror
Person who extends offer to make K
Voidable K
One party has option to avoid (both parties released) or ratify (both parties bound).
Express Warranties: Statements of Opinion or value
Only statements of fact
Offeree
Person who has the right to accept or reject the offer
Interpretation
Previous terms should be interpreted as in harmony, but if that construction is unreasonable: -Express terms prevail over all -Course of performance prevails over course of dealing and usage of trade -Course of dealing prevails over usage of trade [§ 1-303(e)]
Elements of a Valid K: Consideration
Promise must be supported by bargained-for exchange that is legally sufficient -Must be money or something of value to induce a person to K -Can't be gratuitous or moral obligation •Value given in return for a promise •Two requirements: 1. Legally sufficient value/detriment -Promise to do something no prior duty to do -Performing action not obligated to do -"Forbearance" - refraining from legal right -Can be unequal value - free to make bad deals 2. Bargained-for exchange -Must be an inducement to contract -Distinguished from gifts
Warranties of Title: No liens
Protects buyers who are unaware of any encumbrances against goods at the time of the contract. •Unknowingly buy goods that are subject to security interest - securing payment for performance of an obligation. •If creditor repossesses goods from a buyer who had no actual knowledge of the security interest, the buyer can recover from seller for breach of warranty
Liquidated Damages
Provision in your contract setting forth the specific damages that would be owed in the event of a breach. • A liquidated damages provision is generally enforceable (and will override any duty to mitigate) if the liquidated damages are reasonable, and the actual damages would be difficult to prove.
Shipment (origin) contract
Requires the seller to get the goods to the carrier, at which time the buyer assumes the shipping costs. Title passes to the buyer at the time and place of shipment. -The Code favors shipment Ks. Therefore, if the parties agree to use a carrier, but include no shipping term, the contract is a shipment K. Other e.g.: FOB. FOB shipping point. FOB Seller. FOB Seller's city. FAS (seller is obliged to get the goods alongside the water-going vessel). CIF or C&F. COD.
Warranties of Title: Good Title
Seller represents it has good and valid title to goods and transfer is rightful. If not, buyer can sue for breach of warranty.
Risk of Loss when shipment uses a 3rd party carrier
Shipment K: Seller delivers goods to carrier Destination K: Carrier makes a tender of delivery to the buyer at the destination
Duty to Mitigate Damages
The duty to mitigate in the event of a breach is an implied duty that is imposed by law on parties to a contract. You can always decide to expressly exclude the duty to mitigate in your contract.
Perfect Tender Rule Exceptions: "Unless Otherwise Agreed"
The parties may explicitly (in the contract) or implicitly (e.g. course of performance, course of dealings, usage of trade) agree on something less than the perfect tender rule.
Tender of Delivery: Shipment Contract
The seller has four duties: 1. To deliver the goods to a carrier 2. To deliver the goods with a reasonable contract for their transportation; 3. To deliver them with proper documentation for the buyer; and 4. To promptly notify the buyer of the shipment [UCC, Section 2-504]
Tender of Delivery: Destination Contract
The seller has two duties: 1. To get the goods to the destination at the buyer's disposal 2. To provide appropriate documents of delivery. [UCC Section 2-503]
Delivery w/o Movement of Goods: If Title of Document is Required
Title passes to the buyer when and where the document is delivered (to the buyer).
Differences in UCC and Tort Law
UCC: Applies in what are commonly called product disappointment cases; -i.e. cases in which the product simply doesn't work like it's supposed to work. Tort Law: Applies to cases in which a defective product causes personal injury and/or property damage.
UCC Definition of a BOCB
Under the UCC, a person is a buyer in the ordinary course of business if: -She/he buys goods in good faith (honestly). -The goods are purchased without knowledge that the sale violates the rights of another person in the goods. -Goods are purchased in the ordinary course from a merchant (other than a pawnbroker) in the business of selling goods of that kind. -The sale to that person comports with the usual or customary practices in the kind of business in which the seller is engaged [UCC 1-201(9)].
Consequential Damages
Under the UCC, parties to a contract can limit or exclude consequential damages, provided the limitation is not unconscionable.
UCC Article 2: GAP Fillers: Absence of Specified Place for Delivery
Unless otherwise agreed a) The place for delivery of goods is the seller's place of business or if he has none his residence; but b) in a contract for sale of identified goods which to the knowledge of the parties at the time of contracting are in some other place, that place is the place for their delivery; and c) documents of title may be delivered through customary banking channels.
Risk of loss with any other means of delivery other than shipment or storage
Upon receipt of goods by the buyer if the seller is a merchant, upon tender of delivery of goods by seller if the seller is a non-merchant.
Unenforceable K
Valid K that cannot be enforced due to a legal defense. But parties can perform voluntarily.
Implied Warranties: Course of Dealing or Usage of Trade
Warranties implied from prior dealings or trade custom. Where both parties have knowledge of a well-recognized trade custom, the courts will infer that both parties intended for that custom to apply to their contract
Delivery w/o Movement of Goods
When the contract does not call for the seller to ship/deliver the goods, passage of title depends on whether the seller must give the buyer a document of title such as a warehouse receipt.
Elements of a Valid K: Agreement
an offer and an acceptance
UCC Article 1 Terms: "Writing"
includes printing, typewriting, or any other intentional reduction to tangible form. "Written" has a corresponding meaning. [§1-201(b)(43)].
UCC Article 1 Terms: "Signed"
includes using any symbol executed or adopted with present intention to adopt or accept a writing. [§1-201(b)(37)]
UCC Article 1 Terms: "Person"
means an individual, corporation, business trust, estate, trust, partnership, limited liability company, association, joint venture, government, governmental subdivision, agency, or instrumentality, public corporation, or any other legal or commercial entity. [§1-201(b)(27)]
UCC Article 1 Terms: "Good Faith"
means honesty in fact and the observance of reasonable commercial standards of fair dealing. [§1-201(b)(20)] [§1-304] Every K or duty imposes an obligation of good faith in its performance and enforcement.
Elements of a Valid K: Legality
must be lawful; not against public policy... its legal not illegal
Promissor
person making a promise
Promisee
person to whom a promise is made
Destination Contract
requires the seller to get the goods to the carrier and to pay the costs of shipping the goods to the destination. Title passes when the goods are tendered at that destination. -Unless course of performance or course of dealings implies a destination K, the parties must explicitly agree on a destination K. e.g. : FOB destination. FOB Buyer. FOB Buyer's city. Ex ship (goods must be unloaded at buyer's port). No arrival, no sale (destination K and if goods don't arrive, the K is discharged).
Quantity Terms: Requirement Ks
the buyer agrees to buy all of what he needs of a certain product from the seller.
Quantity Terms: Output Ks
the seller agrees to sell all of his production of a specific product to the buyer.
Obligations of the Buyer: Full Acceptance
• Acceptance is clear enough. It means the buyer takes the goods. • The buyer may accept goods by words, silence, or action. Section 2-606(1) of the UCC defines acceptance as occurring in any one of three circumstances: 1. Words: the buyer, after a reasonable opportunity to inspect, tells the seller either that the goods conform or that he will keep them despite any nonconformity. 2. Silence: the buyer fails to reject, after a reasonable opportunity to inspect. 3. Action: the buyer does anything that is inconsistent with the seller's ownership, such as using the goods (with some exceptions) or selling the goods to someone else. • Once the buyer accepts, she is obligated to pay at the contract rate and loses the right to reject the goods (unless the buyer meets the requirements for a revocation of acceptance [discussed momentarily]). UCC, Section 2-607.
Perfect Tender Rule Exceptions: Destruction of Identified Goods
• An unexpected event may totally destroy the goods through no fault of either party before risk passes to the buyer or lessee. • If the goods were identified at the time of contract formation, the parties are excused from performance (UCC 2-613, 2A-221). • If the goods are partially destroyed, the buyer or lessee can inspect them and - either treat the contract as void - Or accept the damaged goods with a price reduction.
UCC: Article 1
• Apply to the entire UCC, not just Article 2 and Article 2A • Principles of law and equity, including: - The law merchant - The law relative to capacity to contract - Principal and agent, - Estoppel - Fraud - Misrepresentation - Duress - Coercion - Mistake - Bankruptcy - And other validating or invalidating cause supplement its provisions. [§1-103]
Delivery of Conforming Goods: Perfect Tender Rule
• If nothing is said in the contract about what quality of goods conform to the contract, then the UCC default rule kicks in. • The seller is to make a perfect tender: what is delivered must in every respect conform to the contract. UCC, Section 2-601. -And if what is delivered doesn't conform to the contract, the buyer may: 1. Accept the goods. 2. Reject the entire shipment. 3. Accept part and reject part.
Buyer's Remedies: Seller's Insolvency
• If the goods are identified and the buyer has paid at least part of the contract price for the goods, then the buyer, by tendering the balance of the contract price, has, consistent with his special property right arising from identification, the right to claim the goods. • In fact, the buyer's right to the goods supersedes that of the seller's other creditors.
Seller's Remedies: Buyer's Insolvency
• If the seller delivers goods on credit to an insolvent buyer, then the seller has the right to reclaim those goods within 10 days of buyer's receipt of them. - It is important to note that the seller's claim in this case supersedes that of buyer's other creditors. • Seller can stop goods in transit if Buyer is insolvent: Seller can stop entire shipment of goods. • Seller has the right to stop delivery of the goods until: 1. Buyer receives the goods; 2. or Carrier or bailee acknowledges rights of buyer in the goods (reshipment or holding goods for buyer); 3. or Negotiable document of title has been transferred to buyer's possession.
Buyer's Remedies:
• If, after the seller's breach, the buyer covers - reasonably purchases substitute goods - then the buyer may recover damages based on the Cover price - Contract price + incidental + consequential damages. • UCC 2-715 defines the buyer's incidental and consequential damages. - Incidental damages include any commercially-reasonable charges arising from inspection, receipt, transportation, storage or covering the goods. - Consequential damages tend to be buyer-specific in the Code. They include any additional expenses/damages borne by the buyer because of the seller's breach. • However, to recover consequential damages, the buyer must demonstrate that the seller could reasonably have foreseen their possibility at the time of the contract. - Examples include lost sales from other contracts, lost production arising from not receiving a necessary machine, etc.
Seller's Remedies: Resale Damages
• In a commercial setting, the seller will typically attempt to resell the goods after the buyer's breach. If the seller reasonably resells the goods (see 2-706(2)), then the seller may recover damages based on the Contract price - Resale price + any incidental damages arising from the breach. - 2-710 defines incidental damages as any commercially reasonable charges incurred by the seller in stopping delivery, transportation, storage and/or attempting to resell the goods. • One situation where different rules apply is in a so-called lost volume sale. This is where a seller has lots of inventory and basically endless resale potential for its inventory. If a buyer defaults, the seller is entitled to recover its lost profit under the contract. - The rationale is that this is the only way to put the seller in as good as a position as it would have been if the buyer hadn't breached. There is no duty for the seller to mitigate since the measure of damages is lost profit under the contract.
Buyer's Remedies: Action for the Goods
• The buyer has a right to recover the goods if: 1. The goods are unique or 2. If the goods have been identified and the buyer has made reasonable efforts to cover but fails. • Obviously, the buyer's ability to recover the goods depends both upon their existence and the seller having retained them. If the seller has sold the goods to someone else, then the buyer cannot claim the goods from that third party.
Product Liability
•It is important to understand that products are sometimes defective and that there are remedies available to those damaged by defective goods. •Things can get a bit complicated because some of these remedies are available under the UCC and others arise from tort law.
Offer: Rejection
•Offeree terminates offer •Inquiries or clarification not necessarily a rejection •Rejection is effective when received
Obligations of the Buyer: Payment
• The parties may specify in their contract what payment means and when it is to be made. • If they don't, the UCC controls the transaction. [UCC Sections 2-511 and 2-512.] • Some relevant gap fillers include: 1. If no payment terms specified, payment is due at the time and place which the buyer is to receive the goods. [UCC 2-301] 2. The parties if they so intend can conclude a contract for sale even though the price is not settled. In such a case the price is a reasonable price at the time for delivery if: a) Nothing is said as to price; or b) The price is left to be agreed by the parties and they fail to agree; or c) The price is to be fixed in terms of some agreed market or other standard as set or recorded by a third person or agency and it is not so set or recorded. [UCC 2- 305].
Rights of Buyer with Respect to Nonconforming Goods: Revocation
• Typically, acceptance of the goods by the buyer is commercially final (i.e. this places the burden on the buyer to complete his side of the agreement.) • However, UCC 2-608 allows the buyer to revoke acceptance of goods if: 1. The buyer discovers a defect in the goods that substantially impairs the value of the goods, but only if the buyer could not have discovered this defect upon inspection; 2. The buyer has accepted the goods upon reasonable belief that the seller would cure, but the seller fails to do so. • Revocation of acceptance is not effective until notice is given to the seller or lessor. • This must occur within a reasonable time after the buyer or lessee either discovers or should have discovered the grounds for revocation.
Obligations of the Buyer: Right of Inspection
• Under Sections 2-513(1) and (2) of the UCC, the buyer has a qualified right to inspect goods. • That means the buyer must be given the chance to look over the goods to determine whether they conform to the contract. • If they do not, he may properly reject the goods and refuse to pay. -The right to inspect is subject to two exceptions: 1. The delivery is to be made C.O.D. (cash on delivery). 2. Payment is to be made against documents of title. - If the parties agree that payment must be made before inspection, then the buyer must pay (unless the nonconformity is obvious without inspection). - Payment under these circumstances does not constitute acceptance, and the buyer does not lose the right to inspect and reject later.
Rights of Buyer with Respect to Nonconforming Goods: Rejection
• Under UCC, Section 2-601(a), rejection is allowed if the seller fails to make a perfect tender. The rejection must be made within a reasonable time after delivery or tender. • Once it is made, the buyer may not act as the owner of the goods. If he has taken possession of the goods before he rejects them, he must hold them with reasonable care to permit the seller to remove them.• If the buyer is a merchant, then the buyer has a special duty to follow reasonable instructions from the seller for disposing of the rejected goods. - if no instructions are forthcoming and the goods are perishable, then he must try to sell the goods for the seller's account and is entitled to a commission for his efforts. • Whether or not he is a merchant, a buyer may store the goods, reship them to the seller, or resell them—and charge the seller for his services—if the seller fails to send instructions on the goods' disposition. Such storage, reshipping, and reselling are not acceptance or conversion by the buyer.
Perfect Tender Rule Exceptions: Installment Contracts
• Unless otherwise agreed, all goods should be delivered at one time, and no payment is due until tender. But where circumstances permit either party to make or demand delivery in lots, Section 2-307 of the UCC permits the seller to demand payment for each lot if it is feasible to apportion the price. • What if the contract calls for delivery in installment, and one installment is defective—is that a material breach of the whole contract? • No. Section 2-612(subsections 2 &3) of the UCC says this: - (2) The buyer may reject any installment which is non-conforming if the non-conformity substantially impairs the value of that installment and cannot be cured or if the non-conformity is a defect in the required documents; but if the non-conformity does not fall within subsection (3) and the seller gives adequate assurance of its cure the buyer must accept that installment. - (3) Whenever non-conformity or default with respect to one or more installments substantially impairs the value of the whole contract there is a breach of the whole.
Course of Performance
•A "course of performance" is the sequence of conduct between the parties to a particular transaction that exists if: •The agreement of the parties with respect to the transaction involves repeated occasions for performance by a party; and•The other party, with knowledge of the nature of the performance and opportunity for objection to it, accepts the performance or acquiesces in it without objection. [§ 1-303(a)]
Formal Requirements: Statute of Frauds
•Contract for sale of goods of $500 or more (or lease of goods of $1000 or more) is not enforceable unless there is a writing sufficient to indicate that a contract has been made between the parties and signed by the party against whom enforcement is sought. [§ 2-201(1), 2A-201(1)(a)] •Exceptions: -Specially manufactured goods, not suitable for resale, & seller has substantially started to manufacture; -admissions by a party; -payment has been made or accepted/goods have been received and accepted.
Sales or Return
•Conversely, in a sale or return, the buyer's goal is to resell the goods. •In such case, the buyer assumes both title and risk of loss during the "return" period. •Consignment sales are treated like sales or return under the UCC. Like a sale or return, the consignee has the ROL and title while the goods are in the consignee's possession. •However, while the consignee possesses the goods and attempts to sell them, the consignee's creditors have a claim against those goods unless the consigned goods are stated to be held on consignment or the creditors should reasonably assume that the goods are so held.
What are not Offers?
•Expressions of Opinion •Statements of Future Intent •Preliminary Negotiations, or Invitations to Negotiate •Advertisements - generally not considered offers but invitations to negotiate or to make an offer
UCC Article 2: "Unless Otherwise Agreed": Options/Cooperation with Regard to Performance
•If K contemplates shipment of goods, but does not specify the shipping arrangements, the seller has the right to make these arrangements. •If a sales K omits terms relating to the assortment of goods, the buyer can specify the assortment.
Objective Theory
•Intent is a key element in contract formation •In contract law, intent is determined by: -What the parties said (not what they were subjectively thinking) -How the parties acted or appeared (what they did or didn't do) -Circumstances around the formation of K -Judged by "reasonable person" standard
Unconsciousability
•Unconscionable K's: void of conscience -Effect of K is oppressive or harsh •Only one-party benefits •One party has no remedy for breach •If K found to be unconscionable, courts may: -Refuse to enforce -Enforce the remainder minus the unconscionable part -Limit the unconscionable term to avoid an unconscionable result -UCC 2-302; 2A-108
UCC Article 2: Offer and Acceptance
•Unless otherwise unambiguously indicated by the language or circumstances, an offer to make a contract shall be construed as inviting acceptance in any manner and any medium reasonable. •An order or other offer to buy goods for prompt or current shipment shall be construed as inviting acceptance either by prompt promise to ship or by the prompt current shipment of goods (either conforming or non-conforming goods). [§ 2-206]
Elements of a Valid K: Acceptance
•Voluntary act by the offeree (either words or conduct) which indicates agreement to the terms of the offer. •Acceptance must be definite and communicated to the offeror. •Wording of acceptance important •Example: I accept if you will take $100 off the price. This is a Counteroffer. •Silence is not acceptance in most cases