2 Uniform Commercial Code (UCC) Governs contracts for sale of goods (not services, real estate or professional services)Primarily state, not federalEach state adopts some “version” of model UCC statute (book covers model act)Purpose: “simplify, clarify, and modernize the law governing commercial contracts”
3 Articles of the UCC Art. 1: General Provisions Purpose of the UCC: general guidance and definitionsArt. 2: Sale of GoodsApplies to sale of goods (focus of Ch. 11)Art. 2A concerns lease of goods.Art. 3: Negotiable InstrumentsUse of checks, promissory notes, and other financial instrumentsArt. 4: Bank Deposits and CollectionsRights and duties of banks and their clientsArt. 5: Letters of CreditGuaranteed payment by a bank that extends credit for a clientArt. 6: Bulk TransfersSale of large part of a company’s materialArt. 7: Warehouse Receipts, Bills of Lading, and Other DocumentsPapers proving ownership of goods being shippedArt. 8: Investment SecuritiesRights and Duties related to stock or other ownership interestsArt. 9: Secured TransactionsSales in which seller holds a financial interest in goods sold
4 Goods, Merchants, Sales & Titles Under the UCC Title can pass as parties see fit - for example when the goods:arrive for shipment at a portarrive at buyer’s warehouseleave the seller’s warehouseare halfway between buyer and sellerUCC says title passes when:seller completes all obligations regarding delivery of goodswhen seller delivers title documents (if goods didn’t need to be moved)Article 2applies to sale of goodsAll parties are bound to a standard of good-faith, or honest dealingTitle must pass to be a saleCan hold title if:1) goods exist2) goods ID’d to contract
5 Merchants Under Article 2 Merchants are held to a higher standard of conduct than others – “good faith and honest dealing”A merchant:1) regularly deals in these kinds of goods2) presents himself as having knowledge or skill special to the transaction, or3) has an agent who does the same
6 Forming a Sales Contract Common law governs unless UCC changes or modifies the rulesMostly, UCC reduces the formality requiredSee Exhibit 11.2
7 Intent to Contract Offer & Acceptance rules relaxed only need evidence of agreement between partiesIndefinite offerOK to be missing major terms like price, delivery, payment terms, if parties intended to be boundusually need quantity, unless 1) output contract or 2) requirements contractBut courts require good faith dealing and don’t allow one party to profit from the bad fortune of the other due to unexpected large changes in market conditionsMerchants Firm Offers – irrevocableSign in writing that offer will remain open for given period. (If not stated, period is “reasonable time.”)
8 Crest Ridge Construction v. Newcourt John & Joe Brower set up Crest Ridge (CR).Awarded a subcontract on job to provide wall panels.Wanted to use the panels made by Newcourt. Price was $760,000 “subject to credit department approval.”Because CR was a new company, little credit info.Over the next 6 months, detailed discussions re: panel specs, and shipment was set.Newcourt then demanded payment in full. Industry practice is 45 days after shipment (so subcontractor can give goods to general contractor who would pay the bill).CR could not make advance payment; Newcourt cancelled order. CR found other supplier at a higher price.CR sued Newcourt.Jury awarded $70,214 in damages. Newcourt appealed.
9 Crest Ridge Construction v. Newcourt HELD: Affirmed. Breach of contract by Newcourt.The phrase “subject to credit department approval” was in form contract but seemingly ignored by both parties.UCC looks at “any manner sufficient to show agreement, including conduct by both parties . . .” to recognize contract was made.Parties exchanged price quotes and purchase order, documents usually binding in construction industry.For 6 months, parties exchanged designs to clarify project.Newcourt sent samples; revisions of shop drawing; fastening details; stipulations re: color; final drawings concerning installation. All appeared to be moving forward.Parties left payment terms blank. Look to “general usage” in the industry. To ask for full payment in advance at late date, was a breach of the agreement by Newcourt.Damages were for added higher cost of alternative supplier.
10 Acceptance Under Article 2 Greater flexibility in communication of acceptance“Any reasonable manner” under the circumstancesMay be valid even if add new terms or change existing termsConflicting Terms – the battle of the forms!Offeree’s form doesn’t match offeror’s formThere is an acceptance, but use offeror’s terms unless special action takenContract ModificationNeed not provide new consideration, but must have “good faith dealing”Modification must usually be in writing
11 Acceptance Under Article 2 Statute of FraudsSale of goods for $500+ is not enforceable unless in writing and signed by the party against whom enforcement is sought.Not every material term needs to be specified.Failure to Respond To A Writing§2-201(2): if writing in confirmation of the contract is received, it satisfies the writing requirements UNLESS “written notice of objection” is within 10 days after writing received.Parol EvidenceMore relaxed under the UCC than at common law.§2-202 says parol evidence can’t be used against the writing.BUT can explain customary trade dealings or meaning of terms.HOWEVER, if the intent that the original writing is “a complete and exclusive statement of terms,” parol evidence may not be used to change the terms.
12 Filling The GapsFilling the Gaps – UCC fills parts of contract left open or unclear, i.e. price, quantity, or delivery termsUCC looks to trade usage and past business dealings of the parties to determine outcome of unclear terms.It applies “reasonableness” standard.Price: if contract not clear, §2-305 tells courts to determine “a reasonable price”–fair market value, past dealings, etc. may be used.Quantity: recognizes requirements contracts and output contracts, where quantities may not be clear.Delivery term: §2-309: delivery must be within “reasonable time”§2-311: seller has options for shipping arrangements§2-308: presumes delivery at seller’s place of business.
13 Griffith v. Clear Lakes Trout Co. Clear Lakes, a fish hatchery, had a deal with Griffith, a trout grower.Griffith would buy small trout from Clear Lakes and sell them back when they had grown to “market size”.Deal was for 6 years.After 3 years, Clear Lake’s said customers demanded larger fish than oz. fish delivered by Griffith.Clear Lakes began to take fewer fish; wanted bigger fish.Griffith was left with too many fish; Griffith deeply in debt; could not change operations easily—costly to grow larger fish.Griffith sued Clear Lakes for breach of contract for not accepting the trout that Griffith had grown to “market size.”Clear Lakes claimed no contract ever existed because the parties differed as to what was “market size.”
14 Griffith v. Clear Lakes Trout District court ruled in favor of Griffith.Court held that parties knew that market size was oz.Clear Lakes appealed.HELD: Affirmed. Both parties understood that “market size” referred to a range of approximately one pound live weight.Parties intended to make a contract, and the contract will not fail for indefiniteness.Performance between Griffith and Clear Lakes of 3 yrs. dealing with ~ 1 lb. trout indicates an understanding of the “market size” of trout.There is similar trade usage predating their contract.
15 Performance and Obligations UCC deals with seller’s delivery conforming to terms of agreement:If the goods fail in any respect to conform to the contract, the buyer may:reject the wholeaccept the whole, oraccept any commercial unit or units or reject the restTender of DeliveryValid and sufficient offer of performance under a contractSeller obliged to tender goods at buyer’s place of businessBuyer may contract to accept goods at point of production“Perfect Tender Rule”: Seller must tender the quality, quantity & delivery method as specified in the contractIf no perfect tender, the buyer has right to reject and rescind contract.Seller’s Right to Cure (UCC Section 2-508):If time for seller’s performance had not yet passedIf seller notifies buyer of intent to cure defect andIf seller repairs or replaces defective goods within time allowed
16 Buyer’s Rights and Obligations Buyer’s duty is to accept conforming goods and pay for them. (2-507)Buyer has right of inspection before acceptance. (2-513)Buyer may reject nonconforming goods and withhold payment. (2-601; 2-602)Buyer has duty to accept goods. If goods are nonconforming but accepted, buyer may later revoke acceptance, but only if nonconformity “substantially impairs” value of goods. (2-606; 2-607; 2-608)Buyer has duty to pay (2-507) when goods are received. Can inspect before payment is made.
17 Sales WarrantiesWarranty of Title – good title will be transferred free of claims against it (2-312)Express Warranties – created by seller’s promise as to quality, safety, performance or durability of goods. May be created:from sample or modelby description of attributesby seller’s statements or promisesWarranties may be disclaimed, but disclaimers must be specific as to the warranties and must be conspicuous.
18 Sales Warranties: Implied Warranties Merchantability - for sales by merchants:Goods must be of quality generally acceptable in trade; Must be able to do what is expectedImplied Warranty of Fitness for a Particular Purposebuyer communicates to seller, or seller “had reason to know” buyer’s particular needs; buyer relies on seller’s expertise; then may have warranty. I.e. a salesperson’s recommendation of a certain paint for a metal building that will not chip and peel.Seller may make disclaimers; language may need to be specific and the disclaimer must be conspicuous.
19 Lee vs. R&K Marine, Inc.Lee bought new boat from R&K Marine; signed standard purchase agreement.On agreement: a disclaimer for all warranties, express or implied (including implied warranty of merchantability or fitness for particular purpose).3 years later: big cracks in the hull. Appraiser says due to manufacturing defects – boat was a complete loss.Manufacturer was bankrupt; Lee sued R&K, claiming breach of warranties of merchantability and fitness for particular purpose.Summary judgment for R&K; Lee appealed.HELD: Affirmed. UCC 2-316(2) states that to exclude warranties, writing must be “conspicuous”.Here writing was in capital letters.A reasonable person would have noticed it.
20 Remedies (UCC Section 1-106) Seller’s Remedies for Buyer breach:Before receiving goodscancel contractID goods; minimize losses by completing or stopping manufacturewithhold or stop deliveryresell goods in commercially reasonably mannersue buyerAfter receiving goodsIf buyer won’t pay, sue for payment & damagesIf buyer wrongfully rejects,can reclaim goods & remedy as aboveif doesn’t reclaim goods, sue for payment & damages
21 Remedies Buyer’s Remedies for Seller breach: Seller repudiates before delivery of goodscancel contractobtain goods from another suppliersue sellerSeller fails to deliver(as in Newcourt case)
22 Remedies Buyer’s Remedies for Seller breach: Seller delivers nonconforming goods, buyer rejectscancel contractobtain goods from another suppliersue sellersell rejected goods to recover advance paymentsif no advance payments, store/reship goodsSeller delivers nonconforming goods, buyer acceptsdeduct damages from pricesue seller for damagessue for breach of warranty
23 Buyer’s Damages Cover Incidental damages Consequential damages buy substitute goods and recover price differenceIncidental damagesinclude: reasonable costs of inspecting, receiving, transporting and taking care of goodsConsequential damagesforeseeable damages that result from seller’s breachmay be with third parties, not necessarily seller
24 Kramer v. ATW Axtell Tech Wholesale Kramer owned CIS, a local Internet service provider. Wanted to upgrade service.Kramer hired Axtell to install equipment so Kramer could offer wireless services for residential (2.4 GHz) & commercial (5.8 GHz) users.Believed he would have ~3,000 new customers for service.Axtell installed equipment on towers.Service worked for 2.4 GHz range, but had some problems.Did not work for 5.8 GHz range. Kramer sued.Trial court found parties entered into an oral contract and Axtell had breached the contract & warranties for fitness for a particular purpose.Kramer should be compensated $95,000:the $50,000 paid to Axtell;$10,000 personal time and service trying to make system operational;$15,000 for cost of tower rental he paid when system was inoperable;$20,000 lost profits (not lost gross revenue). Lost profits beyond this amount too speculative.Kramer appealed, saying damages were too low.Appeals Court Held: All trial court’s damages affirmed.
25 International SalesU.N. Convention on Contracts for the International Sale of Goods (CISG)Sales covered by CISG – commercial sale of goods by parties who have places of business in countries that have adopted CISGSales excluded:Auction salesConsumer goods bought for household useContracts primarily for labor or other servicesGoods excluded:ElectricityShips and aircraftSecurities: stock, negotiable instruments & money
26 International Sales CISG Similarities to UCC Formality Offers need not be formal, nor in writinglook at circumstances for interpretationOffersadvertisements are not offerscan fill in missing termsAcceptancemust be made within time stated or reasonable timeBattle of the Formsif differences are material, then 2nd form is counter offer, not contractDuties of Partiesseller must deliver goods with good title; buyer must notify seller of defects within a reasonable timeRemediesbehave in reasonable manner and give opportunity to cure breach – Nachfrist notice (notice of problem and a chance for nonconforming party to cure prior to lawsuit)Duty to mitigate
27 Treibacher Industire, A.G. v. Allegheny Technologies, Inc. Treibacher, of Austria, sells hard metal powders.TDY, subsidiary of Allegheny, ordered TaC (tantalum carbide) for delivery “on consignment”.TaC used at Alabama plant to make tungsten-graded carbide powers.TDY received first several shipments, then cancelled the order, as it found a cheaper source of TaC.Treibacher had to sell powder at lower price; sued TDY.TDY argued that “on consignment” meant common term of no sale unless and until TDY actually used the TaC.Treibacher argued that had 7 years of previous dealings and understood “on consignment” meant TDY didn’t have to immediately pay for all TaC ordered, but Treibacher delayed billing until TDY actually used the powder.(Continued On Next Slide)
28 International Sales Disputes: The Dominance of Arbitration UN encourages use of arbitration through Convention on the Recognition and Enforcement of Foreign Arbitrable AwardsIf a country has adopted the ConventionIts courts are bound to recognize and enforce arbitration decisionsIf proper procedure was followedException: if the procedure is in conflict with law of the nation of one of the parties OR has gone beyond scope of the matter covered by arbitrationIn U.S., parties to a contract written under the CISG who require arbitration have little reason to be in courtDuty of arbitrators to resolve dispute under CISG Rules