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Advanced Business Law BPP 433 SALES/PRODUCT LIABILITY Advanced Business Law (BPP433/85) 2007 Winter Quarter Week 6 Instructor: David Oliveiri.

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Presentation on theme: "Advanced Business Law BPP 433 SALES/PRODUCT LIABILITY Advanced Business Law (BPP433/85) 2007 Winter Quarter Week 6 Instructor: David Oliveiri."— Presentation transcript:

1 Advanced Business Law BPP 433 SALES/PRODUCT LIABILITY Advanced Business Law (BPP433/85) 2007 Winter Quarter Week 6 Instructor: David Oliveiri

2 Advanced Business Law BPP 433 Learning Objectives Just What Legal Rules Apply to the Production and Sales of Goods to Customers? Managerial Implications -- Constraints, Risks, Opportunities

3 Advanced Business Law BPP 433 How Law/Regulation Affects Business – Review Owners LandEmployees LaborCreditors/Suppliers Venture CapitalCustomers Ent. TalentCompetitors The “Public” FORMINGOPERATING

4 Advanced Business Law BPP 433 Behavior Toward Customers – A Thicket of Regulation/Rules Contexts – Product Development, Contracting, Selling, Service After Sales State Common Law of Contracts and UCC (State Statutes) Big Factors, BUT… Other State/Federal Legislation Applies To Product and Service Sales Process/Afterward (S&R42, 24):  Need for Qualifying Information/Price of Credit (Truth in Lending, Fair Credit Reporting Act)  Discrimination in Granting Credit  Deception/Mistake (UCC Art 2, FTC Act, Lemon Laws, Telemarketing Acts, Internet Sales Laws)  Product Liability

5 Advanced Business Law BPP 433 UNDERSTAND RISKS/ OPPORTUNITIES Outline Business Process Proceduralize Forms Manuals Training/Decision Rights/Incentives Review Processes/ Mine Data Leadership Functional Depts. InHouse Counsel Retained Counsel THE MANAGERIAL OPPORTUNITY – PRODUCT/SALE LIFECYCLE Behavior Toward Customers – A Thicket of Regulation/Rules

6 Advanced Business Law BPP 433 Law of Sales – Conceptual Fit PROPERTY LAW CONTRACT LAW SALES LAW Property = Real + Personal Sales = UCC + Non-UCC Sales Contracts = Sales + Other Primarily STATE LAW

7 Advanced Business Law BPP 433 Contract Law Compared with Law of Sales Some UCC vs. Contract Law Differences

8 Advanced Business Law BPP 433 UCC Sales Law (Article 2) Rationale Purpose – To Modernize, Clarify, Simplify, and Make Uniform the Law of Sales Minimize Transaction Costs on Basic Transactions –Marshalling Terms –Negotiating –Drafting Create Transactions Costs on Variant Terms Concept of “Default Rules” v. Mandatory Rules -- Deviation Allowed [Example: “If no price is specified, and delivery is made, the price is a reasonable one at the time of delivery”]

9 Advanced Business Law BPP 433 Freedom/Efficiency of Contract – Reflecting Preference of Majority Good Faith – Honesty in Conduct or Transaction Concerned; Observance by Merchant of Reasonable Commercial Standards Unconscionability – Refusal of Court to Enforce a Contract Resulting from and Unfair Bargaining Process or with Oppressive or Grossly Unfair Provisions Course of Dealing – Previous Conduct Establishing a Common Basis for Interpreting Agreement Usage of Trade – Practices or Methods Regularly Followed in a Place, Vocation, or Trade UCC Sales Law (Article 2) Principles

10 Advanced Business Law BPP 433 Selected UCC Rules Applicable to Merchants

11 Advanced Business Law BPP 433 Contract formed based on offeror’s terms without additional terms No No contract formed Yes Contract formed (1) different terms cancel each other out, or (2) offeror’s terms control, or (3) additional term test applied Yes Battle of the Forms Is acceptance identical to offer? Contact formed based on offeror’s terms Yes Is acceptance expressly conditional upon assent to additional or different terms? No Does acceptance include different terms? No Does acceptance include additional terms? No Then, Yes Continues on next slide…

12 Advanced Business Law BPP 433 Does offer limit acceptance to its terms? Yes Do additional terms materially alter the offer? No Has offeror assented to the additional terms? Yes No Yes Contract formed with additional terms No Contract formed based on offeror’s terms without additional terms Are both parties merchants? Has the offeror objected to the additional terms? No Battle of the Forms (cont.)

13 Advanced Business Law BPP 433 When Does the UCC Apply to a Transaction? Sales Transactions in “Goods” “Goods” = Moveables (Time of Sale); Not Real Property, Not Intangibles (Stocks, Bonds…), Not Money Includes Incidental Services [Example: Installation + Set-Up]; Not Services Alone Lease Included If “Sale Subject To Security Interest” [Example: Lease car for 15 years. End-of-Term Option to Buy for $1.] Does Not Include “Normal” Security Interests [Example: Sell Car 1/1 For $100, Agree to Buy Back 7/1 for $105.]

14 Advanced Business Law BPP 433 Once UCC Art 2 Applies, … Forming Deal Performance of Deal Quality of Performance Remedies at Breakdown

15 Advanced Business Law BPP 433 Forming a Sales Contract Offer-Varying Acceptance – Battle of the Forms –Acceptance Contains Terms Not in Offer –Generally, Exchange of Standardized Writings –Detailed Rules to Resolve Implied Terms – Trade Usage, Course of Dealing, Course of Performance Statute of Frauds – >= $5,000 – Mandatory Rule “Consent to Agreement” Model v. Formal Offer/Acceptance

16 Advanced Business Law BPP 433 Performance Insecurity & Adequate Assurance of Performance Anticipatory Repudiation Tender, Inspection, Acceptance, Rejection, Cure Generally, Risk of Loss Follows Control Allocating Risk of Loss Via Poor Performance Self-Test P 5, 7

17 Advanced Business Law BPP 433 Identification of Goods Tender of Performance By Seller Continued on next slide… (match arrow numbers) YesNo Duly delivered? Shipment contract Breach 1 NoYes Seller holds goods for buyer at destination? Destination contract Breach 2 NoYes Seller tenders document of title? Goods held by bailee without moving 34 NoYes Seller notifies buyer that goods are held at his disposal? Seller holds goods for buyer Breach 5

18 Advanced Business Law BPP 433 Notifies buyer of shipment? No Yes No Yes Breach 1 Notifies buyer? Yes No Yes Breach 2 Yes 3 No Bailee acknowledges buyer’s right to possession? No Yes Breach 4 Yes 5 Tender Yes Tender of Performance By Seller (cont.) Proper contract?

19 Advanced Business Law BPP 433 Breach by seller Performance by the Buyer Goods conform Breach by buyer Goods conform Buyer liable for price Goods do not conform Seller cures defect Seller does not cure Goods do not conform Buyer revokes acceptance Buyer retains goods Buyer rejects goods Buyer accepts goods OR Buyer liable for price Buyer rejects Buyer accepts Breach by buyer Breach by seller

20 Advanced Business Law BPP 433 4 Risk passes to buyer upon receipt of goods 5 Risk passes to buyer upon tender of goods Passage of Risk of Loss in Absence of Breach Risk of loss passes to buyer at time of contract Trial sale Sale on approval? No Yes 1 No As allocated by agreement Yes Agreement by parties? Continued on next slide… (match arrow numbers) No Contract involving carrier Shipment contract? Yes 2 No Goods in possession of bailee Negotiable document of title? Yes 3 Seller is a merchant Seller is not a merchant All other sales Goods in possession of buyer

21 Advanced Business Law BPP 433 Destination contract NoYes Risk on seller until delivered to carrier Risk on seller until goods tendered at destination 2 Non-negotiable document of title? No Yes Risk shifts upon buyer’s receipt of document 3 No Yes 1 Risk on seller until approved Risk on buyer until returned Risk shifts to buyer upon written acknowledgment by seller or bailee No Yes No document of title Risk shifts to buyer upon tender of document Passage of Risk of Loss in Absence of Breach (cont.) Sale or return

22 Advanced Business Law BPP 433 Warranties Express Warranties Implied Warranties –Fitness for Particular Purpose –Merchantability Disclaiming Warranties – Rules Products Liability Distinguished – Remedies and Parties – Privacy of Contract Allocating Risk of Quality, Given Performance Self-Test – P3, 10

23 Advanced Business Law BPP 433 Warranties Type of Warranty How Created What is WarrantedHow Disclaimed Title Seller contracts to sell goods Good title Rightful transfer Not subject to lien Specific language Circumstances giving reason to know that seller does not claim title Express Affirmation of fact Promise Description Sample or model Conform to affirmation Conform to promise Conform to sample model, or description Usually not possible Merchantability Merchant sells goods Fit for ordinary purposes Adequately contained, packaged, and labeled Must mention “merchantability” If in writing must be conspicuous As-is sale Buyer examination Course of dealing, course of performance, usage of trade Fitness for a particular purpose Seller knows buyer is relying on seller to select goods suitable for buyer’s particular purpose Fit for particular purpose No specific words necessary In writing and conspicuous As-is sale Buyer examination Course of dealing, course of performance, usage of trade

24 Advanced Business Law BPP 433 Allocating Loss of Transactional Breakdown Remedies

25 Advanced Business Law BPP 433 Buyer’s Remedies

26 Advanced Business Law BPP 433 Smith & Roberson’s Business Law Chapter 25 Seller’s Remedies or lost profits Recover price Buyer repudiates CancelWithhold delivery of goods Stop delivery of large shipment in transit Identify conforming goods to the contract Resell and recover damages Recover difference between unpaid contract and market pricesor lost profits Recover price Buyer’s Breach Seller’s Remedies Obligation- orientedGoods-orientedMoney-oriented Buyer wrongfully rejects goods CancelWithhold delivery of goods Stop delivery of large shipment in transit Identify conforming goods to the contract Resell and recover damages Recover difference between unpaid contract and market pricesor lost profits Recover price Buyer wrongfully revokes acceptance CancelWithhold delivery of goods Stop delivery of large shipment in transit Identify conforming goods to the contract Resell and recover damages Recover difference between unpaid contract and market pricesor lost profits Recover price Buyer fails to make payment CancelWithhold delivery of goods Stop delivery of large shipment in transit or ofany shipment if buyer is insolvent Identify conforming goods to the contract Reclaim goods upon buyer’s insolvency Resell and recover damages Recover difference between unpaid contract and market pricesor lost profits Recover price Buyer repudiates CancelWithhold delivery of goods Stop delivery of large shipment in transit Identify conforming goods to the contract Resell and recover damages Recover difference between unpaid contract and market pricesor lost profits Recover price

27 Advanced Business Law BPP 433 Liability for Injury/Damage by Defective Products Reflects Chain of Distribution Reality –Supplier of Components, Manufacturer, Intermediary ( Wholesaler, Distributor, Dealer), Retailer, Purchaser, User –Bystander – Beyond Customers Potential Defendants – Often Indirect Contractual Relationship; No Privacy Legal Rules (Mostly State Law) Evolved As Manufacturing and Commerce Evolved Products Liability Non-UCC Regulation of Quality/Function – Unique Business Risk Characteristics/ Wide Coverage

28 Advanced Business Law BPP 433 Manufacturing Defects Design Defects Warning Defects Products Liability Today’s Rule: Strict Liability for Injury/Damage from Defective Product

29 Advanced Business Law BPP 433 Non-Conformity to Manufacturer’s Design [Example: Seat belt improperly attached to car frame] Need Not Show Inadequate Manufacturing Materials Need Not Show Improper Inspection Rationale: –Hard to Pinpoint Negligence –Manufacturer in Superior Position to Reduce Harm [Example: Research, Cost-Effective Statistical Sampling] –Manufacturer Can Better Spread Cost of Defects When Not Cost- Effective to Eliminate [Example: Mouse in Coke Bottle] Manufacturing Defects

30 Advanced Business Law BPP 433 Occurs in Entire Product Line [Examples: Faulty blueprint, bad specification, bad choice of materials for product] Can Design Ever be Risk-Free? [Example: Knives] Proof Standards: –Consumer Expectations -- Jury? –Risk/Benefit Test -- Hindsight? Design Defects

31 Advanced Business Law BPP 433 Problem of “Complete” Information on Product Risks/Benefits Proof Standard: Is Purchaser in Best Position to Decide Benefits Outweigh Risks [Example: McDonald’s Coffee] Warning Defects

32 Advanced Business Law BPP 433 Standard Negligence Defenses – Contributory Negligence, Comparative Negligence (Reduces Damages), Assumption of Risk Product Misuse – [Exception: Foreseeable Misuse] [Examples – Chainsaw cutting upward v. using chainsaw to cut holiday turkey] Disclaimer of Product Liability – Not an Option Defenses to Product Liability Claims

33 Advanced Business Law BPP 433 Insurance v. Self-Insure? Corrective or Protective Measures? Liability Runs With Corporation! Management Issues

34 Advanced Business Law BPP 433 Bottom Lines; Q&A Behavior Toward Customers (Pre-Sale and Post-Sale) Highly Regulated UCC Article 2 Sales Rules = Default Rules UCC Article 2 Sales Rules Have a Bias Toward Contracting/ Transacting Products Liability = Non-UCC Regulation of Quality Function Direct Seller-Buyer Relationship Unnecessary for Strict Product Liability


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