1. Sales Contracts The Uniform Commercial Code
Formation of Sales Contracts
Ownership and Risk
Warranties Product Liability
Performance and Remedies
Class 4

2. Purposes of the UCC
To simplify, clarify and modernize the law governing commercial transactions;
To permit the continued expansion of commercial practices through custom, usage and agreement of the parties;
To make uniform the laws among the various jurisdictions.

3. UCC Article 2 - Sales Governs contracts for the sale of goods.
§2-201
UCC 2 preempts common law.
Under the UCC, the contract generally governs.
If it is not in the contract, apply the UCC.
Where UCC 2 is silent, common law governs.

4. Scope of Article 2 Applies only to the sale of goods. What is a sale?
What are goods.

5. What is a “Sale”? UCC Article 2 applies only to the “sale of goods.”
A “sale” consists in the passing of title of the “goods” from the seller to the buyer for a price.

6. What are “Goods”?
Goods are things that are moveable– other than money and securities.
UCC does not apply to real estate unless there is a “good” that can be severed by the Seller. If the good is severed by the Buyer, then UCC does not apply.
Generally contracts for services are not considered goods.

7. Mixed Contracts
If the contract involves the sale of goods and services, the UCC will apply if the predominant purpose is the sale of good.
The common law will apply if the predominant purpose is the sale of services.

8. Merchants The UCC 2 creates two sets of rules
One for “merchants”
One for other buyers and sellers
In many instances, the UCC 2 holds merchants to a higher standard of conduct than non-merchants.
A merchant is someone:
Who routinely deals in goods of the kind being sold.
Who holds himself out as having special knowledge or skills.
Who is employed as a broker or agent in a transaction.

9. UCC Art. 2A - Leases
Governs contracts for the lease of personal goods.
Consumer leases (primarily for family or personal use).
Finance leases (involves a 3rd party-supplier).

10. Good Faith
The UCC imposes a duty of good faith in the performance of all contracts.
For merchants this means honesty in fact and the exercise of reasonable commercial standards of fair dealing.

11. Unconscionability
In addition to good faith, the UCC employs a second principle – unconsiounability – to encourage fair play and just results.
A contract may be unconscionable if it is shockingly one-sided and fundamentally unfair.
A court may invalidate the contract, refuse to enforce the unconscionable provision, or limit the contract.

12. Contract Formation
At common law once a valid offer is unequivocally accepted, a binding contract is formed.
The time the contract is formed is discernable.
UCC is more flexible, and allows for open pricing, payment, and delivery terms.
The parties may make a contract in any manner sufficient to show agreement.

13. The Offer
Unlike an offer at common law, the UCC does not require definiteness in the offer.
One or more terms may be left open.
This “indefiniteness” is OK as long as the parties intended to make a contract and there is a reasonable basis for a court to grant a remedy.

14. Merchant’s Firm Offer
Common law: An offer can be revoked any time prior to acceptance, unless there was some consideration.
Article 2: An offer made by a merchant is irrevocable for a reasonable period of time if a written assurance is given. (No consideration necessary.)

15. Acceptance
Any reasonable means of communicating acceptance is permissible.
Promise to ship or prompt shipment is acceptance.
However, if the seller ships non-conforming goods, there is both an acceptance and a breach unless the goods are sent as an “accommodation” to buyer.

16. Additional Terms
If either party is a non-merchant, the contract is formed according to terms of the offer.

17. Additional Terms
If both parties are merchants, the contract incorporates the new terms unless:
Original offer expressly limits the terms of the contract,
The additional terms make a material change to the offer, or
The offeror objects within reasonable time.
If the additional terms conflict with the offer, those terms will cancel each other out.

18. Consideration
Article 2 requires consideration for a contract to be valid
Modifications do not require new consideration if they are made in good faith.
However, a modification must be in writing if required by Statute of Frauds.

19. Statute of Frauds
Sale of goods over $500 must be signed by the party to be charged (defendant) and be in writing to be enforceable.
Exceptions to this rule:
Specially manufactured goods.
Admissions by breaching party.
Partial performance.
Merchant doesn’t object within 10 days.

20. International Sales
United Nations Convention on Contracts for the Sale of Goods (CISG) governs contracts for the sale of goods where the buyer and seller are from different countries.
Primary differences between CISG and UCC.
Mirror image rule applies.
No Statute of Frauds.
Necessity of a Price Term.

21. Ownership and Risk
A legal interest in goods is a right to possess and use those goods.
The right can be valid and good against the claims of others.
The right can be void.
The right can be contingent or subject to the rights of others.

22. “Title” to Goods – Risk of Loss
What is the importance of determining “title” or an “ownership” interest in the goods? Why do we look at this?
Primarily to determine who bears the risk if the goods are damaged, sold, lost or stolen.
Who should insure the goods?
The UCC replaces the concept of title with the concepts of
Identification of goods
Risk of Loss
Insurable interest

23. Existence & Identification
For any interest (or title) to pass to the buyer, the goods must be:
In existence.
Identified as the specific goods referred to in the contract.
By serial numbers and/or
Physically separated from others, unless fungible goods which do not need separation.

24. Identification Gives the buyer the right:
To obtain insurance on the goods.
To recover from third parties who damage the goods.

25. Insurable Interest
Buyer has an insurable interest in goods that have been identified.
Seller has an insurable interest in goods as long as seller retains title or a security interest.
Both buyers and sellers can have an insurable interest at the same time.

26. Passage of Title Title may pass in any manner the parties agree upon.
The parties can decide if title passes when the goods leave the manufacturer’s factory, or when they reach the shipper who will deliver them.

27. Passage of Title
If the parties don’t specifically agree on the matter, title passes to the buyer at the time and place the seller performs physical delivery of the goods, according to the delivery terms.
What does this mean when goods are shipped?

28. Shipment v. Destination
Title passes when agreed to by the parties.
If no agreement then at the time the seller delivers ownership documents to the buyer or, if shipped, “time and place of delivery” depends on whether the contract is a shipment contract or a destination contract:
Shipment: title passes at time and place of shipment.
Destination: title passes when goods are tendered at the destination.

29. Non-shipment Contracts
Title passes when agreed by the parties.
If no agreement, title passes:
With document of title: when and where document delivered.
Without document: when contract is made, if goods have been identified or when identification occurs if they have not been identified.

30. Sales by Non-Owners
If a non-owner sells the goods to a third party, the risk of loss depends on whether the non-owner had
Void Title: true owner gets goods back or
Voidable Title: good faith (bona fide) purchaser keeps goods.

31. Bona Fide Purchaser
A person with voidable title has power to transfer valid title for value to a good-faith purchaser, generally called a bona fide purchaser of BFP.

32. Transfer of Void Title Owner  Bad Guy  Buyer Owner has good title
Bad guy steals goods (void interest – no title)
Buyer pays value, good faith (acquires a void title – nothing)
Owner will get the goods back

33. Transfer of Voidable Title
Owner  Bad Guy  Buyer
Owner has good title
Bad guy uses fraud to purchase goods (Voidable title)
Buyer pays value and acts in good faith (receives good title)
Buyer gets to keep the goods

34. Entrustment
If an owner voluntarily leaves goods with a merchant and the merchant wrongfully sells the goods to a BFP in the ordinary course of business, title passes to the BFP.
This is so even though the merchant did not have title based on “purchase.”

35. Creditor’s Rights The Seller’s creditors –
The UCC generally permits a buyer in the ordinary course of business to take goods free and clear of any security interest a creditor has in the goods.

36. Creditor’s Rights The Buyer’s creditors –
The UCC generally protects goods from the buyer’s creditors until the buyer accepts the goods (and acquires an ownership interest)

37. Risk of Loss Parties may allocate risk of loss any way they wish.
If the parties fail to specify when the risk passes from seller to buyer, the UCC provides the answer.

38. Risk of Loss
When making the agreement, the parties may quickly and easily allocate the risk by using common shipping terms defined by the UCC. They can use the terms alone or in combination and can use accepted designations for the terms.

39. Common Shipping Terms FOB Place of Shipment FOB Place of Destination
FAS a Named Vessel
CIF
C&F

40. Risk of Loss - Summary
In a shipment contract, risk passes when seller tenders goods to carrier.
In a destination contract, risk passes when goods tendered at destination.
Generally, if goods are held by seller, risk passes when buyer takes physical possession of goods.
If goods are held by bailee, risk passes when:
Buyer receives document of title, bailee acknowledges buyer’s right to goods, and buyer receives title and has reasonable time to pick up.

41. UCC Warranties
A warranty is a contractual assurance that goods will meet certain standards.
Warranty of title.
Express warranty.
Implied warranty of merchantability.
Implied warranty of fitness for a particular purpose.
Implied warranty arising from the course of dealing or trade usage.

42. Warranty of Title Seller automatically promises (warrants) Good title
No liens
No infringements
Disclaimer: Warranty of title can generally be disclaimed only with specific language in contract.

43. Express Warranties
A warranty that the seller creates with his words or actions.
Can be oral or written – seller does not have to use the words “warrant” or “guarantee” – or by conduct.
Any affirmation or promise.
Any description.
Any sample or model.

44. Express Warranties
To create an express warranty, the affirmation of fact, promise, description or sample must become part of the “basis of the bargain.”
The buyer must rely on warranty when he enters into the contract.
Does not include “puffing”

45. Implied Warranties
These are warranties created by the UCC, itself, not by any act or statement of the seller.

46. Implied Warranties
Implied warranty of merchantability is in every contract for sale of goods
Unless specifically excluded or modified
If the seller is a merchant with respect to goods of that kind.
UCC § 2-314

47. Implied Warranties
Implied warranty of fitness for a particular purpose arises when seller
Knows the particular purpose for which the goods are being bought and
Knows the buyer is relying on seller’s skill and judgment to select suitable goods.

48. Warranty? http://youtube.com/watch?v=uQqcPlz9-E0

49. Disclaimers
This is a statement that a particular warranty does not apply
Express Warranties can be disclaimed:
If they were never made (evidentiary matter).
If a clear written disclaimer in contract with specific, unambiguous language and called to the buyer’s attention: (i.e., BOLD CAPS UNDERLINED).
Implied Warranties can be disclaimed:
Merchantability - “As Is,” “With All Faults.”
Fitness - in writing and conspicuous.

50. Other Remedies
Remedies in tort or statutes protecting consumers of goods
Federal and state laws regulating advertising (consumer protection laws)
Negligence claims
Lemon laws
Product liability
Strict liability

51. Performance and Breach
The terms of the contract are what the parties have agreed to. The parties’ “duties and obligations” are
Those specified in the agreement
Those reflected by custom
Those required by the UCC Art. 2 or 2A.

52. Breach by Seller Generally breaching party bears the risk of loss.
Seller’s breach (i.e., delivery of nonconforming or defective goods):
Buyer can reject the goods – risk stays with seller until defect is cured or buyer accepts
Buyer can revoke acceptance of goods if defect is not discovered at time of delivery – risk passes back to seller to the extent that buyer’s insurance does not cover the loss

53. Breach by Buyer
Again, the breaching party generally bears the risk of loss.
If the buyer breaches, the risk immediately passes to buyer, however
Goods must have been identified
Risk passes to buyer for a reasonable amount of time after seller learns of the breach
Risk passes only to the extent that seller’s insurance does not cover loss

54. Performance Obligations
Good Faith is the foundation of every UCC commercial contract.
Good faith means honesty in fact.
For a merchant, it means honesty in fact and observance of reasonable commercial standards of fair dealing in the trade.
Merchants are held to a higher standard of care than non-merchants.

55. Seller’s Obligations
Seller’s primary duty is to “tender” delivery of “conforming goods.”
Tender means “delivery” to agreed place:
With reasonable notice
At a reasonable hour
In a reasonable manner
Exactly, unless otherwise agreed.

56. Perfect Tender Rule
If goods, or tender of delivery, fail in any respect to conform to the contract, the buyer can:
Accept the goods
Reject the entire shipment or
Accept part and reject part.

57. Exceptions to the Rule Agreement of the parties Cure
Substitution of carriers
Installment contracts
Commercial impracticality
Partial performance
Destruction of identified goods
Assurance and cooperation

58. Buyer’s Obligations
The buyer’s primary obligation is to accept conforming goods and pay for them.
Generally has the right to inspect the goods before paying.
The buyer must also provide adequate facilities to receive the goods.

59. Acceptance of Goods A buyer is accepts goods: By words or conduct
If Buyer had reasonable amount of time and failed to reject
Buyer performs an act which indicates he thinks he is the owner

60. Revocation or Rejection
A buyer may revoke acceptance only if the goods to not conform and the nonconformance substantially impairs the value of the goods and there was a legitimate reason for accepting initially.
A buyer may reject nonconforming goods by notifying the seller within a reasonable time after acceptance.

61. Remedies
Two remedies are available to both the buyer and seller. They are:
Assurance
A party may demand written assurance of performance from the other party and may suspend his own performance until the assurance is received.
Repudiation
If either party repudiates the contract, the other may suspend her own performance and await performance for a reasonable time, or immediately pursue any remedy for breach.

62. Seller’s Remedies
If a buyer breaches the contract, the seller’s remedy will depend on who has the goods and what steps the seller took after the buyer breached.
The seller can always cancel the contract.

63. Seller’s Remedies The seller also may be able to:
Stop delivery of the goods
Resell and recover damages
Obtain damages for nonacceptance or
Obtain the contract price

64. Stopping Delivery Seller may stop delivery of the goods:
If the buyer’s breach is material, the seller can withhold delivery of all goods.
If the breach is not material breach, the seller can withhold delivery of the installment.
Seller can withhold delivery of all goods if buyer is insolvent.

65. If Seller has the Goods Seller may rescind the contract.
Seller may sell the raw materials.
Seller may resell the goods and
Recover damages: the difference between the contract price and the resale price + incidental damages + damages
If no damages, seller can sue for lost profits.

66. If Buyer has the Goods Seller may sue for the purchase price.
Seller may also sue if goods were “specially-made” and cannot be resold
Seller may also sue for the purchase price if the goods were destroyed and the risk had already passed to the buyer
Seller can reclaim goods received by an insolvent buyer if demand made within 10 days of receipt.

67. Buyer’s Remedies
When a seller fails to deliver goods or if the buyer rightfully rejects the goods, the buyer is entitled to cancel the contract.
Buyer may also recover money paid to the seller – assuming the goods have not been received – and may be able to “cover” and to recover damages.

68. Buyer’s Remedies
If the buyer has accepted non-conforming goods, buyer may:
Sue for breach of warranty
Sue for ordinary damages
Deduct damages (including consequential damages) from purchase price

69. Limitations Parties can elect or limit UCC remedies in the contract.
Contracts can exclude or include consequential damages that are not unconscionable.
Statute of limitations is four years after breach of contract.