©2001 West Legal Studies in Business. All Rights Reserved. 1 Chapter 11: Sales and Leases

©2001 West Legal Studies in Business. All Rights Reserved. 2 IntroductionIntroduction The Uniform Commercial Code (UCC) facilitates commercial transactions. UCC Article 2 governs the Sale of Goods. –Modifies or preempts common law of contracts in some areas. –Where UCC2 is silent, common law governs.

©2001 West Legal Studies in Business. All Rights Reserved. 3 §1: The Scope of UCC 2 UCC 2 applies to the “sale of goods.” –A “sale” is the passing of title of “goods” to/from a “merchant” (seller or buyer) for a price (money, goods, services,etc). –“Goods” are tangible and movable. UCC2 does not govern real estate nor stocks or bonds. –A “merchant” has special business expertise and is not a casual buyer/seller.

©2001 West Legal Studies in Business. All Rights Reserved. 4 §2: Scope of UCC 2A-Leases Contract for lease of personal goods between a lessor and a lessee. Consumer Leases (total payments less than $25,000). Finance Leases (involves a 3rd party- supplier).

©2001 West Legal Studies in Business. All Rights Reserved. 5 §3: Formation of Sales Contracts At common law once a valid offer is unequivocally accepted, a binding contract is formed. UCC is more flexible, and allows for open pricing, payment, and delivery terms.

©2001 West Legal Studies in Business. All Rights Reserved. 6 Offer: Open Terms [1] UCC 2-204: even if terms of are undetermined, contract may still exist. –Open Terms: “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. –Open Price Terms: If parties have not agreed on pricing, court can determine “reasonable price at the time of delivery.”

©2001 West Legal Studies in Business. All Rights Reserved. 7 Open Payment Terms: Unless otherwise agreed, payment is due on delivery (COD). Open Delivery Terms: Unless otherwise agreed, buyer takes delivery at the Seller’s place of business. Open Payment Terms: Unless otherwise agreed, payment is due on delivery (COD). Open Delivery Terms: Unless otherwise agreed, buyer takes delivery at the Seller’s place of business. Offer: Open Terms [2]

©2001 West Legal Studies in Business. All Rights Reserved. 8 Offer: Open Terms [3] Open Quantity Terms: generally courts will not impose a quantity. Exceptions: –Requirements Contract: buyer agrees to purchase what the buyer needs or requires. –Output Contract: buyer agrees to buy all of seller’s production or output.

©2001 West Legal Studies in Business. All Rights Reserved. 9 Merchant’s Firm Offer At common law, an offer could be revoked any time prior to acceptance, unless there was some consideration. At UCC, offer made by merchant is irrevocable for reasonable period of time if writing assurance is given. No consideration necessary.

©2001 West Legal Studies in Business. All Rights Reserved. 10 AcceptanceAcceptance Any reasonable means under the circumstances is permissible. Promise to ship or prompt shipment is acceptance. –Shipment of non-conforming goods is both an acceptance and a breach unless goods sent as an “accommodation” to buyer (UCC2-206).

©2001 West Legal Studies in Business. All Rights Reserved. 11 Additional Terms If either party is a non-merchant, the contract is formed according to the original terms of the offer. If both parties are merchants, contract incorporates new terms unless: (1) original offer expressly limits terms or (2) material change or (3) Offeror objects within reasonable time.

©2001 West Legal Studies in Business. All Rights Reserved. 12 §4: Consideration UCC requires consideration and modifications must be made in good faith. Modification must be in writing if required by Statute of Frauds.

©2001 West Legal Studies in Business. All Rights Reserved. 13 §5: Statute of Frauds Sale of goods over $500 must have a signed writing to be enforceable. Oral agreement is enforceable with a written memorialization. Exceptions to this rule: –Specially manufactured goods. –Admissions by breaching party. –Partial performance. –Merchant doesn’t object within 10 days.

©2001 West Legal Studies in Business. All Rights Reserved. 14 §6: Title, Risk and Insurable Interest Sale of goods requires different rules than real property transactions: risk should not always pass with title. UCC replaces title with identification, risk, and insurable interest.

©2001 West Legal Studies in Business. All Rights Reserved. 15 IdentificationIdentification For any interest to pass to buyer, goods must be: –In existence; and –Identified as specific goods in the sales contract (by serial numbers and/or physically separated from others, except for fungible goods which do not need separation).

©2001 West Legal Studies in Business. All Rights Reserved. 16 Identification [2] Gives the buyer the right: –To obtain insurance on the goods. –To recover from third parties who damage the good. Identification occurs: –If goods are designated when contract is made. If goods are not designated when contract is made, then identified at time of designation.

©2001 West Legal Studies in Business. All Rights Reserved. 17 When Title Passes to Buyer Title passes when agreed by the parties; or If no agreement, depends on whether contract is shipment or destination contract. –Shipment: title passes at time and place of shipment. –Destination: title passes when goods are tendered at the destination.

©2001 West Legal Studies in Business. All Rights Reserved. 18 When Title Passes to Buyer [2] If delivery is “without movement” of the goods, title passes when agreed by the parties; or –With document of title: when and where document delivered. –Without document: when sales contract is made, if goods have been identified or when identification occurs if they have not been identified.

©2001 West Legal Studies in Business. All Rights Reserved. 19 Risk of Loss (ROL) ROL does not necessarily pass with title. ROL is important because of insurance concerns. Unless agreed otherwise, ROL passes to Buyer depending on whether delivery is with or without movement of the goods. Delivery With Movement of the Goods. –Shipment vs. Destination Contracts. 

©2001 West Legal Studies in Business. All Rights Reserved. 20 ROL: Delivery with Movement of Goods In a shipment contract, ROL passes when seller tenders goods to carrier. –Case 11.1: Windows Inc. v. Jordan Panel System (1999).Windows Inc. v. Jordan Panel System In a destination contract, ROL passes when goods tendered at destination. Shipping terms. 

©2001 West Legal Studies in Business. All Rights Reserved. 21 ROL: Shipping Terms TermDefinition F.O.B.Free on Board. Sales price includes shipping to specific FOB place in contract. Example: FOB Chicago. F.A.S.Free Along Side. Requires seller to deliver goods alongside the ship before ROL passes to buyer. C.I.F.Cost, Insurance and Freight. Seller puts the goods in possession of a carrier Delivery Ex- Ship Deliver from Carrying shipping vessel. ROL passes to buyer when goods leave the ship or unloaded.

©2001 West Legal Studies in Business. All Rights Reserved. 22 ROL: Delivery Without Movement of Goods Goods Held by Seller: –Document of Title is generally not used. –If Seller is a merchant, ROL passes when buyer takes physical possession of goods. Goods Held by Bailee (Warehouse). ROL 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.

©2001 West Legal Studies in Business. All Rights Reserved. 23 ROL: Conditional Sales Sale on Approval. –ROL passes when buyer approves expressly or implicitly. Sale or Return. (Consignment is sale or return unless it complies with Art. 9.) –ROL passes to buyer with possession.

©2001 West Legal Studies in Business. All Rights Reserved. 24 ROL: Seller Breaches Contract Generally breaching party bears ROL. Seller’s Breaches the contract by shipping non-conforming goods. –Buyer Rejects Goods: ROL stays with Seller. –Buyer Revokes Acceptance: ROL passes back to Seller to the extent that buyer’s insurance does not cover the loss.

©2001 West Legal Studies in Business. All Rights Reserved. 25 ROL: Buyer Breaches Contract If Buyer breaches the agreement, then ROL passes immediately to Buyer. But: –Goods must identified; –Buyer bears ROL for a commercially reasonable amount of time after Seller learns of the breach; and –Buyer is liable only to the extent that Seller’s insurance does not cover loss.

©2001 West Legal Studies in Business. All Rights Reserved. 26 Insurable Interest Buyer has an insurable interest in goods that have been identified. Seller has an insurable interest in goods as long as they retain title or a security interest. Both buyers and sellers can have an insurable interest at the same time.

©2001 West Legal Studies in Business. All Rights Reserved. 27 §7: Performance Seller has a duty to deliver conforming goods. Buyer’s duty is to accept and pay for conforming goods. In the absence of an agreement between Seller and Buyer, UCC 2 controls as set out below.

©2001 West Legal Studies in Business. All Rights Reserved. 28 Good Faith Requirement Good Faith (“honesty in fact”) is the foundation of every UCC commercial contract. For a merchant, “good faith” 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.

©2001 West Legal Studies in Business. All Rights Reserved. 29 Seller’s Obligations Seller has a duty to “tender” delivery of “conforming goods” to: –The agreed–upon place of delivery; –With reasonable notice; –At a reasonable hour; and –In a reasonable manner. Seller must tender exactly the goods ordered, unless otherwise agreed.

©2001 West Legal Studies in Business. All Rights Reserved. 30 “Place of Delivery” [Carriers] In a Shipment contract, the Seller has a duty to: –Put goods into hands of independent carrier. –Make contract for transportation. –Obtain and promptly deliver or tender to the Buyer any documents necessary. –Promptly notify Buyer that shipment has been made. In a Destination contract, the Seller has a duty to: –Tender the goods at a reasonable hour and hold conforming goods at the Buyer’s disposal for a reasonable period of time.

©2001 West Legal Studies in Business. All Rights Reserved. 31 “Place of Delivery” [Non-Carriers] Buyer picks up at Seller’s place of business or, if Buyer has no place of business, then Buyer’s residence. If both parties know the goods are elsewhere (at a warehouse), then place of delivery is where the goods are.

©2001 West Legal Studies in Business. All Rights Reserved. 32 The “Perfect Tender” Rule Seller has a duty to deliver “conforming goods.” If goods, or tender of delivery, fail in any respect to conform to the contract, the Buyer has the right to: – Accept the goods; – Reject the entire shipment; or – Accept part and reject part.

©2001 West Legal Studies in Business. All Rights Reserved. 33 Click on the Links Below Exceptions to the Perfect Tender Rule Agreement of the Parties.Agreement of the Parties Seller’s Cure.Seller’s Cure Substitution of Carriers.Substitution of Carriers Installment contracts.Installment contracts Commercial Impracticability.Commercial Impracticability Destruction of identified goods.Destruction of identified goods Partial Performance. Proceed to Next Section 

©2001 West Legal Studies in Business. All Rights Reserved. 34 Buyer’s Obligations Furnish facilities reasonably suited for receipt of the goods. Make payment at the time and place the Buyer receives the goods. –Credit has to be prearranged. Credit period begins on the date of shipment. –Pay with cash, credit card, check unless Seller asks for cash, then Seller has to give Buyer time to get cash. Buyer has right to inspect.

©2001 West Legal Studies in Business. All Rights Reserved. 35 AcceptanceAcceptance Buyer can accept 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.

©2001 West Legal Studies in Business. All Rights Reserved. 36 Buyer’s Revocation of Acceptance Must notify Seller of breach. May revoke acceptance only if substantial nonconformity and: –Buyer accepted on the reasonable assumption that the Seller would cure the non-conformity; OR –Buyer did not discover the nonconformity because defect was latent or hard to discover.

©2001 West Legal Studies in Business. All Rights Reserved. 37 Anticipatory Repudiation Occurs when a party communicates she will not perform by time of contract performance. Non-breaching party may suspend performance and: –Treat the repudiation as material breach and pursue a remedy; or –Wait a reasonable time. Case 11.2: Banco International v. Goody’s Family Clothing (1999).

©2001 West Legal Studies in Business. All Rights Reserved. 38 §8: Remedies For Breach Click on the Links Below Seller’s Breach§2Buyer’s Breach If Goods in Seller’s Possession If Goods in Seller’s Possession If Goods in Carrier’s Possession If Seller delivers non- conforming goods If Goods in Buyer’s Possession Proceed 

©2001 West Legal Studies in Business. All Rights Reserved. 39 Contractual Provisions Affecting Remedies Parties to a contract can vary their rights and duties that preempt UCC provisions. Parties can stipulate whether contractual provisions are “exclusive”. However, provisions limiting consumer rights may be unconscionable.

©2001 West Legal Studies in Business. All Rights Reserved. 40 Contractual Provisions Affecting Remedies Limitation of Damages. Limitation of Remedies. Waiver of Defenses.

©2001 West Legal Studies in Business. All Rights Reserved. 41 §9: Warranties A warranty is an assurance of fact upon which a party may rely. –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.

©2001 West Legal Studies in Business. All Rights Reserved. 42 Warranty of Title Automatically arises in most commercial sales transactions. UCC-312 creates 3 warranties: –Good Title. –No Liens. –No Infringements. Warranty of title can generally be disclaimed only with specific language in contract.

©2001 West Legal Studies in Business. All Rights Reserved. 43 Express Warranties Can be oral or written-- don’t have to use the words “warrant” or “guarantee.” –Can be any affirmation or promise, description, sample or model. Express warranty creates affirmation of a fact that becomes the “basis of the bargain” and Buyer must rely on warranty when he enters into contract. Statements of Opinion or Value are “puffery”, not warranties. Case 11.4: Felley v. Singleton (1999).Felley v. Singleton

©2001 West Legal Studies in Business. All Rights Reserved. 44 Implied Warranties Warranty inferred at law based on the circumstances or nature of the transaction. Under the UCC, merchants warrant the goods they sell are “merchantable,” i.e., fit for the ordinary purpose for which such goods are sold.

©2001 West Legal Studies in Business. All Rights Reserved. 45 Implied Warranty of Merchantability Automatically arises from merchants. Goods are of average, fair, or medium- grade. Adequately packaged and labeled. Conform to promises on label. Have a consistent quality and quantity among the commercial units.

©2001 West Legal Studies in Business. All Rights Reserved. 46 Implied Warranty of Fitness for a Particular Purpose Arises by any Seller who: –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.

©2001 West Legal Studies in Business. All Rights Reserved. 47 Implied Warranty Arising from Course of Dealing or Trade Usage Arises when both parties to a contract have knowledge of a well-recognized trade custom. Courts infer that both meant this custom to apply to their transaction.

©2001 West Legal Studies in Business. All Rights Reserved. 48 Warranty Disclaimers 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 Buyer’s attention (e.g., BOLD CAPS UNDERLINED). –Case 11.5: Borden Inc. v. Advent Inc. (1997).

©2001 West Legal Studies in Business. All Rights Reserved. 49 Warranty Disclaimers [2] Implied Warranties: –Merchantability: “As Is,” “With All Faults”. –Fitness for a Particular Purpose: must be in writing and conspicuous. –If Buyer has the right to fully inspect and either: does so or refuses to do so, warranties are disclaimed as to defects that could reasonably be found.

©2001 West Legal Studies in Business. All Rights Reserved. 50 Law on the Web National Conference of Commissioners.National Conference of Commissioners U. Penn Final Draft of Uniform Laws.U. Penn Final Draft of Uniform Laws UCC at Cornell U..UCC at Cornell U. GMPerformanceparts.com.GMPerformanceparts.com “As is” warranty.“As is” warranty Legal Research Exercises on the Web

©2001 West Legal Studies in Business. All Rights Reserved. 51 Agreement of the Parties Parties agree that some defective goods will be acceptable. Parties agree that defective goods can be replaced or repaired within a certain time. Return

©2001 West Legal Studies in Business. All Rights Reserved. 52 Seller’s Cure Seller has the right to “Cure” (ship conforming goods to Buyer) if: –The agreed time of performance has not yet expired; or –If Seller had reasonable grounds to expect that Buyer would accept non-conforming goods, i.e., these goods are better than goods ordered, or Buyer has accepted non-conforming goods in the past. Return

©2001 West Legal Studies in Business. All Rights Reserved. 53 Substitution of Carriers If a carrier becomes impracticable or unavailable through no fault of either party, a commercially reasonable substitute is acceptable. Return

©2001 West Legal Studies in Business. All Rights Reserved. 54 Commercial Impracticability Occurrence of an unforeseen contingency that makes performance impracticable. Nonoccurrence was a basic assumption on which the contract was made. If only partial impracticability, Seller must allocate what he has. Return

©2001 West Legal Studies in Business. All Rights Reserved. 55 Installment Contracts Installment Contracts can be rejected if: –Installment is substantially non-conforming and can’t be cured; or –Non-conforming installment substantially impairs the entire contract. Return

©2001 West Legal Studies in Business. All Rights Reserved. 56 Destruction of Goods If no fault of either party and It occurs before risk passes to Buyer then Both Seller and Buyer are excused from performance. Return

©2001 West Legal Studies in Business. All Rights Reserved. 57 Partial Performance Sometimes unforeseen event only partially affects Seller’s capacity to perform. In that event, Seller has duty to reasonably allocate any remaining production capacity to fulfilling contractual performance. Buyer has the right to reject. Return

©2001 West Legal Studies in Business. All Rights Reserved. 58 Next Goods in Seller’s Possession [1] Seller may withhold delivery of the goods: –If material breach by Buyer, Seller can withhold delivery of all goods. –If non-material breach, Seller can withhold delivery of this installment. Seller can withhold delivery of all goods if Buyer is insolvent.

©2001 West Legal Studies in Business. All Rights Reserved. 59 Goods in Seller’s Possession [2] Seller may rescind the contract. Seller may identify the goods to the contract. Seller may sell raw materials for scrap or finish production. Next

©2001 West Legal Studies in Business. All Rights Reserved. 60 Goods in Seller’s Possession [3] Seller may resell the goods and: –Recover damages: the difference between the contract price and the resale price plus incidental damages + damages = the market price at the time & place of tender + incidental damages - expenses saved –If No Damages, Seller can sue for lost profits. Next

©2001 West Legal Studies in Business. All Rights Reserved. 61 Return Goods in Seller’s Possession [4] Seller may sue Buyer for breach of contract. –Recover Damages = the market price at the time & place of tender + incidental damages. –If there are no damages, Seller can sue for lost profits.

©2001 West Legal Studies in Business. All Rights Reserved. 62 Goods in Transit [1] Goods are “in transit” when Seller has tendered goods to Carrier. Goods are in transit until: –Buyer is given negotiable document of title to goods. –Buyer is given non-negotiable document of title or Bailee has acknowledged Buyer’s right to have the goods. –Buyer has had a reasonable time to pick up the goods. Next

©2001 West Legal Studies in Business. All Rights Reserved. 63 Return Goods in Transit [2] Seller has the right to stop the goods in transit if: –Buyer is insolvent: Seller can stop entire shipment of goods. –Buyer is in breach: Seller may stop a whole truckload or whole container.

©2001 West Legal Studies in Business. All Rights Reserved. 64 Return Goods in Buyer’s Possession Seller may sue for the purchase price. –Seller may also sue Buyer if goods were “specially-made” which Seller cannot resell. –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.

©2001 West Legal Studies in Business. All Rights Reserved. 65 Return Goods in Seller’s Possession If Buyer wants goods, she may: –Ask a Court for specific performance or replevin; –Recover goods from Seller if Seller becomes insolvent within 10 days after receiving first payment. If Buyer does not want goods, he may: –Rescind the contract; or –Cover or do not cover and sue for breach of contract.

©2001 West Legal Studies in Business. All Rights Reserved. 66 Seller Delivers Nonconforming Goods [1] If Seller does not make perfect tender Buyer has the right to reject all or part of goods: –Buyer must timely notify Seller of rejection and reasons and follow Seller’s directions. –Buyer is entitled to commission for selling perishable goods. –Buyer may store the goods and retain a security interest in the goods for his costs. Next

©2001 West Legal Studies in Business. All Rights Reserved. 67 Return Seller Delivers Nonconforming Goods [2] If Buyer has accepted non-conforming goods, she may: –Sue for breach of warranty –Sue for ordinary damages –Deduct damages from purchase price –Case 11.3: Yates v. Pitman Manufacturing (1999).Yates v. Pitman Manufacturing