Sales 1 HAND OUT QUIZ ON Sales and WARRANTIES

§1: The Uniform Commercial Code Contracts Across State Lines – How UCC works among states – Benefits of UCC – All states adopted except Louisiana UCC Article 2: Sale of Goods. – Modifies common law of contracts of some areas. – UCC 2 preempts common law. – Where UCC 2 is silent, common law governs 2

§2: The Scope of Article 2 Sale of Goods. Yes, Article 2 applies to the “sale of goods.” – “Sale.” A “sale” is the passing of title of “goods” to/from a “merchant” (seller or buyer) for a price (money, goods, services, etc). – Good v. Service All things (including specially manufactured goods) which are movable at the time of identification to the contract for sale.” Lohman v. Wagner (2004). Pig “farrow to finish” program. Does UCC apply? Service of raising pigs or sale of goods? Mixed purpose contracts – look for predominant purpose – sale of goods or service – that controls. “Merchant.” A “merchant” has special business expertise and is not a casual buyer/seller. Real Estate. UCC does not apply, unless can be severed (e.g. trees). Services. Generally contracts for services are not governed by UCC2. 3 End-of-Chapter Question 4 – Not Assigned Software with Support. Purchase of accounting software that includes installation of the software, a full year of maintenance, and a training and consulting package Water Served in Restaurant for Free. Class broke causing an injury. Implant of ProtoGen Sling. Operation to install sling for urinary incontinence Water

4 Contract Formation “Shrink-wrap” contracts. – Places license terms OUTSIDE the box. Opening the packaging is an “acceptance” of the offer. “Click-wrap” contracts. – License terms must be agreed to before software is installed. “Browse-wrap” Some websites use licenses which is a part of an online agreement.

§4: Formation of Sales Contracts Under UCC Common Law. 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. Open Price Term: If parties have not agreed on pricing, court can determine “reasonable price at the time of delivery.” UCC Open Price Term: If parties have not agreed on pricing, court can determine “reasonable price at the time of delivery.” UCC Open Payment Term: Unless otherwise agreed, payment is due on delivery (COD). UCC2-310(a). Open Payment Term: Unless otherwise agreed, payment is due on delivery (COD). UCC2-310(a). Open Delivery Term: Unless otherwise agreed, buyer takes delivery at the Seller’s place of business. UCC2-308(a). Open Delivery Term: Unless otherwise agreed, buyer takes delivery at the Seller’s place of business. UCC2-308(a). generally courts will not impose a quantity. UCC  Open Quantity: generally courts will not impose a quantity. UCC

§1: Good Faith Requirement Good Faith is the foundation of every UCC commercial contract. Good faith means honesty in fact. – Generally judging state-of-mind Merchants are held to a higher standard of care than non- merchants. Shell Case – Open Price Term 40 independent operators of Shell stations in the Cleveland area sued Shell under the UCC Good Faith requirement. The dealers claimed Shell deliberately set the wholesale price so high the stations could not make a profit intending to drive them out of business and Shell would take over the stations. What do you think? Does it matter if the stations could prove this was Shell’s goal? What about if the price was reasonable? That the stations could be Shell oil from “jobbers” for less than it could directly from Shell? 6

Case 8.1 Richardson v. Union Carbide CASE 8.1 Richardson v. Union Carbide Industrial Gases, Inc. (2002). Do contradictory terms in a pre-printed contract create an enforceable contract after the parties have performed ? Rage Proposal: ANY PURCHASE ORDER ISSUED AS A RESULT OF THIS QUOTE IS MADE EXPRESSLEY SUBJECT OT THE TERMS AND CONDITIONS ATTACHED HERETO IN LIEU OF ANY CONFLICTING TERMS PROPOSED BY PURCHASER…. INDEMNITY. Purchaser shall indemnify and hold Seller harmless against and in respect of any loss, claim or damage (including cost of suit and attorney’s fees) or expenses incident to or in connection with: the goods/equipment... Hoeganaes Acceptance: THIS ORDER IS ALSO SUBJECT TO THE TERMS AND CONDITIONS ON THE REVERSE SIDE OF THIS PAGE. 14. Indemnification. Seller agrees to indemnify and hold harmless Buyer, … from and against all losses, damages, liabilities, claims….. Questions: Do they have an agreement? Who indemnifies Whom? Why? Three choices: (1) conflicting terms fall out, (2) offeror’s terms control because different terms cannot be saved, or (3) acceptance prevails if not materially different (i.e. treat as additional terms).

8 Battle of the Forms Definite Response: intent to close the deal is crucial. Conditional Response: counteroffer should be clearly stated. Acceptance with Missing Terms: contract formed with included terms.

Acceptance: Additional Terms UCC elimination of common law “mirror image” rule Either Non-Merchant. If either party is a non- merchant, the contract is formed according to original terms of the offer. Both Merchants. 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. Material Alternations – Disclaimers or warranties – Arbitration clause Different Terms. UCC position less clear. Some courts treat as a new term others find contract is formed and use gap-filling provisions. 9

Case Problem #2, p Battle of Forms Request for Proposal. Hardie-Tynes request for quote for two cylinders for a dam. Offer as Response to Request. Hunger responded with a letter offer providing price, quantity and other specific terms. Offer Included Boilerplate language. Hunger included a copy of its standard terms and conditions including a term that stated mode of acceptance and limiting acceptance to the terms provided. Acceptance (with own terms). Hardie-Tynes accepted by sending a purchase order. Attorneys’ Fees as Additional Term. That purchase order included a clause which required payment of attorneys’ fees in the event Hardie-Tynes commenced litigation upon Hunger’s default. Hardie-Tynes also limited the agreement to its own terms. Hunger Breaches Contract Resulting in Lawsuit. The cylinders did not meet government specifications and Hunger breached the contract. Does Hardie-Tynes get attorneys’ fees? Jordanelle Dam Hydraulic Cylinder

Warranties 1.Warranty of title 2.Express warranties 3.Implied warranties (merchants only) Implied warranty of merchantability Implied warranty of fitness for a particular purpose 11

Warranty of Title Automatic Warranty of Title. UCC – Seller automatically warrants that: – Good title. The title conveyed is good – Right to convey the title – Goods are free of security interest or other liens – Warranty of title can be disclaimed. Special Rule for Merchant Sellers – Also warrants that the good is free from any rightful claims of patent, trademark or similar infringement

Express Warranties Requirements: – Affirmation of Fact. Seller makes an affirmation of fact or promise regarding the goods – Description of Goods or Sample. Seller provides a description of the goods or furnishes a sample – Part of Basis of the Bargain. The statement of promise must be part of the “basis of the bargain” – Difficult to Disclaim Puffery CASE 8.2 Boud v. SDNCO, Inc. (2002). What statements by Seller constitute an express warranty? Boud purchased yacht During test drive it had electrical problems, had same problems a week later in second test drive. Boud no longer wanted yacht and wanted to cancel the purchase of $150k yacht 13 Cruiser’s Yacht Offering the best performance and cruising accommodations in its class, the 3375 Espirt offers a choice of either stern drive or inboard power, superb handling and sleeping accommodations for six.

Implied Warranty of Merchantability Applies to Merchants Only. Must be merchant that sells that sort of goods Goods are merchantable if: – Pass without Objection. They pass without objection in the trade under the contract description, – Fair and Average Quality. In the case of fungible goods, be of fair and average quality, – Fit for Ordinary Purpose. Be fit for the ordinary purpose for which such goods are sold, – Even Kind, Quality and Quantity. Be of even kind, quality, and quantity within each unit and among all units – Adequately Packaged and Labeled. Be adequately packaged and labeled, and – Conform to Promises on Container. Conform to any promises or affirmations of fact made on the container or label 14 What if the owner of SDNCO sells his car at his yacht showroom? SDNCO Yacht’s For Sale Williams v. Braum Ice Cream Store Williams purchased a cherry-pecan ice cream cone and broke a tooth on a cherry pit in the ice cream. Williams sued under the implied warranty of merchantability. Who should win? Why?

Implied Warranty of Fitness for a Particular Purpose Seller Knows Purpose. The seller has reason to know of the particular purpose for which the buyer intends to use the goods Seller Knows Buyer Relying on Seller’s Judgment. The seller has reason to know that the buyer is relying upon the seller’s skill or judgment ot select or furnish suitable goods, and Buyer Actually Relies on Seller’s Judgment. The buyer actually relies upon the seller’s skill or judgment. Denny v. Ford Motor Company Denny purchased a Bronco II sport utility vehicle from Ford Motor Company. She slammed on the brakes to avoid a deer and the truck rolled over severely injuring Denny. Denny sued Ford/(dealer?) for breach of implied warranty for a particular purpose Denny did not drive off-road and bought the vehicle for city driving. Ford defended saying the vehicle was meant for off-road use although it had a marketing brochure that stated the vehicle is good for contemporary lifestyles.. Who wins? What facts matter? Mower Purchase of a mower to mow driving range by pulling mower with a tractor Told seller he needed mower to be pulled by 20 hp diesel engine Seller did not sell tractors Seller recommended the LasTec 521 It cut lawn poorly, because tractor was underpowered for the mower LasTec 521

Case Problem 1, p Mack Truck Case --Warranty Oral statement that truck will work on hills and that the transmission is fully rebuilt. …SELLER SPECFICIALLY DISCLAIMS ANY IMPLIED WARRANTEY OF MERCHANTABILITY OR FITNESS FO RA PARTICULAR PURPOSE AND FOR ANY LIABILITY FOR CONSEQUENTIAL DAMAGES FOR ANY BREACH OF WARRANTY. ALL USED VERHICLES ARE SOLD “AS IS.” Transmission had problems resulting in a lawsuit. Express warranty v. implied warranty.

Warranty Disclaimers and Privity of Contract For Warranty Warranty Disclaimers – Disclaimers must be unambiguous (any ambiguity resolved against seller) – Tough to disclaim express warranties – never make them in the first place – “as is” 17

Case Problem #5 18 Brian Yarusso became a quadriplegic after crashing and landing on his head on an off-road motorcycle. “Bell shall not be liable for any incidental or consequential damages…” Marketing Claim on Package: “…primary function of a helmet is to reduce the harmful effects of a blow to the head….NO HELMET CAN PROTECT THE WEARER AGAINST ALL FORSEEABLE IMPACTS.”

Magnuson-Moss Federal Warranty Act Covers Written Warranties Objectives of law – Ensure that consumers could get complete information about warranty terms and conditions – Ensure that consumers could compare warranty coverage prior to purchase – Promote competition on the basis of warranty coverage and – Strengthen incentives for companies to perform their warranty obligations and resolve complaints quickly. Full or Limited Warranty – No warranty required – Full Warranty. Entitles consumer to free repair or after a reasonable number of failed attempts to fix the product entitles the person to choose of a full refund or replacement. l Other Requirements – Cannot disclaim implied warranties – Warranty provided in a single easy-to-read format – Must be available prior to purchase Must state whether limited or full 19

Group Presentation – Underwater Mortgages Group 7 – Ok to walk away Group 8 – unethical to walk away General ethical discussion on right to breach contracts – stand by your word.