Sales Contracts and Warranties

OBE 118, Section 10, Fall 2004

Professor McKinsey

Now we focus on the UCC, in other words Commercial Law

• How the UCC governs Sales contracts.

The UCCA standardized law document adopted in part or in full by all statesArticle 2 Governs the Sales of Goods

•Definition of “Goods”

•Definition of “Merchant”

GoodsThe UCC applies to the sale of goods.

Goods are things that are moveable:

1) A tree growing in the forest?

2) A tree cut down for lumber?

3) A floppy disk containing software?

4) An email containing software?

MerchantsIf a contract involves “goods” the UCC will most

likely govern the making, execution and obligations of the contract.

If merchants are involved the rules of contracts will be even further changed. A merchant is one who:

1) routinely deals in the type of goods or

2) has special knowledge or uses those that do.

Contract Formation Under the UCC

Contracts can be created without key terms such as price

Acceptance does not have to be a mirror image of offer

“Any Manner that shows agreement”

Writing requirement for goods greater than $500: sufficient to indicate a contract, signed by defendant. But only enforceable to quantity stated

Merchants and the UCC

Merchants can use a confirming memo sent to other party to satisfy the writing requirement of the UCC

“Firm Offers” between merchants create an un-revocable offer for a reasonable or specified time.

Battle of the Forms

• When an acceptance differs from the offer a contract can still be created if the parties intended a contract to be created.

• Additional terms:

• Different terms:

Performance under the UCC

• Instead of “substantial performance” the goods must be “conforming”.

• Buyer can inspect and can reject non-conforming goods.

• Seller then has a right to “cure”

Breach under the UCC• Buyer can “cover” when seller “breaches”

• Cover means to reasonably obtain substitute goods.

• Buyer can then collect differential costs, incidental and consequential damages.

• Consequential damages are easier to collect (must still be caused by the breach)

• Seller can also sue for breach and collect differential costs and incidental costs or sue for the contract price.

UCC Problem #1• You order 5,000 tools from a supplier for

your resale business. You fax an order form on your letterhead and receive a confirmation on theirs. Your form said in fine print that the seller had to provide shipping insurance. Their form said that shipping insurance was at the option of the buyer and the buyer’s responsibility. The goods are lost in shipment and not insured. What outcome?

UCC Problem #2• Same situation. Your form said $1.91 each.

Their form said $1.99 each and cited the new catalog. You receive the goods and an invoice for the higher amount. You pay the lower amount. Seller sues you. What outcome?

Review• Contract Formation (UCC vs. Common

Law)

• Contract performance (UCC vs. Common Law)

• Breach of contract and remedies (UCC vs. Common Law)

Warranties• A contractual theory of responsibility for sellers for how a good performs

• Often the UCC is involved• Two Categories of warranties:

Express Implied

3 ways to create: 3 types:

Express Warranties• Opinions and Puffing are not warranty• Statement of fact that a product will meet a

standard or do a specific thing.Examples (yes or no?)This blade will last for over 100 hoursWill kill any weed you spray it onI think this car is the bestI think this car will last another 100,000 miles

without any major maintenanceThis is the best product on the market

Implied Warranties

• Title Warranties – with nearly all sales of goods

• Implied Warranty of Merchantability – only possible when merchant seller

• Implied Warranty of Fitness for a Particular Purpose – certain circumstances

Implied Title Warranties

Three types:

• – sellers owns the goods

• – good is free of claims by others

• – good is free from Intellectual Property(IP) claims

Implied Warranty of Merchantability

• When a merchant sells a good, it is warranted to be fit for use in general purpose

“ ”

• Goods must be reasonably fit for the ordinary purposes for which such goods are used, meet label expectations and be safe

• Victim must have harm caused by the breach of warranty

Implied Warranty of Fitness for a Particular Purpose

Arises when any seller recommends goods to the buyer for a particular purpose:

1) Seller aware of particular use

2) Buyer relies on seller’s knowledge or skill

3) Seller aware of buyer’s reliance

4) Seller recommends goods for particular use

Handling Warranties

A warranty creates terms in the contractWarranty failure is a potential breach of contract

The act of ensuring no warranties is called “disclaiming”

Warranty disclaimers often have to meet requirements to be effective

Disclaiming Warranties

• Merchantability

Conspicuous disclaimer with “merchantability” in it

• Fitness for a Particular PurposeUse the words: “as is” and “with all faults”

Product Liability• Contractual theory- using warranties

(express and implied) within a contract• Negligence theory- was product

negligently made or sold?• Strict liability theory – does product fall

under the strict liability doctrine

Product Liability using Negligence

• To prove negligence the part must show a breach of the duty of care.

• Proximate cause may limit the number of people in the chain of commerce that can be held liable

• Key part is finding a “smoking gun” or other evidence showing fault.

PL based on Strict Liability

3. Product unreasonably dangerous*

1. D sold product in defective condition

2. D normally in business of selling product

4. P suffers physical harm through use of product

5. Defective condition is proximate cause 6. No substantial changes to product since

sold

PL using Strict Liability Theory

• Advantages: lots of possible parties to sue, no need to show fault

• Disadvantages: has to meet one of three types of “defective products”

Intro to Chapter 11

• The following slides may be reached in this class. They apply to next week’s reading (Chapter 11)

Notes and Instruments• Notes and instruments explained how we

allow debts and obligations to be easily transferred to parties

• Obligations to pay someone money or perform services can be a promise in a contract.

• Sometimes the when an obligation is solely about paying money, it is unconditioned, and it meets certain other requirements, we call it a note.

Negotiable Instruments• A Note and other instruments such as checks,

Certificates of Deposit can often be negotiable meaning they are easily transferred or sold for value.

This week we study the world of notes, loans, collateralized loans, purchase agreements, security interests and the like. This is the real world of most personal property acquisition.

Security Interest

• A right another party has in property that allows them take the property and sell it to recover the amount of a debt or obligation

• Can be in Personal Property or in Fixtures: (We use a different system for Land)

• A security interest is acquired through a document called a “security agreement”

Security Agreements

Buyer Seller

Security Agreement, $$

Goods

This exchange of a security agreement for goods creates a valid security interest in the goods.

The goods are “secured property”

The Seller is a “secured party”

The buyer has less than full rights in the goods

Security Interest

• To have a security interest, the seller must– Obtain a security agreement– Give up value