Sales

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Good Faith Requirement

Back 1

Article 2 requires that all parties act in good faith (i.e., with honest in fact and in observation of reasonable commercial standards of fair dealing).

Front 2

Article 2 Sections Distinguishing Merchants from Other Buyers and Sellers

Back 2

2-201(2) - Statute of Frauds (Merchant's Confirmatory Memo Rule)

2-205 - Merchant's Firm Offer

2-207(2) - Additional Terms in Acceptance or Confirmation (Battle of the Forms Rule for Merchants)

2-209(2) - Agreement Excluding Modification Except by Signed Writing (Form Supplied by Merchant)

2-312 - Warranty Against Infringement

2-314 - Implied Warranty of Merchantability

2-316(2) - Disclaimer of Implied Warranty of Merchantability

2-403(2) - Entrusting Goods to Merchant Gives Her Power to Transfer Rights to Buyer in Ordinary Course

2-509(3) - Risk of Loss in the Absence of Breach (Non-Carrier Cases) - Passes on Buyer's Receipt if Seller is a Merchant, Otherwise on Tender of Delivery

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Merchants' Firm Offers

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Common law offers generally are revocable unless consideration is given to keep the offer open. Article 2 modifies the common law rule for certain offers made by merchants. A written offer signed by a merchant giving assurances that it will be held open will be irrevocable - without consideration - for the stated time period or for a reasonable time if no period is expressly stated. The period of irrevocability may not exceed three months.

Front 4

Methods of Acceptance

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An offer is construed as inviting acceptance in any reasonable manner and by any reasonable medium. Generally, an offer to buy goods for current shipment is construed as inviting acceptance either by a promise to ship or by prompt shipment of conforming or nonconforming goods.

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Battle of the Forms Rule

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Article 2 has abandoned the common law mirror image rule for acceptance. Any acceptance or written confirmation that shows an intention to contract is effective. Whether terms in the acceptance that are different from or in addition to the offered terms will be included in the contract depends on whether both parties are merchants.

Contracts Involving a Non-Merchant - Contract will only include the terms of the offer.

Contracts Between Merchants - If both parties are merchants, additional terms automatically become part of the contract unless:
(1) They materially alter the original contract;
(2) The offer expressly limits acceptance to the offer's terms; or
(3) The offeror objects within a reasonable time.

When both parties are merchants, and the acceptance contains different terms from those in the contract, some courts treat them like additional terms, and some use the "knock-out rule."

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Knock-Out Rule

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Conflicting terms in the offer and acceptance (between merchants) are knocked out of the contract, and terms from the UCC will be used instead.

Front 7

Open Terms

Back 7

Just because one or more terms (including price) are left open doesn't prevent the formation of a contract if the parties intended such and there is a reasonable basis for giving a remedy. The court can supply reasonable terms for those that are missing. The one term that is essential (i.e., that a court cannot supply) is quantity (though output or requirements will be sufficient).

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Auctions

Back 8

A sale by auction is complete when the auctioneer so announces by the fall of the hammer or in another customary manner. Auctions are with reserve (i.e., the goods may be withdrawn at any time before the auctioneer announces they are sold) unless explicitly offered without reserve.

Front 9

Statute of Frauds

Back 9

Contracts for the sale of goods at a price of $500 or more (including any modifications) are not enforceable unless there is some writing that is signed by the party to be charged. A writing is sufficient even though it omits or incorrectly states a term, but a quantity must be stated because the contract is not enforceable beyond the quantity of goods shown in the writing.

Front 10

Merchants - Confirmatory Memo Rule

Back 10

In contracts between merchants, if one party, within a reasonable time after an oral understanding has been reached, sends a written confirmation thereof to the other party that binds the sender, it will satisfy the Statute of Frauds requirements against the recipient as well if he had reason to know of the confirmation's contents, unless he objects to its contents in writing within 10 days after it is received.

Front 11

When is a writing not required? (Statute of Frauds)

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A writing is not required:
(1) If the goods are specifically made for the buyer;
(2) Written confirmation by a merchant;
(3) If the party admits in his pleading or court testimony that a contract was made; or
(4) If the contract is performed.

Front 12

Unconscionability

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If a contract was unconscionable when made, the court may refuse to enforce it or limit it to avoid unconscionable results. The test for unconscionability is whether, at the time of execution, the contract or one of its provision could result in unfair surprise and was oppressive to a disadvantaged party.

Front 13

Contract Modification by Agreement of the Parties

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At common law, contracts may not be modified without consideration. Article 2 does not follow this rule.
(1) Contract modifications sought in good faith are binding without consideration.
(2) A provision that a written contract cannot be modified or rescinded except by a signed writing is valid and binding.
(3) An invalid oral modification may serve as a waiver of a party's right to enforce the contract as written if one of the parties relied to her detriment on the modification.
(4) One having the benefit of a condition under a contract may indicate by words or conduct that he will waive that condition.

Front 14

Contract Modification by Operation of Law

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(1) If a contract requires for its performance particular goods identified when the contract is made and, before risk passes to the buyer, the goods are destroyed or damaged without the fault of either party, the contract is avoided. For damaged goods, the buyer may elect to take the goods with a reduction in price. If the goods are destroyed or damaged after risk of loss has passed to the buyer, the buyer will bear the loss.
(2) If the agreed-upon delivery facilities become unavailable or commercial impractical, any commercially reasonable transportation must be tendered and must be accepted.

Front 15

Failure of Presupposed Conditions - Impracticability

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A seller will be discharged from performing a sales contract under the doctrine of impracticability if:
(1) At the time the parties made their contract, a basic assumption of both parties was that a certain circumstance that would make performance extremely more burdensome would not occur; and
(2) The circumstance does occur.

The seller is discharged only to the extent of the impracticability.

Unforeseen wars, embargoes, and natural catastrophes will usually be sufficient if they make it extremely difficult for the seller to obtain or convert raw materials. If it just makes performance more expensive, seller will usually not be discharged.

Partial inability to perform (e.g., shortage of goods) does not excuse performance; the seller must allocate the available supply among its customers.

Front 16

Parol Evidence Rule

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The terms of a contract set forth in the confirmatory memoranda of the parties or in a writing intended as a final expression of the parties' agreement cannot be contradicted by evidence of any prior agreement or contemporaneous oral agreement. Such terms, however, may be explained or supplemented by:
(1) consistent additional terms;
(2) course of dealing (a sequence of conduct concerning previous transactions between the parties to a transaction that may be regarded as establishing a common basis of understanding);
(3) usage of the trade or business; or
(4) course of performance (repeated occasions for performance and a party has opportunity to object to performance; any performance acquiesced to is relevant in determining the meaning of the contract).

Note: There is NO requirement that a contract term be ambiguous before allowing an explanation by course of dealing, usage of trade, or course of performance.

Front 17

Seller's Obligation of Tender and Delivery - Noncarrier Contracts

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If the parties did not intend that the goods be moved by a carrier, the seller must put and hold conforming goods at the buyer's disposition for a time sufficient for the buyer to take possession. In the absence of agreement, the place of delivery in the seller's place of business, or if he has none, his residence.

Front 18

Seller's Obligation of Tender and Delivery - Carrier Contracts

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If the parties intend that a carrier be used to move the goods, the seller may be obligated to deliver the goods for shipment or to deliver them to a particular destination.
(1) Shipment Contracts - Seller must only put the goods in the hands of a carrier, make a reasonable contract for the shipment, tender required documents (promptly), and promptly notify the buyer of the shipment.
(2) Destination Contracts - Seller is required to see that the goods reach the buyer.
(3) F.O.B. Contracts - In contracts that specify that delivery is "Free on Board" (F.O.B.) a particular point, the F.O.B. point is the delivery point.
(4) F.A.S. Contract - In contracts that specify that delivery is "free alongside" (F.A.S.), the seller must deliver the goods alongside the vessel.

Front 19

Buyer's Obligation to Pay - Right to Inspect

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(1) In noncarrier cases, unless the contract provides otherwise, a sale is for cash and the price is due concurrently with tender of delivery.
(2) In cases where there is no express provision as to payment or the contract specifies cash, and the contract is one for shipment by carrier, the seller may send the goods "under reservation" so that the buyer will be unable to get the goods from the carrier until he pays.
(3) Tender of payment by check is sufficient unless the seller demands legal tender and gives the buyer the time reasonably necessary to get cash. When payment is by check, payment is not final until the check is honored.
(4) In an installment contract (i.e., goods are delivered in installments), the seller can demand payment for each installment if the price can be so apportioned, unless a contrary intent appears.
(5) Unless the contract provides otherwise, the buyer has a right to inspect the goods before he pays (except if goods are sent C.O.D. or against documents that indicate the buyer has promised to pay without inspecting the goods).

Front 20

Identification - Allocation of Interest

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A buyer obtains an interest in goods under a sales contract when the goods can be "identified." Identification is a designation of specific goods as the ones to be delivered under the contract of sale. It gives the buyer an insurable interest in the goods and, in certain circumstances, the right to get the goods from the seller and the right to sue third parties for injury to them.

Identification takes place at the time the contract is made if it calls for the sale of specific and ascertained goods currently existing.

If a sale is of unborn animals or of crops to be harvested within 12 months (or the next harvest season), identification takes place when the young are conceived or when the crops are planted.

In other cases, identification takes place when the goods are shipped, marked, or otherwise designated by the seller as the goods to pass under the contract.

Front 21

Risk of Loss in the Absence of Breach

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Noncarrier Cases - If the seller is a merchant, risk of loss passes to the buyer only upon the buyer taking physical possession of the goods. If the seller is not a merchant, risk of loss passes to the buyer upon tender of delivery.

Carrier Cases - In a shipment contract, risk of loss passes to the buyer when the goods are duly delivered to the carrier. In a destination contract, the risk of loss passes to the buyer when the goods are tendered to the buyer at the destination.

Front 22

Effect of Breach on Risk of Loss

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Defective Goods - If the goods are so defective that the buyer has a right to reject them, the risk of loss does not pass to her until the defects are cured or she accepts the goods in spite of their defects. If the buyer revokes acceptance, the risk of loss is treated as having rested on the seller from the beginning for any losses not covered by the buyer's insurance.

Breach by Buyer - Where the seller has identified conforming goods to the contract and the buyer repudiates or otherwise breaches the contract before the risk of loss passes to her under the contract, any loss occurring within a commercially reasonable time after the seller learns of the breach falls on the buyer to the extent of any deficiency in the seller's insurance coverage.

Front 23

Risk in "Sale or Return" and "Sale on Approval" Contracts

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For purposes of risk of loss, a sale or return contract (i.e., the buyer takes goods for resale buy may return them if he is unable to resell them) is an ordinary sale. If the goods are returned to the seller, the risk remains on the buyer while the goods are in transit. In a sale on approval contract (i.e., the buyer takes goods for use but may return them even if they conform to the contract), the risk of loss does not pass to the buyer until he accepts. If the buyer decides not to take the goods, return is at the seller's risk.

Front 24

Rules for Passage of Title

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In the absence of an agreement, title passes when the seller completes his performance with respect to the physical delivery of the goods. Note that title does not control risk of loss, the seller's right to the sale price, or the buyer's right to the goods.

Front 25

Acceptance

Back 25

Acceptance of goods occurs when:
(1) The buyer, after reasonable opportunity to inspect them, indicates to the seller that they conform or that she will keep them in spite of their nonconformance;
(2) The buyer fails to reject them within a reasonable time after tender or delivery of the goods or fails to seasonably notify the seller of her rejection; or
(3) The buyer does anything inconsistent with the seller's ownership.

Front 26

Right of Rejection

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When goods that do not conform to the contract are tendered to a buyer, the buyer can either keep them (and sue for damages) or, under some circumstances, reject the goods and either cancel the contract or sue.

In single delivery contracts, if the goods or tender fail to conform, the buyer may reject all, accept all, or accept any commercial units and reject the rest.

Seller's failure to make a reasonable contract with a carrier or his failure to notify the buyer that the goods have been shipped are grounds for rejection only if material loss or delay results.

In an installment contract, the buyer can reject an installment only if the nonconformity substantially impairs the value of that installment and cannot be cured. The whole contract is breached if the nonconformity substantially impairs the value of the entire contract.

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Formal Requirements for Rejection

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Rejection must be within a reasonable time after delivery or tender and before acceptance. The buyer must seasonably notify the seller. If the buyer fails to state that the goods have a particular defect ascertainable by reasonable inspection, he cannot rely on that defect to justify rejection or show the seller's breach if:
(1) the seller could have cured the defect if he had been told about it; or
(2) in contracts between merchants the seller has, after rejection, made a request in writing for a full and final written statement of all defects upon which the buyer proposes to rely.

Front 28

Buyer's Responsibility for Goods After Rejection

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After rejection of goods in her physical possession, the buyer has an obligation to hold them with reasonable care at the seller's disposition for a time sufficient to permit the seller to remove them or give instructions as to what to do. If a seller gives no instructions within a reasonable time after notification of rejection, the buyer may reship the goods to the seller, store them for the seller's account, or resell them for the seller's account. The buyer has a security interest in rejected goods in her possession for any part of the price already paid and for expenses reasonably incurred in connection with handling the goods after rejection.

Front 29

Seller's Right to Cure

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Where a buyer has rejected goods because of defects, the seller may within the time originally provided for performance "cure" by:
(1) Giving reasonable notice of intention to cure; and
(2) Making a new tender of conforming goods, which the buyer must then accept.

There is one circumstance where a seller is allowed to cure after the original time for performance has passed: If the seller sends the buyer nonconforming goods that he reasonably believes will be acceptable to the buyer, but the buyer rejects, the seller will get a reasonable time to cure, even though the original time for performance has passed.

A defective shipment in an installment contract cannot be rejected if the defect can be cured.

Front 30

Revocation of Acceptance

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Buyer may revoke her acceptance of goods if the defect substantially impairs their value to her and:
(1) she accepted them on the reasonable belief that the defect would be cured and it has not been; or
(2) she accepted them because of the difficulty of discovering defects or because of the seller's assurance that the goods conformed to the contract.

Revocation must occur within a reasonable time after the buyer discovers or should have discovered the defect and before any substantial change in the goods not caused by their own defects. A proper revocation of acceptance has the effect of rejection.

Front 31

Buyer's Right to Replevy Identified Goods

Back 31

Buyer may replevy identified, undelivered goods from the seller if the buyer has tendered full payment and made at least part payment and either:
(1) the seller becomes insolvent within 10 days after receiving the buyer's first payment; or
(2) the goods were purchased for personal, family, or household purposes.

In other cases, where the seller has failed to deliver identified goods, the buyer may replevy them from the seller if the buyer is unable to secure substitute goods.

Front 32

Buyer's Damages

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For Nondelivery or Upon Rejection or Revocation of Acceptance - difference between the contract price and either the market price or the cost of buying replacement goods. (Also incidental and consequential damages).

For Accepted Goods - difference between the value of the goods delivered and the value they would have had if they had conformed plus incidental and consequential damages. Must notify seller within reasonable time.

Front 33

Seller's Remedies

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(1) Right to Withhold Goods - if buyer fails to make payment.
(2) Right to Recover Goods - If seller finds out that buyer (who bought on credit) is insolvent, may reclaim within 10 days of buyer's receipt. May also stop delivery if he finds out that soon.
(3) Right to Force Goods on Buyer and Recover Full Price - Right to force goods on a buyer who has not accepted them ONLY if the seller is unable to resell the goods to others at a reasonable price or if the goods have been lost or damaged.

Front 34

Seller's Damages

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Three measures of damages:
(1) Recover the difference between market price and contract price;
(2) Resell the goods and recover the difference between contract price and resale price; or
(3) Recover, under a "lost profits" measure (when the item is rare - not an unlimited supply, e.g., oil painting versus color TV), the difference between the list price and the cost to the seller.

May also recover incidental damages - includes such expenses as cost of storing, shipping, and reselling the goods.

Front 35

Remedies Available to Both Buyer and Seller

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(1) Right to Demand Assurances (of Performance)
(2) Anticipatory Repudiation
(3) Retraction of Repudiation
(4) Sue Third Parties for Negligence
(5) Liquidated Damages

Front 36

Anticipatory Repudiation

Back 36

In cases where the other party's words, actions, or circumstances make it clear that he is unwilling or unable to perform, the aggrieved party may:
(1) for a commercially reasonable time, await performance by the other party;
(2) resort to any remedy for breach even though he has also urged the other party to conform; or
(3) suspend his own performance.

Front 37

Statute of Limitations

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Breach of a sales contract has a statute of limitations of four years from the time of breach.

Front 38

Types of Warranties

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(1) Warranty of Title and Against Infringement
(2) Implied Warranty of Merchantability
(3) Implied Warranty of Fitness for a Particular Purpose
(4) Express Warranties

Front 39

Warranty of Title and Against Infringement

Back 39

Title - Any seller of goods impliedly warrants that the title transferred is good, the transfer is rightful, and that there are no liens or encumbrances against title of which the buyer is unaware at the time of contracting.

Infringement - A merchant seller dealing in goods of the kind sold warrants that the goods are delivered free of any patent, trademark, copyright, or similar claims. But a buyer who furnishes specifications for the goods to the seller must hold the seller harmless against such claims.

Front 40

Implied Warranty of Merchantability

Back 40

In every sale by a merchant who deals in goods of the kind sold, there is an implied warranty that the goods are merchantable. The most important test for the warranty is whether the goods are "fit for the ordinary purposes for which such goods are used," and a failure of such is the usual claim in a merchantability suit. As in all implied warranty cases, it makes no difference that the seller himself did not know of the defect or that he could not have discovered it.

Front 41

Implied Warranty of Fitness for Particular Purpose

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Arises whenever any seller, merchant or not, has reason to know the particular purpose for which goods are to be used and that the buyer is relying on the seller's skill and judgment to select suitable goods.

Front 42

Express Warranties

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Any affirmation of fact or promise made by the seller to the buyer, any description of the goods, and any sample or model creates an express warranty if the statement, description, sample, or model is part of the basis of the bargain (i.e., the buyer could have relied on it).

Front 43

Disclaimer of Warranties

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(1) Express Warranties - Extremely difficult to negate an express warranty. Language limiting it must be consistent with warranty.
(2) Implied Warranties - Merchantability may be specifically disclaimed and must be conspicuous and mention "merchantability." Fitness for a particular purpose may be disclaimed by conspicuous writing, but need not mention fitness for a particular purpose. Can avoid both types by (1) language like "as is," (2) inspection, or (3) course of dealing/performance or usage of trade.

Unconscionability - Disclaimers will be tested by this standard.

Front 44

Federal Consumer Product Warranties Law of 1975 ("Magnuson-Moss")

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Under the Federal Consumer Product Warranties Law of 1975, if a consumer product manufacturer or marketer issues of full written warranty, implied warranties cannot be disclaimed. If the written warranty is described as a limited warranty, implied warranties cannot be disclaimed or modified, but they may be limited to the duration of the written warranty.

Front 45

Limitation of Damages for Breach of Warranty

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Limits on damages for breach of warranty will be judged by an unconscionability test.

Front 46

Warranty and Third Parties

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In most states, the seller's warranty liability extends to any natural person who is in the family or household of the buyer or who is a guest in her home if it is reasonable to expect that such person may use, consume, or be affected by the goods and he suffers personal injury because of a breach of warranty. The seller cannot escape the effect of this section by contract (no disclaimer saying that it ONLY applies to buyer).

Front 47

Strict Liability

Back 47

Many states have adopted a strict tort liability theory to make a manufacturer or seller of goods liable for injuries to persons or property caused by defects in goods sold. The theory allows a purchaser to recover from all sellers in the distributive chain without regard to privity of contract. It also allows an injured person who is not a purchaser to recover from the same parties.

Front 48

Entrustment

Back 48

Entrusting goods to a merchant who deals in goods of that kind gives him power to transfer all rights of the entruster to a buyer in the ordinary course of business.

Example: Eric leaves his watch at a jeweler's for repair. The jeweler sells the watch to Bonnie. Bonnie gets title to the watch, and Eric's only recourse is to recover damages from the seller.

Front 49

Voidable Title

Back 49

Generally if a sale is induced by fraud, the seller can rescind the sale and recover the goods (voidable title). Exception: The defrauded seller may not recover the goods from a good faith purchaser for value from the fraudulent buyer. Specifically, the good faith purchaser for value cuts off the defrauded seller's rights, even though:
(1) The seller was deceived as to the identity of the buyer;
(2) The delivery was in exchange for a check later dishonored;
(3) The sale was a "cash sale"; or
(4) The fraudulent conduct of the buyer is punishable as larceny.

Front 50

Can a thief pass good title?

Back 50

Generally, no. If a thief steals goods from a true owner then sells them to a buyer, the thief is unable to pass good title to the buyer, because the thief's title is VOID. Therefore, in such a situation, the true owner can recover the stolen goods from the buyer, even if the buyer is a good faith purchaser for value. Exceptions: A thief CAN pass good title if (1) the goods are money, (2) the goods are negotiable instruments that were transferred to an HDC, (3) the buyer has made accessions (i.e., valuable improvements) to the goods, or (4) the true owner is estopped from asserting title (e.g., if the true owner expressly or impliedly represented that the thief had title).

Front 51

Fraudulent Retention of Possession Rules

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Retention of possession by a seller of sold goods is conclusively fraudulent (as against the seller's creditors) unless the sale is evidenced by a written bill of sale. Therefore the seller's creditors can reach the goods while they are in the seller's hands. However, retention of possession in good faith and current course of trade by a merchant seller for a commercially reasonable time after sale or identification is not fraudulent.

The buyer has the right in certain cases to get goods from the seller even though title has not passed. This right apparently exists as against the seller's creditors as well, unless the fraudulent possession rules prevent it.

Front 52

Sale or Return

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If the buyer takes goods for resale and has a right to return them ("sale or return") if they are not sold, the goods are subject to the claims of the buyer's creditors while they are in his possession.