© 2007 by West Legal Studies in Business / A Division of Thomson Learning CHAPTER 10 Sales, Leases, and E-Contracts

THE LEGAL ENVIRONMENT TODAY Miller Cross 5 th Ed. © 2007 by West Legal Studies in Business / A Division of Thomson Learning 2 The Scope of the UCC Facilitates commercial transactions. UCC Article 2: –Governs contracts for sale of goods. –UCC 2 preempts common law. –Where UCC2 is silent, common law governs.

THE LEGAL ENVIRONMENT TODAY Miller Cross 5 th Ed. © 2007 by West Legal Studies in Business / A Division of Thomson Learning 3 What is a “Sale”? UCC Article 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. –A “merchant” has special business expertise and is not a casual buyer/seller.

THE LEGAL ENVIRONMENT TODAY Miller Cross 5 th Ed. © 2007 by West Legal Studies in Business / A Division of Thomson Learning 4 What is a “Good”? A good is both tangible and movable. 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.

THE LEGAL ENVIRONMENT TODAY Miller Cross 5 th Ed. © 2007 by West Legal Studies in Business / A Division of Thomson Learning 5 What is a “Merchant”? Generally UCC 2 applies to all buyers of sellers of goods. In some instances, sales by/for a merchant imposes special duties. A Merchant: –Deals in goods of the kind being sold. –Holds himself out with special knowledge or skills. –Is employed as a broker or agent in a transaction. Case 10.1 Hammer v. Thompson (2006).

THE LEGAL ENVIRONMENT TODAY Miller Cross 5 th Ed. © 2007 by West Legal Studies in Business / A Division of Thomson Learning 6 Scope of Article 2A-Leases Contract for lease of personal goods between a lessor and a lessee. Consumer Leases (primarily for family or personal use). Finance Leases (involves a 3rd party-supplier).

THE LEGAL ENVIRONMENT TODAY Miller Cross 5 th Ed. © 2007 by West Legal Studies in Business / A Division of Thomson Learning 7 Formation of Sales and Lease 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.

THE LEGAL ENVIRONMENT TODAY Miller Cross 5 th Ed. © 2007 by West Legal Studies in Business / A Division of Thomson Learning 8 Offer - Open Terms Article 2-204: even if terms of uncertain, a 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.

THE LEGAL ENVIRONMENT TODAY Miller Cross 5 th Ed. © 2007 by West Legal Studies in Business / A Division of Thomson Learning 9 Offer - Open Terms “Open Quantity” (UCC2-306): generally courts will NOT impose a quantity, UNLESS: –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.

THE LEGAL ENVIRONMENT TODAY Miller Cross 5 th Ed. © 2007 by West Legal Studies in Business / A Division of Thomson Learning 10 Merchant’s Firm Offer Common law: An offer could be revoked any time prior to acceptance, unless there was some consideration. Article 2: An offer made by a merchant is irrevocable for reasonable period of time if a written assurance is given. No consideration necessary.

THE LEGAL ENVIRONMENT TODAY Miller Cross 5 th Ed. © 2007 by West Legal Studies in Business / A Division of Thomson Learning 11Acceptance 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.

THE LEGAL ENVIRONMENT TODAY Miller Cross 5 th Ed. © 2007 by West Legal Studies in Business / A Division of Thomson Learning 12 Additional Terms If either party is a non-merchant, the contract is formed according to 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. Additional terms may be stricken if both parties acted inconsistent with the terms

THE LEGAL ENVIRONMENT TODAY Miller Cross 5 th Ed. © 2007 by West Legal Studies in Business / A Division of Thomson Learning 13Consideration Article 2 requires consideration and modifications must be made in good faith. Modification must be in writing if required by Statute of Frauds.

THE LEGAL ENVIRONMENT TODAY Miller Cross 5 th Ed. © 2007 by West Legal Studies in Business / A Division of Thomson Learning 14 Statute of Frauds Sale of goods over $500 must have a signed writing to be enforceable. Exceptions to this rule: –Specially manufactured goods. –Admissions by breaching party. –Partial performance. –Merchant doesn’t object within 10 days.

THE LEGAL ENVIRONMENT TODAY Miller Cross 5 th Ed. © 2007 by West Legal Studies in Business / A Division of Thomson Learning 15 Performance: Good Faith 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.

THE LEGAL ENVIRONMENT TODAY Miller Cross 5 th Ed. © 2007 by West Legal Studies in Business / A Division of Thomson Learning 16 Obligations of the Seller / Lessor Seller has a duty 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.

THE LEGAL ENVIRONMENT TODAY Miller Cross 5 th Ed. © 2007 by West Legal Studies in Business / A Division of Thomson Learning 17 Place of Delivery (Carriers) Shipment contracts. 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. Destination contracts. Seller has duty to: –Tender the goods at a reasonable hour and hold conforming goods at the Buyer’s disposal for a reasonable period of time.

THE LEGAL ENVIRONMENT TODAY Miller Cross 5 th Ed. © 2007 by West Legal Studies in Business / A Division of Thomson Learning 18 The Perfect Tender Rule 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.

THE LEGAL ENVIRONMENT TODAY Miller Cross 5 th Ed. © 2007 by West Legal Studies in Business / A Division of Thomson Learning 19 Exceptions to the Perfect Tender Rule Click on the Links Below Agreement of the Parties.Agreement of the Parties Cure.Cure Substitution of Carriers.Substitution of Carriers Installment contracts.Installment contracts Commercial Impracticability.Commercial Impracticability Destruction of Identified Goods.Destruction of Identified Goods Assurance and Cooperation.Assurance and Cooperation

THE LEGAL ENVIRONMENT TODAY Miller Cross 5 th Ed. © 2007 by West Legal Studies in Business / A Division of Thomson Learning 20 Obligations of the Buyer / Lessee Furnish facilities reasonably suited for receipt of the goods. 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. But if Seller asks for cash, Seller has to give Buyer time to get cash.

THE LEGAL ENVIRONMENT TODAY Miller Cross 5 th Ed. © 2007 by West Legal Studies in Business / A Division of Thomson Learning 21 Buyer has right to inspect before paying: –Costs of inspection borne by Buyer. –However, C.O.D., C.I.F. and C&F give Buyer no right to inspect. Obligations of the Buyer / Lessee

THE LEGAL ENVIRONMENT TODAY Miller Cross 5 th Ed. © 2007 by West Legal Studies in Business / A Division of Thomson Learning 22Acceptance 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.

THE LEGAL ENVIRONMENT TODAY Miller Cross 5 th Ed. © 2007 by West Legal Studies in Business / A Division of Thomson Learning 23 Anticipatory Repudiation Party communicates he will not perform by time of contract performance. Non-breaching party may suspend performance and: –Treat the A.R. as material breach and pursue a remedy; or –Wait a reasonable time.

THE LEGAL ENVIRONMENT TODAY Miller Cross 5 th Ed. © 2007 by West Legal Studies in Business / A Division of Thomson Learning 24 Remedies for Breach Buyer Remedies Seller Remedies End If Goods in Buyer’s Possession If Goods in Buyer’s Possession If Seller delivers non- conforming goods If Seller delivers non- conforming goods If Goods in Transit If Goods in Transit If Goods in Seller’s Possession If Goods in Seller’s Possession If Goods in Seller’s Possession If Goods in Seller’s Possession Click on the Links Below

THE LEGAL ENVIRONMENT TODAY Miller Cross 5 th Ed. © 2007 by West Legal Studies in Business / A Division of Thomson Learning 25 Remedies of the Seller or Lessor 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.

THE LEGAL ENVIRONMENT TODAY Miller Cross 5 th Ed. © 2007 by West Legal Studies in Business / A Division of Thomson Learning 26 Remedies of the Seller or Lessor Seller may resell or dispose of the goods; and –Recover damages: the difference between the contract price and the resale price + 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.

THE LEGAL ENVIRONMENT TODAY Miller Cross 5 th Ed. © 2007 by West Legal Studies in Business / A Division of Thomson Learning 27 Seller has the right to recover the purchase price (or lease payments). Seller has the right to recover damages = the market price at the time & place of tender + incidental damages. if there are no damages, Seller can sue for lost profits. –Case 10.3 Utica Alloys, Inc. v. Alcoa, Inc. (2004). Remedies of the Seller or Lessor

THE LEGAL ENVIRONMENT TODAY Miller Cross 5 th Ed. © 2007 by West Legal Studies in Business / A Division of Thomson Learning 28 When Seller breaches its contract, Buyer/ Lessee has the right to: –Cover: buy or lease substitute goods in good faith. Available if buyer rejects goods or revokes acceptance. Buyer can recover difference between cost of cover and contract price. –Specific performance: enforce contract for unique goods. Remedies of the Buyer or Lessee

THE LEGAL ENVIRONMENT TODAY Miller Cross 5 th Ed. © 2007 by West Legal Studies in Business / A Division of Thomson Learning 29 Remedies of the Buyer or Lessee Right to recover damages. Measure of damages is difference between contract price and market price for goods at time of breach.

THE LEGAL ENVIRONMENT TODAY Miller Cross 5 th Ed. © 2007 by West Legal Studies in Business / A Division of Thomson Learning 30 Remedies of the Buyer or Lessee Right to reject all or part of the goods. 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.

THE LEGAL ENVIRONMENT TODAY Miller Cross 5 th Ed. © 2007 by West Legal Studies in Business / A Division of Thomson Learning 31 Right to recover damages for accepted goods. If buyer has accepted non- conforming goods, she may: –Sue for breach of warranty. –Sue for ordinary damages. –Deduct damages from purchase price. Remedies of the Buyer or Lessee

THE LEGAL ENVIRONMENT TODAY Miller Cross 5 th Ed. © 2007 by West Legal Studies in Business / A Division of Thomson Learning 32 Remedies of the Buyer or Lessee Right to revocation of acceptance. Buyer must notify Seller of breach. Revocation of 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. –Case 10.4 Fitl v. Strek (2005).

THE LEGAL ENVIRONMENT TODAY Miller Cross 5 th Ed. © 2007 by West Legal Studies in Business / A Division of Thomson Learning 33 Contractual Provisions Affecting Remedies Parties can elect or limit UCC remedies in the contract. Contracts can exclude/include consequential damages that are not unconscionable. Cause of action expires FOUR years after breach of contract.

THE LEGAL ENVIRONMENT TODAY Miller Cross 5 th Ed. © 2007 by West Legal Studies in Business / A Division of Thomson Learning 34 Sales and Lease Warranties: Title Automatically arises in most commercial sales transactions. UCC-312 creates 3 warranties: –Good Title. –No Liens. –No Infringements. Disclaimer of Title warranty can generally be disclaimed only with specific language in contract. –Circumstances may be obvious to clearly indicate disclaimer of title, such as a sheriff’s sale.

THE LEGAL ENVIRONMENT TODAY Miller Cross 5 th Ed. © 2007 by West Legal Studies in Business / A Division of Thomson Learning 35 Express Warranties Can be oral or written-- don’t have to use the words “warrant” or “guarantee.” –Any Affirmation or Promise. –Any Description. –Any Sample or Model.

THE LEGAL ENVIRONMENT TODAY Miller Cross 5 th Ed. © 2007 by West Legal Studies in Business / A Division of Thomson Learning 36 Express Warranties To create an express warranty, the affirmation of fact must become the “basis of the bargain.” And Buyer must rely on warranty when he enters into contract. Statements of Opinion and Value. –Generally excludes “puffing” – “Best car in town”, not an express warranty. –However, expert opinion is not puffery.

THE LEGAL ENVIRONMENT TODAY Miller Cross 5 th Ed. © 2007 by West Legal Studies in Business / A Division of Thomson Learning 37 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 ordinary purpose for which such goods are sold.

THE LEGAL ENVIRONMENT TODAY Miller Cross 5 th Ed. © 2007 by West Legal Studies in Business / A Division of Thomson Learning 38 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.

THE LEGAL ENVIRONMENT TODAY Miller Cross 5 th Ed. © 2007 by West Legal Studies in Business / A Division of Thomson Learning 39 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.

THE LEGAL ENVIRONMENT TODAY Miller Cross 5 th Ed. © 2007 by West Legal Studies in Business / A Division of Thomson Learning 40 Implied Warranty from Course of Dealing or Trade Warranties can arise from parties’ pre-existing relationship or usage of well-recognized trade customs. Courts will infer common trade usage or course of dealing.

THE LEGAL ENVIRONMENT TODAY Miller Cross 5 th Ed. © 2007 by West Legal Studies in Business / A Division of Thomson Learning 41 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: (BOLD CAPS UNDERLINED).

THE LEGAL ENVIRONMENT TODAY Miller Cross 5 th Ed. © 2007 by West Legal Studies in Business / A Division of Thomson Learning 42 Warranty Disclaimers 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.

THE LEGAL ENVIRONMENT TODAY Miller Cross 5 th Ed. © 2007 by West Legal Studies in Business / A Division of Thomson Learning 43 E- Contracts: Offers B2C-Business to Consumer E-Contracts. B2B-Business to Business E-Contracts. Online Offers Should Include: –Conspicuous and Obvious Terms. –Remedies available (including Seller’s Refund). –Statutes of Limitation. –Dispute Settlement Provisions. –Disclaimers of Liability. –How information will be used by Seller.

THE LEGAL ENVIRONMENT TODAY Miller Cross 5 th Ed. © 2007 by West Legal Studies in Business / A Division of Thomson Learning 44 E-Contracts: Acceptance Online Acceptances: –Shrink-Wrap Agreements- Enforceable Terms. –Shrink Wrap Agreements-Proposals for Additional Terms (not all terms are enforceable).

THE LEGAL ENVIRONMENT TODAY Miller Cross 5 th Ed. © 2007 by West Legal Studies in Business / A Division of Thomson Learning 45 E-Contracts: Acceptance Offer (cont’d): –Click-On (Click-Wrap) Agreements. Online version of “shrink-wrap” agreements. Acceptance by clicking on an “I Accept” button on the website. –“Browse-Wrap” Terms.

THE LEGAL ENVIRONMENT TODAY Miller Cross 5 th Ed. © 2007 by West Legal Studies in Business / A Division of Thomson Learning 46E-Signatures Many contracts require a writing and a signature to be enforceable. With E-Contracts, signatures have changed. Signatures can be: –Digital (with Cybernotary). –Signature Dynamics. –Smart Cards, Personal Identification. –A Mouse Click (attribution problems).

THE LEGAL ENVIRONMENT TODAY Miller Cross 5 th Ed. © 2007 by West Legal Studies in Business / A Division of Thomson Learning 47 Laws Governing E-Signatures States: some have e-signature legislation but it is not uniform. Most based on UETA (see below). Federal Law: –E-Signatures (E-SIGN Act). –E-Documents. Parties must agree to use electronic signatures.

THE LEGAL ENVIRONMENT TODAY Miller Cross 5 th Ed. © 2007 by West Legal Studies in Business / A Division of Thomson Learning 48UETA Similar to federal E-SIGN. Highlights: –Parties must agree to conduct e-transactions. Can be implied by conduct/ . –Attribution are procedures that ensures identity of seller and buyer. –Allows formation of contracts by e-agents. –Notarization via digital signature. –E-Mistakes can make a contract voidable.

THE LEGAL ENVIRONMENT TODAY Miller Cross 5 th Ed. © 2007 by West Legal Studies in Business / A Division of Thomson Learning 49 Seller may rescind the contract. Seller may identify the goods to the contract. Seller may sell raw materials for scrap or finish production. Next Seller: Goods in Seller’s Possession