McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 15 Sales and Lease Contracts: Performance, Warranties, and Remedies

15-2 Chapter 15 Ethical Dilemma According to the “perfect tender” rule of Uniform Commercial Code (UCC) Section 2-601, if goods or tender of delivery fail in any respect to conform to the contract, the buyer has the legal right to accept the goods, reject the entire shipment, or accept part and reject part. Obviously, this is an extremely “pro-buyer” rule, giving the buyer great flexibility in terms of how to respond to less-than-perfect goods, or a less-than-perfect delivery. For example, if the buyer orders ten (10) pink plastic flamingoes to be delivered by the last day of the calendar year, and the seller delivers five (5) pink plastic flamingoes on December 31, the buyer has the following options available under the UCC: 1) The buyer can accept the entire nonconforming shipment; 2) The buyer can reject the entire shipment; or 3) The buyer can accept part and reject part of the shipment. From an ethical standpoint, should the buyer accept that portion of the shipment which conforms to the contract? In the above example (and again, from an ethical perspective), should the buyer accept the five (5) pink plastic flamingoes delivered on December 31? In the fast-paced business world, is perfection too exacting of a standard to impose on a merchant seller?

15-3 Chapter 15 Case Hypothetical Determined to carry on the hilarious tradition of placing a number of pink plastic flamingos in another person’s yard as a practical joke, and with several co-workers in mind, Dorothy Hayes orders 100 pink plastic flamingos (for a total contract price of $500) from Tropical Novelties of Tampa, Inc. The contract specifies delivery of the flamingos to Dorothy’s home in Poughkeepsie, New York on or before September 1. On August 31, Amalgamated Package Service (A. P. S.) delivers five large boxes to Dorothy’s home. With much anticipation, Dorothy tears open the boxes, only to find 50 pink plastic flamingos, 50 short of the specified contract quantity. Disappointed that Tropical Novelties did not satisfy its “part of the bargain,” and realizing that $500 is a large amount to pay for a practical joke, Dorothy decides to terminate the contract. She calls Tropical Novelties, speaks with a sales representative, notifies the seller that she is canceling the contract due to its non-performance, and informs the seller that she will be returning the 50 flamingos by package delivery service the following day. Tropical Novelties demands that she keep the 50 flamingos, notifies her that they will ship the remaining 50 the following day, and assures her that she will be held responsible for paying the $500 contract price. Who wins?

15-4 Chapter 15 Case Hypothetical Fred G. Dare Appliances, Inc. sold a $2,000 refrigerator to W.H. Pool. Per the terms of the agreement, the buyer was to pick up the appliance on July 1, and pay for it in full before taking possession. July 1 came and went, and the buyer did not appear. Fred G. Dare, the owner of the store, is certain that W.H. Pool breached the contract. Fred has a plan. His best friend, Sam S. Ung, desperately needs a new refrigerator, but he cannot currently afford one at full retail price. In fact, Sam only has $200. Fred plans to sell the refrigerator to Sam for $200, and then send a bill for $1,800 to W.H. Pool. (The $1,800 represents the difference between the price of the refrigerator in Fred G. Dare Appliances, Inc.’s contract with W.H., and the “resale” price of $200 to Sam.) Fred’s reasoning is that W.H. breached the contract, and that he is simply exercising his resale right. Fred’s brother-in-law, an attorney, once told him that if a customer breaks a purchase contract, the seller has the right to resell the good to a substitute buyer, and then recover any damages from the original, breaching buyer. What is your legal opinion of Fred G. Dare’s plan?

15-5 Chapter 15 Case Hypothetical Hale “Billy” Hatfield is an avid banjo player and bluegrass aficionado. Billy wants to purchase a new banjo for his appearance at the local “Bluegrass in the Park” festival scheduled for August 15. On June 1, Billy orders a “Timber Rattler” brand banjo from Cates Banjo Company of Mountain View, West Virginia. The “Timber Rattler” is custom-made, and the contract specifies a purchase price of $4,000. The contract indicates a delivery date of August 10, allowing ample time for production of the banjo, and enough time for Billy to make his “gig.” August 10 “comes and goes,” and Cates Banjo fails to deliver the instrument. When Billy contacts the owner of Cates Banjo, Richmond Cates, he learns that non-delivery was due to a month-long backlog of orders. Billy knows that he can ill-afford to wait for his “Timber Rattler,” and he cancels his contract, regrettably, with Cates Banjo. On August 12, Billy orders a pre-produced banjo from Babson Instruments, Inc., at a contract price of $6,000. By rush delivery, the Babson banjo arrives at Billy’s home on August 14, and he is able to make the “Bluegrass in the Park” festival with banjo “in hand.” By Billy’s estimation, the Babson instrument is no true substitute for the “Timber Rattler,” but he is willing to keep it, and is reasonably satisfied with it. Billy’s neighbor is an attorney. Billy shares the above facts with his lawyer/neighbor, and asks him if he will take the case, suing Cates Banjo for $2,000 (the difference between the price of the Cates banjo, and the price of the Babson banjo,) plus associated expenses of litigation. Should the attorney take the case? Will Billy win?

15-6 Chapter 15 Case Hypothetical Recall from the Chapter 10 Case Hypothetical and Ethical Dilemma that Lily Ledbetter was seriously injured in an automobile accident when the steering wheel of a new car she had just purchased detached from the steering column (the steering wheel literally came off in her hands), causing Lily to crash into a culvert. In terms of drafting the personal injury complaint against Fjord Motors, Inc. (the manufacturer of the sedan) and Bjorn Fjord Motors, Inc. (the dealership), what theories of warranty liability should Lily’s attorney include? Are there any non-warranty (i.e., non-Uniform Commercial Code) theories of liability that might be applicable in this case?

15-7 Chapter 15 Case Hypothetical Aristotle Mythos is having a “mid-life crisis,” in large part because he is 50 years old, and he realizes that most people do not live to be 100. In an attempt to conquer his depression, and to prove that he is equivalent to a 20-year-old (at least in spirit,) Mythos plans to climb Mount Zeus, the highest peak in his ancestor’s homeland of Greconia. In preparation for his climb, Mythos patronizes the local “outdoors” shop, Athena’s Garden, and asks to speak with a trained sales associate. Mythos specifies that he will be climbing Mount Zeus, and that he will need a tent and sleeping bag to survive the wind and elements on two nights during his ascent and descent. The associate selects a tent and sleeping bag from a wide variety of possibilities, and Mythos leaves the store a “happy camper.” Mythos begins his climb the following day, and successfully reaches his check point, halfway to Zeus’ peak, before nightfall. He prepares his campsite, and looks forward to some much-needed rest. Unfortunately, he has a fitful night, shivering in his sleeping bag below a partially-collapsed tent, with the wind and the cold “getting the best of” Mythos and his camping gear. In the daylight of the following morning, Mythos fully awakens to realize that the toes on both of his feet have turned a sickening shade of blue-purple, and he realizes with great disappointment that he will not be able to fulfill his dream of climbing Mount Zeus. Further, upon closer examination of his tent and sleeping bag, both are trademark-stamped “The Young Mythologist,” gear intended for backyard camping by children. As a result of his misfortune, Mythos must have four toes (two toes on each foot) amputated, and he incurs medical expenses of $58,000 for treatment and rehabilitation. Mythos’ doctor has rated him with 20% permanent partial disability as a result of his toe amputations. Is Athena’s Garden legally responsible for Mythos’ medical expenses and partial disability? If so, on what theory?

15-8 The Basic UCC Performance Obligation Sellers and lessors are obligated to transfer and deliver conforming goods Buyers and lessees are obligated to accept and pay for conforming goods in accordance with terms of contract “Good faith” required in performance and enforcement of every contract

15-9 “Good Faith” Definition: Honesty in fact In transaction between merchants, UCC also imposes obligation of reasonable commercial standards of fair dealing (“commercial reasonableness”)

15-10 “Perfect Tender” Rule States that if goods or tender of delivery fail in any respect to conform to contract, buyer/lessee has right to: 1) accept the goods; 2) reject entire shipment; or 3) accept part and reject part

15-11 Exceptions to “Perfect Tender” Rule Industry Standards Prior Dealings Between Parties Exceptions Outlined in Parties’ Agreement Seller’s/Lessor’s Right to Cure Destroyed Goods “Substantial Impairment” “Commercial Impracticability”

15-12 “Commercial Impracticability” Doctrine Delay in delivery or non-delivery may not, in court’s discretion, constitute breach if performance made impracticable because contingency has occurred that was not contemplated when parties reached agreement

15-13 Inspection, Rejection and Revocation of Acceptance Seller/lessor must provide buyer opportunity to inspect goods “Reasonableness” governs inspection process Post-inspection, buyer has option to accept, partially accept, reject, or revoke acceptance -UCC guidelines govern right to exercise particular options post-inspection Buyers/lessees must give reasonable notice upon exercising right of rejection/revocation of acceptance

15-14 Warranties

15-15 Warranty Definition: Seller’s promise(s) regarding certain characteristics of good(s) sold

15-16 “Express” Warranty Versus “Implied” Warranty Express Warranty: Explicitly stated in contract Implied Warranty: Automatically (by operation of law) applied to contract

15-17 Types of Warranties Warranties of Title Passage of good title Implied promise of no liens/judgments against title Implied promise that title not subject to claims of intellectual property (copyright, patent, or trademark) infringement

15-18 Types of Warranties Express Warranties Description of good’s physical nature or its use May be found in advertisements or brochures May be material term of contract Salesperson’s oral promise concerning good can give rise to express warranty Buyer’s reliance on seller’s representations generally means those representations become express warranties, and part of contract

15-19 Types of Warranties: Implied Warranties Implied Warranty of Merchantability (Definition): Warranty based on reasonable expectation of product performance Good purchased must: -Pass without objection in trade/market for similar goods -Be of fair quality (within the product’s description) -Be fit for “ordinary use” -Have “even kind, quality and quantity” -Be adequately packaged and labeled -Conform to promises made on package/product label

15-20 Types of Warranties: Implied Warranties Implied Warranty of Fitness For Particular Purpose (Definition): Warranty that arises when seller knows purpose for which buyer purchasing goods, and buyer relies on seller’s judgment to recommend/select certain product Seller does not have to be merchant to make this warranty

15-21 Types of Warranties: Implied Warranties Implied Warranty of Trade Usage (Definition): Warranty that arises as result of generally-accepted trade practices

15-22 Warranty Rights of Third Parties: Third Party Beneficiaries of Warranties Seller’s warranties may extend to: Buyer’s household members and guests Any “reasonable and foreseeable” user Anyone injured by good

15-23 Warranty Disclaimers and Waivers Methods of Disclaiming/Waiving Warranties: Seller does not make express warranties Seller disclaims implied warranties in clear, unambiguous, conspicuous language Buyer fails/refuses to examine goods Buyer fails to file suit within applicable statute of limitations period

15-24 UCC Remedies Available to Seller/Lessor When Buyer/Lessee In Breach of Contract Cancel Contract Withhold Delivery Resell/Dispose Of Goods Sue to Recover “Benefit of Bargain” Stop Delivery Reclaim Goods

15-25 UCC Remedies Available to Buyer/Lessee When Seller/Lessor In Breach of Contract Cancel Contract Obtain “Cover” Sue to Recover Damages Recover Goods Obtain “Specific Performance” Reject Non-Conforming Goods Revoke Acceptance of Non-Conforming Goods Accept Non-Conforming Goods and Seek Damages

15-26 Liquidated Damages Definition: Damages identified before contract breach occurs General Rule: Parties are free to negotiate a liquidated damages contract clause General Rule: Courts will enforce liquidated damages provisions, so long as they are non- punitive UCC Section 2-718: Allows non-breaching seller to claim against breaching buyer 20% of purchase price or $500, whichever is less, as liquidated damages

15-27 Modifications/Limitations to Remedies Otherwise Provided by the Uniform Commercial Code General Rule: Parties to sales and lease contracts are allowed to modify/limit remedies UCC Sections and 2A-503 provide that parties are allowed to create an agreement making it clear the remedies outlined by their agreement are the exclusive remedies available to them Courts generally uphold modifications/limitations to remedies unless stipulated remedies “fail in their essential purpose”