Sales and Product Liability Business Law I Sales and Product Liability

Development of Commercial Law As trade increased throughout history, the need for a uniform, modernized business law grew greater. In 1952, the Uniform Commercial Code was published by a group of scholars whose goal was to draft a modern law of commerce. The UCC has been revised several times, most recently in 2003.

Scope of Article 2 Article 2 Article 2A UCC §2-102: Article 2 applies to the sale of goods, things that are movable, other than money and investment securities. Article 2A Article 2A governs the leasing of goods. In a mixed contract involving sales and services, the UCC will govern if the predominant purpose is the sale of goods, but the common law will control if the predominant purpose is service.

Merchants UCC §2-104: A merchant is someone who routinely deals in the particular goods involved, or who appears to have special knowledge or skill in those goods, or who uses agents with special knowledge or skill in those goods. The UCC frequently holds a merchant to a higher standard of conduct than a non- merchant.

Good Faith & Unconscionability The UCC imposes a duty of good faith in the performance of all contracts. For non-merchants, good faith means honesty-in-fact. For a merchant, good faith means honesty-in-fact, plus the exercise of reasonable commercial standards of fair dealing. Unconscionability UCC §2-302: A contract may be unconscionable if it is shockingly one-sided and fundamentally unfair.

Formation Basics: §2-204 UCC §2-204 provides three important rules: The parties may make a contract in any manner that sufficiently shows that they reached an agreement. Knowing the moment of making of the contract is not critical. One or more terms may be left open. Commercially reasonable terms will be assumed by the courts.

Case Analysis Law Governing Formation of Commercial Contracts Jannusch v. Naffziger, Illinois Court of Appeals, 2008 Facts Issue Did the parties form a contract? Decision – Yes. Reasoning – Under the UCC, a contract may be enforced even though some contract terms are missing or left to be agreed upon. However, if the essential terms are so uncertain that a court cannot decide whether the agreement has been broken, there is no contract. Here, the essential terms (i.e., consideration) were agreed upon.

Statute of Frauds UCC §2-201 requires a writing for any sale for goods worth $500 or more. Writing Sufficient to Indicate a Contract In general, the writing must be signed by the defendant. Incorrect or Omitted Terms Under the UCC, a court may enforce a bargain even though one or more terms were left open. Enforceable Only to Quality Stated The Code will enforce the contract only up to the quality of goods stated in the writing.

Merchant Exception When two merchants make an oral contract, and one sends a confirming memo to the other within a reasonable time, and the memo is sufficiently definite that it could be enforced against the sender, then the memo is also valid against the merchant who receives it, unless he objects in 10 days.

Added Terms: Section 2-207 Under §2-207, an acceptance that adds or alters terms will often create a contract. Offeree does NOT intend to accept OFFER Offeree intends to accept NO contract Accepts terms Adds terms Changes terms Accepts IF offerer accepts new terms Contract Usually forms a contract Usually forms a contract NO contract (is a new offer)

Additional or Different Terms Additional Terms: those that raise issues not covered in the offer. When both parties are merchants, additional terms generally become part of the bargain. Different Terms: contradict terms in the offer. Cancel each other out; if there is no clear oral agreement, the Code supplies its own terms to cover prices, delivery dates and places, warranties, and other subjects.

Open Terms: § 2-305 & 2-306 Open Prices: Under §2-305, the parties may conclude a contract even though they have not settled the price. Under the Code, if the parties have not stated a price, it is to be a reasonable price at the time of delivery. Output and Requirements Contracts The UCC requires that the parties in an output or requirements contract make their demands in good faith.

Modification UCC §2-209: An agreement modifying a contract needs no consideration to be binding. The parties may agree to prohibit oral modification and insist that all modifications be in writing and signed. Between merchants, such a clause is valid. If either party is not a merchant, such a clause if valid only if the non-merchant separately signs it.

Ownership and Risk

Who Owns It? The Code must sometimes determine the rightful owner when more than one person claims to own something. An interest is a legal right in something. Existence and Identification Goods must exist before title can pass. Goods must be identified to the contract before title can pass. The parties may agree in their contract how and when they will identify the goods.

Who Owns It? (cont’d) Passing of Title Title may pass in any manner on which the parties agree. If the parties do not agree, UCC §2-401 decides: If goods are being moved, title passes to the buyer when the seller completes whatever transportation it is obligated to do. If goods are not being moved, title passes when the seller delivers ownership documents to the buyer. Insurable Interest: a legal right in something A buyer obtains an insurable interest when the goods are identified to the contract. The seller retains an insurable interest in goods as long as she has either title to the goods or a security interest in them.

Case Analysis Passing of Title and Insurable Interest Valley Forge Insurance Co. v. Great American Insurance Co., Ohio Court of Appeals, 1995 Facts Issue Decision Reasoning

When the Seller Has Imperfect Title Bona Fide Purchaser A void title is no title at all. A voidable title gives limited rights in the goods, inferior to those of the owner. A person with voidable title has power to transfer valid title for value to a good faith purchaser, generally called a bona fide purchaser or BFP.

Entrustment Entrusting means delivering goods to a merchant or permitting the merchant to retain them. Entrusting to a merchant who deals in goods of that kind gives him power to transfer all rights to a buyer in the ordinary course of business. The entrusting provision protects the innocent buyer, who buys goods ONLY of the type normally sold by that merchant, not knowing that they belong to someone else.

Creditor’s Rights Ordinary Sales A buyer in the ordinary course of business may take the goods free and clear of the security interest.

Returnable Goods Sale on Approval Sale or Return When a buyer takes goods intending to use them herself but has the right to return. In a sale on approval, the goods are not subject to the buyer’s creditors until the buyer accepts them. Sale or Return When a buyer takes goods intending to resell them, but has the right to return them. The goods are subject to the claims of the buyer’s creditors.

Risk of Loss The parties may allocate the risk of loss any way they wish.

Risk of Loss (cont’d) If the parties fail to allocate risk, the point at which the risk of loss or damage to goods identified to a contract passes to the Buyer is as follows: If the contract requires the Seller to ship the goods by carrier but does not require that the a Seller guarantee their delivery to a specified destination (shipment contract), the risk of loss passes to the Buyer when the Seller has delivered the goods to the carrier and made an appropriate contract for their carriage. If the contract requires the Seller to guarantee delivery of the goods to a specific destination (destination contract), the risk of loss passes to the Buyer when the goods are delivered at the designated destination.

Risk of Loss (cont’d) If the goods are in the hands of a third person and are to be delivered without being moved, the risk of loss passes to the Buyer when the Buyer has the power to take possession of the goods; e.g., when he or she receives a document of title. In any situation other than those note above where the Seller is a merchant, the risk of loss passes to the Buyer on his or her receipt of goods. In any situation other than those note above where the Seller is a merchant, the risk of loss passes to the Buyer on the tender of delivery to the Buyer by the Seller.

Risk of Loss (cont’d) When a Seller tenders goods that the Buyer could lawfully reject because they do not conform to the contract description, the risk of loss stays on the Seller until the defect is cured or the Buyer accepts them. When a Buyer rightfully revokes acceptance of goods, the risk is on the Seller to the extent it is not covered by the Buyer’s insurance. If a Buyer repudiates a contract for identified, conforming goods before risk of loss has passed, the Buyer is liable for a commercially reasonable time for any loss or damage to the goods that is not covered by the Seller’s insurance.

Shipping Terms Many merchants specify who bears the risk of loss by using common shipping terms. FOB place of shipment - Seller is at risk until goods are in carrier’s hands FOB place of destination - Seller is at risk until goods are at the destination FAS a named vessel - Seller is at risk until goods are delivered to that vessel CIF - Cost includes insurance and shipping C&F - Cost includes shipping, but does not include insurance

Warranties

Express Warranties An express warranty is one that the Seller creates with Seller’s words or actions. Any affirmation of fact - or any promise - can create an express warranty. Any description of the goods can create an express warranty. Any sample or model can create an express warranty.

Case Analysis Express Warranties You Be the Judge - Keller v. Inland Metals All Weather Conditioning, Inc., Supreme Court of Idaho, 2003 Facts Issue – Did Inland make an express warranty? Decision - ? Reasoning - ? AFFIRMED

Implied Warranties Are created by the Code itself, not by any act or statement of the Seller. Implied Warranty of Merchantability Unless excluded or modified, a warranty that the goods shall be merchantable is implied in a contract for their sale, if the Seller is a merchant of goods of that kind.

Case Analysis Implied Warranty of Merchantability Goodman v. Wenco Foods, Inc., Supreme Court of North Carolina, 1992 Facts Issue – Was the hamburger unfit for its ordinary purpose because it contained a harmful but natural bone? Decision – Yes. Reasoning – When an object of food harms a consumer, the injured person may recover even if the harmful substance occurred naturally, provided that a reasonable consumer would not expect to encounter it.

Implied Warranties (cont’d) Implied Warranty of Fitness for a Particular Purpose When the Seller at the time of contracting knows about a particular purpose for which the Buyer wants the goods, and knows that the Buyer is relying on the Seller’s skill and judgement, there is (unless excluded or modified) an implied warranty that the goods shall be fit for such purpose.

Disclaimers and Defenses A disclaimer is a statement that a particular warranty does not apply. Oral Express Warranties – may be disclaimed. Written Express Warranties – may NOT be disclaimed. Implied Warranties of Merchantability – may be disclaimed, but must use word “merchantability” and the disclaimer must be conspicuous. Note: Many states prohibit a seller from disclaiming implied warranties in the sale of consumer goods.

Disclaimers & Defenses (cont’d) Seller may disclaim implied warranties with the terms “as-is” or “with all faults”. Many states prohibit disclaimers in the sales of consumer goods. Remedy Limitations A limitation of remedy clause, by which the parties may limit or exclude the normal remedies, is permitted under the Code.

Warranties under the UCC Summary Warranty Creation Defense/Disclaimer Express Warranty (2-313) An express warranty is created where: Seller makes an affirmation of fact or promise concerning the goods that becomes part of the basis of the bargain. Descriptive terms, drawings, or technical specifications are used. A sample or model is used as the basis for the contract. Seller may defend on grounds that statement was an opinion or recommendation, or that it did not become part of the basis of the bargain (e.g., it was made after the sale). Any disclaimer must be consistent with the express warranty made or it may be disregarded

Warranties under the UCC Summary (cont’d) Warranty Creation Defense/Disclaimer Implied Warranty of Merchantability (2-314) The implied warranty of merchantability is an implied warranty of quality imposed by law on merchants dealing in goods of that kind. Goods must be fir for the ordinary purpose for which such goods are used. Disclaimer may be oral or in writing but must mention merchantability and, if in writing, must be conspicuous. Disclaimer is effective if the sale is stated to be “as is” or “with all faults”. If Buyer inspects, or is offered opportunity to inspect, then Buyer is bound by defects that were found, or should have been found. Court may refuse to enforce an unconscionable disclaimer.

Warranties under the UCC Summary (cont’d) Warranty Creation Defense/Disclaimer Implied Warranty of Fitness for a Particular Purpose (2-315) The implied warranty of fitness for a particular purpose is imposed by law on Sellers (including nonmerchants) who: Know the purpose or use for which the Buyer is acquiring the goods. Know that the Buyer is relying on the Seller to select goods suitable for that purpose. Disclaimer must be in writing and conspicuous. Disclaimer is effective if the sale is stated to be “as is” or “with all faults”. If Buyer inspects, or is offered opportunity to inspect, then Buyer is bound by defects that were found, or should have been found. Court may refuse to enforce an unconscionable disclaimer.

Warranties under the UCC Summary (cont’d) Warranty Creation Defense/Disclaimer Implied Warranty of Title (2-312) In any sale of goods, Seller impliedly warrants that Seller has the right to sell the goods, that Buyer will get good title, and that the goods are free of liens or claims by third parties unless Buyer is given notice of them. Warranty may be limited or excluded by specific language or by circumstances (e.g., police auction).

Product Liability

Negligence A Plaintiff in a negligence case must show that the Defendant had a duty that was breached. In negligence cases, Plaintiffs most often raise one or more of these claims: Negligent design Negligent manufacture Failure to warn

Strict Liability Need not prove that the Defendant’s conduct was unreasonable. Strict liability may be imposed if: The defective condition is unreasonably dangerous to the user. Seller is in business to sell this product. The product reaches the user without substantial change. Strict liability may be imposed EVEN IF: The Seller exercised all reasonable care. There is no contractual relationship.

Contemporary Trends Strict liability may be imposed based on design, manufacture or failure to warn. Tests to measure design and warning cases include: Consumer expectation: if the design causes the product to be less safe than expected Risk-utility tests: weigh the value of the product, gravity and likelihood of the danger, feasibility of a safer design, and adverse consequences of a safer design.

Case Analysis Strict Liability – Contemporary Trends Uniroyal Goodrich Tire Company v. Martinez, Texas Supreme Court, 1998 Facts Issue – When warnings are adequate, is a manufacturer still obligated to use a safer alternative design? Decision – Yes. Reasoning – Under the new Restatement of Contracts, the key question remains whether a safer alternative can be used. To decide, a court should look at: the probability and magnitude of potential harm, instructions and warnings included, consumer expectations, cost of alternative design, and product longevity.

Bases for Product Liability Summary Basis Who Benefits/Who Can Sue? Defenses Disclaimers Express Warranty Included by parties in the contract of sale. Buyer, family members, and, in some states, any person who may reasonably be expected to use, consume, or be affected by the goods and who is injured by the breach. Warranty was not made or was effectively disclaimed or limited. Possible to the degree it is not inconsistent with the express warranty made.

Bases for Product Liability Summary (cont’d) Basis Who Benefits/Who Can Sue? Defenses Disclaimers Implied Warrant- ies of Merchant-ability or Fitness for a Particular Purpose Imposed by law in the contract of sale. Buyer, family members, and, in some states, any person who may reasonably be expected to use, consume, or be affected by the goods and who is injured by the breach. The warranty was effectively disclaimed or limited. Possible so long as it is not unconscion-able.

Bases for Product Liability Summary (cont’d) Basis Who Benefits/Who Can Sue? Defenses Disclaimers Negligence Duty to use due care to avoid foreseeable injury. Includes duty concerning design, inspection, manufacture, representation, disclosure of defects, and instruction as to safe use. Person to whom duty of care is owed and who is injured by breach. Privity of contract is not required. Seller exercised reasonable care. Buyer assumed the risk. Buyer was contributorily negligent. Generally not effective to shield against liability for negligence to consumers.

Bases for Product Liability Summary (cont’d) Basis Who Benefits/Who Can Sue? Defenses Disclaimers Strict Liability Liability without fault imposed on manu- facturers and Sellers of unreasonably dangerous products. Person injured by using or consuming product where the defect is the proximate cause of the injury or damage. Privity of contract is not required. Product has been substantially changed. Buyer was adequately warned. Product was state of the art when designed or manufactured. Buyer used product in an unintended or unforeseen manner. Buyer assumed all obvious risk of injury. Generally not effective.

Quiz Matching Questions Determined by the reasonableness of defendant’s conduct. An implied warranty that goods are fit for their ordinary purpose. An implied warranty that goods are fit for any particular purpose that the seller knows the buyer intends. The reasonableness of defendant’s conduct is irrelevant. Written statement that certain warranties do not apply. Negligence Strict liability Merchantability Disclaimer Fitness

Quiz True/False Questions A statement that goods are sold “as is” may disclaim all implied warranties. Seller cannot be found strictly liable if its conduct met or exceeded generally accepted industry standards. Seller can be liable under the implied warranty of fitness regardless of whether Seller knows what Buyer is planning to do with the goods. Seller can be bound by written warranties but not by oral statements. Under strict liability, an injured consumer could potentially recover damages from the product’s manufacturer and the retailer who sold the goods. F F F T