Sales Contracts and Warranties

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Sales Contracts and Warranties

• Now we focus on the UCC, in other words
  Commercial Law
• How the UCC governs Sales contracts.

• OBE 118, Section 10, Fall 2004
• Professor McKinsey

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The UCC

• A standardized law document adopted in part or in
  full by all states

Article 2 Governs the Sales of Goods

• Definition of Goods
• Definition of Merchant

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Goods

• The UCC applies to the sale of goods.
• Goods are things that are moveable
• A tree growing in the forest?
• A tree cut down for lumber?
• A floppy disk containing software?
• An email containing software?

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Merchants

• If 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
• routinely deals in the type of goods or
• has special knowledge or uses those that do.

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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

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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.

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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

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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

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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.

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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 buyers responsibility. The goods
  are lost in shipment and not insured. What
  outcome?

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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?

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Review

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

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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
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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 hours
• Will kill any weed you spray it on
• I think this car is the best
• I think this car will last another 100,000 miles
  without any major maintenance
• This is the best product on the market

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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

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Implied Title Warranties

• Three types

• sellers owns the goods

• good is free of claims by
  others

• good is free
  from Intellectual Property(IP) claims

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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

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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 sellers knowledge or skill
3) Seller aware of buyers reliance
4) Seller recommends goods for particular use
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Handling Warranties
A warranty creates terms in the contract
Warranty 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
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Disclaiming Warranties

• Merchantability
• Conspicuous disclaimer with merchantability in
  it
• Fitness for a Particular Purpose
• Use the words as is and with all faults

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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

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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.

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PL based on Strict Liability
1. D sold product in defective condition
2. D normally in business of selling product
3. Product unreasonably dangerous
4. P suffers physical harm through use of product
5. Defective condition is proximate cause
6. No substantial changes to product since sold
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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

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Intro to Chapter 11

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

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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.

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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.

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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

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Security Agreements
Buyer
Seller
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
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Security Interest

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