Contracts and Sale of Goods

Contracts - Promise

Benefits Society to Enforce Promises Common law v. UCC Contract Law is based on state law Bi-lateral v. Unilateral Contracts

Contract DefinedAn agreement that can be enforced in court, formed

by two or more parties who agree to performor to refrain from performing some act now or in

the future.

Harris v. Time. Three year old boy received an offer as follows: “Joshua Gnaizda, I’ll give you this versatile new calculator watch free just for opening this envelope.” On the inside – hidden by the envelope it said – “And mailing this Certificate today” requiring him to buy Fortune Magazine.

• False Advertising• Unilateral Contract? • Promissory Estoppel?

§1: The Uniform Commercial Code

Contracts Across State Lines– How UCC works among states– Benefits of UCC– All states adopted except Louisiana

UCC Article 2: Sale of Goods.– Modifies common law of contracts of

some areas.– UCC 2 preempts common law.– Where UCC 2 is silent, common law

governs

§2: The Scope of Article 2

Sale of Goods. Article 2 applies to the “sale of goods.”– “Sale.” A “sale” is the passing of title of “goods” to/from a “merchant”

(seller or buyer) for a price (money, goods, services, etc).– Good v. Service

Lohman v. Wagner (2004). Pig “farrow to finish” program. Does UCC apply? Service of raising pigs or sale of goods? Mixed purpose contracts – look for predominant purpose – sale of goods or service – that controls.

“Merchant.” A “merchant” has special business expertise and is not a casual buyer/seller.

Real Estate. UCC does not apply, unless can be severed (e.g. trees). Services. Generally contracts for services are not governed by UCC2.

Re: Plantation Shutter Co. v. Ezell, p. 317, Case Presentation Special interior shutters for his home. Free installation

§1: Good Faith Requirement

Good Faith is the foundation of every UCC commercial contract.

Good faith means honesty in fact. – Generally judging state-of-mind

Merchants are held to a higher standard of care than non-merchants.

– Observance of reasonable commercial standards of fair dealing in the trade.

Exxon Case

Exxon stations argued the Exxon violated good faith under UCC by charging stations more than they could get gas from “jobbers.” Exxon argued that it met good faith by charging a commercially reasonable price.

Requirements of a Contract

The four requirements that constitute what are known as the elements of a contract are:

AGREEMENT CONSIDERATION

CAPACITY LEGALITY

Requirements of the Offer

IntentThere must be a serious, objective intention by the offeror to become bound by the offer. Nonoffer situations include:(a) expressions of opinion; (b) statements of intention; (c) preliminary negotiations; and (d) advertisements, catalogues, and circulars.

DefinitenessThe terms of the offer must be sufficiently definite to be ascertainable by the parties or by a court.

CommunicationThe offer must be communicated to the offeree.

Presentation Case: Advertisement as Offer, Leonard v. PepsiCoGroups 19 & 12

Link To Commercial http://www.youtube.com/watch?v=ZdackF2H7Qc

Arbitration ClausesHarris v. BlockbusterCase Illustration 9.3, p. 323

Harris sued blockbuster because Blockbuster entered into a contract with Facebook that caused Blockbuster customer movie selections to be disseminated on Facebook.

Blockbuster’s online contract had an arbitration clause that Harris agreed to.

Blockbuster also stated:

“You agree to review these Terms and Conditions of Use periodically and your continued use of this Site following such modifications will indicate your acceptance of these modified Terms and Conditions….”

Is the arbitration clause/contract valid or is it illusory because Blockbuster can change at any time?

AT&T Case – Nov 9, 2010• US Supreme Court Case• $30.22 sales tax on “free phone”• Arbitration clause prevents class

action lawsuits• Plaintiffs argue the clause is

“unconscionable”• Arbitration Clause Details

• AT&T must pay a minimum of $7,500 if it loses

• AT&T pays all arbitration fees• Supreme Court Ruled April 2011.

AT&T Mobility LLC v. Concepcion.

Termination of an Offer

Counteroffer Revocation by offeror Rejection by the offeree Lapse of time Death or incapacity of either party

Consideration

Legally Sufficient– To be legally sufficient, consideration must involve a legal

detriment to the promisee, a legal benefit to the promisor, or both.

– One incurs a legal detriment by doing something that one had no prior legal duty to do.

UCC. UCC does not require consideration for a contract modification. Common law does.

Noncompete without pay raise

Contracts Contrary to StatuteUSURY

Occurs when a lender makes a loan at an interest rate above the

lawful maximum. The maximum rate of interest varies

from state to state.

GAMBLINGGambling contracts that

contravene (go against) state statutes are deemed illegal and

thus void.

LICENSING STATUTESContracts entered into by

persons who do not have a license, when one is required by statute, will not be enforceable

unless the underlying purpose of the statute is to raise

government revenues.

SABBATH LAWSLaws prohibiting the formation or the performance of certain

contracts on Sunday. Such laws vary widely from state to state, and many states do not enforce

them.

Contrary to Public Policy and Quasi Contract

Contrary to Public Policy– Restraint of trade

Covenant not to compete– Unconscionable

Adhesion Contract Exculpatory Clauses (exclude liability for fraud,

intentional injury, or illegal acts) Quasi Contract - Implied In Law

– Quasi Contract– Unjust enrichment

Jones v. Star Credit Corp. (1969). $300 freezer for $1,234. Fraud is not present. Excessive price and unequal bargaining positions.

Houseboat example, fear factor,

Statute of Frauds - UCC

Sale of goods over $500 must have a signed writing to be enforceable. Exceptions

– Between merchants – if within a reasonable time a writing confirms the contract– Specially manufactured goods.– Admissions by breaching party.– Partial performance (or complete performance – if payment made and goods received).– Merchant doesn’t object within 10 days.

Oral agreement enforceable after written confirmation between merchants.

job for “remainder of his life” End-of-Chapter Q: 1, p. 349

• New company offered 8% commission

• Current company said it would offer 10% commission to get employee to stay – plus employment for life (except disability or dishonesty)

• Relationship soured and employee fired.

• Sued for permanent – job

• Was there consideration?

• Does Statute of Frauds apply?

Parol Evidence

No Oral Evidence. Terms of a written agreement intended to be the final expression of parties’ intentions, cannot be contradicted by prior or contemporaneous agreements.

Exceptions to the rule: – Contracts subsequently modified.– Voidable or Void contracts.– Contracts containing ambiguous terms.– Prior dealing, course of performance, or usage of trade.– Contracts subject to orally agreed-on conditions.– Contracts with an obvious or gross clerical error that clearly would not

represent the agreement of the parties.

Separate Contract Issue - Language Limiting Liability in a Contract Puget Sound Financial LLC v. Unisearch, Inc. (1976). Searched for liens and missed one. Invoice said “liability limited to amount of fee” or $25. Puget used Unisearch and received this notice 47 times.

End-of-Chapter Q: 14, p. 352. Williams v. Spitzer Autoworld.• Williams purchased a 2004 GMC Yukon from Spitzer• He was to receive a trade in allowance of $15,500 for his 2003 Ford Explorer• The contract said “This was the entire agreement between the parties”• Williams sued Spitzer stating he and Spitzer had reached a prior oral agreement

that he would receive a trade-in allowance of $16,500 – he said he failed to notice the difference.

Presentation Case, Oakley Fertilizer (P) v. Continental Ins. (D) (2009) , page 341 Groups 8 & 1

Oakley Fertilizer v.

Acceptance: Additional Terms UCCelimination of common law “mirror image” rule

Either Non-Merchant. If either party is a non-merchant, the contract is formed according to original terms of the offer.

Both Merchants. 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.

Material Alternations– Disclaimers or warranties– Arbitration clause

Different Terms. UCC position less clear. Some courts treat as a new term others find contract is formed and use gap-filling provisions.

§4: Formation of Sales Contracts Under UCC

Common Law. 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. Open Price Term: If parties have not agreed on pricing, court can

determine “reasonable price at the time of delivery.” UCC2-305. Open Payment Term: Unless otherwise agreed, payment is due

on delivery (COD). UCC2-310(a). Open Delivery Term: Unless otherwise agreed, buyer takes

delivery at the Seller’s place of business. UCC2-308(a). Open Quantity: generally courts will not impose a quantity.

UCC2-306. End-of-Chapter Q: 2, p. 349.

Presentation Case: Discussion Case, Promissory Estoppel, Tour Costa Rica v. Country WalkersGroups 6 & 3

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Types of Damages

Compensatory Damages

Punitive Damages

Nominal Damages

Liquidated Damages

Consequential Damages

termination of catering job 5 days before picnicEnd-of-Chapter Q 6, p. 350 also End-of-Chapter Q: 7• $7,000 contract for catering• Cancelled 5 days before• Contract required full payment if cancelled• Plaintiff asserts it's an unlawful penalty clause

Liquidated Damages,

Facts (End-of-Chapter Q: 3)

– Ameritech Business Pages – Sells ads to its phonebook – Ameritech failed to place Ad for customer (it made a

mistake)– Customer, Trimble, sued for lost business revenue.– Clause in signed contract read:

“if publisher should be found liable for loss or damage due to a failure on the part of the publisher or its directory, in any respect…. The liability shall be limited to an amount equal to the contract price for the disputed advertisement, or that sum of money actually paid by the customer toward the disputed advertisements, whichever sum shall be less, as liquidated damages, and not as a penalty…”

– Trimble not charged Issue - Is this enforceable? Question - What is this clause called?

Mitigation of Damages

When breach of contract occurs, the innocent injured party is held to a duty to reduce the damages that he or she suffered.

Duty owed depends on the nature of the contract.

End-of-Chapter Q 7, p. 350Diaz v. Learjet Liquidated Damages Ques

Diaz purchased a Learjet:• He singed a contract with a $250,000 nonrefundable deposit.• Learjet expected to make $1.8 million on the sale• Diaz breached the contract and wanted his $250,000 back• Learjet sold Diaz’s jet for a $1.88 million dollar profit• Learjet was building jets under capacity and could have sold 2• Should Learjet have to return the deposit?

Specific Performance

Equitable Remedy. An equitable remedy calling for the performance of the act promised in the contract.

Unique Goods. Specific performance is only available in special situations, such as– those involving contracts for the sale of

unique goods or land, or– when monetary damages would be an

inadequate remedy. Personal Services. Specific performance is

not available as a remedy in breached contracts for personal services.

Special UCC Rules

§2: Obligations of the Seller- UCC – Tender of Goods

Tender. Seller has a duty to “tender” delivery of “conforming goods.” Meaning with reasonable notice, at a reasonable hour, In a reasonable manner, Exactly, unless otherwise agreed.

Non- Carrier– Buyer picks up at Seller’s place of business or, if Seller has no place of business,

then Seller’s residence.– If both parties know the goods are elsewhere (at a warehouse), then place of delivery

is where the goods are. Carrier

– 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 Perfect Tender Rule UCC

Buyers’ Rights for Sellers Failure of Perfect Tender– Accept the goods; – Reject the entire shipment; or– Accept part and reject part.

Seller has the right to “Cure” if:– Agreed time of performance has not yet expired; or– If Seller had reasonable grounds to expect that Buyer would accept non-

conforming goods, i.e., these goods are better than goods ordered, or Buyer has accepted non-conforming goods in the past

§3: Obligations of the Buyer UCC and Right to Inspect

Buyer Obligations. – Receive Goods. – Make Payment.

Right to Inspect. Buyer has right to inspection before paying: – Costs of inspection borne by Buyer.– However, C.O.D. give Buyer no right to inspect.

Buyer Breach: Seller Remedies

Goods in Seller’s Possession– Withhold Goods. Seller may withhold delivery of the goods:– Rescind Contract. Seller may rescind the contract.– Identify Goods. Seller may identify the goods to the contract.– Sell Material. Seller may sell raw materials.– Re-sell the goods

Recover damages– Sue Buyer for breach of contract.

Goods in Transit– Goods are “in transit” when Seller has tendered goods to Carrier.– Seller has the right to stop the goods in transit if:

Buyer is insolvent - Seller can stop entire shipment of goods. Buyer is in breach - Seller may stop a whole truckload or whole container.

Goods in Buyer’s Possession– Sue for Purchase Price. Seller may sue for the purchase price.– Reclaim Goods. Seller can reclaim goods received by an insolvent Buyer if

demand made within 10 days of receipt.

Seller Breach: Buyer RemediesGoods in Seller’s Possession

Buyer Wants Goods– Specific performance or replevin– Recover goods from Seller if Seller becomes

insolvent within 10 days after receiving first payment. Buyer Does Not Want Goods

– Rescind contract.– Cover or do not cover and sue for breach of

contract.

Risk of Loss for Goods

Title. Sale of goods requires different rules than real property transactions: risk should not always pass with title.

UCC replaces title with – identification, – risk, – and insurable interest.

Risk of Loss in the case of Breach of Contract

Generally breaching party bears ROL. Seller’s Breach.

– Rejection - risk stays with seller.– Revocation of acceptance - risk passes back to seller to the extent that

buyer’s insurance does not cover the loss. Buyer’s Breach. Goods are identified, risk passes to buyer for a

reasonable amount of time after seller learns of the breach, to the extent that seller’s insurance does not cover loss.

§4: Insurable Interest

Identification. Buyer has an insurable interest in goods that have been identified.

Title/Security Interest. Seller has an insurable interest in goods as long as they retain title or a security interest.

Both at Same Time. Both buyers and sellers can have an insurable interest at the same time.

§2: When Title Passes

Title can pass:– Upon physical delivery, or– When agreed to by the parties, or– If no agreement, depends on whether contract is shipment or destination

contract: Shipment: title passes at time and place of shipment. ROL passes to

Buyer when tendered to carrier Destination: title passes when goods are tendered at the destination.

ROL passes to Buyer when goods tendered at destination. Delivery Without Movement of Goods Title passes when agreed by

the parties, or– With document of title: when and where document delivered.– Without document: when sales contract is made, if goods have been

identified or when identification occurs if they have not been identified.– If Seller is a merchant, ROL passes when buyer takes physical possession

of goods.

Windows Inc. v. Jordan Panel System Corp. (1999). “delivery to New York City” Goods properly packaged but broken during shipping via Consolidated (a carrier). When terms ambiguous a strong presumption exists for a shipping contract. End-of-chapter Q: 12, p. 352

Ganno v. Lanoga Corp. (2003). End-of-Chapter Q: 12. Ganno purchased a 12 foot beam and the Building Center put it in his truck without tying it down. It fell out at an intersection and when he picked it up, the other end was struck by a car shattering his knee. Risk of loss passed.

End-of-Chapter Q: 2, p. 249

Carl Merritt contacted R&P Products about selling RxP Gas Kicker, a fuel additive as a private label product.

The agreement stated the following:– $10 for consideration – R&P agrees to sell RxP Gas Kicker for

$1.25 per 2.5 oz bottle $1,280 per 55 gallon drum

– R&P agrees to guarantee shipment within 14 days of an order

Dispute arose and Merritt sued for specific performance under a requirements contract. RXP argued it was an options contract.

Skip – requirements and options contracts