Chapter 20-22 BLAW 3311 - 001
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Date Created: 04/03/16
Chapter 20 – The Formation of Sales and Lease Contracts a. “Goods” are tangible things that are movable at the time of their identification to the contracts. 1. UCC Article 2 covers Sale of goods. 2. Lease of goods is covered by UCC Article 2A. 3. “Mixed sale” is a sale of both goods and services a. Service is common law, goods is UCC Article 2, however, what if it’s both? Identify what is the main thrust of the contract. b. Formation of a contract for the sale of goods 1. Offers a. Opens terms i. The UCC states that a sales or lease contract will not fail for indefiniteness even if one or more terms are left open as long as both of the following are true: 1. The parties intended to make a contract. 2. There is a reasonably certain basis for the court to grant an appropriate remedy. b. Firms offers (review of UCC Sections 2-205 and 2A-205) i. 2-205: its possible for a merchant or the offeror to promise to keep the offer open is bound to keep the offer open even without consideration. 2. Acceptance a. Any reasonable manner or method of communication i. (Pg. 383) The UCC is more severe than the common law in this regard because it requires notification. If the offeror is not notified within a reasonable time that the offeree has accepted the contract by beginning the performance, then the offer as having lapsed before acceptance. b. Battle of the forms (UCC Sec. 2-207) c. (Pg. 380) Who is the merchant? i. A person is a merchant when she or he, acting in a mercantile capacity, possesses or uses an expertise specifically related to the goods being sold. 3. Modification without consideration a. (Pg. 385) The UCC states that an agreement modifying a contract for the sale or lease of goods “needs no consideration to be binding”. ANY CONTRACT MUST BE IN GOOD FAITH. 4. Statute of frauds (review of UCC Section 2-201) (pg. 386) 5. Parol Evidence Rule Chapter 21 – Title, Risk, and Insurable Interest c. Identification (identification of the goods to the contract) and risk of loss SALES CONTRACTS 1. Risk of loss where goods are conforming and a carrier is used. Depends on whether contracts is shipment (seller’s plant) or delivery (buyer’s plant) contract. Passage of r/o/l occurs when seller has completed seller’s obligations under the contract. Risk of loss where there is a breach of contract and a carrier is used. R/o/l rules change, allowing r/o/l to be shifted to breaching party even though it would be otherwise but for the breach. Note the intent of the UCC that the breaching party’s r/o/l be only to the extent of the non-breaching party’s insurance deficiency. a. Insurable interest also means risk of loss, buyer can buy insurance on the goods b. Ex: There’s a contract between the buyer and seller, and the goods were identified. What if something happens to those goods? Who suffers the lost? It depends, look at the contract first, does the contract says for the goods to be moved or not to be moved? Not to be moved mean the buyers picks up the goods at the sellers place of business. R/o/l passes to the seller to the buyer as long as the seller fully performs all sellers’ obligations from the contract. Now, if the goods are not to be moved and the goods are destroyed by the time buyer comes pick them up well the seller has fully performed right? So, the buyer will have the r/o/l. i. What about a situation that goods are to be moved? 1. Shipment K (seller’s plant K) – cause the seller to ship the goods to the buyer 2. Delivery K (buyer’s plant K) – cause the seller to deliver the goods to the buyer 3. Destination K (buyer’s plant K) - cause the seller to deliver the goods to the buyer ii. Sellers makes full performance (Shipment K) 1. The sellers makes a reasonable contract of carriage with the carrier 2. Seller physically takes the goods to the carrier iii. Seller fully performs (delivery or a destination K) 1. When goods ARRIVES at their destination at then and there to the buyer Another story case for R/O/L: a. Lets say that the buyer breaches the contract; the parties have a shipment contract. Goods are identified to the contract. The shipment has made it to the buyer but the buyer says he doesn’t need them anymore. The buyer has breached the contract and that will be an anticipatory breach. So now in view of the buyers breach of contract, what will the seller do? The seller has the right to reach the r/o/l is resting on the buyer for a reasonable length of time. Now what a reasonable length of time? It depends. But that reasonable length of time is tied to remedies. One of the remedies is the seller to find another buyer. (Remedy of resale) so the seller has a reasonable length of time to sell those goods somewhere else. What if in the mean time, a tornado came by and the goods are destroyed. If that occurs in that reasonable time window, the buyer would have the risk of loss and would owe the seller the contract price of those goods. If the buyer had not breach the goods would have been on the truck and out of harms way so the seller has the advantage. b. In the event of a breach by the buyer, the seller has the right to reach a r/o/l is resting on the buyer for a reasonable length of time but only to the extent of any deficiency in the seller’s insurance company iv. It’s the same story case, but let’s say the contract price was $45,000. Lets the seller had $20,000 of insurance coverage on the goods, so seller collects that from sellers insurance carrier. Sellers go after the buyer for the deficiency, ($45,000- $20,000) which would be $25,000. Even though the buyer breaches the contract, the buyer gets the benefit of seller’s insurance coverage. That’s the intended of the code. v. If the seller had no insurance then the buyer will give the whole $45,000 contract price. c. What if the seller breaches the contract, goods arrive at the buyer’s place of business, which also means under our ordinary r/o/l rule the r/o/l is passed to the buyer. Lets say the goods are nonconforming, (conforming goods means they are the right goods and they bearer no defects). The buyer has the right to treat the r/o/l is being shifted back to the seller. So if the goods are in the buyer’s possession while the seller comes and picks them up, because the buyers notify the seller that they are nonconforming. Seller hasn’t picked them up yet; tornado hit and goods are destroyed. Buyer has the right to treat the r/o/l is being shifted back to the seller, so the seller is going to have to pay the contract price but only to the extent of any deficiency in buyer’s insurance coverage. So the buyers has the contract price of $45,000, the buyer has the goods insured for $25,000, the seller would be entitled to that $25,000 and would have to pay that $20,000 deficiency. 2. Delivery without movement of the goods. i. Goods are not to be moved (buyer picks up the good) LEASE CONTRACTS 3. In ordinary lease, lessor retains risk of loss. UCC Sec. 2A-219 4. In finance lease, risk of loss passes to lessee. UCC Sec. 2A- 219 5. If tender of delivery fails to conform to the lease contract, risk of loss remains with the lessor or supplier until cure or acceptance. UCC Sec. 2A-220(1) (a) d. Sale on approval, and sale or return a. Still talking about r/o/l, but we haven’t said anything about passage of title. Title a relatively secondary performance. Sale on approval is when you have goods which is the subject matter of the contract, but the sale is not complete yet because the deal between the seller and the buyer, who are not really seller and buyer yet, the deal is that the seller is delivering those goods to the buyer, and then the buyer would to check if he would like to buy them or not. During the period of approval, the buyer is nothing more than a bailee (Bailment is the transfer of possession of personal property without the transfer of title). The goods are transferred to the buyer and buyer is in possession of goods for the moment without buying them yet. Title still remains with the seller in a sale of approval until the buyer accepts the goods. b. What’s the difference between sale on approval and sale on return? Sale or return – the goods are delivered from the seller to the buyer but in this case instead of the buyer being in possession of those goods to test them to see if whether or not the buyer wants to buy them, instead, the sale or return the buyer is in possession of use for resale purchases. Sale or return purposes, the sells of goods by the seller to the buyer, the buyer has the right to return the goods to the seller of any time with no further obligations but in the mean time the buyer has both title and r/o/l in a sale of return. e. Sales of goods by non-owners a. Generally a seller cannot pass any greater title that the seller has, i. Owner – superior title ii. Seller - who either no title or a voidable title iii. Purchaser – bonafide (the purchaser purchased the personal property purchased it in good faith and without notice that the seller had anything less than full title) 1. Void title and lease—Stolen goods a. If the seller stole to the goods from owner, and sold it to the purchaser (which had no idea that the seller was not the owner of goods) than the owner is entitled to get it back. b. If seller was a finder of loss property, he can’t pass any title. The owner would be entitled to get the property back. 2. Voidable title – Sale or lease of goods to bona fide purchaser a. Owner lend seller a weed eater (bailee-transfer of possession without title), the seller sold the weed eater to purchaser, which makes the purchaser a bona fide purchaser. Owner would be entitled to get that weed eater back. 3. Entrustment rule – bail arrangement a. Lets say that the owner is bill bubba Hawkins, and Billy Bubba at the end of the work day closes office locks it up and goes home. Three o’clock the next morning, Reggie Rip-off bust a window in the office breaks in, and Reggie looking around to see what he can take. Then Reggie shines a flashlight on Billy Bubba’s desk and finds is a warehouse receipt, which lists all kinds of stuff. Reggie knows that instead of taking all the stuff, he takes the receipt instead and finds a purchaser. A bona fide purchaser, and sells what’s listed on the warehouse receipt and negotiates what is signs on the receipt and forges Billy Bubba’s name. Delivers the receipt to purchaser, and the purchaser take the receipt to the warehouse and claims his goods. Warehouse turns him over. The purchaser got full title, but Billy Bubba found out and went to go get those goods back. But we just issued a regular negotiable document of title, which means that if the court is confronted with this the issue is on whom does the loss fall? BILLY BUBBA HAWKINS! For leaving the receipt on his desk and out of the open instead of putting it away privately. b. Lets say, that Billy Bubba has a Rolex watch that needs some repair work, he takes it to Reggie’s jewelry store and possibly where the watch was purchased. This store has a watch repair facility and sells Rolex watches; Billy takes it in and leaves it there. What is the relationship between Billy bubba and the store? Bailment. Billy bubba has transferred the possession of the watch to Reggie but not title. Store is a bailee. Now once the watch is repaired, somehow or another, Billy Bubba’s watch winds up in the store retail area, in a display case with a price tag on it. In come a purchaser and buys the Billy bubbas Rolex watch, and this bona fide purchaser becomes full title to the watch. Billy bubba cannot get the watch back; he’s going to have to go after the store for the fair market value. In this instance the bailee is a merchant, dealing in gods of that kind so you have a merchant bailee oppose to a non-merchant bailee (case example 3a). i. Lets stick with this case, and say that the bona fide purchaser looks at Billy bubba’s watch before he purchases it and discovers on the watch was encrypted with Billy bubba’s name on it. This makes the purchaser a non bona fide purchaser. Which mean that Billy bubba can get the watch back. f. Letters of credit (textbook coverage in Ch. 21) Chapter 22 – Performance and Breach of Sales and Lease g. Performance of sales contracts 1. Buyer’s right to inspect the goods a. Buyer has the right to reject those goods until reasonable inspections both before accepting them and before paying for them. If the seller denies the buyer to first inspect the goods then the seller has breach the contract. However, the parties can agree otherwise, for example, maybe the contract between the seller and buyer cause for the buyer to make an up front payment. 2. Rejection of shipment (“perfect tender rule” and its exceptions) a. General rule: buyer may reject the goods for any nonconforming i. Perfect tender rule: the goods and their tender has to be perfect otherwise, buyer has the right to reject the goods. b. Installment contracts- the goods be transferred from the seller to the buyer in installments. Shipment arrives and the goods are nonconformity, in order for the buyer to reject that shipment, the nonconformity has to be material. It can’t just be for a minor defect, for example, 100 units were slightly scratched. If it were under the perfect tender rule, then the buyer has the right to reject, but since its an installment contract, the buyer cannot reject unless a material nonconformity. If the buyer already accepted the goods, the buyer cannot reject them even when they are nonconforming. However, they’re may be a distinction her because for the buyer to revoke acceptance. c. Seller right to cure – lets say the contract cause the buyer to receive the goods by April 5 , but the buyer receives the goods tomorrow (April 1 ). The buyer inspects the goods and they are nonconformity, so buyers rejects the goods, however, time remains on the contract, because the contract says for the seller to bring conforming goods by the 5 . So the buyer must give the seller reasonable opportunity to cure the nonconformity by April the 5 .th d. Good faith of the buyer- contract has been made and hasn’t been performed yet but the goods are about to be delivered from seller to buyer. However the buyer regrets having made that contract because the buyer doesn’t need the goods anymore. And so the buyer may be looking for just any reason the buyer can come with to reject the goods and to get out of the contract. Well, if the buyer’s motivation for rejecting the goods is not nonconformity, well that’s a bad faith reason to reject the goods. Law says the buyer can’t do that but it’s hard to prove. e. Acceptation substitution of carrier – lets say that, the contract, either shipment or delivery contract, by FedEx. The day has arrived now where the seller is supposed to put the goods on the truck, turn them over to the carrier, and then deliver to the buyer. But for whatever reason there is not a FedEx truck available today. What can the seller do? Make a reasonable substitution of carrier. There is not a FedEx truck available but a UPS truck. That would a commercial impracticability and the seller would have to notify the buyer that his goods would not be delivered that day. 3. Acceptance of the goods a. The goods arrive at the buyer’s place of business, the goods are not to be moved and the buyer shows up. The buyer inspects the goods and does not discover the nonconformity so the buyer accepts the goods, how does that acceptance occur? Well, it can be expressed; the buyer says, “I accept.” Or it can be implied, maybe the goods arrived at the buyers warehouse, the buyer inspects them, does not notify the seller of anything but the buyer puts the goods in warehouse and immediately starts to use them. In a matter of the buyer to teat them as his own goods. A send way of accepting implied of the goods, can be if the buyer fails to notify the seller that the goods are rejected. b. Rejection of the goods- there is no such thing as implied rejection. Rejection of the goods can be expressed in notification. 4. Revocation of acceptance a. Lets say the buyer has accepted the goods, and then subsequently one way or another, discovers that the goods are nonconformity. The buyer can reject the goods because the buyer accepted it, but this is where we get to revocation of acceptance. It’s different from rejecting the goods. b. Lets say you have manufacture plywood, which would call plaintiff. The defendant is the buyer under the contract with the plaintiff. However, the defendant in this case is essentially a middleman, what the defendant is doing is buying the plywood in order to resale it to the end user, which is the building contractor. Building contractor building houses and the plywood is being used as part of the construction. The plywood is put on the truck and sent to the buyers (defendants) warehouse. The defendant rejects the plywood due to an inspection. The defendant is inspecting for a bundle of plywood and the plywood will be wrapped up until the building contractor receives them, the defendant accepts the goods. The building contractor notifies the buyer to deliver the plywood. The building contractor will unwrap the bundle of plywood and notices some units’ bad boards. So, the building contractor rejects the boards. The defendant notifies the plaintiff that they are revoking acceptance. i. The elements of revocation of acceptance: 1. In order to revoke acceptance, the nonconformity has to be material. Unlike the perfect tender rule, where the buyer can reject for any nonconformity. 2. The nonconformity was not discoverable, it was hidden. 3. Or it was a material nonconformity and the buyer discovered it and rejected the goods, but with the seller’s promise to go ahead and accepts the product and they will cure the nonconformity. But the seller has failed to cure. 5. Reasonable time for rejections a. What is reasonable length of time to reject a product? If the buyer spots the goods to be nonconformity, what is the given time for the buyer to reject the goods? Lets say you have a general contractor, who is building a hotel. At one point, when the construction progress is at a particular point where the subcontractor notifies the manufacture and supplier of commercial carpeting. Its time to deliver the carpet to a nearby warehouse for it to be available for insulation for a reasonable length of time. The seller delivers the carpet to the warehouse. Now, in what form would that carpet is in when it arrives? In a big roll. Is the buyer going to be inspecting to unroll it and inspect it? No, they carpet will be inspected once it’s ready to be installed. However, there is a delay for whatever reason for the carpet to be delivered to the construction site for about 5 days. The carpet made to the construction site and is unrolled for the first time for insulation and find out that it is nonconformity. They have right to reject. 6. Assurance of performance. Under UCC Sec. 2-609 believe that the other party cannot or will not perform, an adequate assurance of due performance may demanded in writing. And, if it commercially reasonable, the party making such demand may suspend performance until such assurance is received from the other party. a. There is a sec. 2-609 for the sale of goods and 2-409 for the lease of goods. If either has reasonable ground (that is key) to suspect that the other party is not going to be able to perform the party having those doubts can a written demand on the other party. Giving adequate assurance on due performance in the mean time they will not go forward on the contract. If the seller has reasonable ground and believe the buyer cant pay or the buyer having reasonable grounds that the seller is so far behind on their production processes. h. Remedies for breach 1. Buyer’s (lessee’s) remedies when seller (lessor) breaches * If the seller has a contract with the buyer, and then the seller notifies the buyer that the seller is not going to perform or maybe the goods arrive and they are nonconformity, here’s where the sales of goods is consisted with the common law. a. Cancellation i. Buyer doesn’t have to deal with that seller because the seller has materially breached the contract by failing to deliver the goods or by nonconforming. b. Cover i. That the buyer is going to make a contract with another vendor to buy substitutes goods. What if the buyer has to pay more on that cover contract than the buyer is supposed to pay on the original contract? Well, the buyer sues the seller for the difference. c. Ordinary measures of damages i. The buyer’s ordinary measure of damages, seller has breach so the buyer has canceled and the buyer has gone out and purchased substitute goods from another vendor. So, the buyer has covered buy what the buyer may do here, instead of suing the seller the difference between the cover price and the original contract price, the buyer may instead elect to pursue the buyer’s ordinary measure of damages. How will they be measure? They will be measured by the difference between the contract price (the original price) and the fair market value of the goods at the time the buyer learned the breach. Lets say the seller breach the contract, notified the buyer in advance, if by the time the buyer learned the breach the fair market value was greater than the original contract price. The buyer can sue for that difference, instead of suing for the difference between the cover and the original contract price. Buyer can choose but cant get both for that will be a double recovery. d. In case of seller’s insolvency i. Well the code gives the buyer a special remedy, incase the seller is insolvent. Insolvency means debt exceed assets and you owe more than you have. Is it possible for somebody who is insolvent in the equity sense to still pay bills on time? Yes. Not really the kind of insolvency we’re talking about, the one we are talking about is the bankruptcies sense. Meaning not paying debts as they come do, not paying obligations on time. e. Specific performance (recovery of purchase price or lease payments) i. Under what circumstance, a buyer could get a specific performance under the contract of sales of goods? If the buyer is not able to cover within reason, even though the goods may not have uniqueness. f. Incidental and/or consequential damages i. Having to advertise to pay a periodical trade charge to advertise those goods, that would be incidental damages. Which the buyer be entitled to collect in addition to the difference between the cover price and the original contract price and maybe it cost the buyer a lost of profits. The seller’s breach, that is, cause the buyer lost of profits because the buyer’s cover price was greater than it should’ve been and that cut into the buyer’s profit that would be consequential damages.
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