The Sale in Business
A. A sales contract is made in any manner that shows agreement, including conduct.
B. Method of Formation:
1. Verbal Offer and Acceptance – Parties may express their intent to agree by spoken words, written words or both. Is it an offer or just an invitation for an offer?
2. Verbal Offer, Acceptance by Conduct – A buyer’s offer to buy seeking prompt shipment can be accepted EITHER by seller’s promise to ship OR by Shipment of conforming or non-conforming goods.
3. Verbal Expression of Acceptance with Differing Terms -
• Rule: Sending a definite, timely expression of acceptance creates a contract even if the acceptance contains terms that differ from the offer. [If no definite, timely expression of acceptance, parties are still negotiating.]
• Rule: Between Merchants, the new terms become part of the contract unless either the offeror objects within a reasonable time, OR the new terms are material (causing hardship and surprise)
C. Essential Terms:
Parties must agree to what is to be sold and how much (quantity). Agreement on other terms is not necessary as the court can supply missing terms and provide a remedy.
If different terms - Court may use Knock out Rule (merchants) and use gap fillers.
D. Contract Modification:
Contracts can be modified by language or behavior indicating agreement to modify. No new consideration is required (as in common law) but the modification must be in good faith.
DEFENSES TO ENFORCEABILITY – STATUTE OF FRAUDS
A. Statute of Frauds is a potential defense
• The statute of frauds is a potential defense to enforcement of a contract that the parties have formed. The defense is available to any buyer or seller who has not signed a writing expressing the contract or indicating its existence.
B. Contracts for $500 or more must be in writing and signed. Rule: Unless an exception applies, a contract for a price of $500 or more is unenforceable unless the party to be bound has signed a writing indicating a contract between the parties and stating the quantity.
C. Satisfying the Statute of Frauds
• Can be satisfied by a formal written contract OR any writing which one could infer that a contract was made. [Letter to friend that references the contract; Buyer’s payment check mentioning the subject matter; A written objection that refers to the agreement.]
D. Misstated Terms:
• The writing need not state the terms correctly in order to satisfy the statute of frauds. The contract will not be enforced beyond the quantity stated.
E. Alternatives to the Writing Requirement: (The Exceptions) CAPS – Confirmation, Admission, Performance, Specially Mfg Goods
1. Merchant Confirmation (After oral contract)
• If a Merchant gives a sufficient signed writing (indicates quantity and an agreement) to another Merchant, who does not object in writing within 10 days, the statute is satisfied as to both parties.
2. Performance
• Delivery and acceptance of goods or payment satisfies the statute for the quantity of goods accepted or paid for.
3. Specially Manufactured Goods
• Baseball cap order with professor’s photo on it.
4. Admissions in Court
F. Waiver of Affirmative Defense – SOF defense may be waived if not asserted.
TERMS
A. Express Terms - in written agreement apply
B. New Terms - Become part of the contract unless they (i) material alter it, (ii) offer is limited to its terms, or (iii) original offeror objects within reasonable time. Between Merchants, a confirmation of an oral contract that contains terms different from the oral agreement is deemed to be a proposal for modification. The new terms modify the agreement unless they are material and it was not objected to within a reasonable time.
C. Commercial Context - Course of Dealings, Usage of Trade, Course of Performance.
D. Open Terms - Use Gap Fillers – default rules
1. Price = Reasonable price at time of delivery
2. Place = Seller’s place of Business
3. Time = Reasonable time
4. Payment = Due at receipt
5. Risk of Loss = At tender for non-merchant sellers; at delivery for merchant sellers; FOB seller in shipment contracts.
E. Output Contracts (however much seller can produce) and Requirement Contracts (seller will fulfill all of buyers.
F. Warranties – All issues involving the quality of the goods will be questions of warranty
1. Express Warranties – Rule: Any description of the goods that becomes part of the “basis of the bargain” creates an express warranty that the goods will conform to the description. Express Warranties are Created By:
a. Model or Sample
b. Description of Goods (“Commercial grade”)
c. Any Affirmation of fact or promise
2. Implied Warranties – Arises by operation of law.
a. Of Merchantability – Goods sold by a Merchant who deals in goods of that kind are warranted to be fit for there ordinary purpose. Fit for ordinary purpose means not defective – good enough to satisfy average buyer. An occasional sale is not enough to establish dealer status. Applies to both new and used goods.
b. Fitness for Particular Purpose. Goods sold by a seller who is aware that the buyer is relying on seller’s skill to provide goods fit for buyer’s particular purpose are warranted to be fit for that purpose.
i) Seller Knows of buyers use
ii) Buyer relies on seller
3. Disclaimer of Warranties
a. Express - Usually not allowed, but if made before the deal is closed, then arguably the warranty is not a part of the “basis of the bargain.”
b. Implied Warranty of Merchantability – disclaimer must either use the word “merchantability” or “as is,” and if in writing, it must be conspicuous.
c. Implied Warranty of Fitness - Must be both written and conspicuous.
F. Limitation on Remedies – Sellers can exclude remedies if it would not be unconscionable to do so. Contract may provide for exclusive remedy to repair or replace.
G. Risk of Loss – The risk of loss always starts on the seller and ends on the buyer. Where and when it shifts is determined by the agreement between the parties and the default rules if not discussed.
• When parties don’t agree: If the goods are delivered directly from seller to buyer without being shipped by a third party carrier, risk of loss passes when a buyer receives possession of the goods from a Merchant Seller
• If the contract permits seller to ship the goods via a common carrier like trucking company or ship, and nothing is said in the contract about risk of loss, then tender occurs and risk of loss shifts to the buyer when the goods are loaded onto the carrier. Note that tender must be conforming for risk to shift; non-conforming goods lost in transit are at the seller’s risk even after FOB point.
• Legal Effect of Loss: If goods are lost or damaged before risk of loss shifts, seller must re-perform and buyer is not liable for the price of the goods that are lost. If goods are lost or damaged after risk of loss shifts, then seller has fully performed and buyer must pay the contract price.
• But risk of loss does not shift if the tender is non-conforming. If non-conforming goods are lost or damaged, then seller must perform or be in breach.
• Installment v. Single Delivery Contract.
PERFORMANCE AND BREACH
A. Breach - Any failure to perform the obligations created by the contract.
B. Seller has duty to tender conforming goods - Perfect Tender Rule
C. Buyer has a duty to accept and pay for conforming goods
1. Buyer has right to inspect (Inspection at reasonable time, place, manner)
2. Acceptance occurs when buyer indicates acceptance or does any act inconsistent with seller’s ownership
D. Buyer must reasonably notify seller of rejection (if goods non-conforming)
1. Notice must describe defects in order to rely on them as a basis for breach
2. In single delivery contracts, the perfect tender rule applies, so buyer can reject the whole or any part of the delivery, or may accept the whole or any part
3. If Installment contract, the buyer may reject a delivery only if it is substantially non-conforming (material breach) If minor, the buyer must accept goods and later recover for damages.
E. Buyer’s right to revoke acceptance if:
• Acceptance was induced by latent defect or assurances of cure;
• The defect substantially impairs their value to buyer;
• Buyer gives notice of revocation within reasonable time after should have discovered defect; and Buyer can return goods substantially unchanged
F. Buyer’s Duty to Care for rejected Goods
1. Buyer must hold goods with reasonable care for seller for reasonable time
2. Merchant must follow seller instructions and sell if perishable.
G. Seller’s Right to Cure
1. Before shipment is due, seller has a right to cure.
2. After shipment, seller has reasonable time to cure upon notice to buyer
3. If no instructions from seller, buyer may ship, store or resell goods
H. Right to Adequate Assurances [Either party]
1. Right is availed upon reasonable grounds for insecurity
2. Demand must be in writing
3. Party may suspend performance until assurances are given
4. If no response in 30 days, party may treat it as repudiation.
I. Anticipatory Repudiation: [Either party] An event which makes it clear the other party is not going to perform, permits the party to treat the contract as repudiated; and thereafter may:
1. Await Performance
2. Seek Assurances
3. Seek Damages
4. A party who states unequivocally that she will not perform has breached the contract by repudiation and can be sued immediately for total breach. Repudiation is present if she does something that will make it possible for her to perform too.
J. Remember must always give notice of Rejection, Notice of Breach (but not necessary if seller just fails to deliver) and Notice of Revocation!
REMEDIES
RULE: The remedy for breach should make the non-breaching party as well off as if the contract had been fully performed by both parties. This is expectation interest.
A. Buyer’s Remedies
1. Cancellation of Contract
2. Recover Price Paid
3. Cover (Cost of Cover – contract price + consequential + incidental and return of anything already paid.)
4. Market Formula - If buyer does not cover, damages are: (Market Price – Contract Price plus consequential + incidental damages and return of any price already paid.
5. Consequential Damages (Lost Profits, Physical Harm) Must be both: Foreseeable by the seller at the time of Contract Formation; and Unavoidable by the buyer.
6. Incidental Damages (cost of inspection, storage, transportation, expenses involved in cover, out of pocket expenses in finding new goods like advertising.)
7. Warranty Damages (Value of goods as warranted - Value of Goods as delivered + consequential + incidental. Cannot recover price paid to seller!) NOTICE OF BREACH IS ESSENTIAL FOR RECOVERY WHEN ACCEPTING NON-CONFORMING GOODS. NO WAIVER OF RIGHT TO DAMAGES IF GIVE PROMPT NOTICE.
8. CANCELLATION – If seller repudiates or fails to cure a non-conforming delivery, or if seller’s breach materially affects the value of an entire installment contract, buyer may Cancel the contract. Cancellation ends all further duties to perform by either party and buyers claim for breach is preserved.
B. Seller’s Remedies
1. Recovery of Contract Price in three scenarios:
• Accepted goods, whether or not conforming
• Conforming goods lost while buyer has risk of loss
• Wrongfully rejected goods that seller cannot resell.
2. Seller’s Damages for non-accepted goods:
• Resale (Contract price – resale price + incidental damages)
a. Notice required
b. Commercially reasonable sale
• Market Formula (Contract price – market price + incidental - savings.)
• Lost Volume Dealer only – Net lost profit plus incidental damages.
Consumer Protection Act: Prohibits unfair and deceptive acts or practices occurring in trade or business that affect the public and cause injury to a consumer.
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