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Formation and Terms of Sales Contracts Product Liability Performance of Sales Contracts Remedies for Breach of Sales Con

Formation and Terms of Sales Contracts. Merchants have no country. The mere spot they stand on does not constitute so strong an attachment as that from which they draw their gains.Thomas Jefferson, U.S. president and merchant, in a letter to Horatio G.Spafford (March 17, 1814). Chapter 19. ? 2010 The McGraw-Hill Companies, Inc. All rights reserved..

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Formation and Terms of Sales Contracts Product Liability Performance of Sales Contracts Remedies for Breach of Sales Con

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    1. Formation and Terms of Sales Contracts Product Liability Performance of Sales Contracts Remedies for Breach of Sales Contracts

    2. Formation and Terms of Sales Contracts Merchants have no country. The mere spot they stand on does not constitute so strong an attachment as that from which they draw their gains. Thomas Jefferson, U.S. president and merchant, in a letter to Horatio G. Spafford (March 17, 1814)

    3. Learning Objectives Definitions of basic terminology Terms (details) of sales contracts The nature of “title” Title & third parties Risk of loss Sales on trial, approval, or consignment

    4. The Uniform Commercial Code (UCC or Code) govern most commercial transactions within the United States Under UCC Article 2, a sale of goods involves the transfer of ownership to tangible personal property in exchange for money, other goods, or the performance of services Does not specifically apply to trade in services UCC Article 2A applies to a lease of goods The District of Columbia and all states except Louisiana (civil law system) have adopted UCC Article 2A Leasing large goods, such as manufacturing or agricultural equipment, is common UCC Article 2A applies to a lease of goods The District of Columbia and all states except Louisiana (civil law system) have adopted UCC Article 2A Leasing large goods, such as manufacturing or agricultural equipment, is common

    5. If dispute arises concerning a sales transaction, a disputing party must determine (a) basis for the dispute, (b) applicable law, (c) and how to respond to the dispute (negotiate or litigate). The UCC Article 2 does not explicitly apply to sale of services, but goods only. While some courts will apply UCC Article 2 rules to a transaction in which sales and services are mixed, most seem to avoid application of UCC Article 2 to mixed goods and services. Therefore, when faced with a sales transaction dispute, a person must identify the subject matter (services, goods, or a mixture) in order to determine the applicable law. This chart is Figure 1 on page 481 of the text. Case example: Dealer Management Systems, Inc. v. Design Automotive Group, Inc. in which court determined whether unsigned contract for software over $500 was a contract for goods governed by the UCC (yes) and if it complied with Statute of Frauds (no) Design Automotive Group, Inc., issued a purchase order to Dealer Management Systems, Inc. (DMS), for “computer programs and other services.” In the purchase order, DMS agreed to provide Design Automotive with an “Accounting Information Management” system consisting of various separately priced software components. The price of the individual components totaled $24,000, but DMS agreed to provide them as a package for $20,000 plus an additional $795 for an item described a “RMCOBALRUNTIME SYSTEM FOR UNIX 16.” DMS brought suit against Design Automotive alleging that it had breached the contract…Design Automotive moved to dismiss the contract claim on the grounds that because it had not signed the purchase order, the agreement was unenforceable under section 2–201(1) of the Uniform Commercial Code—Sales—the statute of frauds. Court: Most courts would probably agree that an ordinary sale of “off-the-rack” software is a transaction in goods. …a transaction that nominally involves a mere license to use software will be considered a sale under the UCC if it involves a single payment giving the buyer an unlimited period in which it has a right to possession…. Applying these principles here, we conclude, as a matter of law, that the contract was predominantly for goods and only incidentally for services, and that it amounted to a “sale of goods” under the UCC…. The agreement is a sale subject to the statute of frauds because it provided for the transfer of the software for an unlimited time for a single payment. Accordingly, DMS has not shown the existence of a meritorious claim that could have withstood the UCC’s statute of frauds. The UCC Article 2 does not explicitly apply to sale of services, but goods only. While some courts will apply UCC Article 2 rules to a transaction in which sales and services are mixed, most seem to avoid application of UCC Article 2 to mixed goods and services. Therefore, when faced with a sales transaction dispute, a person must identify the subject matter (services, goods, or a mixture) in order to determine the applicable law. This chart is Figure 1 on page 481 of the text. Case example: Dealer Management Systems, Inc. v. Design Automotive Group, Inc. in which court determined whether unsigned contract for software over $500 was a contract for goods governed by the UCC (yes) and if it complied with Statute of Frauds (no) Design Automotive Group, Inc., issued a purchase order to Dealer Management Systems, Inc. (DMS), for “computer programs and other services.” In the purchase order, DMS agreed to provide Design Automotive with an “Accounting Information Management” system consisting of various separately priced software components. The price of the individual components totaled $24,000, but DMS agreed to provide them as a package for $20,000 plus an additional $795 for an item described a “RMCOBALRUNTIME SYSTEM FOR UNIX 16.” DMS brought suit against Design Automotive alleging that it had breached the contract…Design Automotive moved to dismiss the contract claim on the grounds that because it had not signed the purchase order, the agreement was unenforceable under section 2–201(1) of the Uniform Commercial Code—Sales—the statute of frauds. Court: Most courts would probably agree that an ordinary sale of “off-the-rack” software is a transaction in goods. …a transaction that nominally involves a mere license to use software will be considered a sale under the UCC if it involves a single payment giving the buyer an unlimited period in which it has a right to possession…. Applying these principles here, we conclude, as a matter of law, that the contract was predominantly for goods and only incidentally for services, and that it amounted to a “sale of goods” under the UCC…. The agreement is a sale subject to the statute of frauds because it provided for the transfer of the software for an unlimited time for a single payment. Accordingly, DMS has not shown the existence of a meritorious claim that could have withstood the UCC’s statute of frauds.

    6. Interpreting a sales contract is easier with common rules of interpretation: Trade practices refers to using words common in a particular industry Example: “case” has a different meanings for different industries If price was omitted, UCC 2-305 fills the gap by providing the term: reasonable price at the time for delivery

    7. An outputs contract is an agreement in which buyer purchases all the production of seller Example: chicken farmer agrees to sell only to Chicken Co. all chickens produced A requirements contract is an agreement in which seller must provide all requirements of the buyer Example: Textiles Inc. must provide all fabric required by T-Shirts LLC for production

    8. Under the exclusive dealing contract provision of UCC 2-306(2), sellers have an obligation to use their best efforts to supply the goods to the buyer and the buyers are obligated to use their best efforts to promote their sale If no time for performance is specified, a reasonable time is implied

    9. For contracts requiring successive performances over an indefinite period of time, UCC 2-309 provides that either party can terminate the contract upon giving reasonable notice Standardized shipping terms are customarily used in sales contracts to aid in determining which party bears the risk of loss

    10. Title (evidence of legal ownership) to goods cannot pass from seller to buyer until goods are identified to the contract [UCC 2–401(1)] Parties may agree when title passes If no agreement, title to goods passes to buyer when seller completes obligations of delivery Fundamental rule: buyer cannot receive better title to goods than seller had Regarding the fundamental rule: If seller was a thief, buyer does not obtain good title Case example: State of Connecticut v. Cardwell illustrates the application of the rules concerning passage of title. Court: “The contracts made by Cardwell for the sale of tickets do not contain any explicit agreement by Cardwell to deliver the goods to a particular destination or to bear the attendant risk of loss until such time as the goods are delivered. Therefore, the contracts at issue in this case are properly classified as shipment contracts. Because delivery of the goods to the carrier constitutes delivery to the buyer under a shipment contract, section 2–401(2)(a), with respect to each sale of tickets made by Cardwell, delivery is made to the post office or other commercial carrier, and hence to the buyer, within Massachusetts. As a result, the “sale” of the tickets, as defined by the code, occurs in Massachusetts. Consequently, the trial court’s determination that Cardwell sells tickets within Connecticut, and thereby violates the Connecticut statute, was incorrect.” Regarding the fundamental rule: If seller was a thief, buyer does not obtain good title Case example: State of Connecticut v. Cardwell illustrates the application of the rules concerning passage of title. Court: “The contracts made by Cardwell for the sale of tickets do not contain any explicit agreement by Cardwell to deliver the goods to a particular destination or to bear the attendant risk of loss until such time as the goods are delivered. Therefore, the contracts at issue in this case are properly classified as shipment contracts. Because delivery of the goods to the carrier constitutes delivery to the buyer under a shipment contract, section 2–401(2)(a), with respect to each sale of tickets made by Cardwell, delivery is made to the post office or other commercial carrier, and hence to the buyer, within Massachusetts. As a result, the “sale” of the tickets, as defined by the code, occurs in Massachusetts. Consequently, the trial court’s determination that Cardwell sells tickets within Connecticut, and thereby violates the Connecticut statute, was incorrect.”

    11. Under UCC 2-403(1), a seller who has a voidable title may pass good title to a good faith purchaser for value Voidable title: gained by fraudulent means Good faith means “honesty in fact in the conduct or transaction concerned” [UCC 1–201(19)] For example, a person would have voidable title if s/he obtained goods by impersonating another person, paying for goods with bad check, or obtained goods without paying agreed purchase price when it was agreed that the transaction was to be a cash sale. Under the Code, good faith means “honesty in fact in the conduct or transaction concerned” [1–201(19)] and a buyer has given value if he has given any consideration sufficient to support a simple contract [1–201(44)] For example, a person would have voidable title if s/he obtained goods by impersonating another person, paying for goods with bad check, or obtained goods without paying agreed purchase price when it was agreed that the transaction was to be a cash sale. Under the Code, good faith means “honesty in fact in the conduct or transaction concerned” [1–201(19)] and a buyer has given value if he has given any consideration sufficient to support a simple contract [1–201(44)]

    12. A buyer in ordinary course is a person who gains good title because s/he (a) in good faith and without knowledge that the sale to him is in violation of the ownership rights of a third party, (b) buys goods in the ordinary course of business of a person selling goods of that kind (other than a pawnbroker) [UCC 1–201(9)]

    13. If goods are entrusted to a merchant who deals in goods of that kind, the merchant may transfer all rights of the entruster to a buyer in the ordinary course of business [UCC 2– 403(2)] But a merchant-seller cannot pass good title to stolen goods even if buyer is a buyer in the ordinary course of business

    14. Common law placed risk of loss on the party who had technical title at the time of loss UCC provides specific rules: Contracting parties, subject to the rule of good faith, may specify who bears risk of loss in the agreement [UCC 2–509(4)] If contract requires seller to ship goods by carrier but does not require delivery to a specific destination, risk passes to buyer when seller delivers goods to carrier [UCC 2–509(1)(a)]

    15. The United Nations Convention on Contracts for the International Sale of Goods (1980) provides rules governing risk of loss in sale of goods contracts The International Chamber of Commerce published a list of common international shipping terms known as INCOTERMS

    16. FOB (free on board) point of origin: Seller must deliver goods free of expense and at seller’s risk (including loading on board) to the place designated [2-319(1)] FAS (free alongside ship): Seller must deliver goods alongside the vessel at the port at seller’s own risk and expense [2–319(2)]

    17. CIF (cost, insurance, and freight): price of goods includes seller’s cost and risk to load, ship, and insure goods [2–320] C & F: same as CIF, except seller not obligated to insure [2–320] Shipment contract: seller must place goods in possession of a carrier and contract for transportation as is reasonable for the nature of goods and other circumstances [2–504(a)] Unless parties specify shipment method, contract is generally construed as a shipment contractUnless parties specify shipment method, contract is generally construed as a shipment contract

    18. Destination contract: seller bears risk and expense of delivery to particular destination [2–509(1)(b)] Common terms of destination contract: FOB destination [2–319(1)(b)]: seller bears expense and risk of delivering goods to that destination Ex-ship [2-322]: seller bears expense and risk until goods unloaded from ship No arrival, no sale [2-324]: seller bears expense and risk during shipment, but if goods fail to arrive, seller has no further liability to buyer

    19. Common commercial practice is for seller of goods to entrust possession of goods to buyer to either give buyer an opportunity to decide whether or not to buy or to try to resell them to a third person Sale on approval, sale or return, or consignment Risk of loss depends on terms of entrusting Cautionary tale: In re Corvette Collection of Boston, Inc. In a sale on approval, goods are delivered to buyer with an understanding that buyer may use or test them for purpose of determining whether buyer wishes to buy the goods [2–326(1)(a)]. Neither the risk of loss nor title to the goods passes to buyer until he accepts the goods. In a sale or return, goods are delivered to buyer for resale with understanding that buyer has the right to return them [2–326(1)(b)]. Under a sale or return, title and risk of loss are with buyer. While the goods are in buyer’s possession, they are subject to claims of his creditors [2–326 and 2– 327]. If the merchant to whom goods are consigned maintains a place of business dealing in goods of that kind under a name other than that of the person consigning the goods, then consignor must take certain steps to protect his interest in the goods or they will be subject to claims of merchant’s creditors. The risk taken by a consignor who does not take appropriate steps to protect his interest is illustrated in, In re Corvette Collection of Boston, Inc. In a sale on approval, goods are delivered to buyer with an understanding that buyer may use or test them for purpose of determining whether buyer wishes to buy the goods [2–326(1)(a)]. Neither the risk of loss nor title to the goods passes to buyer until he accepts the goods. In a sale or return, goods are delivered to buyer for resale with understanding that buyer has the right to return them [2–326(1)(b)]. Under a sale or return, title and risk of loss are with buyer. While the goods are in buyer’s possession, they are subject to claims of his creditors [2–326 and 2– 327]. If the merchant to whom goods are consigned maintains a place of business dealing in goods of that kind under a name other than that of the person consigning the goods, then consignor must take certain steps to protect his interest in the goods or they will be subject to claims of merchant’s creditors. The risk taken by a consignor who does not take appropriate steps to protect his interest is illustrated in, In re Corvette Collection of Boston, Inc.

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