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CHAPTER 8

CHAPTER 8 . Sales and E-Commerce . This chapter addresses sales contracts governed by the UCC as well as the Convention on Contracts for the International Sales on Goods and “battle of the forms” and warranty issues.

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CHAPTER 8

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  1. CHAPTER 8 Sales and E-Commerce

  2. This chapter addresses sales contracts governed by the UCC as well as the Convention on Contracts for the International Sales on Goods and “battle of the forms” and warranty issues. • The chapter also addresses laws regulating e-commerce and the formation of electronic contracts. Remedies for breaches of these contracts are also delineated. INTRODUCTION 2

  3. Sale of “Goods” – “all things (including specially manufactured goods) which are movable at the time of identification to the contract for sale.” • Merchants – “a person who deals in goods of the kind or otherwise by his occupation holds himself out as having knowledge or skill peculiar to the practices or goods involved in the transaction.” • Identification to the contract – the designation – by marking, setting aside, or other means – of the particular goods. WHEN DOES ARTICLE 2 OF THE UCC APPLY? 3

  4. Offer – traditional common law principals determine whether an offer has been made. It is not defined by the UCC. • Acceptance – unless the offeror indicates unambiguously that his or her offer can be accepted only in a particular way, an offer may be accepted in any manner and by any medium that is reasonable in the circumstances. It is not defined by the UCC. CONTRACT FORMATION 4

  5. Case 8.1 Synopsis. ProCD, Inc. v. Zeidenberg (7th Cir. 1996).  ProCD compiled information from over 3,000 telephone directories into one database. ProCD sold this data on a CD-ROM. The purchaser of the data found shrink-wrapped with the data an agreement not to sell the data. The purchaser could not read the license without opening the shrink wrap; further, to use the data, the purchaser had to click on the “I Agree” (with the license terms) button to start the program. Zeidenberg purchased the data, then sold the information on the Internet through his company, Silken Mountain. ProCD sued Zeidenberg for violating the license agreement. The district court ruled for Zeidenberg citing Wisconsin state law. ISSUE: Is a shrink wrap or “click wrap” license whose terms are unknown to the buyer at purchase binding on the buyer? HELD: Reversed, stating that the terms of the shrink wrap license were binding on a buyer unless the terms are objectionable on grounds applicable to contracts in general. If Zeidenberg did not want to be bound to the license, he could have returned the data or bought a competitor’s data. CONTRACT FORMATION 5

  6. Consideration – must be included in contracts for the sale of goods to be enforceable. • Offer – not defined by the UCC. • Firm Offer – a signed offer by a merchant that indicates that the offer will be kept open. • Acceptance - not defined by the UCC, except stated that an acceptance may contain terms additional to or different from those in the offer. CONTRACT FORMATION 6

  7. Definite Response - intent to close the deal is crucial. • Conditional Response—counteroffer should be clearly stated. • Acceptance with Missing Terms—contract formed with included terms. • Acceptance with Additional Terms—depends if either of the parties is a merchant. • Acceptance with Different Terms—depends if either of the parties are merchants. BATTLE OF THE FORMS UCC 2-207 7

  8. Case 8.2 Synopsis.Ionics, Inc. v. Elmwood Sensors, Inc. (1st Cir. 1997). Elmwood manufactures thermostats. Ionics bought Elmwood sensors to include in its water dispensers. During each purchase of thermostats, a battle of the forms occurred. Each company tried to force the other company to bend to its choice of contractual provisions. Several Ionics dispensers caused fires, allegedly from faulty Elmwood thermostats. Ionics sued for breach of the implied warranty of fitness. Elmwood moved for a partial summary judgment limiting its liability to its contractual acknowledgment. ISSUE: If there has been an acceptance of an offer, but the offer and acceptance are on printed forms that contain contradictory terms, is there a contract? If so, what are the terms? HELD: The trial court held that the conflicting battle-of-the-forms provisions would be stricken, and UCC warranty terms would apply instead. The appeals court affirmed the decision because of the clarity of the UCC provision in question. BATTLE OF THE FORMS UCC 2-207 8

  9. “Some Writing” - lenient interpretation under the UCC. • Quantity of Goods - writing unenforceable unless: • quantity specified • goods specially manufactured and not readily re-salable • defendant admits in judicial proceedings that an agreement existed • payment was made and accepted • goods were received and accepted STATUTE OF FRAUDS UCC 2-201 9

  10. STATUTE OF FRAUDS UCC 2-201 • Signature - writing must be signed by the person against whom enforcement is sought. • The E-Sign Act, UCITA and UETA allow digital signatures. 10

  11. DUTY OF GOOD FAITH UNDER THE UCC Section 1-203 of the UCC states that “[e]very contract or duty within this Act imposes an obligation of good faith in its performance and enforcement.” 11

  12. Express Warranty (UCC 2-313) - an explicit guarantee by the seller that the goods have certain qualities. • Puffing - opinion statements do not constitute a warranty. WARRANTIES 12

  13. Case 8.3 Synopsis.Connor, Inc. V. Proto-Grind, Inc. (Fla. 2000). FACTS. Doug Connor, the president of Connor, Inc., a land-clearing business, became interested in purchasing a large commercial grinding machine manufactured by Proto-Grind, Inc., called the Proto-Grind 1200. Proto-Grind’s brochure described the machine as the “toughest grinder on the market” and stated that the machine could grind timber, stumps, and railroad ties into mulch. Connor attended a demonstration of the machine during which a large log was reduced to mulch. During the demonstration, he spoke to Protos, the president of Proto Grind, and told him that he needed a machine that would grind palmettos, palm trees, oak trees, and other trees. Protos assured him that the machine was capable of doing this work. Connor signed a sales contracts which provided for a two-week trial period during which time he could use the machine and purchase it only if he was satisfied. After the machine experienced problems, Protos waived the first installment payment of $5,500 in exchange for elimination of the trial period. Connor accepted. Protos failed to fix the machine’s recurring problems and Conner sued for breach of express oral warranties that the machine would grind organic materials effectively, that the machine would be free from defects for a period of six months, and that Proto-Grind would fix the machine. The case went to trial and the trial court granted Proto-Grind’s motion for a directed verdict at the conclusion of Connor’s case on the grounds that Connor waived the express warranty in exchange for elimination of the first installment payment of $5,500. Connor appealed. CONTINUED WARRANTIES 13

  14. WARRANTIES Case 8.3 (Cont’d) Connor, Inc. V. Proto-Grind, Inc., (Fla. 2000). ISSUE: When do oral statements by a seller about the capability of a commercial grinding machine constitute an express warranty? Is a warranty claim waived if the buyer agrees to eliminate a trial period? HELD: Reversed and remanded for trial. The finder of fact could reasonably conclude that the alleged oral promises made were more than mere puffing, that the product failed to meet the promise that it would sufficiently grind palm trees and palmettos, that Connor relied on these affirmations, and that because the deficiency of the product was not cured, Proto-Grind breached this express warranty.

  15. Implied Warranty of Merchantability -guarantees that goods are reasonably fit for the general purpose for which they are sold, and that they are properly packaged and labeled. • Reasonable Expectations: The key issue in determining merchantability is whether the goods do what a reasonable person would expect of them. WARRANTIES 15

  16. Implied Warranty of Fitness for a ParticularPurpose - guarantees that the goods are fit for the specific purpose for which the seller recommended them. Buyer relies on Seller’s expertise. • Reliance - Seller may try to show: • the buyer’s expertise was equal to or superior to the seller’s. • the buyer relied on the skill and judgment of people hired by the buyer. • the buyer supplied the seller with detailed specifications or designs that the seller was to follow. WARRANTIES 16

  17. Limiting Liability - express or implied warranties are avoidable under the UCC. • Under the UCC, a seller is not an absolute insurer of the quality of goods sold. WARRANTIES 17

  18. MAGNUSON-MOSS WARRANTY ACT • Protects consumers against deception in warranties. It gives a consumer purchaser of a product the right to sue a manufacturer or retailer for failing to comply with the ACT or the terms of a written or implied warranty arising from the ACT. • Full Warranty – gives the consumer the right to free repair or replacement of a defective product. • Limited Warranty – might restrict the availability of free repair or replacement. 18

  19. Case 8.4 Synopsis. Moore & Moore General Contractors, Inc. v. Basepoint, Inc. (Va. 1997). Moore & Moore was the contractor for a Red Lobster restaurant. The plans for the cabinets called for “melamine” cabinets; it is unclear what that term means in the industry. Basepoint was the subcontractor for the cabinets. Basepoint delivered particle-board cabinets to the job site instead of sturdier plywood cabinets. Moore & Moore’s representatives inspected the cabinets and the plans and decided to accept the goods and save money on the job. When the inspector for the restaurant saw the particle board cabinets, he ordered them replaced. Moore & Moore then rejected the cabinets and notified Basepoint they expected delivery of other cabinets within one week. Basepoint notified Moore & Moore that they could not meet that deadline. Moore & Moore bought cabinets elsewhere and refused to pay Basepoint. Basepoint sued Moore & Moore for the price of the cabinets. Moore & Moore counter-sued for the labor and materials needed to remove and replace Basepoint’s cabinets. The trial court ruled for Basepoint and rejected Moore & Moore’s counterclaim. CONTINUED RIGHT TO REJECT NONCONFORMING GOODS 19

  20. RIGHT TO REJECT NONCONFORMING GOODS Case 8.4 Synopsis. Moore & Moore General Contractors, Inc. v. Basepoint, Inc. (Va. 1997). ISSUE: Can a Buyer’s acceptance of goods be revoked because of their nonconformity? If not, is the Buyer entitled to recover from the seller the cost of substitute goods? HELD: The Virginia Supreme Court affirmed the decision stating that Moore & Moore had accepted the goods and did not justifiably revoke that acceptance. That being the case, Moore & Moore was not entitled to recover its costs for cover (buying other cabinets) in this case.

  21. ROL: Generally, the party controlling goods at the time of loss is responsible unless an agreement exists to the contrary. • Goods Shipped by Carrier : • FOB seller’s place of business. • FOB buyer’s place of business. • Goods Held by Independent Warehouse. • All Other Cases. ALLOCATION OF RISK OF LOSS 21

  22. Case 8.5 Synopsis. Lynch Imports, LTD. v. Frey (Ill. 1990).  The buyers purchased a car from the seller for $8,706. The sales form had written additions that guaranteed the buyers’ satisfaction with the car. The buyers financed $4,000 and paid the rest by check. The agreement was that the buyers would take possession of the car, then return it later for an air conditioner to be added to it. When the buyers did that, they were informed that the car had been previously damaged. Upon learning that, the buyers refused to take possession of the car, refused to get financing for the balance of the car payment, and stopped payment on the check given to seller. The seller sued the buyer for these actions claiming that the buyer had accepted the car by taking possession. Trial court granted Seller’s Motion for Summary Judgment. ISSUE: When a buyer takes possession of a car, but it is understood that the buyer will return with the car to have air-conditioning installed per the purchase order, has the buyer fully accepted the car and assumed complete responsibility for it? HELD: Reversed. The case was remanded for further determination on the question of whether or not the buyer had yet accepted the goods under the UCC. ALLOCATION OF RISK OF LOSS 22

  23. Extreme unfairness of a contract may prompt it to be ruled unenforceable by a court. • Procedural Unconscionability - one party is induced to enter the contract without having any meaningful choice. • Substantive Unconscionability - terms of a contract are unduly harsh or oppressive or unreasonably favorable to one side. UNCONSCIONABILITY UCC 2-302(1) 23

  24. Case 8.6 Synopsis. Walker v. American Cyanamid Co. (Id. 1997). Walker Farms purchased an herbicide, ASSERT, manufactured by American Cyanamid Company (Cyanamid) to use on crops of grain and potatoes grown in rotation on its fields. A Cyanamid representative told Walker that ASSERT was safe and posed no risk to potatoes even if sprayed directly on the plants. The label stated that potatoes could be planted in rotation after applying ASSERT on certain grain crops. A disclaimer on the label further provided: “Any damages arising from breach of this warranty shall be limited to direct damages and shall not include consequential commercial damages such as loss of profits or values or any other special or indirect damages. American Cyanamid Company makes no express or implied warranty, including other express or implied warranty of FITNESS or of MERCHANTABILITY.” The crops harvested with ASSERT were irregular and substandard. Walker sued claiming the limitation of liability provision on the ASSERT label was unconscionable. CONTINUED UNCONSCIONABILITY UCC 2-302(1) 24

  25. UNCONSCIONABILITY UCC 2-302(1) Case 8.6 Synopsis. Walker v. American Cyanamid Co. (Id. 1997) [Cont’d]. A jury awarded Walker $3,428,703 in damages for potato crop losses and increased expenses. The trial court reduced the award by $315,333, the amount of crop insurance Walker received. Cyanamid appealed. ISSUE: Is an ambiguous provision limiting liability to “direct damages” unconscionable? HELD: Affirmed. The limitation of liability provision was procedurally and substantively unconscionable. Walter could recover for damage to his potato crops. The limitation of liability provision was substantively unconscionable because it constitutes unfair surprise.

  26. Application under the UCC - a failure to perform is not a breach if performance is made impractical by an event unforeseen by the contract, unless the contract provides otherwise. • Factors: • Underlying Condition • Unforeseen Contingency • Impracticable Performance COMMERCIAL IMPRACTICABILITY—UCC 2-615 26

  27. Seller’s Remedies [UCC 2-708] - UCC provides monetary damages if the buyer cancels a contract or refuses to accept delivery of the goods covered by the contract. • Buyer’s Remedies [UCC 2-711] - UCC gives a variety of choices if a breach occurs. DAMAGES 27

  28. SPECIFIC PERFORMANCE UCC 2-716 If the promised goods are unique, then under Section 2-716 of the UCC a court may order the seller to deliver them. 28

  29. UNIFORM COMPUTER INFORMATION TRANSACTIONS ACT (UCITA) • Scope: computer information – “information in electronic form which is obtained from or through the use of a computer or which is in a form capable of being processed by a computer.” • UCITA Statute of Frauds– a contract requiring payment of $5,000 or more is not enforceable unless there is an authenticated record of the existence of a contract. • Assent and Contract Formation –electronic agents allowed. • Warranties—tailored to information and licensing. • Damages 29

  30. INTERNATIONAL SALE OF GOODS AND THE CISG (CONVENTION FOR THE INTERNATIONAL SALE OF GOODS) • Scope of CISG—contracts between citizens of different countries. • Offer and Acceptance—effective upon receipt. • Battle of the Forms—different terms is a counter-offer. • Good Faith—like UCC. • Implied Warranties—like UCC. 30

  31. THE RESPONSIBLE MANAGER Operating Under Varying Legal Regimes Any manager who enters into contracts on behalf of a business should know which body of contract law will govern the transaction. The manager should determine whether the transaction is governed by Article 2 of the UCC, the common law rules concerning contracts, CISG, or UCITA. 31

  32. 1. Will e-mail and the Internet make the Statute of Frauds obsolete? 2. Should the protection of unconscionability be eliminated and replaced with caveat emptor? 3. Why would United States’ companies tend to like the CISG more than most or all other countries’ companies? REVIEW 32

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