978-0077733735 Chapter 14 Lecture Notes

Type

Quiz

Book Title

Business Law with UCC Applications 14th Edition

ISBN 13

978-0077733735

April 10, 2019

Chapter 14 Sales Contracts Rights, Duties, Breach, and Warranties

Chapter 14

Sales Contracts Rights, Duties, Breach, and Warranties

I. Key Words

Carrier (p. 338) Merchant (p. 346)

Commercial docket (p. 342) Merchantable goods (p. 346)

Commercial unit (p. 335) Sales puffery (p. 345)

Consequential damages (p. 348) Shipment contract (p. 335)

Consumer products (p. 345) Special masters (p. 342)

Cover (p. 341) Stoppage in transit (p. 338)

Cure (p. 336) Tender of delivery (p. 335)

Economic equivalent (p. 346) Tender of payment (p. 335)

Express warranty (p. 344) Tender of performance (p. 334)

Full warranty (p. 345) Unconscionable contract (p. 333)

Good faith (p. 333) Warranty of fitness for a

Implied warranty (p. 345) Particular purpose (p. 347)

Insolvent (p. 338) Warranty of merchantability (p. 346)

Legal tender (p. 335) Warranty of title (p. 347)

Limited warranty (p. 345) Writ of replevin (p. 342)

II. Learning Objectives

1. Describe what is meant by tender of performance.

2. Outline the rights and duties of sellers and buyers in a sales contract.

3. Explain the doctrine of anticipatory breach.

4. Discuss the seller’s and the buyer’s remedies in case of a breach.

5. Define the term statute of limitations.

6. Describe the three ways in which an express warranty may be created.

7. State the requirements of the Magnuson-Moss Warranty Act.

8. Differentiate among the implied warranties of fitness for a particular purpose,

merchantability, and usage of trade.

9. Explain the meaning of a warranty of title.

10. Recognize the ways in which warranties may be excluded.

III. Major Concepts

14-1 Rights and Duties of the Parties

Sellers and buyers must follow the terms of their contract and act in good faith. Tender of

performance is necessary to test the other party’s ability and willingness to perform.

Tender of delivery requires the seller to make conforming goods available to the buyer at

a reasonable hour of the day. Tender of payment may be made by any means that is

commonly used in the ordinary course of business. Except when goods are shipped c.o.d.

or when the contract provides for payment against a document of title, the buyer has the

right to inspect goods before accepting or paying for them. When improper goods are

distribution without the prior written consent of McGraw-Hill Education.

Chapter 14 Sales Contracts Rights, Duties, Breach, and Warranties

delivered, the buyer may elect to reject all of them, accept all of them, or accept any

commercial unit or units and reject the rest. Sellers may cure defects or nonconformities

that caused the goods to be rejected by the buyer.

14-2 Breach of Contract

When a buyer breaches a sales contract, the seller may withhold delivery of any goods

not yet delivered, stop goods that are in transit, resell the goods or the undelivered

balance of them, retain the goods and bring suit for damages, bring suit for the price of

any goods that the buyer has accepted, or cancel the contract. When a seller breaches a

sales contract, the buyer may cancel the contract and recover any money paid out, buy

similar goods from someone else and sue the seller for the difference in price, sue the

seller for damages for nondelivery, keep the goods and deduct the cost of damages from

any price still due, or sue for specific performance if the goods are rare or unique.

14-3 Warranty Protection

Express warranties arise by a statement of fact or promise, by a description of the goods,

and by a sample or model. Other warranties may arise from the ways in which parties

have dealt in the past. When goods are sold, either by a merchant or a private party, the

seller warrants that the title is good and that there are no liens on the goods. Except when

express warranties are made, sellers may exclude the warranties of merchantability and

fitness for a particular purpose. Such an exclusion must be in writing and conspicuous.

The words as is and with all faults serve to disclaim implied warranties but not the

warranty of title. Warranties extend to people who would normally be expected to use the

goods as well as to those who actually buy them.

IV. Outline

I. Rights and Duties of the Parties (14-1)

A. Introduction

1. The seller is obligated to turn the goods over to the buyer.

2. The buyer is obligated to accept and pay for the goods.

3. All parties in a sales contract must act in good faith, meaning they must act honestly.

4. Unconscionable contracts are contracts that give unfair advantage.

5. Courts need not enforce contracts or parts of contracts that are unconscionable.

6. Past performance and usage of trade are often considered in enforcing contracts.

7. The UCC establishes a series of rights and duties that are key elements within all

sales contracts.

B. Tender of Performance

1. When the seller offers to turn the goods over to the buyer and when the buyer offers

to pay for them, tender of performance occurs.

2. To make proper tender, a seller must put and hold conforming goods at the buyer’s

disposition during a reasonable hour of the day.

distribution without the prior written consent of McGraw-Hill Education.

Chapter 14 Sales Contracts Rights, Duties, Breach, and Warranties

3. If goods are in the possession of a warehouse, the seller must either tender a

document of title covering the goods or obtain an acknowledgment by the warehouse

of the buyer’s right to their possession.

4. In a shipment contract, the seller must put the goods in the possession of a carrier and

contract with that carrier for their transportation.

5. Tender of payment means offering to turn the money over to the seller.

6. The seller has the right to demand payment in legal tender but must give the buyer a

reasonable time to obtain it.

C. Buyer’s Right’s and Duties

1. Except when goods are shipped c.o.d. or when the contract provides for payment

against a document of title, the buyer has the right to inspect the goods before

accepting or paying for them.

2. When defective goods or goods not of the kind specified in the contract are delivered,

the buyer may elect to reject them all, accept them all, or accept any commercial unit

or units and reject the rest.

3. A rejection occurs when a buyer refuses to accept delivery of goods tendered.

4. Rejection must be done within a reasonable time after delivery or tender.

5. If the goods are in the buyer’s possession upon rejection, the buyer must hold them

with reasonable care long enough for the seller to remove them.

6. If the seller gives no instructions within a reasonable time after being notified of the

rejection, the buyer may store the goods for the seller, reship them to the seller, or

resell them for the seller.

7. Merchant buyers have a duty after the rejection of goods in their possession or control

to follow any reasonable instructions received from the seller with respect to the

goods.

8. In the case of merchant buyers, if no instructions are received from the seller, the

merchant must make reasonable efforts to sell the gods for the seller if they are

perishable or threaten to decline speedily in value.

9. Once goods have been accepted, they cannot be rejected.

10. Acceptance occurs when the buyer, after a reasonable opportunity to inspect them,

does any of the following:

a. Signifies to the seller that the goods are conforming.

b. Signifies to the seller a willingness to accept the goods even if they are not

conforming.

c. Fails to reject the goods.

d. Performs an act inconsistent with the seller’s ownership.

11. A buyer who has accepted goods and later discovers something wrong with them,

must notify the seller within a reasonable time.

12. A buyer who has accepted goods on the assumption that their nonconformity will be

corrected may revoke acceptance if the nonconformity is not corrected.

13. Revocation must occur within a reasonable time after the buyer discovers the

nonconformity.

D. Seller’s Rights and Duties

1. When the time for performance has not yet expired, the seller has the right to cure the

defect and make a proper tender within the contract time.

distribution without the prior written consent of McGraw-Hill Education.

Chapter 14 Sales Contracts Rights, Duties, Breach, and Warranties

2. If the time for performance has expired, the seller is allowed to have an additional

amount of time to substitute a conforming tender if the seller had reasonable grounds

to believe that the goods that were delivered were acceptable.

3. Sellers must notify buyers that they are going to cure the improper tender or delivery.

4. The seller does not have the right to cure improper tender when a buyer accepts

nonconforming goods, even though the buyer may later sue the seller for breach of

contract.

II. Breach of Contract (14-2)

A. Anticipatory Breach

1. Anticipatory breach occurs when one of the parties notifies the other party before the

time for performance that he or she is not going to conform.

2. Under the UCC, when either party repudiates the contract before the time for

performance, the injured party may take action immediately if waiting would be

unjust or cause a material inconvenience.

B. Seller’s Remedies

1. When a buyer breaches a sales contract, the seller may withhold delivery, stop

delivery, resell the goods, recover damages, sue for the price of the goods, or cancel

the contract.

2. Canceling the contract may be the simplest but also the most damaging.

C. Buyer’s Remedies

1. The buyer may tell the seller that the deal is off or demand repayment of any money

that has already been handed over to the seller.

2. If the seller is uncooperative, the buyer may cover the sale, sue for breach, or keep the

goods and seek an adjustment.

3. The buyer may sue for specific performance when goods are unique or rare.

D. The Commercial Docket

1. Some courts have established a separate docket for commercial cases.

2. Supporters argue that commercial lawsuits can be handled more effectively if they are

assigned to judges who have been trained to manage such cases.

3. The commercial docket provides a legal forum that is limited to commercial lawsuits

handled by judges and mediators who receive special education sessions devoted

exclusively to commercial law.

E. Statute of Limitations

1. Lawsuits must be brought within the time frame allowed by law or the action is

barred.

2. In general, an action for breach of a sales contract must be brought within four years

from the date of the breach.

III. Warranty Protection (14-3)

A. Express Warranties

1. An express warranty is an oral or written statement, promise, or other representation

about the quality of a product.

2. Express warranties arise by a statement of fact or promise, by a description of the

goods, or by a sample or model.

3. In states that have adopted Article 2A of the UCC, express warranties arise when

goods are leased in the same way that they arise when goods are sold.

distribution without the prior written consent of McGraw-Hill Education.

Chapter 14 Sales Contracts Rights, Duties, Breach, and Warranties

4. The Federal Trade Commission has established specific rules for advertising express

warranties on goods sold in interstate commerce.

5. Buyers must use common sense to recognize the difference between a sales person’s

statements of fact and statements that are opinion or puffery.

6. The Magnuson-Moss Warranty Act applies when written warranties are made

voluntarily for purchases of consumer products.

7. The Magnuson-Moss Warranty Act is designed to prevent deceptive warranty

practices and to provide consumers with more information about warranties.

8. The Magnuson-Moss Warranty has the following terms:

a. Under the act when a written warranty is given to a consumer on goods costing

more than $10, the warranty must disclose whether it is a full or a limited

warranty.

b. When goods cost more than $15, the written warranty must be made available

before the consumer decides to buy the product.

c. A full warranty is one in which a defective product will be repaired without

charge within a reasonable time after a complaint has been made about it, or the

consumer may have a replacement or a refund.

d. A full warranty must state its duration.

e. A limited warranty is anything less than a full warranty.

B. Implied Warranties

1. There are three types of implied warranties: the implied warranty of merchantability

the implied warranty of fitness for a particular purpose, and the implied warranty that

is derived from a course of dealing or usage of trade.

2. Unless it is validly excluded, the implied warranty of merchantability provides that

whenever a merchant sells goods, the merchant warrants the goods are merchantable,

meaning that they are fit for the purpose for which the goods are to be used.

3. The implied warranty of fitness for a particular purpose arises when a buyer relies on

the seller’s skill and judgment to select the goods and the seller impliedly warrants

that the goods will be fit for the purpose for which they are to be used.

4. Other implied warranties may arise from ways in which the parties have dealt in the

past or by usage of trade.

C. Warranty of Title

1. When goods are sold by a merchant or a private party, the seller warrants that the title

being conveyed is good and that the transfer is rightful.

2. When the buyer is aware, such as in a sheriff’s sale, that the person selling the goods

does not personally claim title to them, the warranty of tile is not made by the seller.

D. Warranty Exclusion

1. To exclude the implied warranty of merchantability in states that allow it, the word

merchantability must be used in the disclaimer; and if the exclusion is in writing, it

must be in large, bold type so that it is conspicuous.

2. To exclude the implied warranty of fitness for a particular purpose, the exclusion

must be in writing and also be conspicuous.

3. The use of expressions such as “as is,” “with all faults,” and others is another way to

exclude implied warranties; however, those words do not exclude express warranties

or the warranty of title.

distribution without the prior written consent of McGraw-Hill Education.

Chapter 14 Sales Contracts Rights, Duties, Breach, and Warranties

4. Implied warranties may be excluded under the UCC by having buyers examine the

goods.

5. Under the Magnuson-Moss Warranty Act, any clause purporting to exclude or limit

consequential damages for breach of warranty must appear conspicuously on the face

of the warranty.

E. Privity Not Required

1. The UCC has abolished the requirement of privity.

2. The UCC provides three options from which states may choose regarding warranty

coverage for individuals other than purchasers.

V. Background Information

A. Cross-Cultural Notes

1. With some qualifications, the CISG provides a seller the right to remedy a breach.

2. Deposits are commonly used in China to assure contract performance. If the depositor

does not meet the terms of the contract, the other party has the right to retain the

deposit. If the party accepting the deposit defaults, it is required to pay back twice the

original deposit amount.

3. Under international law (CISG), buyers must notify sellers within a reasonable time

after discovering any lack of conformity of the goods. CISG Article 39.

B. Historical Notes

1. In the nineteenth century, implied warranty was looked on with scorn by lawyers and

judges. It was felt by many that making the seller liable would put a burden on

commerce and create litigation. However, a seller’s claims were often held as express

warranties.

C. State Variations

1. In North Carolina, as is generally true, if a sales contract, or any portion of the

contract, is determined to be unconscionable, the court may: (1) refuse to enforce the

contract, or (2) enforce the contract without the unconscionable clause, or (3) limit

the application of any unconscionable clause to avoid an unconscionable result.

2. In Iowa, like other UCC states, the burden is upon the buyer to establish any breach

with respect to the goods accepted.

3. In Delaware, the implied warranties of merchantability and fitness are not applicable

to the sale of human tissue or organs from a reservoir of such tissue or organs.

4. An article from the Marquette Law Review by Susan Landrum titled “Much Ado

About Nothing?: What the Numbers Tell Us About How State Courts Apply the

distribution without the prior written consent of McGraw-Hill Education.

Chapter 14 Sales Contracts Rights, Duties, Breach, and Warranties

Unconscionability Doctrine to Arbitration Agreements,” at 97 Marq. L. Rev. 751

(2014), discusses variations in how courts approach the issue of unconscionabilitly.

VI. Terms

1. Breach refers to a failure to perform in a manner expected. In the context of contracts,

it is simply a failure to do what the contract states.

2. An anticipatory breach, also called a constructive breach, is a clear and absolute

refusal to perform what is stipulated by a contract before the time for performance.

3. Those who are insolvent are those unable to pay their debts. In opposition is the term

liquid, referring to something that is capable of producing or converting into cash.

4. When a refund is paid pro rata it’s divided in proportion to some calculable factor.

5. Privity refers to a relationship between people with a legal interest in the same

property, contract, or other transaction.

VII. Related Cases

1. Wine World had an oral contract with Brand to sell wine to Brand for distribution.

This type of contract in the wine industry was customarily sealed with a handshake.

In 1989, Wine World terminated the contract. Brand asserted that custom and usage in

the wine industry dictated that a distributorship could only be terminated for poor

performance or failure to pay invoices. The court noted that the custom and usage of

the industry was relevant to prove an implied term of an oral contract. However, in

this case, the custom had ceased by 1989, so the termination was upheld. Varni Bros.

Corp. v. Wine World, Inc., 41 Cal.Rptr.2d 740 (1995).

2. The owner of a bowling alley began having some trouble with the second-hand

pin-spotters he had recently bought. He notified the seller in a letter, outlining the

several problems. Noting the difference between notice required in a rejection

situation as opposed to notice required when goods are accepted but nonconforming,

the court ruled that the buyer’s letter of dissatisfaction was particular enough to put

the seller on notice of defects. Bonebrake v. Cox, 499 F.2d 951 (8th Cir. 1974).

3. Hal-Tuc, Inc., contracted to have Central District Alarm install new surveillance

equipment at their place of business. When the equipment malfunctioned, Hal-Tuc

discovered that Central Alarm had installed used equipment instead. Central Alarm

attempted to cure with new equipment, citing UCC 2-508(2). However, the court

ruled that the evidence failed to support the company’s position that it had a right to

cure. Central Dist. Alarm, Inc. v. Hal-Tuc, Inc., 886 S.W.2d 210 (Mo. Ct. App. 1994).

4. In a bar, a father and his daughter became curious about an advertised alcoholic

concoction called a Watermelon. A waitress recommended the drink and said it was

distribution without the prior written consent of McGraw-Hill Education.

Chapter 14 Sales Contracts Rights, Duties, Breach, and Warranties

good, tasting like watermelon. The pair then ordered and drank what they believed to

be two Watermelon shots. In fact, they drank dishwashing liquid and chemical lye.

They sued, and the court ruled that the bartender’s statement was an express warranty.

Cott v. Peppermint Twist Management Co., Inc., 856 P.2d 906 (Kan. 1993).

5. An automobile dealership unknowingly purchased a stolen car and then sold the car.

Since the rightful owner did not agree to this transfer, the court ruled that the

subsequent sale of a stolen car by a dealer constituted a breach of warranty of good

title. Robinson v. Durham, 537 So.2d 966 (Ala. Civ. App. 1988).

6. In Tarulli v. Birds in Paradise, 417 N.Y.S.2d 854 (N.Y. Civ. Ct. 1979), the buyer of a

Moluccan cockatoo claimed that the seller had breached warranty by refusing to

replace the bird, which had died of anemia less than four weeks after purchase. The

sales agreement provided a two-day period in which the buyer could have the bird

examined by a veterinarian and exchanged should any serious health problem be

found. Tarulli failed to have the cockatoo examined, despite being urged to do so by

the seller. Had the bird’s health been checked, the anemia would most likely have

been detected. The court determined that because the buyer had refused to have the

bird examined by a veterinarian, no warranty existed.

7. In Languilli v. Bumble Bee Seafood, Inc., 604 N.Y.S.2d 1020 (N.Y. Sup. Ct. 1993),

Languilli broke a tooth on a one-half inch tuna bone that had come from a can of tuna

fish. Applying the reasonable expectations test, the court refused to dismiss the

plaintiff’s claim for violation of the implied warranty of merchantability.

VIII. Teaching Tips and Additional Resources

1. At

http://business.ftc.gov/documents/bus01-businesspersons-guide-federal-warranty-law,

the Federal Trade Commission provides “A Businessperson’s Guide to Federal

Warranty Law.”

2. Massachusetts provides “A Massachusetts Consumers Guide to Shopping Rights” at

http://www.mass.gov/ocabr/consumer-rights-and-resources/consumer-protection/shop

ping/shopping-rights/shopping-rights.html.

3. The State of California provides information on motor vehicle warranties and lemon

laws at http://ag.ca.gov/consumers/general/lemon.php.

4. An article involving a breach of warranty claim against Honda is available at

http://www.bloomberg.com/news/2010-03-31/honda-must-defend-u-s-lawuit-over-air

-conditioner-defects-judge-rules.html.

5. An article titled “Supreme Court Allows Contracts That Prohibit Class-Action

Arbitration” is available from the New York Times at

http://www.nytimes.com/2011/04/28/business/28bizcourt.html.

distribution without the prior written consent of McGraw-Hill Education.

Chapter 14 Sales Contracts Rights, Duties, Breach, and Warranties

6. An article titled “Bedbugs in New Clothes Could Breach Warranty of

Merchantability, Law Prof Says” is available from the ABA Journal at

http://www.abajournal.com/news/article/bedbugs_in_new_clothes_could_breach_war

ranty_of_merchantability_law_prof_sa/.

7. Recalls in regard to product defects are not uncommon. ConsumerReports.org reports

on recalls involving airbags and injuries that occurred at

http://www.consumerreports.org/cro/news/2014/10/everything-you-need-to-know-abo

ut-the-takata-air-bag-recall/index.htm. Information general information regarding

vehicle recalls and defects including a link to resources to find defects is available at

the FindLaw website at

http://injury.findlaw.com/product-liability/vehicle-recalls-and-defects.html.

8. The Federal Trade Commission provides information on auto warranties and routine

maintenance including some information on the Magnuson-Moss Warranty Act at

http://www.consumer.ftc.gov/articles/0138-auto-warranties-routine-maintenance.

9. An article titled “Warranty Laws and the Magnuson-Moss Warranty Act” is available

on the FindLaw website at

http://consumer.findlaw.com/consumer-transactions/warranty-laws-and-the-magnuson

-moss-warranty-act-.html.

10. Discuss with the class the meaning of legal tender. Point out that, under the UCC,

tender of payment may be made by a check; however, the seller may demand legal

tender and give the buyer a reasonable time to obtain it.

11. Stress that when goods are shipped c.o.d., there is some risk because the buyer must

pay for the goods before inspecting them.

12. Propose scenarios in which the students are buying certain goods. Ask students if they

know their rights in each situation.

13. Inform students that if a buyer of computer software and hardware not only failed to

reject those goods, but also retained and used them for a period of time, the court

would declare these actions as acceptance under UCC 2-606(1)(c).

14. Use Table 14-1 as a guide for conducting a class discussion on the seller’s remedies

when the buyer breaches a sales contract.

15. Use Table 14-2 as a guide for conducting a class discussion on the buyer’s remedies

when the seller breaches a sales contract.

16. In order to be found reasonable by a court, liquidated damages must be realistic and

in proportion to the losses anticipated in the event of a breach. If the court finds them

unreasonable, they will be disregarded, and a jury will have to set damages.

distribution without the prior written consent of McGraw-Hill Education.

Chapter 14 Sales Contracts Rights, Duties, Breach, and Warranties

17. Ask students to share their own experiences with warranties and company negligence.

Assign half of the class members the role of devil’s advocate in the discussion. For

example, if a student shares a story about false promises from a salesperson, the

devil’s advocates should defend the salesperson’s position.

18. The word warrant has its origins in very or true.

19. From a seller’s point of view, the best express warranties are those that take away

more rights than they give. When a statement explains what a product can do, it

implies all that it cannot do. Use examples of real warranties from products you’ve

bought or from advertisements so that students can examine and define what

warranties truly promise.

20. Have students write an advertisement or a sales pitch for any item they choose.

Instruct them to include a mix of warranty details and sales puffery in their

descriptions. Ask students to exchange their ads and look for examples of fact and

hype.

21. Point out to students that some warranties include a disclaimer exempting the seller

from responsibility for anything that is not included in the warranty. This exemption

helps guard against claims made on the basis of what a seller might have said or

promised but did not write down. However, any statement of fact or promise, whether

oral or written, creates an express warranty under the UCC.

22. When analyzing the concept of limited warranty, discuss why such a warranty is

limited—what will not be done for the consumer when a defect is discovered.

23. Suggest that students bring to class a limited warranty and a full warranty that came

from products recently purchased. Ask them to identify whether they are full or

limited.

24. Emphasize the importance of the warranty of merchantability. Explain that, unless the

warranty is excluded, everything a merchant sells must be merchantable.

25. Stress that, for a warranty of merchantability to come about, the seller must be a

merchant. Then stress that, for a warranty of fitness to come about, the buyer must

rely on the seller’s skill and judgment in selecting the goods.

distribution without the prior written consent of McGraw-Hill Education.

Chapter 14 Sales Contracts Rights, Duties, Breach, and Warranties

26. Initiate a discussion of the pros and cons of requiring manufacturers to provide a full

warranty of all products. Topics to talk about might include the cost of making only

superior products, misuse of goods, the expense of breach of warranty suits, and the

presence of disreputable manufacturing firms. Encourage students to consider not

only the benefits to consumers but also the possible costs to both consumers and

businesses of mandatory full warranties.

27. Ask students if anyone they know has ever been injured by using a defective product.

Discuss the circumstances in the class.

distribution without the prior written consent of McGraw-Hill Education.