Type
Solution Manual
Book Title
Business Law with UCC Applications 14th Edition
ISBN 13
978-0077733735

978-0077733735 Chapter 14 Lecture Notes

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 sellers and the buyers 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
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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 buyers
disposition during a reasonable hour of the day.
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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 buyers 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. Buyers 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 buyers 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 sellers 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. Sellers 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.
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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. Sellers 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. Buyers 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.
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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 sellers 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 sheriffs 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.
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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 sellers 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
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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 buyers 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
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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 bartenders 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
plaintiffs 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.
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or
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 sellers remedies
when the buyer breaches a sales contract.
15. Use Table 14-2 as a guide for conducting a class discussion on the buyers 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.
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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 sellers 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 sellers skill and judgment in selecting the goods.
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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.
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distribution without the prior written consent of McGraw-Hill Education.