573
Unit Four
Focus on Ethics: Domestic and
International Sales and Lease Contracts
See Separate Lecture Outline System
INTRODUCTION
This Focus on Ethics highlights some ethical issues that have emerged in the application of sales and lease law.
Transactions involving sales of goods constitute a major portion of business activity in the commercial and
manufacturing sectors of this economy. Sales of goods are governed by the UCC in virtually every state. Many of the UCC
provisions express ethical standards.
ADDITIONAL RESOURCES—
574 INSTRUCTOR’S MANUAL TO ACCOMPANY BUSINESS LAW, TWELFTH EDITION
VIDEO SUPPLEMENTS
The following video supplements relate to ethical issues on topics discussed in this feature—
Business Law Digital Video Library
The Business Law Digital Video Library at www.cengage.com/blaw/dvl offers a variety of videos for group or
individual review. Clips related to topics in this feature include the following.
• Ask the Instructor
could probably pursue a number of different product liability theories of recovery. These could include contract
theories like express warranty or the implied warranty of merchantability. They might also include tort theories, such
as negligence or strict liability.
• Legal Conflicts in Business
Product Liability—Caleb’s Cigar Selling Idea—The software start-up discusses whether to offer other products for
sale on its web site, but disagree about whether to sell cigars. Should they be concerned about the seller’s liability in
selling such a product?
International Sales & Lease Contracts—Not enough Jalapenos—The advertising firm ordered a quantity of
jalapenos from Mexico. When the shipment arrived, the advertiser found that the full quantity was not delivered.
ordered equipment, but the price was not specified in the agreement. Now the equipment company says there was no
contract and therefore will not deliver the equipment.
• Drama of the Law
Warranties—Party Platter Matters—Contracts are built on promises, warranties and expectations. When a
customer’s expectations do not match to the store’s delivery, a dispute is likely to occur.
• LawFlix
Matilda—Contracts; misrepresentation (Scene in which Matilda’s father explains to Matilda how to make a bad car
look good and sell).
FOCUS OUTLINE
I. Good Faith and Commercial Reasonableness
UNIT FOUR: FOCUS ON ETHICS—DOMESTIC & INT’L SALES & LEASE CONTRACTS 575
Good faith and commercial reasonableness—concepts that permeate the UCC—help to prevent unethical behavior.
For example, a party filling in a missing term may not deviate from what is commercially reasonable in the context of
the transaction.
576 INSTRUCTOR’S MANUAL TO ACCOMPANY BUSINESS LAW, TWELFTH EDITION
B. BAD FAITH NOT REQUIRED FOR BREACH
A party can breach the obligation of good faith under the UCC even if the party did not act in bad faith. The text
discusses a recent case as an example.
C. COMMERCIAL REASONABLENESS
II. The Concept of the Good Faith Purchaser
The concept of the good faith purchaser reflects the UCC’s emphasis on protecting innocent parties (those who buy
goods unaware that the seller does not have good title). Ethical questions arise when a buyer suspects that a seller
may not have good title but the buyer allows the transaction go forward because it is a “good deal.”
III. Unconscionability
The UCC’s provisions on unconscionability are based on ethical premises. UCC 2–302 allows courts to refuse to enforce
a contract or a clause in a contract, or limit its application, if it is too one-sided or unfair.
IV. Warranties
A seller has an ethical obligation to provide safe products. An ethical issue arises when safety means higher costs and
therefore higher prices.
A. EXPRESS AND IMPLIED WARRANTIES
To what extent should manufacturers be responsible for repairing products that break down during normal use?
Warranty laws protect consumers from sellers who choose to neglect ethical concerns if they are doing what is
otherwise legal. In other words, the law imposes an ethical obligation on merchants in statutory form.
B. WARRANTY DISCLAIMERS
C. FREEDOM OF CONTRACT VERSUS FREEDOM FROM CONTRACT—REVISITED
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V. International Transactions
In international business deals, some of the biggest stumbling blocks relate to ethics. One notable difference among
cultural attitudes is the role of women. In some countries, this may present some difficult ethical problems for firms
doing business internationally. Should companies avoid assigning women to work overseas because of these
differences? Another question involves the legitimacy of certain side payments (or “gift giving,” or bribes). Should a
company avoid what could appear improper in the United States when to do so could undercut the ability of the firm
to make a deal?
TEACHING SUGGESTIONS
1. Emphasize the problems posed by standard form contracts. By this time, inside or outside of class, students may
have had several opportunities to read and consider parts or all of standard purchase agreements and, through their
studies, should have an awareness of the problems that they engender. Nevertheless, standard form contracts often
present difficulties for student comprehension. Have them review problem areas explored in this Unit together,
perhaps in the context of the warranty disclaimers discussion in this Focus. What additional problems do forms create
when business is done internationally?
2. Relate warranties and the protection they provide to a discussion of ethical issues that arise in the area of product
liability, which is discussed earlier in the text. Ethical issues that occur in the area of product liability include the
following: (1) whether consumers should recover damages for harm caused by their own carelessness or product
misuse or for accidents for which no one is at fault (lawsuits have been brought against manufacturers even when
consumers are at fault—if anyone is); (2) whether a manufacturer should be liable for failing to warn of an obvious dan-
ger concerning the use of its product (for example, when a young boy fell through a toilet seat and suffocated in the
water, his parents sued the toilet seat manufacturer for failing to place a sticker on the lid to warn them to take
to a strict liability standard for consumer products). Where is the line drawn in imposing strict liability standards on
imposition of ethical standards on manufacturers to benefit society and one that has the effect of overprotecting
consumers.
3. Ask students the ethical issues that arise from the license agreements that come with software, and that often
cannot be read until the software has been loaded. Consider, too, the same agreements that come with a point-and-
click contract on the Web. From the different perspectives of the different parties to a licensing agreement, what are
the most important clauses? Are these agreements too one-sided to be fair?
4. The “battle of the forms” raises an important ethical question: what is a fair and just solution to a dispute created
by differing standard forms? UCC 2–207 provides that a contract can be formed even though the acceptance includes
additional terms. For this reason, some buyers and sellers attempt to draft their acceptances as “offers” or
“counteroffers” (instead of acceptances) to dictate the terms of their contracts. Under UCC 2–207(3) a contract
consists of only those terms on which the parties agree, and all conflicting terms are stricken from the deal.
Cyberlaw Link
What are the ethical issues in a sale of goods in the context of cyberspace? How do ethical standards impact e-
contract formation, and the attribution and authentication of e-messages?
ADDITIONAL QUESTIONS
1. How does the concept of good faith affect performance under output and requirements contracts? The concept of
2. What does the requirement of commercial reasonableness mean? The requirement of commercial reasonableness
3. What is the ethical principle expressed in the doctrine of commercial impracticability? The ethical principle expressed
4. What is emphasized by the UCC’s concept of the good faith purchaser? The concept of the good faith purchaser
5. What kind of sellers do warranty laws protect consumers from? Warranty laws protect consumers from sellers who
choose to neglect ethical concerns if they are doing what is otherwise legal (that is, the law imposes an ethical obligation on
merchants in statutory form). The UCC’s use of the term warranty reflects a promise or guarantee made by a seller that goods
have certain characteristics. What does the UCC inject into contractual situations through its recognition of a description as an
6. What ethical premise is the basis for the UCC requirement that warranty disclaimers be conspicuous? This
7. What values must multinational businesses be cognizant of? Multinational firms must consider the ethical values of
Americans and the values of the citizens of other countries in which they do business. What is the dilemma involving these
values? If there is a conflict, which should prevail? Some countries discriminate on the basis of race, sex, or religion by law. In
8. Should U.S. companies be allowed to export domestically banned chemicals to developing countries? A chemical may
9. Should bribes to foreign officials be permitted? Because American companies are prohibited by law from bribing
foreign officials, many persons have argued that American companies are placed at a competitive disadvantage relative to their
foreign rivals. Compounding the difficulty of resolving this issue is the fact that bribes are not regarded as unethical in many of
these foreign countries but simply a cost of doing business with government officials. Some people believe that the American
ACTIVITY AND RESEARCH ASSIGNMENT
There are terms considered omnipresent in the UCC—good faith, commercial reasonableness, unconscionability.
These terms regulate all transactions under the UCC. Commercial reasonableness may be determined by objective factors
(course of dealing, usage of trade). Good faith, however, is defined according to a subjective standard (“honesty in fact in the
conduct or transaction involved”). Unconscionability is not defined at all. Have students break into small groups (four to five
students in each) and imagine that they are reconsidering the definitions of these terms for a revised UCC Article 2. How would
UNIT FOUR: FOCUS ON ETHICS—DOMESTIC & INT’L SALES & LEASE CONTRACTS 581
they define unconscionability? What would they set as determinants of commercial reasonableness? Would they change the
standard for evaluating good faith? Ask each group to share its revisions with the class.
DOMESTIC AND INTERNATIONAL SALES AND LEASE CONTRACTS—
ANSWERS TO DISCUSSION QUESTIONS
1. Review the UCC provisions that apply to the topics discussed in Chapters 19 through 22. Discuss fully how various
UCC provisions, excluding the provisions discussed above, reflect social values and ethical standards. The concepts of
good faith and commercial reasonableness permeate the UCC. They are thereby read into every sales and lease
contract, and impose duties on all of the parties. Reasonability in the formation, performance, and termination of
contracts also runs through most of the UCC’s provisions. Together, the principles help to prevent unethical behavior
by businesspersons.
and warranties. Every other provision of the UCC likewise reflects social values and ethical standards—from negotiation
2. How can a court objectively measure good faith and commercial reasonableness? The concepts of good faith and
commercial reasonableness permeate the UCC and help to prevent unethical behavior by businesspersons. These two
key concepts are read into every contract and impose certain duties on all parties. Courts frequently look to course of
dealing, usage of trade, and the surrounding circumstances in determining what is commercially reasonable in a given
situation.
For example, if the market price of the goods subject to a requirements contract rises rapidly and dramatically
because of an extreme shortage of materials necessary to their production, the buyer could claim that her needs are
substantially below the market price), the buyer could turn around and sell the goods that she does not need at the
3. Generally, the courts determine what constitutes “reasonable” behavior in disputes between contract parties over
this issue. Should the UCC be more specific in defining what will be deemed reasonable in particular circumstances so
that the courts do not have to decide the issue? Why or why not? Reasonability in the formation, performance, and
commercial reasonableness. All commercial actions—including the performance and enforcement of contract
to reasonable commercial customs. The reliance of the UCC’s drafters on commercial customs, or usage of trade, as a
guideline to reasonable behavior in a given trade or industry indicates the importance of good faith and commercial
Given the omnipresence of these concepts in the UCC, it is not possible to define specifically what would be
deemed reasonable in all of the particular circumstances that might arise under its provisions. There are too many
varieties of courses of dealing, usages of trade, and courses of performance—not to mention the surrounding
4. Why does the UCC protect innocent persons (good faith purchasers) who buy goods from sellers with voidable
title but not innocent persons who buy goods from sellers with void title? The concept of the good faith purchaser
reflects the UCC’s emphasis on protecting innocent parties. Suppose, for example, that you innocently and in good
faith purchase a boat for a fair market price from someone who appears to have good title. Under the UCC, you are
protected from the possibility that the real owner—from whom the seller may have fraudulently obtained the boat—
will later appear and demand his boat back.
But another ethical issue is raised when the purchaser of goods is not quite so innocent. Suppose that the
purchaser has reason to suspect that the seller may not have good title to the goods being sold but nonetheless goes
ahead with the transaction because it is a “good deal.” Has this buyer crossed the boundary that separates the good
faith purchaser from one who purchases in bad faith? This boundary is important in the law of sales because the UCC
will not be a refuge for those who purchase in bad faith. The term good faith purchaser means just that—one who
anything shady or illegal about the deal.
5. Should U.S. firms doing business internationally send female employees to foreign nations that reject any role for
women in business? Why or why not? How can a U.S. company accommodate the culture of foreign nations and still
treat its own employees equally? Conducting business internationally presents unique challenges including, at times,
ethical challenges. This is understandable, given that laws and cultures vary from one country to another. In the
United States, for example, equal employment opportunity is a fundamental public policy. This policy is clearly
expressed in Title VII of the Civil Rights Act of 1964, which prohibits discrimination against women in the employment
context. Some other countries, however, largely reject any professional role for women. Consequently, U.S. women
But the existence of these difficulties does not mean that U.S. firms doing business internationally should
necessarily reject the role of women in business themselves. Instead of expecting one culture to blindly accept the
social and political norms of another, however, preliminary negotiations could include sensitive discussions of the
issue. Explanations could be offered, and compromises could be reached. Even if it is not possible to accommodate all
cultures in all instances, a broader understanding of the easy and means of business would benefit all of the parties.