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Chapter 14

Sales Contracts:Rights, Duties, Breach, and Warranties

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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.

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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.

Learning Objectives

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Obligations of the Parties

• Good faith – All parties must act honestly

• Unconscionable contract – So one-sided that it is oppressive and gives unfair

advantage to one of the parties – Unequal bargaining power, absence of choice by one

party, unreasonably one-sided terms • Course of dealings and usage of trade– Can influence firms’ obligations

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Unconscionable contract/clause in NC§ 25 2 302. Unconscionable contract or clause.‑ ‑(1) If the court as a matter of law finds the contract or any clause of the contract to have been unconscionable at the time it was made the court may refuse to enforce the contract, or it may enforce the remainder of the contract without the unconscionable clause, or it may so limit the application of any unconscionable clause as to avoid any unconscionable result.

(2) When it is claimed or appears to the court that the contract or any clause thereof may be unconscionable the parties shall be afforded a reasonable opportunity to present evidence as to its commercial setting, purpose and effect to aid the court in making the determination. (1971, c. 1055, s. 1.)

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Tender of Performance

• The offering by a party to do what they agreed to in the contract– When the seller offers to turn the goods over to the

buyer – When the buyer offers to pay for them

• If a party fails to make tender, they cannot bring suit in case of breach

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Tender of Delivery by Seller

• Offer to turn the goods over to the buyer• Failure to make tender could give the buyer an

excuse not to perform

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Tender of Delivery by Seller

• Manner of Seller’s Tender– Seller must put and hold conforming goods at the

buyer’s disposition during a reasonable time of day– Must notify buyer that goods are being tendered– Buyer must furnish suitable facilities for receipt

• Shipment Contract– Seller must put goods in possession of carrier, contract

with carrier for transportation, and send any necessary documents to buyer

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Tender of Delivery by Seller

• Goods in Possession of Warehouse– Seller either:• Tenders a document of title covering the goods, or• Obtains an acknowledgment by the warehouse of the buyer’s

right to possession

• International Law– Seller delivers goods and any required documents,

hands goods over to a carrier, or places the goods at the buyer’s disposal

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Tender of Payment by Buyer

• Tender of payment – Offering to turn the necessary money over to the seller– May be done by any means or manner commonly used

in ordinary course of business

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Tender of Payment by Buyer

• Legal tender – Money that may be offered legally in satisfaction of a

debt and that must be accepted by a creditor when offered

• Under UCC, payment by check is conditional– If check clears, debt discharged– If dishonored, debt is revived

Treasury.gov on legal tender

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Buyer’s Rights and Duties

• Buyer has the right to inspect the goods before accepting or paying for them.

• Exception:– When goods are shipped c.o.d.• Buyer must pay first, but may choose to reject upon

inspection – Unless the defect is obvious without inspection

– Payment before inspection does not constitute acceptance. If a defect is found, buyer may seek remedies against the seller.

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Buyer’s Rights and Duties

• When defective goods are delivered, the buyer may elect to:– reject them all– accept them all, or – accept any commercial unit or units and reject the rest

• Commercial unit – a single whole for the purpose of sale, the division of

which impairs its character or value on the market

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Rejection

• Occurs when a buyer refuses to accept delivery of goods tendered

• Must be done within a reasonable time after delivery or tender to the buyer

• Buyer must notify seller of the defect in the goods to give the seller an opportunity to correct the defect

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Rejection

• If seller does not give instructions after a reasonable time, buyer may:– Store goods for seller– Reship to seller– Resell them for seller

• Buyer is entitled to recover expenses incurred.

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Merchant Buyer’s Duties

• Merchant buyers have a duty to follow any reasonable instructions received from the seller with respect to the goods

• If no instructions, must make reasonable effort to sell goods for the seller if they are perishable or threaten to decline in value quickly

• Merchant buyer is entitled to recover costs for reasonable expenses of storage and sale, as well as a commission

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Acceptance

Acceptance of goods takes place when the buyer does any of the following:

• Signifies to the seller that the goods are conforming• Signifies to the seller a willingness to take them even

though they are not conforming.• Fails to reject them.• Performs any act that is inconsistent with the seller’s

ownership.

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Revocation of Acceptance

• If a buyer accepts goods assuming that their nonconformity would be corrected by the seller, and the seller does not do so, the buyer may revoke the acceptance.– Must be done in a reasonable time, and is not complete

until buyer notifies seller – If buyer revokes acceptance, has same rights and duties

as if he/she had rejected the goods

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Seller’s Right to Cure Improper Tender

• Sellers may sometimes cure an improper tender or delivery of goods– correcting the defect that caused the goods to be

rejected• If time for performance has not expired, seller can

cure within contract time.• If time has expired, seller can have additional time

if they had reasonable grounds to believe that goods delivered were acceptable

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Central Dist. Alarm, INC. v. Hal-Tuc, Inc.

• Hal-Tuc contracts to have Central Dist. Install new surveillance equipment

• Equipment malfunctions, Hal-Tuc discovers Central had installed used equipment

• Central attempts to cure• Court allows Hal-Tuc to rescind contract because

Central did not live up to its end of the original contract.

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Breach of Contract

• When one of the parties fails to do what was agreed upon in the contract

• UCC provides for specific remedies• All parties must attempt to mitigate damages

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Anticipatory Breach

• Anticipatory Breach– one of the parties notifies the other party before the

time for performance that he/she is not going to perform

• Injured party can take action immediately if waiting would be unjust or cause a material inconvenience

• Can seek any remedy available for breach of contract and suspend his/her own performance

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Seller’s Remedies When Buyer Breaches

• Withhold Delivery of Goods • Stop Delivery of the Goods• Resell the Goods• Recover Damages• Sue for Price• Cancel the Contract

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• Stop Delivery of the Goods– If, after shipping the goods, the seller discovers that the

buyer is insolvent (unable to pay debts), the seller may have the delivery stopped.

• This right is known as stoppage in transit

Seller’s Remedies When Buyer Breaches

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Seller’s Remedies When Buyer Breaches

• Resell the goods– Resell goods that have been rightfully withheld, and

then sue the buyer for the difference between the agreed price and the resale price• Private sale – must give buyer reasonable notice of intention

to resell• Public sale – must be made at a place normally used for

public sales, if such a place is available

– If someone buys goods at a resale in good faith, the goods are free from any rights of the original buyer

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Seller’s Remedies When Buyer Breaches

• Recover Damages– Retain the goods and sue the buyer for the difference

between the agreed and market prices, or– Sue for the profit the seller would have made if the

contract was honored– Seller is entitled to incidental damages• Reasonable expenses that result indirectly from breach• Stoppage of transit, transportation costs, taking care of goods

after the buyer breached

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Seller’s Remedies When Buyer Breaches

• Sue for price– Price of goods that the buyer accepted– Price of goods that cannot be reasonably resold– Price of any lost or damaged goods after risk of loss

passed to buyer• If buyer has to pay price as result of court

judgment, goods become property of buyer.• If goods are resold by seller before collection of

judgment, the net proceeds are credited to the buyer.

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Buyer’s Remedies When Seller Breaches

• Cancel the contract and sue for return of any money that has been paid

• Cover the Sale– buy similar goods from someone else and sue seller for

difference in price

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Buyer’s Remedies When Seller Breaches

• Sue for Breach– Sue to recover damages, if any were suffered– Measure of damages is difference between agreed

price and market price on the day the buyer learned of the breach

– Buyer may also sue for incidental and consequential damages

– Damages may be agreed upon by parties when they first enter the contract (liquidated damages), and the court will uphold as long as they are reasonable

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Buyer’s Remedies When Seller Breaches

• Keep Goods and Seek Adjustment– When improper goods are delivered, buyer may keep

them and ask the seller for an adjustment– If no adjustment is made, buyer may sue for breach of

warranty or breach of contract– Amount of suit would be difference in value of goods

contracted for and value of goods received

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• Sue for Specific Performance– Buyer may ask court to order seller to perform what

was agreed to in the contract– Permitted when award of money will not be sufficient– Writ of replevin – court order that allows a person

entitled to goods to recover them from someone who has them wrongfully

Buyer’s Remedies When Seller Breaches

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Statute of Limitations

• Nearly all lawsuits have a time limit within which suit must be brought

• In general, an action for breach of a sales contract must be brought within four years after the date of the breach

• Parties may agree on a different time period if they wish, but not shorter than one year or longer than four years

• NC statutes of limitation

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Warranty Protection• Express warranty – An oral or written statement, promise, or other

representation about the quality of a product• Statement of fact or promise• Description of the goods• Sample or model

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Statement of Fact or Promise• UCC § 2-313“Any affirmation of fact or promise made by the seller to the buyer which relates to the goods and becomes part of the basis of the bargain creates an express warranty that the goods shall conform to the affirmation or promise.”

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Contrast: Puffery• Statements of opinion, exaggerated and persuasive

statements

“an affirmation merely of the value of the goods or a statement purporting to be merely the seller's opinion or commendation of the goods does not create a warranty.”

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FTC-established rules• For advertising express warranties on goods that

are sold in interstate commerce.– An ad promoting a good as ‘warranted’ must tell you how to get

a copy of the warranty before purchase– Using expressions like: “satisfaction guaranteed,” “money-back

guarantee,” “free trial offer,” must refund full purchase price at request of purchaser. Conditions limiting return must be stated in ad.

– Advertisers who warrant products for lifetime must explain what that means.

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Description of the Goods• Any description of the goods that is made part of

the basis of the bargain creates an express warranty that the goods will be as described.– Verbal– Packaging– Catalog descriptions– Etc.

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Sample or Model• When a sample or model becomes part of the

basis of the bargain, an express warranty is created.

• The seller warrants that the goods that will be delivered are the same as the sample or model.

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Magnuson-Moss Warranty Act (1975)

• Designed to prevent deceptive warranty practices and provide consumers with more information about warranties that are made on products they buy.

• Applies only when written warranties are made voluntarily for purchases of consumer products.

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Magnuson-Moss Warranty Act• Consumer products– tangible personal property normally used for personal,

family, or household purposes

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Magnuson-Moss Warranty Act• Full warranty – defective product will be repaired without charge

within a reasonable time after a complaint has been made about it

• Limited warranty – any written warranty that does not meet all of the

requirements for a full warranty.

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Implied Warranties

• A warranty that is imposed by law rather than by statements, descriptions, or samples given by the seller– Designed to promote good business practices

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Warranty of Merchantability• Whenever a merchant sells goods, the merchant

warrants that the goods are merchantable (fit for the purpose for which they are sold)– Must be of acceptable quality, in conformance with

contract description, adequately contained/packaged/labeled, in conformance with statements made on packaging/labeling

– Applies only when defect exists at time of purchase

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Fitness for a Particular Purpose• When the buyer relies on the seller’s skill and

judgment to select the goods, the seller implicitly warrants that the goods will be fit for the purpose for which they are to be used.

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Warranty of Title• When goods are sold (merchant or private party),

seller warrants that title is good and transfer is rightful– Includes an implied promise that the goods will be

delivered free of any liens (claims of others) about which the buyer has no knowledge

• If buyer is aware that seller does not personally claim title, warranty of title not created– Ex: seller operating in a representative capacity, like

auctioneer, sheriff, or administrator of a decedent’s estate

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Duty to Notify Seller of Defective Product

• Buyers must notify the seller of the defect within a reasonable time either after the discovery or after the defect should have been discovered.

• If no notification made, cannot recover money damages

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Exclusion of Warranties• To exclude the implied warranty of merchantability

(in states that allow it), the word merchantability must be used in the disclaimer.

• If the exclusion is in writing, it must be in large, bold type so that it is conspicuous.

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Exclusion of Warranties• Expressions like, “as is” and “with all faults” also

exclude implied warranties – but not express warranties or warranty of title

• Implied warranties may also be excluded by having the buyer inspect the goods prior to purchase– only excludes defects that would have been revealed

upon inspection

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Exclusion of Warranties• Under Magnuson-Moss, clauses limiting or

excluding consequential damages for breach of warranty must be conspicuously placed on the face of the warranty

• Consequential damages – losses that do not flow directly and immediately from

an act but only from some of the consequences or results of the act.

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Consumer Protection• Under Magnuson-Moss:– If either a full or limited express warranty is made to a

consumer, the implied warranties of merchantability and fitness for a particular purpose may not be excluded during the warranty period.

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Privity Not Required• Old law: Privity required to obtain a remedy.

• UCC has abolished this requirement

• Provides three alternatives where warranties extend to people who would normally be expected to use the goods as well as to those who actually buy them.

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3 Alternatives (NC uses Alt. A)• Alternative A - A seller’s warranty, whether express or implied, extends to

any natural person who is in the family or household of his buyer or who is a guest in his home if it is reasonable to expect that such person may use, consume, or be affected by the goods and who is injured in person by breach of the warranty. A seller may not exclude or limit the operation of this section.

• Alternative B - A seller’s warranty, whether express or implied, extends to any natural person who may reasonably be expected to use, consume, or be affected by the goods and who is injured in person by breach of the warranty. A seller may not exclude or limit the operation of this section.

• Alternative C - A seller’s warranty, whether express or implied, extends to any person who may reasonably be expected to use, consume, or be affected by the goods and who is injured by breach of the warranty. A seller may not exclude or limit the operation of this section with respect to injury to the person of an individual to whom the warranty extends.

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Question?

What type of contract is so one-sided that it is oppressive and gives unfair advantage to one of the parties?

A. FormattedB. UnconscionableC. ConscientiousD. Systematic

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Question?

When the seller offers to turn the goods over to the buyer and when the buyer offers to pay for them it is called __________.

A. Tender of paymentB. Legal tenderC. Tender of performanceD. Tender of compensation

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Question?

When one of the parties of a contract notifies the other party before the time for performance that he or she is not going to conform it is called _______________.

A. Consultant breachB. Anticipatory breachC. Contract breachD. Indenture breach

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Question?

The offer to turn the goods over to the buyer is called tender of _________.

A. PerformanceB. ContractC. IndentureD. Delivery

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Question?

What is money that may be offered legally in satisfaction of a debt?

A. Legal tenderB. ExchangeC. CoinageD. Barter

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Question?

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

A. ThreeB. FourC. FiveD. Ten

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Question?What is an oral statement, promise, or other

representation about the quality of a product?A. GuaranteeB. PledgeC. Implied AssuranceD. Express warranty

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Question?What is tangible personal property normally used for

personal, family, or household purposes?A. Consumer productsB. Customer artifactsC. Consumer goodsD. Customer goods

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Question?Which type of warranty is imposed by law rather

than by statements given by the seller?A. FullB. LimitedC. ImpliedD. Restricted

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Question?What type of warranty includes an implied promise

that the goods will be delivered free of any liens?A. Warranty of merchantabilityB. Warranty of fitness for a particular purposeC. Warranty of titleD. Warranty of commercilization

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Question?What are losses that do not flow directly and

immediately from an act but only from some of the consequences or results of the act?

A. Bad lossesB. Inconsequential lossesC. Consequential damagesD. Inconsequential damages

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Question?What is the failure to exercise that degree of care

that a reasonably prudent person would have exercised under the same circumstances and conditions?

A. Strict liabilityB. NegligenceC. Personal responsibilityD. Carelessness