Law of Sales – Fall 2012

Class OverviewI. Is the transaction one for the sale of goods?II. Is the governing law the UCC, CISG, or some other body of law?III. Has a contract been formed?IV. What are the terms of the contract?V. Has the contract been performed? Excuse?VI. If not and no excuse, what are the injured parties options?VII. Duties of third parties involved in the sales transaction: banks & carriers

The Codes Uniform Commercial Code (UCC)

Applies to merchants as well as consumer transactions Each state has adopted parts of it differently so not “uniform” across states State consumer protection law and federal supremacy may apply

General Provisionso 1-103: General Policy; principles of law and equity will supplement the provisionso 1-201: General definitions of terms

i.e. aggrieved party, bill of lading, creditor, etc. o 1-301: Choice of Law

in absence of an agreement, UCC applies to transactions parties can agree that the law of this state or that of the other parties state or

nation applies. o 1-302: Variation by agreement

Can vary provisions of UCC by agreement EXCEPT: Good faith, diligence, reasonableness, and care. BUT parties can

determine standards by which they are met, as long as not manifestly unreasonably standards

o 1-303: c/p, c/d, and u/t Hierarchy: Express terms > c/p > c/d > u/t

o 1-304 Good Faith every contract w/in UCC has good faith obligation defined as “honesty in fact (subj.) and observance of reasonable commercial

standards of fair dealing in the trade (obj.)”o Official Comments and legislative history are persuasive authority

CISG Applies to international sales of goods

o Commercial transactions only (not consumer) Buyer and seller both must be located in a nation that has adopted the CISG Parties can opt out of the CISG by agreement

General Provisionso Art. 4: Gaps in the CISG

Not concerned about the validity of the contract (unconscionability, duress, mistake, etc.) or title of goods

When we have gaps: Look at domestic law Look at general principles upon which CISG is based

International character Promote uniformity Good faith in international trade

Look at general principles of international law (UNIDROIT)o Article 6

Parties can derogate portions of CISG in their contract that they do not want to apply

o Article 7 Interpret the contract with regard to its international character, the need to

promote uniformity in its application, and the observance of good faith in international trade

When dealing with gaps, first use a general principle from the Convention and if there is not one do a choice of law analysis to determine which domestic law to gap-fill with

o Article 8 In interpreting contract:

Parties’ intent governs If one party knew or could not have been unaware of the

other party’s intent it governs If no intent, the understanding that a reasonable person of the same

kind as the other party would have had in the same circumstances governs

Consider all relevant circumstances of the case including the negotiations, any practices which the parties have established between themselves, usages and any subsequent conduct of the parties.

o Article 9 Course of dealing, course of performance, and trade usage are part of the

contract

o Article 10 If you have more than one place of business, the place of business is that

which has the closest relationship to the K and its performance

I. Is The Transaction for the Sale of Goods?- Must be for the sale of Goods:

UCC 2-102o Unless the context otherwise requires, this Articles applies to transactions in goods

CISG Article 1o This Convention applies to contracts of sale of goods

- Definition of Goods: UCC 2-105: All things, including specially mfr’d goods, that are movable at the time of

sale… tangible personal property o i.e. so not selling an accounts receivable

CISG: Does not give a definition of goods, but provides some specific exclusions (see below)

- Sale of Goods (Contract): UCC

o 2-106: defines a contract for a sale of goods. Not applicable to leases or licenses

o 2-107: sale of minerals, timber, or crops Sale of minerals or the like (including oil and gas) or a structure or its

materials to be removed from realty (1) when the good is so intertwined with the realty and (2) the seller

severs the goods from the land Sale of crops, timber, etc. that are easy to take off the land

Doesn’t matter if seller or buyer severs the good from the land Doesn’t matter if the good is rooted

Can argue under the Art. 1 principles of law and equity instead of Art. 2o 2-314: Sale of food in restaurants

Constitutes a good for purpose of implied warranty of merchantability o Software licenses

No uniform law governing this. Courts can use Art. 2 where it’s pre-packaged and readily available as opposed to someone professionally installs software.

CISGo CISG Art. 1: states that it applies to contract for sale of goods (tangible personal

property)o CISG Art. 2:

CISG does not apply for a sale of goods for personal, family or household use.

BUT if the seller did not know nor ought to have known that goods were for personal, family, or household use, the CISG applies

*If seller did not know, he thinks it is a commercial transaction; if he does know, he knows the CISG doesn’t apply

o CISG Art. 3: Preponderant Purpose Does NOT cover contracts where the preponderant part of the obligations of

the party who furnished the goods consists in the supply of labor or other services

Is this a contract where the preponderant obligation is the supply of labor or other services or the supply of goods?

If preponderant obligation supply of goods sale of goods contracto CISG Art. 5: does not apply to liability of the seller for death or personal injury

caused by the goods to any person (Article 5)

- Mixed Use/Hybrid Transactions UCC: no discussion of how Art. 2 would apply for mixed use of goods and services

Judge Made Law:o “Predominant Purpose Test” (MAJ.): intent of parties to contract for goods or

services? o “Gravamen Test”: Does the problem concern the goods or the services?

Factors to Determine Whether UCC Art. 2 Applies:1. Intent of Parties: contracting for goods or services?2. Focus on Obligation of Seller: mostly goods or services?3. Public Policy (most important): wise to use Art. From a policy perspective?

Idea is that Art. 2 may impose strict liability whereas laws governing service contracts impose negligence type liability

II. is the governing law UCC, CISG, or some other body of law? - CISG

Have parties opted for CISG to Govern?o Both Parties Part of CISG

Applies to contracts between parties of different nations who have both agreed to application of CISG (“contracting state”)

When buyer or seller has multiple places of business, the relevant place of business is the one with the closest relationship to the contract. (Art. 10)

Even if buyers business in diff nations, CISG will NOT apply if this fact doesn’t appear from either contract, during any dealings, or from info disclosed before or at the conclusion of the contract. (Art. 12)

o Choice of Law Leads to the application of the law where the seller is located. So if the seller has adopted CISG, but buyer has not the CISG may still

apply under choice of law. Art. 95 Declaration:

Nations can opt out of the choice of law provision and only subject their citizens to CISG when the other nation has adopted it. (U.S. has done this)

i.e. U.S. and U.K. dispute would lead to application of UCC or U.K. sales law

Is the Issue covered by CISG?o CISG doesn’t cover:

liability for death or personal injury caused by a good validity issues

o for issues excluded by CISG, courts or arbitral tribunals need to do a choice of law analysis to determine the applicable law

Have parties opted out of the CISG?o Art. 6: parties may opt out of the CISG in whole or part and designate some other

law to apply to the transaction so long as the law bears a reasonable relationship to the transaction.

- UCC Does the UCC apply (UCC 1-105)?

o Did parties make a contractual choice? If parties made contractual choice, UCC permits parties to select law of a

state if it bears a reasonable relationship to the transaction (1-105): Have the parties chosen the law of a jurisdiction that has reasonable

nexus to transaction? If parties have chosen the law of a jurisdiction that has a

reasonable nexus to that transaction that law will apply If there is no reasonable nexus, treat it like no contractual

choice If parties did not make a contractual choice:

The forum state’s version of the UCC will apply if the transaction bears an “appropriate relation” to the forum state (UCC 1-105)

Some courts use general choice of law ruleso What law governs the performance of the K? What is

the place of performance? Where goods are shipped or tendered

OR

Center of gravity testo What law governs the validity of the K?

Where the K was formed (where acceptance occurred, using the mailbox rule)

Some courts just determine what is appropriate o If buyer or seller is located in the state, then there is

an appropriate relation with the state and that state law applies

III. Has a contract been formed?- Offer

UCCo 1-103: doesn’t set forth a definition of offer, so we look to general principles of law

and equity (common law) CISG

o Art. 14: offer sufficiently definite (indicates goods and can ascertain quantity and price

implicitly or explicitly) and

indicates the intention of the offeror to be bound in case of acceptance. communications to the public are not offers, unless clearly indicated

- Revocability of Offer UCC 2-205: Merchant’s Firm Offer

o Offer is irrevocable if: By a merchant Signed writing

Assurance of irrevocability Irrevocable for time stated, not to exceed 3 months

If not time stated, reasonable time not greater than 3 months If form supplied by offeree, offeror must separately sign firm offer

CISG Art. 16o (1) An offer can be revoked if revocation reaches offeree before he has dispatched

acceptance. o (2) However, an offer can’t be revoked:

if it indicates (by fixed time for acceptance or otherwise) that it’s irrevocableOR

if it was reasonable for offeree to rely on the offer being revocable and offeree has acted in reliance of the offer.

to determine irrevocability look at: language, intent of parties, and reasonable person standard.

- Acceptance UCC

2-206(1) (a) Can accept an offer in any manner any by any medium reasonable in

the circumstances unless otherwise unambiguously indicated by the language or circumstances

(b) An order to buy goods for prompt shipment invites acceptance by:o A prompt promise to ship ORo Prompt or current shipment of conforming or non-conforming

goods (more of counter-offer unless “accommodation” shipment) o CISG

Art 18: (1) Acceptance = statement made or conduct of the offeree indicating

assent to an offer

Silence or inactivity does not in itself amount to an acceptance

(2) Acceptance occurs when the indication of assent reaches the offeror

If not reached within the time fixed or within a reasonable time no acceptance

But if acceptance gets delayed in mail, acceptance effective unless the offeror says they don’t want the acceptance

Even if no acceptance was made, if the offer, past practices, or trade usage show that the offeree can assent by performing an act acceptance effective when act performed

- Battle of the Forms UCC 2-207

o Step 1: Do the parties have a contract based on the writing? Determine whether the seller/offeree’s acknowledgment is a “seasonable and

definite expression of acceptance” If yes, then see if expressly conditional. If no, then counter-offer. (step 3)

Ascertain whether seller’s acceptance is “expressly conditional” on buyer’s “assent to any different or additional terms.”

If yes, then a counter-offer and go to step 3. If no, go to step 2.

o Step 2: if BOTH parties are merchants, seller/offeree’s terms become part of the contract unless:

Offer expressly limits acceptance to the terms of the offer Additional terms materially alter the offer Notification of objection is given by offerer w/in reasonable time

o Step 3: Determine if implied in fact contract is formed by parties conduct. Did both parties perform?

If no, then no contract If yes, then apply the knock out rule and use gap fillers where

necessary. CISG (Art. 19) (1) A reply containing additions, limitations, or other modifications that materially alter

terms of the offer = rejection and constitutes counteroffero “Materially alter” includes, but not limited to:

Price Payment Quality and quantity of goods Place and time of delivery Extent of one party’s liability to the other or the settlement of disputes

(2) If not materially alter AND buyer does not object orally to discrepancy or dispatch a notice to that effect w/out undue delay terms of K are offer w/ modifications of acceptance

- Statute of Frauds UCC 2-201

o Contracts for goods $500 or more must be evidenced by writing Writing: quantity must be stated and only applies to that amount Signed: by party against whom enforcement is sought

printed, stamped or written (any insignia) o Exceptions: (SOF satisfied)

Between Merchants: If w/in reasonable time a written confirmation of a K sufficient

against the sender

Other party receives it and has reason to know of its contents Party has NOT given notice of objection w/in 10 days after receipt.

Specially manufactured goods that are not suitable for sale to others Either substantial beginning of mfr or began procuring

Party admits existence of K in some fashion Payment made and accepted or received and accepted Promissory Estoppel

Majority allows this as defense to SOF CISG Art. 11

o No writing required generally o Parties can “opt out” of Art. 11 by making an Article 96 declaration

This makes CISG silent on whether writing is required and may need writing if using nations local laws.

- Modifications UCC: 2-209

1. Modification does not need consideration2. No modification except in writing clause is upheld

If between merchants, form must be signed by party against whom enforcement is sought.

3. Has to satisfy statute of frauds Two interpretations:

1. Any time you modify a K that’s w/in the SOF, it must be in writing

2. Only need writing if increasing quantity4. If above three requirements not met, oral modification could still operate as waiver

Two views:1. When there is reliance on oral modification

Estoppel Waiver2. Oral modification can be a waiver w/ conduct that has already occurred.

If there is a finding that there is a waiver, then don’t need reliance to be a modification

The only way reliance comes into play is with regard to future performances

If you try to retract your waiver, if other party has changed to conform to oral mod, can’t take back waiver and can’t go back to original K

Ex. K to manufacture shoes. I build all machines to make machines a certain way. Our K says no oral mods. Julie says she wants shoes to be designed differently. Normally I can’t do that b/c no oral mod. But if I say okay and change all the machines in my factory. Then waiver can’t be taken back and Julie can’t come back and say she wants it the original way.

A waiver may be retracted upon reasonable notice, but not if it would be unjust in view of material reliance.

CISGo No requirement of consideration for modificationo A contract may be modified or terminated by the mere agreement of the parties.o “No oral modification/termination clauses” ARE enforceable, UNLESS there is

reliance on the oral modification by a partyo Burden of proof on party trying to say the oral mod clause is not enforceableo Modifications as waivers of no oral modification clauseo Have to prove:

That there was an oral modification Waiver effective as to prior performance BUT with future performances will allow party to retract as long as the party

has not relied on it

IV. Terms of the Contract- Warranty of Title

UCC o 2-312:Seller impliedly warrants that title is good, transfer is rightful, and no liens or

encumbrances exist that buyer is subjectively unaware. o Disclaiming warranty of title

To disclaim warranty of title, there must be specific language or circumstances to give buyer reason to know that seller does not claim title

“As is” does NOT disclaim warranty of title Exceptions

Circumstances where buyer can’t reasonably expect a warranty of title, but then can sue for unjust enrichment

Three types of title a seller can have:o Good title

They have paramount right over anyone elseo Void title

No rights against anyone elseo Voidable title

they may be in possession and have some rights to the goods, but there is someone else out there that has superior rights to the goods.

o 2-403: buyer obtains all title seller had Exceptions:

purchaser of limited interest gets rights only to the extent of the interest purchased.

Seller with voidable title can transfer good title to a BFP for value when:

Voluntary transaction involving rightful owner (first seller gave up goods)

Person with voidable title can transfer good title to BFP even though: the transferor was deceived as to the identity of the purchaser,

or the delivery was in exchange for a check which is later

dishonored, or If buyer uses a bad check to buy goods, seller can reclaim

goods UNTIL a BFP for value buys goods it was agreed that the transaction was to be a "cash sale", or the delivery was procured through fraud punishable as

larcenous under the criminal law. When seller is a merchant

When entrusting goods to a merchant who deals in goods of that kind:

Merchant can transfer all rights to a buyer in ordinary course of business

“Entrusting”o Includes delivery and any acquiescence in retention of

possession Owner Thief BFP Owner Buyer using bad check BFP Owner Merchant to whom biocob

goods “entrusted”

CISGo Art. 41: requires seller to deliver goods free from any claim of a third party, unless

the buyer agreed to take the goods subject to that claim.o Art 4: Doesn’t address questions of title.

Just need to do choice of law analysis.

Warranty of Quality- Express Warranty

UCC 2-313o (a) An affirmation of fact or promise the seller makes to the buyer relating to the

goods becomes part of the basis of the bargaino (b)Description of goods made part of the basis of the bargain creates an express

warranty that the goods will conform to the descriptiono (c) a sample/model that is made as part of the basis of bargain creates an express

warranty that the whole of the goods will conform to that sample. Don’t need to say “warrant” or “guarantee” to create express

warranty but mere opinion or value statements don’t create a warranty

o “Puffing” v. Warranty Factors Definiteness of statement “hedging”

saying product will work in a certain way or that it may or may not (equivocal or definite promise)

Experimental good Court will cut more slack depending on how much buyer is aware

Buyer’s actual or imputed knowledge Nature of defect In writing

More likely to be relied o “Basis of the Bargain”

Buyer need to show reliance? Some courts say “Yes”

Rebuttable Presumption: it is presumed that affirmations of fact are part of the basis of the bargain

Seller must rebut the presumption (2-313 comment 3)

CISG o Look at what the K says and use interpretation to determine if warranty of quality

Look at the Contract (Art. 35)o The seller must deliver goods which are the quality, quantity and description

required by the K and which are contained or packaged in the manner required by the K (Art. 35)

Interpret the K (Art. 8)o Interpret a party’s statement according to his intent where the other party knew or

could not have been unaware what that intent waso Interpret a party’s statement according to the understanding that a reasonable person

of the same kind as the other party would have had in the same circumstances. o Look at K and whether a reasonable person in the position of this buyer would think

that these were statements of warranty*Courts will likely look at same factors as UCC

- Implied Warranty - Can be oral or written

UCCo 2-314: warranty of merchantability is implied in a contract if seller is a merchant

of those goods. Unless excluded or modified.

o Serving of food and drink that’s consumed on the premises is a sale. o Merchantable:

Pass without objection in the trade under the contract description; and In the case of fungible goods, be of fair average quality within the

description; and Be fit for the ordinary purposes for which such goods are used; and Run, within the variations permitted by the agreement, of even kind, quality

and quantity within each unit and among all units involved; and Be adequately contained, packaged, and labeled as the agreement may

require; and Conform to the promise or affirmations of fact made on the container or

label if any.o In food sale cases, whether food is merchantable:

Two approaches Natural v. unnatural substances test Reasonable expectations test

What does buyer reasonably expect with this product?

o Products Liability Tort (1 of 3 tort categories): If good is defectively manufactured If reasonable alternative design for product *take into account foreseeability of damage caused by current design and

utility of design Does product contain adequate warnings

o Fitness for particular purpose (2-315) Seller at time of contracting has reason to know:

1. Any particular purpose for which the goods are required AND2. That the buyer is relying on the seller’s skill or judgment to select or furnish suitable goods

3. *No requirement that seller be merchant UNLESS excluded or modified

Maybe never an implied warranty of fitness without an express warranty CISG

o Goods do not conform with the K unless they: Are fit for the purposes for which goods of the same description would

ordinarily be used (merchantability) Are fit for any particular purpose expressly or impliedly made known to the

seller at the time of the conclusion of the K (fitness) Except where circumstances show that the buyer did not rely, or that

it was unreasonable for him to rely, on the seller’s skill and judgment Possess the qualities of goods which the seller has held out to the buyer as a

sample or model (like an express) Are contained or packaged in the manner usual for such goods, or, where

there is no such manner, in a manner adequate to preserve and protect the goods

*The seller is not liable for any lack of conformity of the goods if, when K concluded, the buyer knew or could not have been unaware of such lack of conformity

o Application Don’t have to conform to safety standards in buyer’s question, only question

is whether goods work Seller not normally responsible to supply goods that conform to public laws

and regulations enforced at buyer’s POB Exceptions

If buyer’s state and seller’s state have identical public laws and regulations

If buyer informed the seller about those regulations If due to special circumstances, the seller knew or should

have known about the regulations at issue Priority of warranties

o UCC Priority

Fitness Express Merchantability

Express and implied warranties construed as consistent with each other and as cumulative

If such construction is unreasonable the intention of the parties shall determine which warranty is dominant.

Factors to determine which warranty is dominant: Exact or technical specifications displace an inconsistent

sample or model or general language of description A sample from an existing bulk displaces inconsistent general

language of description Express warranties displace inconsistent implied warranties

other than an implied warranty of fitness for a particular purpose

o Comparing UCC to CISG Merchantability

UCC – requires goods to be comparable to other similar types of goods

CISG – requires goods to work

- Disclaiming Implied Warranty Both UCC and CISG allow parties to disclaim warranties. UCC

o 2-316 Exclusion/Modification of Warranties (1) Express warranties may NOT be disclaimed

(2) Disclaiming implied warranty must have word “merchantability” if in writing must be conspicuous implied warranty of fitness must be in writing and conspicuous

(3) Alternative way to disclaim is to use language that “in common understanding” indicates warranties are being disclaimed

i.e. use of “as is” or “with all faults” is this language seller may also demand for buyer to inspect goods

failure to inspect will bar buyer suing on a defect that reasonable inspection would have disclosed.

Can also disclaim warranties through course of dealing, course of performance, and usage of trade.

o 2-302 Unconscionability Prevents oppression and unfair surprise If court finds a contract or any clause of contract to be unconscionable at the

time it was made, then: Enforce part of contract Enforce entire contract, Or limit application of the clause

CISGo No technical requirements like UCCo Art. 6 allows buyers to derogate provisions of CISG (or entire CISG)o Art. 35’s implied warranties apply “except where parties agreed otherwise”o To be disclaimed:

What understanding would a reasonable person have had under the same circumstances

Most likely a reasonable person would not believe there is a disclaimer, if inconspicuous, small print, reverse side, etc.

OR Could be a question of whether this a valid disclaimer

Then you would just do choice of law analysis to have domestic law fit in

o Unconscionable: no mention here But under choice of law, could apply UCC if applicable

- Privity Vertical: Buyers goes up chain from retail purchase to sue mfr.

o Manufacturer Retailer Buyero Focuses on the proper defendant

Horizontal Privity: when user can sue seller when he wasn’t the buyero i.e. dad buys toy for son and son gets injured. o Focuses on the proper plaintiff

UCC 2-318o 3 Alternatives to privity issues

Alt. A: A seller’s express or implied warranty 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 (majority rule)

Alt. B: A seller’s express or implied warranty 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

Alt. C: A seller’s express or implied warranty 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.*Have to show causation

If buyer knows of the defect and uses it anyway no causationo Lack of privity generally not a bar in personal injury cases

Alt. A and expanded by courtso Buyer can generally sue mfr for express warranties that accompany goodso Many courts require privity for actions based on breach of implied warranty of

merchantability dealing with economic loss (compared to personal injury)o Buyers can frequently argue they are intended third party beneficiary

CA did NOT adopt any version of UCC 2-318o - it deals with Q’s of horizontal privity and not really vertical privity o - In CA, all the privity analysis is Common Law related.

CISGo Says nothing about privityo CISG not applicable to consumer transactions or personal injury claims.

- Magnuson-Moss Warranty Act (consumer protection law) Congress added protection to consumers Applies to any Written Warranty

o “Any written affirmation of fact or written promise made in connection w/ sale of a consumer product by a supplier to a buyer”

o “Relates to nature of the material or workmanship”o also includes promise to repair or provide refunds

“Full Warranty”o must meet the min standards required under M-Mo this is why most warranties are only “Limited Warranty”

Applies to goods “normally” used for personal, family, or household use. Consumer: a buyer (other than purpose of resale) of a consumer product.

Leases:o Courts split over whether M-M covers leases

Privityo If the buyer/consumer is suing the entity that gave the written warranty:

No requirement of privity for express warranties Courts split as to requirement of privity for implied warranties

Can argue that if under state law privity is required for action under implied warranty, then it should prolly be required under M-M

Majority opinion Limited Duration of Implied Warranties

o If a written warranty is given, supplier may not disclaim or modify any implied warranties

Except: if limited warranty given, supplier may limit the duration of the implied warranty to the duration of the written warranty (so long as reasonable)

Warrantor may establish an informal dispute resolution processo Has to be free to the consumero Buyer can be required to go through procedure before suing under M-M

But process is not a binding one and can bring action under M-M Major Protection given: If suing under MM and win buyer can get attorney’s fees

- Song-Beverly Act (CA) If an express warranty is given, seller cannot disclaim, limit, or modify the implied

warranty of merchantability or fitness. If NO express warranty given, the warranties can be disclaimed but disclaimer must be

more precise and explanatory than 2-316 “Lemon Law” – mfr must replace goods or refund buyer (mitigated for use) if unable to

repair/fix goods after reasonable number of attempts

- Risk of Loss Risk of loss starts with seller and at some point passes to buyer Parties are free to allocate risk by contract No Shipment Involved

UCCo When there is a bailee:

risk of loss passes when bailee acknowledges the buyer’s right to possession of the goods or when buyer receives a document of title to the goods

o When no bailee is involved: If seller is merchant: risk of loss passes when buyer takes possession of

goods If seller is non-merchant: risk of loss passes upon tender of delivery

CISGo Art. 69(1): risk of loss passes to buyer when buyer takes over the goods or when

buyer breaches by not taking delivery. o Art. 69(2): If goods aren’t at sellers business, risk passes to buyer when delivery is

due and buyer is aware the goods are placed at his disposal at that place. Shipment Involved

UCCo “Shipment Contract” (default)

seller gives goods to carrier, makes reasonable contract for shipment, obtains and forwards documents needed for buyer to take possession of goods, and notify buyer of shipment

o “Destination Contract” seller is obligated at its own risk and expense to deliver the goods to the

destination indicated in the contract CISG

o Shipment – risk of loss passes when delivered to carrier

o Destination – risk of loss passes at destination Shipment Shorthand Terms

o FOB (Free on Board) Two Types:- FOB Place of Shipment:

Seller ships the goods and bears the expense and risk of putting them into the carrier’s possession

- FOB Place of Delivery: Seller at his own risk and expense must transport the goods to the place of

tendero CIF

Seller must pay for Cost, Freight, and Insurance Shipment by waterborne vessel

o Incoterms Used in international commerce and international shipments Incoterms are NOT law. Not enacted by any country/state. They are more of

a custom in practice put together by the international chamber of commerce. - If a party wants to use them, they must put in the contract “Incoterms

2010” applicable and there must be an agreement. FCA is the Incoterm equivalent to an FOB place of shipment contract.

- Gap Fillers CISG and UCC have provisions to fill in gaps of a contract where parties have indicated an

intent to be bound UCC

o K can have many gaps and still be enforceableo All required for enforceable K is:

Parties intended to make K AND Reasonably certain basis for giving an appropriate remedy

*Must have reasonably certain basis for court to enforce the K o Open price terms

If there is no price, price is market price at time of deliveryo 1-303

c/p – how parties have been performing under the contract in question c/d – how parties have performed on previous contracts u/t – industry practice

These will be looked at before applying gap fillers CISG

o “Obligations of Seller” (Art. 30-34)o “Obligations of Buyer” (Art. 53-69)o Art. 14 Price

Article 14 requires a way to determine price For K to be have been made, requires an express or implicit fix or provision

for determining the quantity and priceo Art. 55 Price

Provides a way to determine price In a K validly concluded, where don’t expressly or implicitly fix or make

provision for determining price (Article 55): Parties considered to have impliedly made reference to the price generally

charged when K concluded for such goods sold under comparable circumstances in the trade concerned

*Price is market price at time K concluded

o Open Price inconsistency bet. Art. 14 and Art. 55 (different views) Not enforceable if relevant nation (under choice of law rules has adopted

Art. 14 Not enforceable if relevant nation doesn’t enforce open price contracts (such

contracts are “invalid”) Enforceable if parties intend to be bound to open price term contract

Art. 14 doesn’t express exclusive ways of making “offer” Enforceable if parties contract other than by offer and acceptance (i.e. they

sign one document) the last two views are trying to be creative

- Contract Interpretation UCC: Parol Evidence Rule

1. Do we have a partially integrated writing? If so, evidence of prior agreements or oral agreements may not contradict

2. Do we have a completely integrated writing? If so, evidence of prior agreements or oral agreements may not supplement whether the party’s “certainly would have put the evidence in question into

the written contract”3. Evidence of course of performance, course of dealing, and usage of trade may be used if reasonably consistent with writing. See Rev. 1-303

o Ways to determine if something is partially or completely integrated: Merger clause: saying this is the entire agreement and a final expression of

parties agreement. Important, but not determinative.

Corbin view: should look at everything and all circumstances surrounding (this seems to be majority approach)

o Does NOT apply to modificationso Hierarchy of extrinsic evidence

Express terms Course of performance Course of dealing Trade usage

Exceptions to Parol Evidenceo Fraud

if party wants to introduce fraud in order to rescind the contract, that’s acceptable

negligent misrepresentation: split in authority So basically some courts distinguish between fraud and negligent

misrepresentation. o Mistake

Can reform the written K on the basis of mistake if it can be shown by clear and convincing evidence that there was a mistake made when writing down K

CISGo No Parol Evidence ruleo In interpreting terms of K:

Each party’s statements or actions to be interpreted according to the understanding that a reasonable person of the same kind as the other party would have had in the same circumstances

Actual intent of the party governs WHEN the other party knows or could not be unaware of that intent

In determining intent of a party or the understanding a reasonable person would have had:

Consideration given to all relevant circumstances Negotiations

Any practices which the parties have established between themselves

Usages Subsequent conduct of the parties

- Unconscionablility UCC

o To prevent oppression and unfair surpriseo If court 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, enforce the remainder of the contract without the unconscionable clause,

OR may so limit the application of any unconscionable clause as to avoid any

unconscionable result.o 2 parts

Procedural Problems in the bargaining process, lack of meaningful choice, lack

of education, sophistication, legalese, fine print, deceptive sales practices

Substantive Unfair, terms unreasonably favorable to one party (ex. price is to

high, altering buyer’s rights in way to favorable to seller) Under CISG

o No concept of unconscionabilityo BUT if choice of law analysis points to UCC, could argue that is regarding validity

and unconscionability should apply

V. Has the contract been performed? Excuse?

- Performance (3 questions) UCC

1. Does injured party have reasonable grounds for insecurity? Look at 2-609 comments (i.e. buyer falling behind on “his account”, seller

making defective deliveries to other buyers)2. Has adequate assurance been given?

Letter of credit, personal guaranty, etc. 3. Has there been repudiation?

Until the repudiating party’s next performance is due, he can retract repudiation

UNLESS the aggrieved party has since the repudiation Cancelled OR Materially changed his position OR Otherwise indicated that he considers the repudiation final

CISGo Party can suspend performance if:

It becomes apparent that the other party will not perform a substantial part of his obligation as a result of:

A serious deficiency in his ability to perform or in his creditworthiness OR

His conduct in preparing to perform or in performing the K A party suspending performance must immediately give notice of

suspension AND must continue w/ performance if there is adequate assurance

o Party can only avoid the K if it is clear that the other side will commit a fundamental breach

o Says nothing about retractiono Strong notion in CISG to keep the contract alive

o Big Difference between UCC: If you demand assurance and it’s not given, there is an automatic repudiation

of the contract. - Breach UCC

“One Shot” sales o when contract calls for delivery in one installment o perfect tender rule (2-601) applies where buyer may:

reject the whole, accept the whole, or accept any commercial unit(s) and reject the rest

o unless agreed otherwise, buyer has reasonable opportunity to inspect the goods (2-606)

sometimes reasonable opportunity to inspect involves some use of the goods (Zabrinske case)

o Rejection: Buyer must give notice to seller of rejection and hold goods w/ reasonable

care (2-602(1)) Seller can cure (2-508) within time left before performance is due where

time for performance not yet expired AND seller seasonably notifies buyer of his intention to cure

Seller can cure within in a reasonable time after time for performance expires when seller had reasonable grounds to believe would be acceptable AND seller seasonably notifies the buyer

o If buyer is merchant: Must exercise reasonable instruction of seller and in absence of instruction

resell the goods if perishable or threaten to decline speedily in value (2-603)o Revoking Acceptance:

Buyer can revoke his acceptance where substantial impairment in value of goods to buyer if he has accepted it:

On the reasonable assumption that its non-conformity would be cured and it has not be seasonably cured OR

Without discovery of such non-conformity if his acceptance was reasonably induced either by the difficulty of discovery before acceptance or by the seller’s assurances

o Reasonable Use Test (split in authority) If buyer reasonably uses goods, buyer can still revoke acceptance

“Installment” contracts (2-612)o Contract for delivery of goods in separate lots o Perfect tender rule does NOT apply hereo Test: does the nonconformity substantially impair the value of the installment and

cannot be cured To cancel the entire contract need to ask whether nonconformity impairs

value of the whole contracto Approach

1. Is the installment non-conforming? If yes, buyer can reject if substantial impairment unless seller can

cure 2. Can seller cure?

If seller able to cure, buyer can’t reject installment3. Does non-conformity substantially impair value of installment?

Objective test If non-conformity substantially impairs value of installment buyer

can reject installment and may be able to reject contract4. Does non-conformity substantially impair value of entire contract?

If yes, then buyer can cancel the entire K If no, then buyer can reject this installment, but has to continue to

allow seller to ship further installments o Substantial Impairment Factors:

To what extent is the injured party deprived of a reasonably expected benefit of the bargain?

To what extent can the injured party be compensated in damages? To what extent will the party failing to perform suffer forfeiture if the

contract is canceled? What is the likelihood of cure? To what extent is the breaching party acting in bad faith?

Parties can say in their contract what constitutes a s substantial impairment

o Revoking Acceptance: Same as “one shot” sales

Limits on Buyer’s Rights to Reject or Revoke (2-719)o Seller may limit buyer’s ability to reject or revoke acceptance of a defective product

to repair or replacement of defective partso If limited remedy fails of its essential purpose then buyer is entitled to UCC

remedieso Purpose of limited remedy is to give buyer what they bargained for o Two Questions:

1. Has limited remedy failed its essential purpose? Factors:

Nature of goods (experimental/complex v. basic) Commercial or consumer transaction Ability of seller to repair

2. Does an accompanying limitation on consequential damages also fail? Courts split as to whether limit on consequential damages ineffective

when limited remedy to repair or replace fails of its essential purpose The courts that do uphold consequential damage clause do so

as long as it’s not unconscionable. (2-713)

UCC buyer remedy’s include consequential damageso Consequential Damages:

Lost profits on resale of goods or loss bc goods not working properly Limited consequential damages fail generally when:

consumers are involved or

when the seller attempts to make repairs but fails. Risk of Loss – Breach (2-510)

o Three cases this covers:1. Buyer has a right to rejection due to nonconformity

R.O.L on seller until cure or acceptance2. Buyer rightfully revokes acceptance

R.O.L. on buyer if insurance covers, otherwise on seller3. Buyer repudiates or is otherwise in breach before risk of loss passes to buyer

R.O.L. on seller if insurance covers, otherwise on buyer for commercially reasonable time

CISG (Breach) biggest difference from UCC

o neither party can cancel or “avoid” the contract for an insignificant breacho Art. 49: buyer can avoid contract only when “fundamental breach” or seller doesn’t

deliver the goods after additional time given under Art. 47 Same applies to seller (Art. 63)

Fundamental Breach: (Art. 25)

o Substantial deprivation of expectation – monetary value of contract, monetary value of harm, interference w/ injured parties activities. also consider material breaches

o Foreseeable Must have been reasonably foreseeable to the breaching party Up to tribunal to decide if whether at the time of contracting or time of

breach. Nachfrist

o Extension or notice of reasonable additional time giveno After nachfrist, the party can avoid the contract and later sue for damageso If avoidance not possible, other remedies may be available (i.e. damages)

Right to inspection and notification of avoidance must also be given in CISG- Impracticability and Frustration of Purpose

Impracticability o Where, due to some unforeseen event the performance becomes either physically

impossible or becomes unduly onerous Frustration of purpose

o Where parties understood at the time of contracting that there was a specific purpose for the K and due to some unforeseen event the purpose has become substantially frustrated

UCC (2-613 to 2-616 covers Impracticability) Seller not in breach if:

1. Performance is impracticable purpose substantially frustrated

2. Event non-occurrence was basic assumption of contract3. No fault of the Seller (or Buyer if frustration)4. Seller did not assume the risk (Buyer if frustration)

Foreseeability factors in: if the event was foreseeable at time of contract, it’s assumed that the party seeking excuse took the risk

CISG (Art. 79) party to a contract isn’t liable for failure to perform due to an “impediment” beyond his

control and that it was not reasonably expected to be taken into account. o Difficult to apply bc “impediment” is hard to define

Courts are generally very reluctant to give relief under impracticability or frustration of purpose.

Need to show serious harm and that the other party wouldn’t be harmed too much from the relief.

VI. Remedies (what are the injured parties options?)- want to put parties in position they would have been but for breach Buyer’s remedies (TWO) UCC

1. Cover (2-712): o when seller doesn’t deliver goods or repudiates, buyer rightfully rejected or

acceptance is rightfully revoked o cover price – contract price + incidental/consequential damages – expenses savedo must be done in good faith and w/o unreasonable delayo Split JDX: Courts split as to when there are additional benefits on substitute

purchase that were not on the K good Some courts say that buyer covers as long as what buyer did was reasonable

under the circumstances Some court say that if buyer receives additional benefits on substitute,

adjustments should be made to damage calculation2. Contract Market Formula (2-713) non-delivery

o Market price (at time buyer learned of breach) – contract price + incidental/consequential damages – expenses saved

o 3 Approaches to “when buyer learns of breach” Time of repudiation Time of performance Commercially reasonable time after repudiation

Consequential Damageso Reasonably foreseeable as probable consequence of breacho Calculable to reasonable certaintyo Not reasonably avoidableo If Personal injury or property damage – must be prox cause/ reasonably foreseeableo Incidental damages may also be recovered

Buyer’s Right to Goods o Specific Performance 2-716(1)

May be given where goods are unique or in other proper circumstances Other proper circumstances

Inability to cover is strong evidence of other proper circumstances Look at available substitutes Look at how difficult it will be to calculate damages

Equitable Remedy (judge made decision)o Replevin 2-716(3)

Replevin given where:

Goods are identified to the K (buyer has special property interest) AND

Must be difficult to obtain cover Legal Remedy (jury trial)

o Right to Claim Identified Goods 2-502 Buyer has right to claims goods identified in K where:

Buyer has paid part or all of the price AND Goods identified in K (buyer has special property interest) AND EITHER

Seller repudiates or fails to deliver where goods bought for personal, family or household purposes OR

o *Consumer Ks In all cases, where seller becomes insolvent within 10 days

after receipt of the first installment on their priceo *Commercial goods

*Does NOT require difficulty in covero When Buyer Accepts Goods

If buyer accepts the goods, the buyer has to pay for them but can sue for damages where goods don’t conform to the K

Burden on buyer to establish breach with respect to goods in question Notice: Buyer must notify seller of any breach w/in a reasonable time after

buyer discovers or should have discovered the breach Value of goods as warranted minus value of goods as they are at time and

place of acceptance Consequential Damages: contractual limitations on ability to recover

consequential damages Tort Remedies

o Tort v. contract

Tort requires no privity Tort requires no notice of breach (See UCC 2-607) Tort has a different statute of limitations Tort has a different measure of damages (“proximately caused”) as

compared to Contract (“benefit of the bargain”) Punitive damages may be available in tort

o Breach of Warranty (3 Views)1. Need injury to person or property for tort (Maj and CA)2. Need potential injury to person or property for tort3. Tort action available even if tort committed and damage was economical Tort available if “independent” of contract breach

i.e. fraudulent inducement (Robinson Helicopter) this is also an EXCEPTION to CA view

CISG Similarities

o General rule for measurement similar, but not identical Art. 74

o CISG requires reasonable mitigation (Art. 77)o CISG has a cover remedy in cases of avoidance like 2-712

Art. 75o CISG has contract/market remedy

Time of measurement is time of avoidance or time buyer takes over the goods if avoidance occurs after that time.

Market is place of delivery or reasonable substitute Differences

o CISG more liberal in granting specific performance (Art. 46) Subject to limitation under Art. 28 Can get damages in addition

o Price reduction remedy (Art. 50) May give buyer greater recovery than under Art. 74 Contract price x value of goods as is/value as warranted

Statute of Limitations UCC: 4 years after the cause of action has accrued for breach of contract

o Same for international sales Seller’s remedies (2-703 to 2-709) UCC

Goods not accepted o non-delivery buyer breach and goods wrongfully rejectedo General:

Refuse delivery – 2-702 & 2-705 Menu – 2-703 Complete or Scrap? – 2-704 Resale – 2-704

Contract/Market – 2-708(1) Lost profits – 2-708(2) Price – 2-709

o Resale Remedy (2-706) Resale must be reasonably identified as referring to broken contract Resale can be by private sale or public sale (auction) If private sale, reasonable notice must be given to buyer of intent to resell If public sale, reasonable notice must be given to buyer of time and place of

sale a. Unless goods are perishable or threaten to decline in value speedily

All aspects of the sale must be commercially reasonable If seller doesn’t follow 2-706 procedures, may recover under 2-708(1)

contract/market differential theory Same as buyer’s formula

*Seller cannot get consequential damages, only incidental damageso Lost Profits (3 situations generally)

Volume Sellera. Seller lost a sale and had sufficient inventory

Middle Persona. Middleperson doesn’t have the good yet so he doesn’t have anything

to sell for market price Components manufacturer

a. Seller makes product specially for buyer and before good is completed, buyer breaches (so seller has unfinished product)

Damage Calculation

Revenue lost – expenses saved Fixed costs NOT included Amount for components included Labor costs difficult to determine

When high profit margin, more likely to subtract labor costs o Action for the Price

Allows seller to sue for the price under the contract if: Unable to resell item(s) at reasonable price Or The circumstances reasonably indicate that such effort will be

unavailing Goods Delivered

o The right to reclamation is lost if the goods are resold to a good faith purchaser for value

o Successful reclamation of goods precludes seller from seeking other remedieso Best way to retain right to reclamation is to have a “security interest”

Liquidated Damageso Where parties may craft their own remedies in the contracto Questions to Ask

Alternative performance or liquidated damages? If former then upheld, if liquidated then move on to next question

If liquidated damages, reasonable in light of Anticipated or actual damages;

Difficulty of proof of actual loss; and Inconvenience or nonfeasibility of obtaining an adequate remedy

Unreasonably large liquidated damage void as penalty*Take or pay provisions generally viewed as alt. performance

Some courts won’t enforce them CISG

Rejects the doctrine of election that seller may both avoid the contract and seek damages under it

No liquidated damages provision in CISG Nachfrist notice need not be formal Seller doesn’t need to give notice of resale

o But seller can’t engage in fire sale and hold buyer responsible Injured party has a right to interest under Art. 74 & 78.

o No indication of how it should be calculated. o Unidroit principles may have a role.

VII. Duties of third parties involved in the sales transaction: banks & carriers - Approach:

Do we have a letter of credit or something elseo Letter of credit = K between applicant (buyer) of letter of credit and bank and then

beneficiary of the letter of credit (seller) is 3rd partyo Something else = guaranteeo Letter of credit v. guarantee

Letter of credit Documentary presentation that triggers obligation to pay

Independent of underlying K If seller must present documents to bank that on their face make it

look like goods have been shipped bank must pay Two types:

Commercial letter of credit Standby letter of credit

o Looks like a guarantee except that bank’s obligation to pay is not contingent on performance of underlying K, it is conditioned on documentary presentation that says that applicant of letter in default and therefore bank must pay

“Bank promises to pay in the event that owner of property delivers affidavit indicating that lessee is in default

Guarantee “Bank promises to pay if lessee is in default.”

o If letter of credit, then UCC Article 5 applieso If letter of credit, UCP applies if K specifies that it applies

Has a conforming presentation been madeo Independent principle

Letter of credit is independent of underlying transactiono Strict compliance rule

Rule Documents must strictly comply with letter of credit

BUT slavish compliance not required If obvious typo on docs or something like that, bank should

honor letter of credit

If documents don’t comply, bank should ask applicant (buyer) for waiver

If waiver, bank should honor If no waiver, bank can’t honor

Where bank paid and properly paid If bank paid and properly paid, bank has statutory right to be

reimbursed by applicant Where bank paid and should not have paid

If bank paid but should not have paid, bank has no statutory right to be reimbursed by applicant

BUT bank has a right of subrogation Bank can step in shoes of seller or buyer and sue the other

party Can issuer refuse to pay even if presentation conforms?

o Issuer can refuse to pay if there is material fraud If there is material fraud:

Bank can refuse to pay upon a conforming presentation If payment not yet made, buyer (applicant) can get injunction

enjoining bank from paying But courts disinclined to enjoin banks from paying

Material fraud = Where beneficiary under letter of credit does not have any colorable claim to being paid

Where seller (beneficiary) knowingly forged documents Where seller knowingly shipped crappy goods Where intent to defraud buyer out of money

o When buyer goes to bank and says that seller is defrauding buyer Bank can decide to pay or not to pay

If bank doesn’t pay and there was fraud, no liability for bank If bank doesn’t pays and there wasn’t fraud, bank breached and is

liable Seller entitled to face amount of letter of credit AND

attorneys fees AND interesto No obligation to mitigate damageso But if seller did mitigates damages, face amount of

letter of credit minus mitigated damages CANNOT give rise to consequential damages

Remedies for failure to payo Seller entitled to face amount of letter of credit + attorneys fees + interest + cost of

litigation + incidental damages – damages actually avoided No obligation to mitigate damages But if seller did mitigates damages, face amount of letter of credit minus

mitigated damages