Accounting Law Week 4 - Sales

What does the UCC do in the sale of goods?

It replaces title with identification, risk, and insurable interest.

What are the requirements to have interest pass to the buyer?

1. It must be in existence

2. It must be identified as specific goods in the sales contract by either serial numbers or physical separation from other goods. (except for fungible goods which need no separation).

What rights does the buyer have when interest passes to them?

• They have the right to obtain insurance on the goods

• To recover from third parties who damage the good.

When does Title pass?

When the goods are physically delivered

when the parties agree. If the parties agree to something else, that can trump the delivery rule.

If no agreement, depends on the FOB point (shipping point or destination)

Shipment FOB

Title passes at the time and place of shipment.

• Contracts are assumed to be shipment if nothing is stated in the contract.

Destination FOB

Title passes when goods are tendered (delivered/made available to buyer) at the destination.

Delivery without movement of goods

Title passes when agreed by the parties.

Example: Goods at warehouse. Buyer picks them up there.

If there is a document (such as a bill of lading/warehouse receipt: Title passes when are where the document was delivered

If there is no document: When a sales contract is made. Title will pass back to seller if buyer rejects the goods.

Sales or leases by Nonowners

generally, a buyer acquires at least whatever the seller had/has to the goods sold.

Void title

True owner gets goods back. The buyer cannot acquire the title and the owner can reclaim the goods from the buyer.

Voidable title

A seller has voidable title of the goods that they are selling were obtained by fraud, paid for with a check that was later dishonored, purchased from a minor, or purchased on credit when the seller was insolvent.

• A good faith purchaser keeps the goods.

In which cases is a good faith purchaser protected and allowed to retain title of goods?

Voidable title. Void title is not protected.

Entrustment rule is also protected.

ROL Shipment contract

ROL passes to buyer when tendered to Carrier. (Shipment FOB). If goods are damaged in transit, its the buyer’s loss.

ROL Destination contract

ROL passes to buyer when goods are tendered at particular destination (title transfers when goods are delivered).

ROL: Delivery without movement

Goods held by seller:

• If seller is merchant, ROL passes when buyer takes physical possession of goods

• If seller is non-merchant, ROL passes when the seller tenders the goods (How is this different? this is when the seller makes the goods available to be picked up and notifies the buyer that the goods are ready to be picked up

Goods held by warehouse

• ROL passes when

  1. buyer receives negotiable document of title

  2. warehouse acknowledges buyers right to goods, or

  3. Buyer receives non-negotiable document and has reasonable time to pick up the goods.

Conditional sale: Sale or Return

Sale for which buyer has options to return goods to seller.

• Sale or return: Usually when a merchant purchases goods primarily for resale but has the right to return part or all of the goods in lieu of payment if the goods fail to be resold

  • Risk is with buyer

Conditional sale: Sale on Approval

Transfer of possession without title to buyer for trial period

• Title and ROL remain with seller until accepted

• Sale on approval is really an offer. Not subject to buyer’s conditions until accepted.

ROL: breach of contract

Generally, the breaching party bears ROL.

ROL: Seller’s breach of contract

• Rejection - ROL stays with seller

• Revocation of acceptance - ROL passes back to seller to the extent that buyer’s insurance does not cover the loss.

Buyer’s breach Before ROL has passed

If goods are ID’d, ROL passes to buyer for a commercially reasonable amount of time after seller learns of the breach. But only to the extent that seller’s insurance does not cover loss.

What if the seller ships nonconforming goods?

the ROL does NOT pass to the buyer UNTIL the defects are CURED or until the buyer ACCEPTS INSPITE OF DEFECTS.

Insurable Interest

• Buyer has an insurable interest in goods that have been identified

• Seller has an insurable interest in goods as long as they retain title or a security interest

• Both buyers and sellers can have insurable interest at the same time.

Performance and Breach

• seller must transfer and delivery conforming goods

• buyers must accept and pay for conforming goods

• in the absence of an agreement between the two parties, UCC article 2 controls it.

Good faith requirement

• good faith is the foundation of every UCC commercial contract

• Good faith means honesty in fact

• For a merchant, it means honesty in fact and observance of reasonable commercial standards of fair dealing and trade.

Obligations of the Seller-Lessor

• seller has a duty to “tender” delivery of “conforming goods”

• Tender to place of delivery

• with reasonable notice

• at a reasonable hour

• in a reasonable hour.

• Exactly, unless otherwise agreed.

Tender

Unconditional offer to perform with the current ability to do so.

Place of delivery: Non-carriers

• Buyer picks up at seller’s place of business, or if seller has no place of business, then their residence

• If both parties know the goods are elsewhere (held by a bailee), then place of delivery is where the goods art.

Place of delivery: carriers FOB shipment

1. Shipment contracts (FOB place of shipment) Seller has a duty to:

   • Put goods in the hands of independent carrier

   • make reasonable contract for transportation

   • obtain and promptly delivery or tender to the buyer any documents necessary

Place of Delivery: FOB destination

Seller has duty to

• Tender the goods at a reasonable hour and hold conforming goods at the buyer’s disposal for a reasonable period of time.

• Buyer must be given notice.

The Perfect Tender Rule

If goods, or tender of delivery, fail in any respect to conform to the contract, the buyer has the right to:

• accept the goods

• reject the entire shipment

• accept part and reject part

  • Cannot accept less than a commercial unit

Exceptions to the Perfect Tender Rule: Agreement

1. Agreement

   • parties agree that some defective goods will be acceptable

   • parties agree that defective goods can be replaced or repaired within a certain time

Exceptions to the Perfect Tender Rule: Seller’s cure

1. • Seller has the right to “cure” (ship confirming goods to the buyer) if:

     • Seller had reasonable grounds to expect that buyer would accept the non-conforming goods (example, these goods are better than the goods orders, or buyer has accepted non-conforming goods in the past.

     • Agreed time of performance has not yet expired

Exceptions to the Perfect Tender Rule: Substitution of carriers

If a carrier becomes impracticable or unavailable through no fault of either party, a commercially reasonable substitute is acceptable

Exceptions to the Perfect Tender Rule: Commercial Impracticability

• Occurrence of an unforeseen contingency that makes performance impracticable

• nonoccurrence was a basic assumption on which the contract was made

• if only partial impracticability, seller must allocate what they have.

Exceptions to the Perfect Tender Rule: Destruction of goods

if no fault of either party and it occurs before risk passes to buyer, then both seller and buyer are excused from performance.

Obligations of the Buyer or lessee

• furnish facilities reasonably suited for the receipt of the goods

• make payment at the time and place the buyer receives the goods.

• if using credit - must be prearranged.

  • Credit period begins on date of shipment

  • pay with cash, credit card, check.

• If the seller asks for cash, seller has to give buyer a reasonable amount of time to get cash

• Buyer has right to inspection before paying

  • The buyer bears costs of inspection

  • however, cash on delivery gives buyer no right to inspect.

Acceptance (buyer)

Buyer can accept goods by:

• words or conduct

• if buyer had reasonable amount of time and failed to reject

• buyer performs an act that indicates that they believe theyre the owner

Partial acceptance

Rejection of nonconforming goods

Revocation of acceptance

• notify seller of breach

• revoke only if substantial nonconformity, and

• buyer accepted on the reasonable assumption that seller would cure the non-conformity ORRR buyer did not discover the defect because it was latent or hard to discover.

Anticipatory Repudiation

• party communicates they will not perform by time of contract performance.

• nonbreaching party may suspend performance and

  • treat the AR as material preach and pursue a remedy

  • wait a reasonable time.

• a repudiation may sometimes be retracted.

Right to Adequate Assurances

• if one party has reasonable grounds to believe that the other party will not perform, they can demand in writing for assurances from the other party

• can suspend performance until assurances received.

• reasonable time limit not to exceed 30 days.

Seller’s remedies:

If buyer defaults by:

• wrongfully rejecting the goods

• wrongfully revoking acceptance of goods

• failing to make a payment due on or before delivery

• repudiating

Then the seller may seek remedy.

Seller’s remedies: goods in seller’s possession

Seller may withhold delivery of the goods.

• if material breach by buyer, seller can withhold delivery of all goods

• if non-material breach, seller can withhold delivery of this installment

• Seller can withhold delivery of all goods if buyer is insolvent

  • unless buyer pays cash

• Seller may resell the goods in a commercially reasonable manner and recover damages.

• Damages: the difference between the contract price and the resale price + incidental damages - expenses saved.

Seller may rescind the contract.

Seller may sell raw materials for scrap or finish production.

Seller doesn’t have to resell. Seller can get damages:

• the difference between the unpaid contract price and the market price at the time and place of tender + incidental damages - expenses saved.

• if no damages, seller can sue for lost profits

Seller may sue to recover the price plus incidental damages where the goods have been identified to the contract and there is no ready market available for their resale at a reasonable price.

Seller’s remedies: goods in transit

Goods are in transit until:

• Buyer is given negotiable document of title to goods

• buyer is given non-negotiable document of title or Bailee has acknowledged buyer’s right to have the goods.

• Buyer has had reasonable time to pick up the goods

Seller has the right to stop the goods in transit if:

• buyer is insolvent - seller can stop entire shipment of goods

• seller can refuse delivery unless buyer pays in cash.

Seller’s remedies: Goods in buyer’s possession

Seller may sue to recover the price plus incidental damages if:

• buyer has accepted goods

• the goods were destroyed and the risk had already passed to the buyer.

Seller can reclaim goods received by an insolvent buyer if demand made within 10 days of receipt.

Buyer’s remedies

Seller defaults

• repudiates

• fail to delivery the goods without repudiation

• deliver or tender nonconforming goods.

Buyer’s remedies: Goods in Seller’s possession

Buyer wants goods

• Specific performance (unique goods)

• replevin (specific goods, cant cover)

• Recover goods from seller if seller becomes insolvent within 10 days after receiving first payment

Buyer does not want goods

• rescind contract

• Cover (buy a substitute) OR do not cover and sue for breach of contract.

  • if cover: cost of cover - contract price + incidental damages - expenses saved

  • If no cover: contract price - market price at place of tender at the time the buyer learned of the breach + incidental damages - expenses saved

• Buyer’s basic remedies

  • incidental

  • shipping, storing, commissions, etc

  • consequential damages (must be foreseeable)

Buyer’s remedies: Seller delivers non-conforming goods

• If seller does not make perfect tender Buyer has the right to reject all or part of the goods

• Buyer must timely notify seller of rejection and reasons and follow seller’s directions

• Buyer is entitled to commission for selling perishable goods

• Buyer may store the goods and retain a security interest in the goods for their costs

• If buyer has accepted non-conforming goods, they may sue for breach of warranty.

  • damages are value of goods as accepted - their value if they had been delivered as warranted

  • Consequential and incidental damages

  • Deduct damages from purchase price.

Limitations of remedies

• if there are exclusive remedies stipulated in the contract, you are limited to those remedies

• Liquidating damages - damages agreed upon in the contract

  • Reasonable

  • Difficult to prove actual loss

  • Cant be a penalty

Warranty/Product Liability Overview

• a warranty is an assurance of fact upon which a party may rely.

• Warranty of Title

• Express warranty

• implied warranty of merchantability

• implied warranty of fitness for a particular purpose

• implied warranty arising from the course of dealing or trade usage

Warranties of title

Automatically arises in most commercial sales transactions- either express of implied.

Basic warranties:

• Good title ( i am entitled to own these goods)

• Transfer is rightful

• No liens (no outstanding debts or claims on the property)

• if merchant, then warrant no infringements - patents or trademarks.

Warranty title disclaimer

title warranty can generally be disclaimed only with specific language in contract (cant say ‘as is”)

Circumstances may be obvious to clearly indicate disclaimer of title, such as a sheriff’s sale (buyer beware)

Express Warranties

• can be oral or written - don’t have to use the words “warrant” or “guarantee”

• Any affirmation or promise - this is a new car

• Any description - the color is blue

• any sample or model - it looks like the one over there

• To create an express warranty, the affirmation of fact must become the “basis of the bargain”

• And buyer must rely on warranty, when they enter into contract

• Statements of opinion and value are usually not warranties.

  • generally excludes “puffing” (best car in town!) usually if there’s superlatives or adjectives.

  • however, expert opinion is NOT puffery.

Implied warranties

• warranty inferred at law based on the circumstances or nature of the transaction

• on exam, you see goods are not as they should be - that is indication of an implied warranty issue. See if merchant.

Implied warranty of merchantability

Under the UCC, merchants warrant the goods they sell are “merchantable” aka fit for ordinary purpose for which such goods are sold.

Automatically arises from merchants

goods are of average, fair, or medium-grade. do not need to be perfect, just need to meet reasonable expectation of average customer.

adequately packaged and labeled

conform to promises on label

have consistent quality and quantity among the commercial units.

implied warranty of fitness for a particular purpose

Arises by ANY seller who

• knows the particular purpose for which the goods are being bought, AND

• Knows the buyer is relying on seller’s skill and judgement to select suitable goods

overlapping warranties`

• occurs when two or more warranties made in a single transaction.

• if warranties are consistent, they are considered cumulative

• If nonconsistent:

  • First, implied warrant of fitness for a particular purpose

  • Then: express over implied.

Warranty Disclaimers and Limitations on Liability

Express warranties can be disclaimed:

• If they were never made (evidentiary matter)

• If a clear written disclaimer in contract with specific, unambiguous language and called to Buyer’s attention FOR EXAMPLE BOLD AND CAPPED LIKE THIS!!!

implied warranties can be disclaimed:

• “as is” or “with all faults”

• if specifically disclaiming the implied warranty of merchantability or fitness, then it must contain the word merchantability.

Buyer’s right to fully inspect and either: does so or refuses to do so, warranties are disclaimed as to defects that could reasonably be found.

Privity requirement is relaxed.

Statute of Limitation

Action for breach of warranty.

• begins to toll at tender

• Buyer must notify seller within a reasonable time

• Buyer must sue within four years after cause of action accrues.

  • Agreement can reduce to not less than one year

  • If warranty is for future performance, action accrues when performance happens and breach is discovered.

Product Liability based on negligence

• negligence based product liability is based on a manufacturer’s breach of the reasonable standard of care and failing to make a product safe.

• Manufacturer must exercise due care in:

  • Designing products

  • Manufacturing and Assembling products

  • inspecting and testing products

  • placing adequate warning labels

• Manufacturers who violate state or federal law in the manufacture or labeling of a product may be negligent

• No privity of contract required between Plaintiff and Manufacturer. Liability extends to any person’s injuries caused by a negligently made (defective) product.

Product liability based on Misrepresentation

• occurs when fraud committed against consumer or user of product.

• Fraud must have been made knowingly or with reckless disregard for safety.

• Plaintiff does not have to show product was defective.

Strict Product Liability

• Manufacturers liable without regard to fault based on public policy

• Consumers must be protected from unsafe products

• manufacturers should be liable to any user of the product.

• Manufacturers, sellers, and distributors can bear the costs of injuries

Requirements for Strict Product Liability

• product must be in defective condition when sold.

• defendant is in the business of selling the product (merchant)

• product must be unreasonably dangerous (dangerous beyond the expectation of the ordinary consumer or a less dangerous alternative was economically feasible for the manufacturer, but the manufacturer failed to product it)

• Plaintiff must be physically harmed

• Defective condition must be proximate cause of injury

• Goods are in substantially same condition.

3 types of product defects

• Manufacturing defects

• Design defects

• warning defects

Manufacturing defects

• occurs when a product “departs from its intended design even though all possible care was exercised in the preparation and marketing of the product

• Example: Defective airbag in car

Design defects

Occurs when the “foreseeable risks of harm posed by the product could have been reduced or avoided by the adoption of a reasonable alternative… and the omission of the alternative design renders the product not reasonably safe

Example: asbestos lawsuits

Warning Defects

• a product may be defective because of inadequate warnings or instructions

• liability based on foreseeability that proper instructions/labels would have made the product safe to use.

• There is no duty to warn about obvious or commonly known risks

• Seller must also warn about injury due to product misuse.

• Key is whether misuse was foreseeable.

• example: warning on folding chair to not stand on chair

Manufacturing chain

Product liability refers to the responsibility for a defective product anywhere along the manufacturing chain.

This manufacturing chain includes the components manufacturer, the assembler of the components, the wholesaler, distributor, and retailer of the defect product.

Defenses to product liability

• assumption of risk

• product misuse (plaintiff is unaware the product is dangerous if used a particular way)

• Comparative negligence (plaintiff was partially at fault)

• Commonly known dangers (a kitchen knife is obviously sharp)

• Statues of limitation

• Statute of Repose: any law that bars claims after some action by the defendant, even if the plaintiff has not been injured. This is generally more favorable to defendants than the statute of limitations.