19-1 Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

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4• Formation and Terms of Sales

Contracts• Product Liability

• Performance of Sales Contracts• Remedies for Breach of Sales

Contracts

Sales

PART

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Formation and Terms of Sales Contracts

PA ET RHC 19Merchants have no country. The mere spot they stand on does not constitute so strong an attachment as that from which they draw their gains.

Thomas Jefferson, U.S. president and merchant, in a letter to Horatio G. Spafford (March 17, 1814)

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Learning Objectives

• Analyze whether common law or the UCC applies to a sale of goods

• Explain the meaning of voidable title and when title to goods passes from seller to buyer

• Apply UCC’s rules about risk of loss• Distinguish between sale or return

and sales on approval

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• The Uniform Commercial Code (UCC or Code) govern most commercial transactions within the United States

• Under UCC Article 2, a sale of goods involves the transfer of ownership to tangible personal property in exchange for money, other goods, or the performance of services– Does not specifically apply to trade in

services

The UCC and Sale of Goods

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• If dispute arises about a sales transaction, a disputing party must determine (a) the basis for the dispute, (b) applicable law, (c) and how to respond to the dispute (negotiate or litigate)

• Example: Dealer Management Systems, Inc. v. Design Automotive Group, Inc. in which court determined whether unsigned contract for software over $500 was a contract for goods governed by the UCC (yes) and if it complied with Statute of Frauds (no)

If a Dispute Arises…

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• Interpreting a sales contract is easier with common rules of interpretation:– Trade practices refers to using words

common in a particular industry• Example: “case” has a different

meanings for different industries

– If price was omitted, UCC 2-305 fills the gap by providing the term: reasonable price at the time for delivery

Details of Sales Contracts

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• An outputs contract is an agreement in which buyer purchases all produce of seller– Example: hog farmer agrees to sell all hogs

produced only to HamNBacon Co.

• A requirements contract is an agreement in which seller must provide all requirements for buyer’s production to the buyer– Example: Textiles Inc. must provide all

fabric required for production to T-Shirts LLC

Details of Sales Contracts

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• Under the exclusive dealing contract provision of UCC 2-306(2), sellers have an obligation to use their best efforts to supply the goods to the buyer and the buyers are obligated to use their best efforts to promote their sale

• If no time for performance is specified, a reasonable time is implied

Details of Sales Contracts

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• For contracts requiring successive performances over an indefinite period of time, UCC 2-309 provides that either party can terminate the contract upon giving reasonable notice

Details of Sales Contracts

• Standardized shipping terms customarily used in sales contracts to aid in deciding which party bears risk of loss

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• Title (evidence of legal ownership) to goods cannot pass from seller to buyer until goods are identified to the contract [UCC 2–401(1)]

• Passage of title determines who bears risk of loss if goods damaged during shipment• If no special agreement, title to goods passes to buyer

when seller completes obligations of delivery

• Fundamental rule: buyer cannot receive better title to goods than seller had

Title to Goods

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• Under UCC 2-403(1), a seller who has a voidable title may pass good title to a good faith purchaser for value– Voidable title: gained by fraudulent

means– Good faith [UCC 1–201(19)] means

“honesty in fact in the conduct or transaction concerned”

Title to Goods: Exception to Rule

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• A buyer in ordinary course is a person who gains good title because s/he– in good faith and without knowledge that

the sale to him is in violation of the ownership rights of a third party, and

– buys goods in the ordinary course of business of a person selling goods of that kind (other than a pawnbroker) [UCC 1–201(9)]

Title to Goods: Exception to Rule

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• If goods are entrusted to a merchant who deals in goods of that kind, the merchant may transfer all rights of the entruster to a buyer in the ordinary course of business [UCC 2– 403(2)]– But a merchant-seller cannot pass good

title to stolen goods even if buyer is a buyer in the ordinary course of business

Title to Goods: Exception to Rule

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• Common law placed risk of loss on the party who had technical title at time of loss

• UCC provides specific rules:– Contracting parties, subject to the rule of good

faith, may specify who bears risk of loss in the agreement [UCC 2–509(4)]

– If contract requires seller to ship goods by carrier but does not require delivery to specific destination, risk passes to buyer when seller delivers goods to carrier [UCC 2–509(1)(a)]

Risk of Loss in Shipping

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• United Nations Convention on Contracts for the International Sale of Goods (1980) provides rules governing risk of loss in sale of goods contracts

• International Chamber of Commerce publishes a list of common international shipping terms known as INCOTERMS

International Sale of Goods

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• Shipment contract: seller must place goods in possession of a carrier and contract for transportation as is reasonable for the nature of goods and other circumstances– Unless parties specify shipment method, contract

is generally construed as a shipment contract

• Destination contract: seller must deliver goods to specific destination bearing risk and expense of delivery

Common Shipping Terms

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• FOB (free on board) point of origin: seller must deliver goods free of expense and at seller’s risk (including loading on board) to the place designated [2-319(1)]

• FAS (free alongside ship): seller must deliver goods alongside the vessel at the port at seller’s own risk and expense [2–319(2)]

Shipment Contracts

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• CIF (cost, insurance, and freight): price of goods includes seller’s cost and risk to load, ship, and insure goods [2–320]

• C & F: same as CIF, except seller not obligated to insure [2–320]

Shipment Contracts

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• Common commercial practice is for seller of goods to entrust possession of goods to buyer to either give buyer an opportunity to decide whether or not to buy or to try to resell them to a third person– Sale on approval, sale or return, or

consignment– Risk of loss depends on terms of entrusting

Sales on Trial

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Thought Questions

• Jefferson said, “Merchants have no country.” Do you agree with Jefferson? How might Jefferson view current international business practices?