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Formation and Terms of Sales ContractsPAETRHC19Merchants 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 ObjectivesAnalyze 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 buyerApply UCCs rules about
risk of lossDistinguish 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 StatesUnder 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
servicesDoes not specifically apply to trade in servicesThe 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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Leasing large goods, such as manufacturing or agricultural
equipment, is common UCC Article 2A applies to a lease of goodsThe
District of Columbia and all states except Louisiana have adopted
UCC Article 2AArticle 2 A
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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 industryExample: case has a different meanings for
different industriesIf price was omitted, UCC 2-305 fills the gap
by providing the term: reasonable price at the time for
deliveryDetails of Sales Contracts
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An outputs contract is an agreement in which buyer purchases all
produce of sellerExample: 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 buyers
production to the buyerExample: Textiles Inc. must provide all
fabric required for production to T-Shirts LLC Details of Sales
Contracts
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Noble Romans, Inc. v. Pizza Boxes, Inc.Facts: Franchisor Noble
Romans and Pizza Boxes entered into letter agreement for
manufacture of boxes that distributor Multifoods would
orderAgreement included clause: In the event that the total of 2.5
million boxes are not manufactured, Noble Romans is responsible for
any portion of the [printing] prep charge remaining.Pizza Boxes
produced far more than ordered by distributor, then sued Noble
Romans for unpaid inventory; trial court found for Pizza Boxes
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Appellate Opinion: Contract language is that of requirements
contractNo meeting of the minds on how many boxes Pizza Boxes would
ultimately produceCourse of performance (UCC 2-208) shows Pizza
Boxes invoiced Multifoods as purchaserUnambiguous clause states
Noble Romans liability for printing prep charges onlyReversed and
remanded with instructions
Noble Romans, Inc. v. Pizza Boxes, Inc.
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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 impliedDetails 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 noticeDetails of
Sales ContractsStandardized 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
2401(1)]Parties may agree when title passesIf no agreement, title
to goods passes to buyer when seller completes obligations of
deliveryPassage of title determines who bears risk of loss if goods
damaged during shipmentTitle to Goods
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Fundamental rule: buyer cannot receive better title to goods
than seller hadIf seller was thief, buyer does not obtain good
titleTitle 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 valueVoidable title:
gained by fraudulent meansGood faith [UCC 1201(19)] means honesty
in fact in the conduct or transaction concerned Title to Goods:
Exception to Rule
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Tempur-Pedic International, Inc. v. Waste to Charity, Inc.Facts:
Tempur-pedic (TP) made donations to Waste to Charity (WTC) for
Hurricane Katrina victimsDonation contract conditioned on
non-resaleTP discovered that the mattresses were being sold in
various ways, including from trucks and e-BayTP sued WTC and CSS
(reseller) for breach of contract and fraudIssue: Was CSS a good
faith purchaser?
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Opinion: TP voluntarily made donation to WTC, thus WTC acquired
voidable title to the propertyCSS, though, was not a good faith
purchaser:Mattress price substantially below market valueTags had
been removed from mattressesCSS knew TP didnt authorize sale of
used mattressesCorporate charter of ADI, seller to CSS, had been
revoked during relevant time periodMotion for preliminary
injunction grantedTempur-Pedic International, Inc. v. Waste to
Charity, Inc.
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A buyer in ordinary course is a person who gains good title
because s/hein good faith and without knowledge that the sale to
him is in violation of the ownership rights of a third party,
andbuys goods in the ordinary course of business of a person
selling goods of that kind (other than a pawnbroker) [UCC
1201(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 businessTitle 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 lossUCC provides specific rules:Contracting
parties, subject to the rule of good faith, may specify who bears
risk of loss in the agreement [UCC 2509(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 2509(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 contractsInternational Chamber of Commerce publishes a
list of common international shipping terms known as
INCOTERMSInternational 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 circumstancesUnless parties specify
shipment method, contract is generally construed as a shipment
contractDestination contract: seller must deliver goods to specific
destination bearing risk and expense of deliveryCommon Shipping
Terms
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FOB (free on board) point of origin: seller must deliver goods
free of expense and at sellers 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 sellers own
risk and expense [2319(2)]Shipment Contracts
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CIF (cost, insurance, and freight): price of goods includes
sellers cost and risk to load, ship, and insure goods [2320]C &
F: same as CIF, except seller not obligated to insure
[2320]Shipment Contracts
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FOB destination: FOB term plus destination for the goods puts
expense and risk of delivering to that destination on the seller
[2319(1)(b)]Ex-ship: places expense and risk on seller until goods
are unloaded from whatever ship is used [2322]No arrival, no sale:
expense and risk during shipment is on seller, but if goods fail to
arrive through no fault of the seller, the seller has no further
liability to buyer [2324]Destination Contracts
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Tender of delivery requires that seller put and hold conforming
goods at buyers deposition and give the buyer any notification
reasonably necessary to enable him to take deliveryIn this case,
question remains as to why Hickman gave car keys to Capshaw, but
car was left in Hickmans driveway until Capshaws check
clearedCapshaw v. Hickman
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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
personSale on approval, sale or return, or consignmentRisk of loss
depends on terms of entrustingSales on Trial
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Test Your KnowledgeTrue=A, False = BAn outputs contract is an
agreement in which buyer purchases all the production of sellerCIF
(cost, insurance, and freight) means buyer covers risk to load,
ship, and insure goodsFOB (free on board) Port of Miami means that
seller must deliver goods to the Port of Miami at sellers risk and
expense, including loading goods on board
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True=A, False = BShipment contract means that buyer must arrange
for carrier to pick up and transport goodsFAS (free alongside ship)
means that seller must deliver goods alongside the vessel at the
port at sellers own risk and expenseA consignment is not a sale,
but an entrusting in which the consignor bears the risk of lossTest
Your Knowledge
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True=A, False = BUCC Article 2 governs most sale of goods
transactions in the United StatesTom agrees to mow Katys lawn
during the summer. Katy failed to pay Tom as agreed. The provisions
of UCC Article 2 apply to Tom and Katys contract.INCOTERMS were
developed by the United Nations to determine title to goods Test
Your Knowledge
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Multiple ChoiceIkes Bikes sells motorcycles. Sams Used Cars
& Cycles (Sams) sold Ike a used motorcycle. Ike believes the
bike belonged to Sams since Sams produced papers that looked
official. Sams had stolen the bike from Ted. Ike may: sell the bike
since he was a buyer in the ordinary course of business with good
titlenot sell the bike since it was stolensell the bike to any
customer, but Ted may sue Ike for damages and will win since Ted is
the rightful owner of the bikeTest Your Knowledge
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Multiple ChoicePacific Paper Co. (Pacific) and BoxCo had a
contract in which Pacific must provide all cardboard for BoxCos box
production. This type of contract is known as a(n): outputs
contractdestination contractsupply contractrequirements
contractnone of the aboveTest Your Knowledge
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Multiple ChoiceChoi ordered 100 crystal vases from Kristal in
New York. The contract stated the goods were to be delivered FOB
Chois, 111 Main, Cityville, TX. The truck overturned en route and
the vases were destroyed. Choi must: pay Kristal the contract price
and order again since Choi contracted for the risk of lossnotify
Kristal to resend the order since Kristal contracted for the
expense and risk of delivering to the destinationTest Your
Knowledge
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Thought QuestionsJefferson said, Merchants have no country. Do
you agree with Jefferson? How might Jefferson view current
international business practices?
***Hyperlink is to the courts opinion.Design Automotive Group,
Inc., issued a purchase order to Dealer Management Systems, Inc.
(DMS), for computer programs and other services. In the purchase
order, DMS agreed to provide Design Automotive with an Accounting
Information Management system consisting of various separately
priced software components. The price of the individual components
totaled $24,000, but DMS agreed to provide them as a package for
$20,000 plus an additional $795 for an item described a
RMCOBALRUNTIME SYSTEM FOR UNIX 16. DMS brought suit against Design
Automotive alleging that it had breached the contractDesign
Automotive moved to dismiss the contract claim on the grounds that
because it had not signed the purchase order, the agreement was
unenforceable under section 2201(1) of the Uniform Commercial
CodeSalesthe statute of frauds.Court: Most courts would probably
agree that an ordinary sale of off-the-rack software is a
transaction in goods. a transaction that nominally involves a mere
license to use software will be considered a sale under the UCC if
it involves a single payment giving the buyer an unlimited period
in which it has a right to possession. Applying these principles
here, we conclude, as a matter of law, that the contract was
predominantly for goods and only incidentally for services, and
that it amounted to a sale of goods under the UCC. The agreement is
a sale subject to the statute of frauds because it provided for the
transfer of the software for an unlimited time for a single
payment. Accordingly, DMS has not shown the existence of a
meritorious claim that could have withstood the UCCs statute of
frauds.
*The UCC Article 2 does not explicitly apply to sale of
services, but goods only. While some courts will apply UCC Article
2 rules to a transaction in which sales and services are mixed,
most seem to avoid application of UCC Article 2 to mixed goods and
services. Therefore, when faced with a sales transaction dispute, a
person must identify the subject matter (services, goods, or a
mixture) in order to determine the applicable law. This chart is
Figure 1 on page 481 of the text. *Only Louisiana (which has a
civil law system rather than a common law system) did not adopt UCC
Article 2A. ***Hyperlink is to the appellate court decision located
on the Findlaw.com website.Noble Romans is a franchisor of pizza
restaurants. Noble Romans franchisees order supplies approved by
Noble Romans. Pizza Boxes is a broker that acts as an intermediary
for vendors who manufacture pizza boxes.Noble Romans and Pizza
Boxes entered into an agreement for a new type of box that would be
ordered and distributed by Multifoods, the distributor, would
submit orders for the boxes and pay the invoices; and that
Multifoods would pick up the boxes after the orders were filled.
Pizza Boxes, through its vendor, Dopaco, Inc., manufactured 519,200
boxes in anticipation of Multifoods future orders. Multifoods
submitted an initial purchase order to Pizza Boxes for six cases
(12,000) boxes, and Multifoods paid Pizza Boxes for that order.
However, after the initial order, Multifoods did not order any more
boxes. Pizza Boxes then filed suit against Noble Romans alleging
breach of contract, seeking $54,901.44 for the unpaid inventory and
tooling charges. The trial court entered summary judgment in favor
of Pizza Boxes and Noble Romans appealed.
*Court: Noble Romans maintains that its only obligation under
the November 1, 2002, letter was to pay the printing prep charges
remaining in the event Pizza Boxes did not manufacture the 2.5
million boxes. We agree. on its face,contemplates the possibility
that not all 2.5 million boxes would be manufactured. Thus, it is
not a purchase order. And, despite the inclusion in the letter of a
specific estimate of quantity, it is clear that there was no
meeting of the minds on how many boxes Pizza Boxes would ultimately
produce under the requirements contract. Noble Romans contends, and
we agree, that the letter is unambiguous and provides that it is
only responsible for the unpaid printing prep charges in the event
that the toal of 2.5 million boxes are not manufactured.. The terms
of the November 1 letter show that: (1) Multifoods would pick up
the boxes; (2) Pizza Boxes would remit the invoices to Multifoods;
and (3) Noble Romans was responsible for any portion of the
[printing] prep charges remaining in the event that not all 2.5
boxes were manufactured.In addition, the parties course of
performance shows that Pizza Boxes did not expect that Noble Romans
would be responsible for paying for the boxes. The conduct of
Multifoods in submitting the order to Pizza Boxes and paying Pizza
Boxes, and Pizza Boxes in submitting the invoice to Multifoods and
contacting Multifoods to inquire about additional orders, establish
a course of performance between them, consistent with the terms of
the letter, all of which shows that Multifoods is the
purchaser.
***State of Connecticut v. Cardwell illustrates the application
of the rules concerning passage of title. Court: The contracts made
by Cardwell for the sale of tickets do not contain any explicit
agreement by Cardwell to deliver the goods to a particular
destination or to bear the attendant risk of loss until such time
as the goods are delivered. Therefore, the contracts at issue in
this case are properly classified as shipment contracts. Because
delivery of the goods to the carrier constitutes delivery to the
buyer under a shipment contract, section 2401(2)(a), with respect
to each sale of tickets made by Cardwell, delivery is made to the
post office or other commercial carrier, and hence to the buyer,
withinMassachusetts. As a result, the sale of the tickets, as
defined by the code, occurs in Massachusetts. Consequently,
thetrial courts determination that Cardwell sells tickets within
Connecticut, and thereby violates the Connecticut statute,was
incorrect.
**For example, a person would have voidable title if s/he
obtained goods by impersonating another person, paying for goods
with bad check, or obtained goods without paying agreed purchase
price when it was agreed that the transaction was to be a cash
sale. Under the Code, good faith means honesty in fact in the
conduct or transaction concerned [1201(19)] and a buyer has given
value if he has given any consideration sufficient to support a
simple contract [1201(44)]
*Hyperlink is to the courts opinion in pdf. In 2005, TP decided
to make a donation of approximately $15 million in mattress,
slipper, and pillow inventory to Gulf Coast residents victimized by
Hurricane Katrina. The donations included approximately 7,800
mattresses to Waste to Charity (WTC), which was supposed to
distribute those products to Hurricane Katrina victims. On November
14, 2005, TP entered into a charitable donation agreement with Jack
Fitzgerald and his company, WTC, to distribute mattresses,
slippers, and pillows. As a recipient of charitable produce
donations, WTC agreed to certain restrictions. Not in the text: WTC
contacted a company called Action Distributors (ADI) to make the
actual distributions to the hurricane victims. ADI and owner Thomas
Scarcello were named defendants in the lawsuit. Both ADI and
Scarcello failed to appear and the court entered default judgments
against them. An investigation by TP, a consultant it hired, and
the FBI discovered the donated mattresses being offered for sale in
a variety of ways: from trucks parked in shopping centers, from a
warehouse where WC had stored some of the donations, by a number of
individuals affiliated in various ways with the warehouse, and on
e-Bay. TP brought an action for replevin, breach of contract, and
fraud against WTC and CSS, a company caught selling the
mattresses.
*Court: TP voluntarily gave the property to WTC. There is no
showing that WTC was just a sham operation. WTC lawfully came into
possession of the property. Thus, it appears clear that WTC did
acquire voidable title to the donated property. . I conclude TP has
shown a probability that it will succeed on the merits of
establishing that CSS was not a good-faith purchaser for value of
the mattresses. A number of factors lead the court to this
conclusion. First, the price of the mattresses was substantially
below market value. The average price per mattress paid by CSS was
$125. TPs witness testified that the value of these mattresses
would be substantially above that figure Second, the terms of the
purported sale were suspicious: all tags had been removed; while
the mattresses were confirmed to be TP mattressesthey could not be
sold as such; no sales could be made to TP dealers; and the
representation was made that TP hasconfirmed the mattresses would
not have tags on them. Third, both the timing of the attempted
sales, and the use ofa building material supplier re some of the
offered sales, lends support to the conclusion that CSS was not a
good-faith purchaser for value. Fourth, the president of CSS
acknowledged that he knew TP did not authorize the sale of used
mattresses. Fifth, the corporate charter of ADI had been revoked
both before and during the relevant period of time.
*********Hyperlink is to the courts opinion in pdf. Charles
Capshaw entered into a written contract with Rachel Hickman to
purchase Hickmans 1996 Honda Civic EX for $5,025. Contract
provided, among other things, that the title will be surrendered
upon the new owners check clearing. Capshaw made a down payment of
$80 in cash and gave Hickman a personal check for the balance. She
provided Capshaw with the keys to the vehicle and also complied
with his request to sign the certifi cate of tile over to his
father and placed the certificate in the vehicles glovebox. They
agreed the vehicle was to remain parked in Hickmans driveway until
the check cleared. Unfortunately, before Hickman was notifi ed by
her bank that the check had cleared, a hailstorm heavily damaged
the vehicle. Due to the damage, Capshaw decided that he no longer
wanted the vehicle and asked Hickman to return his money. Hickman
refused, believing that the transaction was complete and that the
vehicle belonged to Capshaw. She also requested that it be removed
from her driveway. Capshaw brought suit against Hickman, alleging,
among other things, conversion, breach of contract and
quasi-contract and unjust enrichmentpromissory estoppel. Capshaw
contended that the risk of loss remained with Hickman until the
check cleared; because it had not cleared at the time the hail
damaged the car, Hickman sustained the loss. Hickman maintained
that the risk of loss for a nonmerchant seller like her passes to
the buyer after the seller tenders delivery to the buyer. The trial
court found that the parties agreed the transfer of title and
delivery of the vehicle would occur only after the successful
transfer of funds. Because neither had occurred at the time of the
hailstorm, the court concluded that the risk of loss remained with
the seller. Hickman appealed.*In a sale on approval, goods are
delivered to buyer with an understanding that buyer may use or test
them for purpose of determining whether buyer wishes to buy the
goods [2326(1)(a)]. Neither the risk of loss nor title to the goods
passes to buyer until he accepts the goods.In a sale or return,
goods are delivered to buyer for resale with understanding that
buyer has the right to return them [2326(1)(b)]. Under a sale or
return, title and risk of loss are with buyer. While the goods are
in buyers possession, they are subject to claims of his creditors
[2326 and 2 327].If the merchant to whom goods are consigned
maintains a place of business dealing in goods of that kind under a
name other than that of the person consigning the goods, then
consignor must take certain steps to protect his interest in the
goods or they will be subject to claims of merchants creditors.
*True. False. CIF (cost, insurance, and freight) means that the
price of goods includes sellers cost and risk to load, ship, and
insure goods True. *False. 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
False. FAS (free alongside ship) means that seller must deliver
goods alongside the vessel at the port at sellers own risk and
expense True.*True. False. Tom and Katys contract relate to
services and not goods, thus the applicable law is a specific
statute or common law. False. First, INCOTERMS were developed by
the International Chamber of Commerce. Second, INCOTERMS are a
published list of standardized terms for international shipping to
assist in determining risk of loss.*The correct answer is (a). Ike
is a buyer in ordinary course of business and gained good title
because he bought the bike from Sams (a) in good faith and without
knowledge that the sale to him is in violation of the ownership
rights of a third party, and (b) bought goods in the ordinary
course of business of a person selling goods of that kind [UCC
1201(9)].
*The correct answer is (d).*The correct answer is (b). FOB
destination [2319(1)(b)]: seller bears expense and risk of
delivering goods to that destination.
*Opportunity to discuss globalization and the impact of
multinational sales contracts on society.