Week 5: Sales and the UCC

Administrative Items

Case reading assignment for Week Six on October 9:

Oswald Machine & Equipment, Inc. v. Yip, 10 Cal. App. 4th 1238 (1992)

L&B Real Estate v. Wells Fargo Bank, 2008 Cal. App. Unpub. LEXIS 5060 (2008)

Chapter 18: Sales Contracts: UCC Art. 2

UCC Background

Link to California Commercial Code

"(2) (The) underlying purposes and policies of this code are:

Salient features of the UCC

Largely the work of a few legal scholars. Many subtle internal linkages anticipate issues and problems

Modifies "classic" contract rules to facilitate commercial transactions in many ways:

For more background on the UCC's emphasis on legal realism instead of formalism, see reprint of Karl Llewellyn's article on Canons of Statutory Construction, 5 Green Bag 2d 297 (Spr. 2002), available by searching Academic Universe in Legal Research /Law Reviews fn1

Scope of UCC Article 2

"Sales" that transfer "title" (ownership rights) to "goods" (tangible moveables) for a price

If both goods and services, see which predominates

"Merchant": important defined term

One who deals in the goods or holds self out as having special expertise as to this type of goods. Often different standards and rules apply to merchants as opposed to other buyers and sellers

How UCC modifies classic contract law

Not need consideration for merchant's firm offers

Merchant's firm offer stays open for stated time (or "reasonable", max 3 months), even if no consideration was given to hold offer open

Also, contract modifications don't need new consideration. Allows flexible renegotiation

Acceptance UCC 2-206

Additional terms on acceptance: UCC 2-207(1)

If either is nonmerchant, additional terms are proposed additions, but:
If both are merchants UCC 2-207(2) says new terms are in the contract, unless:

Reason for rule: the battle of the forms

Does it work? Some say "No!" Others agree.

Gap filling for Open Terms: UCC 2-204(3) and 305 ff

UCC Statute of Frauds

Writing is usually required if goods cost over $500

For Merchants tho, the Written Confirmation rule

Binds both if one sends written confirm and other does not object w/in 10 days of receipt

Also exceptions for specially manufactured goods, admissions by a party, part performance

UCC Parole Evidence Rule

Not allow integrated writing to be contradicted by prior written or oral, or contemporary oral. UCC 2-202

Except: additional terms that don't contradict

If language is ambiguous, look to course of performance, course of dealing, usage of trade

Chapter 19: Performance of UCC Contracts

Title and Risk

"Title" is not a defined term in UCC. It generally means "rights of ownership: possession, use and resale"

Risk of loss

Who bears the burden if something goes wrong?

Is on seller at least until goods are "identifed to the contract by"

  • Naming specific goods, such as by serial number
  • Or separating or tagging the goods from a stock (fungible goods need not be physically separated)

Passage of Title

In general UCC 2-401(2): Title passes when & where seller's performance with reference to physical delivery is completed. (Tho the parties may specifically agree otherwise)

Seller need only "tender" (i.e. show readiness for) performance: The goods are available for delivery and buyer is notified

If document of title controls ownership, delivery of document transfers title. Example: goods at warehouse

If no document of title, and goods are identified, title passes at time and place of contracting

If buyer picks up later, buyer has had title and may have had risk of loss, BUT

If non-merchant buyer is to pick up goods, merchant seller bears risk of loss until buyer receives goods

Terms and risks of shipment

Contracts may require delivery at destination, or shipment via common carrier

eg. FOB (place) means

Seller is to arrange shipment and put the goods in carrier's possession. Seller has expense and risk of loss to (place)

Terms and risks of conditional sales

Note financial accounting revenue recognition issues here -- SFAS No. 48

Sale on approval - a try-out period for use

Buyer may accept expressly, or by failing to notify of rejection, or by using goods inconsistently with a trial. Return is at seller's expense. Risk of loss and title stays with seller, unless loss due to buyer's negligence or fault

Sale or return - buyer is a re-seller

Buyer has risk of loss on taking possession: returns to seller are at buyer's expense. Eg: magazines at newsstand. In effect a contract with a built-in partial right to rescind.

Sale on consignment

UCC treats as "sale or return". Consignee (person with possession) has risk of loss. Seller's rights against consignee's creditors depend on filed financing statements

Risk of loss in case of breach: UCC 2-510

If buyer has right to reject goods (defective), seller has risk of loss until defect cured

A buyer who accepts may later revoke acceptance of non conforming goods if there is a "latent defect"

If buyer breaches, buyer bears risk of loss for identified goods

Less any insurance recovery by seller. Risk lasts only commercially reasonable time

"Insurable interest"

Reason for concept is to distinguish insurance from gambling

  • Buyer has insurable interest when goods identified to contract.
  • Seller has insurable interest as long as any title or security interest.
  • If insurance overlaps, only the party suffering loss may recover

Transfers by non owners

Rights of buyer and "true" owner depend on whether transfer is by a thief, a swindler, a merchant holder, or a debtor

  • Thief: A purchaser from a thief has void title (no good at all), even if bought in good faith for value. Original owner may reclaim
  • A swindler (fraud, bad check, impersonation and the like) has "void-able" title

A bona fide purchaser in good faith for value does acquire good title from holder of voidable title

  • Merchant holder. If goods are entrusted to a merchant, buyer in good faith in ordinary course of business has good title
  • Debtor. Although creditor has security interest in the goods, and may have filed a UCC-1 financing statement, buyer in ordinary course of business acquires free of security interest

Distinguish this from a bulk sale, where purchaser is considered to be "on notice" of a security interest

Chapter 20: UCC Sales Breaches and Remedies

S's obligation: deliver conforming goods (UCC 2-301)

B's payment is due on tender of delivery unless parties agree to credit terms

Where to Deliver

If no carrier, S's place of business. (If none, S's residence)

If carrier, and shipment contract, S is to arrange shipping, deliver documents, notify B. B may reject goods damaged by improper shipment or improper notice

If carrier, and destination contract, S is to tender delivery at stated location

Perfect Tender Rule

If goods don't conform, B can accept or reject as to some or all. BUT 2-605: B must state particular reasons for rejection. Allows S to cure after rejection (if time remains for performance)

If Installment contracts for multiple deliveries

B's obligation: take conforming goods and pay for them

B may inspect goods before accepting or paying

Unless: payment is due on receipt of documents of title, or it's a COD shipment.

Manner of payment:

How B accepts the goods

  • Tells S by words or conduct that the goods conform
  • Tells S that B will retain non-conforming goods
  • Fails to effectively reject goods within a reasonable time after delivery
  • Acts inconsistently with S's ownership rights: for example, resells the goods

If B discovers problems after acceptance

Can no longer "reject", but can "revoke" acceptance by notifying seller within reasonable time: 2-608. B may lose right to reject if too long a delay in inspecting

Adequate assurance of performance: UCC 2-609

If either party has reasonable grounds to fear impairment, they may demand assurance. The other has 30 days to provide assurance, and requesting party may suspend performance pending assurance. "Adequate assurance" depends on the facts -- from "give it my attention" to "replace the defective goods" to "post a guarantee".

Official Commentary: " The section rests on the recognition of the fact that the essential purpose of a contract between commercial men is actual performance and they do not bargain merely for a promise, or for a promise plus the right to win a law suit and that a continuing sense of reliance and security that the promised performance will be forthcoming when due, is an important feature of the bargain. If either the willingness or the ability of a party to perform declines materially between the time of contracting and the time for performance, the other party is threatened with the loss of a substantial part of what he has bargained for. A seller needs protection not merely against having to deliver on credit to a shaky buyer, but also against having to procure and manufacture the goods, perhaps turning down other customers. Once he has been given reason to believe that the buyer's performance has become uncertain, it is an undue hardship to force him to continue his own performance. Similarly, a buyer who believes that the seller's deliveries have become uncertain cannot safely wait for the due date of performance when he has been buying to assure himself of materials for his current manufacturing or to replenish his stock of merchandise."

If explicit anticipatory repudiation, or if "assurance" not forthcoming

Requesting party may: await performance, resort to remedy for breach, suspend own performance

May be retracted if no cancellation or change in reliance

S's Remedies for B's breach: (See Concept Summary, p. 304 and UCC Sec. 2701 ff.)

Key Questions affecting remedies

Who has the goods? S, Carrier, B? Is B insolvent?

UCC 1-201 (23) "A person is "insolvent" who either has ceased to pay his or her debts in the ordinary course of business, cannot pay his or her debts as they become due, or is insolvent within the meaning of the federal bankruptcy law."

1) S holds goods when B breaches. S can:

  • Withhold delivery
  • Require COD if B insolvent
  • Sell to someone else in good faith and commercially reasonable manner, crediting B with proceeds, less disposition costs
  • Sue for damages (contract price less market price)
  • Cancel

2) Carrier holds goods. S can:

  • Stop delivery of a carload lot if B fails to pay, or repudiates contract
  • Stop delivery of less-then-carload if B is insolvent

3) B has goods, S can:

Reclaim within 10 days of receipt if B is insolvent, or bounces check

Reclaim beyond 10 days if an insolvent B lied in writing to S about solvency w/in last 90 days

Sue for unpaid contract price

B's remedies for S's breach (see Concept Summary, p. 307)

Key issues: do the goods conform? Does B want them?

1) S delivers nothing, or unwanted nonconforming goods

  • Reject nonconforming goods
  • Revoke acceptance of nonconforming goods
  • Cover (buy elsewhere)
  • Sue for damages
  • Cancel contract

2) B accepts nonconforming goods

  • Sue for damages
  • Deduct damages from unpaid purchase price

3) S delivers nothing, B wants the goods

fn1. Yes, there is a Law Review called The Green Bag. <back>

notes and format (c) 2001-08 Robert H. Daniels