BUSINESS LAW I
A. Development of the Law of Contracts
1. Common
law. Contracts governed by state and
case law. Reference is made to the Restatement of Contracts.
2. Uniform
Commercial Code (UCC). Article 2: Sales
of goods are a type of contract involving the transfer of the title of goods
from the seller to the buyer for a price. Where common law is not modified by
the code, the common law applies. ie. employment and real estate contracts
B. Definition of a Contract. Restatement § 1. A contract is a promise or a set of promises for the breach of which the law gives a remedy or the performance of which the law in some way recognizes as a duty.
C. Types of Contracts
1. Formal. Depends on a particular [form?] for its
efficacy ie.
promissory note
Informal. All other contracts ie. employment contract, realty contract
2. Express. Where the parties manifest their assent in spoken or written words
Implied. Formed by conduct
3. Unilateral. Exchange of a promise for an act or the
exchange of a promise for a forbearance to act. ie. Mark’s uncle promises to pay $1
million to Mark if he graduates from Yale instead of Harvard, where Mark wants
to go.
Bilateral. The exchange of a promise for a
counterpromise. ie. Promise to pay Mark $50 if Mark will promise to shovel a driveway
for $50.
4. Void. No legal effect to the contract. ie. wager or a bet, or if an individual has been ruled mentally disabled by a court of law
Voidable. Law permits one party to avoid his duties. ie. Individual is a victim of fraud or duress; also, contracts of a minor for a non-necessity
Unenforceable. Contract fails to satisfy certain requirements. ie. Real estate contracts must be in writing under the Statute of Frauds.
5. Executed. Parties have fully performed their duties or
all parties have signed the contracts.
Executory. One or more unperformed promises by a party
to the contract.
ie. unexpired lease
II. Manifestation of Mutual Assent. Parties must manifest to one another by spoken or written words or by conduct, their offer and acceptance.
A. Offer to Contract. ie. job offer, offer to buy a house
1. Offer. A definite proposal or undertaking made by one person to another effective upon an act, forbearance of an act, or return promise being given in exchange for an offer. An offer always contains a promise. When the offeree receives the offer, he then has the power to accept.
2. Offeror makes a proposal; offeree is the person to whom the offer is made. In realty, the seller is the offeree and the buyer is the offeror. In some businesses, the seller is the offeror.
B. Essentials of an offer
1. Communicated to the offeree
a. Offeree must have knowledge of the offer
b. Offer must have been communicated to the
offeree by the offeror
2. The offeror must have the intent to make an offer
a. Offeror must manifest an intention to enter into a contract
b. Invitations-seeking offers are not offers. ie. Newspaper ads do not contain a promise and leave certain terms unexpressed; therefore, newspaper ads are not offers. However, if newspaper ads are extremely detailed, they may be offers.
c. Objective standard of intent is necessary. A promise made jokingly or under stress is not an offer.
3. Definite. Offer must be definite. Terms of the offer must be definite as to quality, quantity, and price.
C. Duration of Offers. Upon termination of an offer, it cannot be accepted. Up to the point of termination of the offer, the offer confers upon the offeree the power to create rights and duties by the offeree manifesting his acceptance. An offer can be terminated 7 ways.
1. Lapse of
time. If an offer is open for a
specified time period, then it terminates at the end of the time period. If no
time period is stated, then the offer lapses after a reasonable time. ie. If a job
offer is dated Oct. 1 and it states that it must be accepted by Oct. 15, then
the offer terminates on Oct. 15. Also, an offer for residential real estate
terminates in 24 hours.
2. Revocation. An offeror may revoke his offer prior to acceptance. Direct or indirect notice to the offeree is required.
a. There are limits on revocation, like option contracts. An option is a contract in which the offeror is bound to hold open an offer for a specified period of time. An option contract is supported by separate consideration.
b. Statutory irrevocability. ie. Bids for municipal ______ contracts, preincorporation stock subscription agreement.
3. Rejection. The manifestation by the offeree of his unwillingness to accept an offer. The offeree can no longer accept an offer once the offeree rejects the offer. The rejection may be expressed or implied by conduct.
4. Counteroffer. A counterproposal from the offeree to the offeror which contains a willingness to contract with reference to the subject matter of the offer, but on different terms. It operates as a rejection.
5. Death or insanity of the offeror or the offeree. There is no longer legal capacity; the exception is an option contract.
6. Destruction of the subject matter. This renders performance impossible.
7. Subsequent illegality. Prohibition, WWII, or embargo.
D. Acceptance of an offer. An overt act by an offeree by which he manifests his assent to the terms of the offer. Unilateral contract – acceptances by an act or forbearance; Bilateral contract – acceptances by a return promise
1. An acceptance must be definite. It must be positive and unequivocal.
2. An acceptance is effective upon dispatch (an offer, counteroffer, revocation, and rejection are effective upon receipt). There are limitations on the rule that an acceptance is effective upon dispatch:
a. To be effective upon dispatch, the acceptance must be sent by authorized means. Authorized means is the means set forth in the offer. If no authorized means is set forth in the offer, then the authorized means is the means by which the offer is conveyed.
b. If the acceptance is sent by unauthorized means, then it is effective upon receipt provided that the acceptance arrives within the time that an authorized acceptance would arrive.
c. Specific provisions in an offer: The acceptance must comply with these terms. If the acceptance must be received by a certain date, then the date of receipt is the date of acceptance.
d. Acceptance following (after) a rejection. Rejection following an acceptance.
1/1 --------------------à 1/3 1/1 --------------------à 1/3
A letter offer B A offer B
1/5 -------------------à 1/9 1/5 -------------------à 1/9
B letter rejection A B acceptance A
1/5 -------------------à 1/8 1/5 -------------------à 1/8
B letter acceptance A B rejection A
Contract occurs at 1/8 because Contract occurs at 1/5
when the acceptance was sent
the acceptance was received first
After dispatching a rejection, an acceptance is not effective when sent by the offeree unless the acceptance is received by the offeror prior to the receipt of the rejection.
e. Defective acceptance does not create a contract.
f. The required earnest money deposit is not enclosed.
3. Mode of
acceptance
a. Silence does not create an acceptance.
b. Auction sales
1) Bidders are the offerors. They can withdraw their bids at any time.
2) In an auction with "reserve", the auctioneer can withdraw the goods at any time.
3) In an auction without "reserve", the auctioneer cannot withdraw the goods unless a bid is not made within a reasonable time.
4) The bid is accepted by the fall of the gavel.
III. Consideration. Consideration for a promise is any of the following bargained for and given in exchange for a promise:
- an act other than a promise
- a forbearance
- creation, modification or destruction of a legal relation
- or a return promise
A. Elements
1. Legal sufficiency. This is something of value in the eye of the law, either a
benefit to the promisor or a detriment to the promisee.
2.
Bargained-for exchange. The parties
have negotiated and agreed upon the terms of what each party is giving and
receiving.
B. Legal Sufficiency
1. Legal benefit is the obtaining by the promisor
of what he had no prior legal right to obtain.
2. Legal detriment is the doing by the promisee of
what the promisee was under no prior legal obligation to perform or refraining
from doing what he was under no prior legal obligation to perform.
3. Unilateral contracts.
a. A promise is exchanged for an act.
b. A promise is exchanged for a forbearance.
4. Bilateral contracts. A promise is exchanged for a promise. Each party is a promisor
and a promisee.
5. Adequacy. Courts are not concerned with whether the bargain was fair, but whether there has been a bargained-for exchange and the legal benefit/detriment exists.
6. Mutuality of obligation. Each party or promisor is bound or neither is bound. Look at the benefit/detriment.
a. Illusory contracts. These occur when performance is optional. "Let me know if you want to buy some of my tomatoes."
b. Output and requirement contracts.
1) An output contract is where the entire production of a facility, such as a plant or a mine, is the subject of a contract. (Seller)
2) Requirements contract. A requirements contract is where the contract calls for the purchaser to buy all of his materials of a particular kind from a facility. (Buyer)
3) Output and requirements contracts are supported by consideration. The parties must use honesty and good faith.
c. Exclusive-dealing contracts. These are normally between a manufacturer of a distributor. Each party must use his best efforts to supply and sell the goods.
d. Pre-existing
public obligation. The performance of a
pre-existing public duty is not a detriment to one under a legal obligation to
perform that duty. ie. A policeman cannot collect a reward for apprehending
a criminal.
e. Pre-existing contractual obligation. This is doing what one is already bound to do. It is not a legal detriment to the promisee or a benefit to the promisor. ie. Edward employer hires Wanda worker to work at a $100 a week for 6 weeks. After 2 weeks, Wanda asks and receives from Edward a promise that she will be paid $125 a week for the remaining 4 weeks without additional duties. The promise of Edward is not enforceable.
f. Settlement of an undisputed debt. An undisputed debt is an uncontested obligation to pay a sum certain in money. Payment of a sum of money in consideration of a promise to discharge a fully matured and undisputed debt, which debt is larger than the sum paid, is legally insufficient to support the promise of discharge. ie. Ralph purchased a laptop computer for $7,000 at CDW. After Ralph received his credit card bill from CDW, Ralph had buyer's remorse. Ralph met with CDW's customer services agent. The agent agreed to reduce the bill to $5,000. CDW can recover the $2,000 difference from Ralph because there was no benefit to CDW, the promisor, or a detriment to Ralph, the promisee.
g. Settlement of a disputed debt. A disputed debt is an obligation which is contested as to its existence or its amount. The good faith tender of a lesser amount when a debt is in dispute is sufficient consideration. ie. After David had an emergency appendectomy, Dr. Butcher sends a bill for $20K, David was outraged and offered to pay $10K. Dr. Butcher accepted David's offer and cashed David's check for $10K. By cashing the check, Dr. Butcher accepted David's offer. Dr. Butcher gave up the right to pursue further collection. This was a detriment to the promisee, Dr. Butcher. Therefore, there was mutuality of obligation.
C. Bargained-for exchange.
1. The parties have negotiated and mutually agreed upon the terms of what each party is giving to the other party in exchange for what he is receiving.
2. "Past consideration" and "moral
consideration" are not consideration. The element of bargaining is not
present.
IV. Conduct invalidating mutual assent.
A. Duress. This is wrongful force or threats. If conduct appears to be a manifestation of assent by a party who does not intend to engage in that conduct and who is physically compelled to perform, then that conduct is not effective as a manifestation of assent.
1. These contracts are voidable. They are void if there is imminent physical harm. (If life is not at risk, the contract is voidable. If life is at risk, the contract is void.)
2. The test is subjective: The acts need not be tortious or criminal, but are against public policy.
B. Undue influence. This occurs when one party is under the domination of another party or by virtue of the trust and confidential relationship between them is justified in assuming that the other party will not act in a manner inconsistent with his welfare. These contracts are voidable.
C. Fraud. It is a false representation of a material fact made with knowledge of its falsity (scienter) or culpable ignorance of its truth with the intention that it be acted on by the party deceived and induce him to contract to his injury. (Scienter - know it’s a lie).
1. Fraud in the execution. This deceives the defrauded person as to the very essence of the contract that he is entering into with the other party. ie. An individual thinks he is signing a receipt, but he actually signing a promissory note.
2. Fraud in the inducement. This is the misrepresentation of a material fact made by one party to the other party who consents to enter into a contract in reliance upon the misrepresentation.
a. False representation. This is a positive statement or conduct that misleads. Silence is not enough.
b. Fact. This must be a fact, not an opinion.
1) Puffing is sales talk.
2) An opinion is not fact; however, if one has superior knowledge, such as an attorney or a CPA or an appraiser, then their opinions may be deemed fact.
c. Material. The fact is of sufficient substance to induce reliance.
1) Scienter: This is knowledge of the falsity and the intention to deceive. Scienter is present when the defrauding party has actual knowledge or lack of belief in a statement’s truthfulness or reckless indifference to its truthfulness.
2) Justifiable reliance.
3) Injury.
4) Damages.
d. Mistake. An erroneous understanding or inaccurate concept, which if acted upon, may produce an unfortunate result for the actor. The courts use an objective approach.
1) Relief is not granted for a unilateral mistake: One person is mistaken as to a fact. ie. A buyer of real estate thinks it is zoned commercial, but it is not.
2) Relief is only granted when there is a mutual mistake of a material fact by both parties.
a) Mutual mistake as to the existence or identity of the subject matter.
b. Mutual mistake as to the nature of the subject matter.
3) Where there is a mistake of law, there is no relief.
A. Violations of statutes
1. If a contract is illegal by statute, it is not enforceable. ie. wagering, commercial bribery, fireworks
2. Licensing statutes
a. Regulatory statute. This protects the public against unqualified providers of services. The unqualified person cannot recover for professional services.
b. Revenue statutes. Their purpose is to acquire revenue. The unqualified person can recover for services.
3. Gambling
a. Gambling is illegal because one has no interest other than one arising from a gain or a loss.
b. Insurable interest . One pays a premium in exchange for a promise to pay a larger amount upon the occurrence of an event. This is legal because it distributes the loss.
4. Sunday statutes. Certain contracts are prohibited on Sunday, but may be ratified on Monday.
5. Usury statutes. These state the maximum rate of permissible interest which may be contracted between a lender and a borrower.
B. Violations of public policy. This is injurious to the public or the private good.
1. Tortious conduct is unenforceable.
2. Common law restraint-of-trade agreements are allowable if the following are met:
a. They protect the property interest of the promisee, and
b. Restraint is only reasonably necessary. ie. Sale of a business and employment contracts: Courts look at the geographic area and the length of time of the restraint. If it is not reasonable, the courts will "blue-pencil" it (narrow the contract).
3. Obstructing the administration of justice. ie. Destroying evidence.
4. Corrupting public officials or impairing the legislative process.
5. Exculpatory clauses. One party limits liability unfairly.
6. Unconscionable contracts. Harsh with no regard for conscience.
VI. Contractual capacity. Some parties are legally limited in their capacity to enter into contracts.
A. Minors. An individual reaches the age of majority at the age of eighteen. A minor is obliged to pay for the reasonable value of necessities such as food, clothing, and shelter. He is not liable for non-necessities such as a diamond bracelet or sailboat. Always protect the minor.
1. Minors contracts for non-necessities can be voidable. When he exercises this power is called a disaffirmance. A minor can disaffirm prior to reaching the age of majority or shortly thereafter. A minor must return the goods.
2. The minor can affirm the contract only after reaching the age of majority. This can be done by words or conduct, silence is not enough.
3. A minor is not liable on those contracts on which he misrepresents his age.
4. If a minor is not liable in contract, he not liable in tort.
B. Mentally disabled. One who is mentally disabled is incapable of comprehending the subject matter of a contract, its nature, and probable consequences.
1. He is liable for necessities, such as food, clothing, and necessities.
2. His contracts for non-necessities are voidable.
3. When an individual is declared mentally disabled by a court of law, his contracts are void.
C. Intoxicated persons. One is intoxicated and not liable on contracts when one cannot comprehend the nature and effect of his actions. The contracts are voidable.
VII. Statute of Frauds. Most oral contracts are enforceable. However, some contracts fall within the Statute of Frauds (created around 1500 A.D.) and must be in writing.
A. A promise by an executor or an administrator of a probate estate to pay the debts of an estate out of his own funds must be in writing.
Probate
1.
Decedents
Testate
will executor in will
Interstate
- no will (court appoints an administrator)
2.
Minors
3.
Disabled persons
B. Surety: The promise to pay for the debt of another must be in writing.
1. This is a collateral, not an original promise: “If he does not pay, I will.”
2. A promise to the debtor is not within the Statute of Frauds and need not be in writing.
C. A contract upon consideration of marriage is within the Statute of Frauds and must be in writing. In Illinois, there are three requirements for a valid prenuptual contract: in writing, full disclosure, and independent counsel for each party.
D. Contracts dealing with land must be in writing. However, if the party seeking enforcement has fully performed, the contract will be enforced. This applies to sales of real estate and leases.
E. Contracts that cannot be performed within one year
of the date of the making of the contract must be in writing. The test is
whether it is possible to perform the contract within one year from the date
that the contract is made. The time runs from the date the agreement is made,
not the date that the performance commences. [My
words: The building of an aircraft carrier cannot be accomplished within one
year. Any contractor offering to build an aircraft carrier must demand a
written contract. If a written contract is not created, the hiring entity can terminate
the relationship with the contractor on the 364th day of the
agreement without the contractor having any recourse.]
F. Method of compliance. The writing must be signed by the party to be charged, specify the parties, and specify the subject matter.
VIII. Parole Evidence Rule.
A. Parole evidence is evidence which consists of
words, spoken or written, which are not contained in a written contract or
incorporated therein by reference. ie. letters,
oral conversations, testimony, or dispositions
B. When there is a written contract, parole evidence cannot be introduced to alter, change, or vary the terms of an unambiguous written contract. Rationale: By reducing the agreement to writing, the parties are presumed to have written the entire contract.
C. Exceptions to the Parole Evidence Rule
1. Receipt for goods
2. Clerical or typographical error which obviously does not represent the agreement [between] the parties.
3. Lack of contractual capacity of one of the parties.
4. Defense of fraud, duress, undue influence, illegality
5. Certain condition agreed upon orally at the time of execution of a written contract to which the entire contract was made subject.
6. Parole evidence of custom and usage.
7. Parole evidence is admissible to explain ambiguous terms in the contract.
IX. Interpretation of Contracts. The rules of interpretation or construction permit the introduction of evidence in order to resolve ambiguity and to show the meaning of the language of the contract.
1. Words and conduct are interpreted in light of all the circumstances.
2. Writing is interpreted as a whole.
3. Technical terms and words of art are given their technical meaning.
4. Interpretation which gives a reasonable, lawful meaning is preferred.
5. Specific terms govern over general terms.
6. Words control figures.
X. Discharge of Contracts. This means the obligations of the parties are terminated. Discharge can be by act or agreement of the parties or by operation of law. A contract’s promises are not always absolute and are usually conditional.
A. Condition. This is any operative event the happening or non-happening of which affects a duty of performance under the contract. It prevents the promisee from acquiring a right or deprives him of a right, but subjects neither party to any liability.
1. Express condition. It is the operative event to which the performance of the promisee is made subject in some manner clearly expressed. Performance may be to the satisfaction of another.
a. A subjective standard
applies if satisfaction is to one’s personal taste. ie.
tailored suit
b. An objective standard
applies if the contract does not clearly state that performance is subjective
or performance relates to mechanical fitness. ie.
Architect’s certificate is necessary for an occupancy permit under the building
code.
2. Implied in fact conditions. These are understood
by the parties to be part of the contract. ie. A
painter does not start painting until the homeowner selects the paint.
3. Implied in law conditions. These are imposed by law for a just result. These occur when the time for performance has not been agreed upon.
4. Concurrent conditions. These are proposed
reciprocal and agreed performances of two mutual promisors which are to take
place at the same time. ie. real estate closing.
Time for performance has been agreed upon.
5. Condition precedent. It is an operative event
the happening of which must precede the creation of a duty of performance under
a contract. ie. mortgage finance clause in a real
estate contract
6. Condition subsequent. It is an operative event which terminates an existing duty of immediate performance under a contract.
B. Discharge by performance.
1. Performance discharges the parties. Substantial performance does not fully discharge a promisor but deprives the promisee of an excuse for non-performance of his promise.
2. In a bilateral contract, tender by one party which is refused by the other party is a repudiation which discharges the tendering party.
C. Discharge resulting from breach.
1. Breach by one party is an excuse for non-performance by the other party.
2. Prevention of performance. If one party to a contract substantially interferes with or prevents performance by the other party, a discharge occurs.
3. Anticipatory repudiation. If a party announces prior to the date of performance that he will not perform, there is an anticipatory repudiation and the injured party can bring suit immediately.
4. Material alteration of a written contract by one party discharges the other party.
D. Discharge by agreement of the parties.
1. Mutual rescission is an agreement by the parties to a contract to terminate their respective duties under the contract.
2. Accord and satisfaction. An accord is a contract between an obligee and his obligor whereby the obligee agrees to accept and the obligor agrees to render a substituted performance in satisfaction of an existing contractual duty. Satisfaction is payment.
3. Release. It is a formal writing supported by consideration
which recites the termination of rights. [A
covenant not to sue is imposed as a bar to a lawsuit.]
4. Novation. It involves three parties and is an agreement among them to substitute a new obligor in place of an existing obligor. The old obligor is discharged.
E. Discharge by operation of law.
1. Subsequent illegality
2. Outbreak of war
3. Impossibility
a. Objective impossibility
occurs if no one is able to perform. ie.
destruction of the subject matter or the means of performance or death
b. Frustration of purpose.
The purpose of the contract is frustrated by fortuitous circumstances which
deprive the performance of the value attached to it by the parties. ie. coronation cases
A. Definition. An assignment is the manifestation of an assignor’s intention to transfer a right by virtue of which the assignor’s right to performance by the obligor is extinguished in whole, or in part, and the assignee acquires a right to such performance. It is simply the transfer of rights under a contract to a third person.
B. Parties.
1. Assignor transfers the rights.
2. Assignee is the person to whom the rights are transferred.
3. Obligor is the person required to render the
performance. ie. “A” promises to sell “B” a boat
for $5,000. A assigns to “C” his right to receive payment from B. C receives
$5,000 from B. A is the assignor, C is the assignee, and B is the obligor.
C. Types of assignments are wage assignments, accounts receivable, and rights expected to accrue in the future.
D. Rule: In an assignment, rights are assigned and duties are delegated.
1. Unassignable rights
a. Materially increase the risk or burden upon the obligor.
b. Transfer of highly personal contact rights (13th amendment).
c. Transfer prohibited by contract.
d. Transfer prohibited by
law. ie. liquor license
2. Rights of the assignee
a. Assignee stands in the shoes of the assignor. He has all the rights against the obligor that the assignor had.
b. A valid assignment does not require that notice be given to the obligor. However, there are times when there are successive assignments of the same rights. The majority rule is that the first assignee in point of time prevails over successive assignees.
E. Delegation of duties. Courts scrutinize the delegation of duties more than an assignment of rights because the obligee is receiving performance from one with whom he has no dealings. A delegation of duties will not be permitted when:
1. The duties are of a highly personal nature.
2. Performance is expressly made non-delegable. Even when a delegation is allowed, the delegator is still bound. The alternative is for a novation, which is a three party contract where the delegator is discharged and the delegatee is bound directly to the obligee.
3. Delegation is prohibited by statute or public policy.
XII. Third parties – Beneficiaries. A third party beneficiary occurs when a promisor agrees to render a certain performance not to the promisee by to a third party who is a beneficiary.
A. Donee beneficiary. The purpose of the promisee in bargaining for and obtaining the promise from the promisor was to make a gift to the beneficiary. ie. John, Sr., the insured, pays Pru $10,000 for a life insurance premium. Pru promises that on the death of John, Sr., to pay a death benefit of $25,000 to John, Jr. Pru is the promisor, John, Sr. is the insured and the promisee, and John, Jr. is the donee beneficiary.
B. Creditor beneficiary.
1. The promisee intends the performance of the
promisee to satisfy a legal duty owed to the beneficiary, who is a creditor of
the promisee. ie. HOV sells a business to Ron Rich
who promises to pay HOV’s debt to ANB, the creditor beneficiary. Ron Rich is
the promisor, HOV is the promisee, and ANB is the creditor beneficiary.
2. A donee beneficiary can only sue a promisor. A creditor beneficiary can sue a promisor or a promisee.
C. Incidental beneficiary.
XIII. Remedies for Breach of Contract. A remedy occurs when one party to a contract defaults or breaches and does not respond to demands for performance of his contractual promise.
A. Money damages
1. Compensatory damages. These provide compensation
to the plaintiff which will place him in as nearly good a position as if the
defendant performed under the contract. ie. breach
of an employment contract
2. Consequential damages.
a. These are recoverable
when it is readily foreseeable that they will occur as a result of a breach. ie. lost profits
b. Hadley: Damages are not recoverable for a loss that the party in breach did not have reason to foresee as a probable result of that beach when the contract was made.
3. Nominal damages. These are granted if there is no loss but there is a breach of contract.
4. Punitive damages. These punish and discourage the defendant and others from wrongful conduct. They are not granted for breach of conduct.
5. Liquidated damages. One party promises to pay the other party a fixed sum of money in the event of his breach. They must bear a reasonable relationship to the amount of probable loss.
B. Restitution. It is the return to the injured party of the consideration which the injured party gave to the other party. It is not available to a party in default.
C. Remedies in Equity.
1. Specific performance.
a. The breaching party must perform as agreed. This is usually seen in the purchase of real estate or for unique property.
b. An injured party can obtain specific performance or damages, but not both.
c. A court will not grant specific performance of a personal services contract but will enforce the negative covenant in a contract for personal services.
2. Injunction. It is a formal order of court
commanding a person to refrain from an act (or commanding a person to do a
specific act). ie. pollution - permanent
injunction; sale of a business - enjoin on the basis of the restrictive
covenant.
XIV. Introduction to Sales. A sale is a transfer of title to goods for a consideration known as a price.
A. Goods
1. Goods must be in existence and identified before an interest can be transferred.
2. Fungible goods. Each particle or unit of measurement of fungible goods is equal to the other particle or unit of the same goods. A buyer of fungible goods is a tenant in common if the subject matter of the sale is an undivided portion of fungible goods. A tenant in common may sell his undivided share in the fungible goods. ie. fungibles: corn, wheat, rye, soybeans, alfalfa, oil. Tenants in common are a group of people who share a good, such as three bushels of corn.
B. Sales as distinguished from other transactions
1. Gift. The transferor receives nothing for his promise. A gift requires donative intent, delivery, and acceptance.
2. Bailment. It is the transfer of possession of personal property without the title. ie. sending your car to get detailed
3. Lease. It is the transfer of the right to possession for a period of time in exchange for a payment.
4. Chattel mortgage. It is the transfer of title to goods as security for the payment of a debt. Chattel = goods.
5. Pledge of goods. It is the transfer of goods as security for the payment of a debt.
C. Price. If there is no price set forth in the contract, then the price is a reasonable one. A price can be fixed by a market or a third person (an appraiser).
D. Statute of Frauds.
1. Sales of goods of $500 or more must be in writing.
2. A contract modifying a contract must be in writing if the resulting contract would be within the Statute of Frauds.
3. (Merchant Rule) With respect to merchants, if a contract is oral, a confirming writing by one merchant to another merchant satisfies the Statute of Frauds unless the recipient objects in writing within 10 days of receipt of the confirming writing.
4. Specially-manufactured goods do not require writing under the Statute of Frauds.
E. Unconscionable contracts.
F. Firm offer. (Merchant rule) A merchant is bound to keep an offer open for a maximum of three months if the merchant gives assurance in a signed writing that it will be held open.
G. Battle of Forms (UCC
2-207). Between merchants, terms contain in the offeree’s acceptance which add
to or differ from those in the offer become part of the contract unless:
1. the offer expressly
limits acceptance to the terms of the offer, or
2. the different terms
in the acceptance materially alter the offer, or
3. the offeror objects
to such additional or different terms within a reasonable time.
H. Sale of goods by a buyer.
1. Voidable title arises when the former owner has the power to rescind due to duress, undue influence, mistake, lack of capacity, or fraud.
2. A bona-fide (good faith) purchaser for value acts honestly, without notice, and gives value.
3. If the buyer sells goods to a bona-fide
purchaser before the former owner rescinds, then the bona-fide purchaser
acquires good title. ie. If B misrepresents the
value of A’s product and buys it from A, and he subsequently sells the product
to C, in good faith, A can no longer reacquire the product from C. However, A
can have a civil action against B.
A. Transfer of title and other property rights (UCC 2-401).
1. When delivery is made by moving the goods, title passes on delivery.
a. Shipment contract. Title passes at the time and place of shipment if the seller is not required to deliver the goods to the destination. ie. The goods are manufactured in Chicago and they are delivered to the carrier FOB Chicago for transport to Toledo, OH. Title passes at the place of shipment, which is Chicago.
b. Destination contract. Title passes at the time and place of tender at the destination if delivery is to the destination. ie. In the above example, if the goods are FOB Toledo OH, then the title passes upon tender at Toledo, OH.
c. Shipment terms. FOB = free on board; FOB place of shipment is a shipment contract; FAS = free alongside; FAS port of shipment is a shipment contract; CIF means cost insurance an freight; C & F means cost and freight; COD = collect on delivery; this a shipment and the title and risk gets passed to the buyer upon delivery of the goods to the carrier
d. Destination terms:
1) FOB place of destination means seller pays expense of transport to the destination.
2) EXShip means risk of loss does not pass to the buyer until the goods are unloaded at the destination.
3) No arrival-no sale means that the risk of loss does not pass to the buyer until the goods are tendered to the buyer at the destination.
2. When delivery is to be made without moving the goods, title passes:
a. upon delivery of a
document of title. ie. a bill of sale
b.
at the time and place of contracting when the goods are identified and no
documents are to be delivered
XVI. Risk of Loss (UCC 2-509). In the absence of a breach, the general rule is that if a title has not passed, then the risk of loss remains with the seller. Special rules:
A. Trial sales
1. Sale on approval. Title and risk of loss do not pass to the buyer, only possession passes to the buyer. If goods are damaged or destroyed during the trial period, the risk of loss remains on the seller. If the buyer fails to return the goods during the trial period, then the risk of loss passes to the buyer.
2. Sale or return. The buyer has the title and the risk of loss. These items are usually for resale, such as a newsstand.
3. Sale on consignment. The buyer has the title and the risk of loss.
B. Contracts involving carriers.
1. Shipment contracts. The risk of loss passes to the buyer on delivery of goods to the carrier. ie. The Iron Mountain Ore Company agreed to sell to Inland Steal (located in East Chicago, IN), FOB the carrier Edmund Fitzgerald ( in Escanaba, MI). When the ship sank, the risk of loss was on Inland Steal.
2. Destination contracts. The risk of loss remains to the seller until tender to the buyer at the destination. A destination contract requires the seller to ship the goods at his expense and tender the goods to the buyer at the destination. In the above example, if the ore was to be shipped FOB East Chicago, IN, then the risk of loss would remain with the seller, Iron Mountain Ore Company.
C. Risk of loss where there is breach.
1. Breach by the seller.
a. If the seller ships non-conforming goods, then the risk of loss remains with the seller until there’s a cure by the seller or acceptance by the buyer. ie. Seller ships 1000 short-sleeved shirts instead of 1000 long-sleeved shirts. The risk of loss is on the seller until he cures by shipping 1000 long-sleeved shirts.
b. If a buyer accepts non-conforming goods and revokes his acceptance, he can treat the risk of loss as remaining on the seller to the extent of any deficiencies in the buyer’s insurance coverage.
2. Breach by the buyer. If conforming goods are identified and the buyer repudiates before the risk of loss passes to the buyer, then the seller may place the risk of loss on the buyer to the extent of any deficiency in the seller’s insurance coverage.
XVII. Performance of sales contracts.
A. Basic duties of performance (UCC 2-301). The obligation of the seller is to transfer and deliver and the obligation of the buyer is to accept and pay in accordance with the contract.
B. Performance by the seller (UCC 2-507(1)). Tender of conforming goods by the seller entitles him to acceptance thereof by the buyer and payment of the purchase price according to the contract.
1. Time and manner of delivery (UCC 2-503).
a. Tender must be at a reasonable hour and the goods must be kept available for a period reasonably necessary to enable the buyer to take possession of them.
b. If no time is set for delivery, then a reasonable time is available for delivery. Also the buyer must have a reasonable time to accept delivery.
2. Place of tender.
a. If the contract is silent as to the place of delivery of the goods, then the place of delivery is the seller’s place of business. If the seller has no place of business, then the place of delivery is the seller’s residence.
b. If a contract is for the sale of identified goods, which the parties know at the time of contracting are located elsewhere than the seller’s business, then the location of the goods is the place of delivery.
3. Quality of tender
a. If the goods do not conform to the contract, then the buyer may reject the whole, accept the whole, or accept some of the commercial units and reject the rest of the commercial units (UCC 2-601).
b. In installment contracts, the delivery of the goods is in separate lots and payment is in installments. The buyer may reject any installment which is not conforming if the non-conformity impairs the value of the installment and cannot be cured (UCC 2-612).
c. A buyer cannot reject an installment if the seller assures of the installments’ cure; but if the non-conformity impairs the value of the whole contract, then there is a breach of the whole contract.
4. Cure by the seller. If the buyer refuses to accept the tender of the goods, which do not conform to the contract, then the seller may cure. This protects the seller against non-conforming goods.
a. (could be a new contract from buyer to seller) If the time for performance has not passed and the seller notifies the buyer of the seller’s intent to cure, the seller may make a conforming delivery within the time for performance.
b. (usually long-term relationship between buyer and seller) If the seller has reasonable grounds to believe the non-conforming goods would be acceptable to the buyer, but the buyer rejects the delivery of the non-conforming goods, then upon notice to the buyer, the seller may make a conforming delivery within a reasonable time period. This provision allows for a conforming delivery even if the time for performance has passed.
C. Performance by the buyer.
1. Right to inspection.
a. The buyer has the right to inspect before payment or acceptance.
b. If the contract requires inspection before acceptance, then non-conformity does not excuse the buyer from making payment and payment is not acceptance. The buyer is allowed a reasonable time to inspect the goods. ie. COD
2. The right on improper delivery. If the goods do not conform, then the buyer can reject the goods, accept the goods, accept some commercial units and reject the rest of the commercial units.
Delivery.
If
rejected, one can no longer accept.
If
accepted, one can no longer reject. Acceptance precludes rejection. If
accepted, revocation of acceptance is the only option – one cannot reject.
3. Rejection. Rejection is the manifestation of the buyer of his unwillingness to become the owner of the goods. It must be done within a reasonable time.
a. (Merchant rule) The buyer has the obligation to hold the goods for a reasonable time with reasonable care for the seller to remove them. However if the seller is a merchant, then the buyer must follow the seller’s instructions to remove them.
4. Acceptance is the willingness of the buyer to become the owner of the goods tendered or delivered to him by the seller. It precludes rejection. It is the alternative to rejection. Acceptance occurs as follows:
a. After a reasonable opportunity to inspect the goods, the buyer indicates that the goods conform or he will accept them despite their non-conformity.
b. If the buyer fails to reject, then the goods are accepted. (See below)
c. Acceptance occurs with any act inconsistent with the claim that the buyer has rejected the goods.
5. Revocation of acceptance. A buyer may revoke his acceptance if the goods do not conform and the non-conformity impairs their value to him. Revocation of acceptance must be done within a reasonable time. A buyer may revoke his acceptance in two situations:
a. The non-conformity cannot be cured by the seller and it was not cured.
b. Acceptance was without discovery of the non-conformity and the acceptance was induced by the difficulty of discovery.
6. Obligation of payment. Payment is due at the time and place that the buyer is to receive the goods.
A. Buyer’s remedies
1. Cancel. If the seller fails to make delivery, or the seller repudiates the contract, or the buyer rightfully rejects the goods, or the buyer revokes his acceptance, the buyer must give notice of the cancellation to the seller.
2. Recover payments made
3. Cover. The buyer, in good faith and without
reasonable delay, purchases goods in substitution for the contract goods. ie. Texaco The buyer can
recover from the seller the difference between the cover price and the contract
price plus incidental and consequential damages, less expenses of the seller’s
breach.
4. Replevin. The buyer can recover goods unlawfully withheld by the seller who has breached his contract.
5. Specific performance
6. Damages for breach for warranty. Buyer can recover the difference between the value of the goods accepted and the value warranted.
7. Incidental damages. Inspection, receipt, transportation, and reasonable commercial damages.
8. Consequential damages. Seller knew at the time of contracting that the buyer’s loss could not be prevented by the cover.
9. No punitive damages.
B. Seller’s remedies.
1. Withhold delivery where the buyer wrongfully failed to make payment.
2. Resell the goods to recover damages where the buyer has breached: Seller can recover the difference between the resale and the contract price, plus incidental damages, less expenses.
Private sale: Seller must give buyer reasonable notice of resale.
Public sale: Seller must give buyer reasonable notice of time and place of resale.
3. Recover damages for non-acceptance or repudiation by the buyer.
4. Recover the price
5. Recover incidental damages
6. Cancel the contract if the buyer wrongfully
rejects or repudiates.
XIX. Warranties. A warranty creates a duty on the part of the seller for breach of which the buyer may recover a judgment against the seller for damages.
A. Express Warranties (UCC 2-213)
1. An express warranty is an explicit undertaking by the seller with respect to the quality, description, condition, or performance of the goods. If they are basic to the bargain, reliance is implicit.
a. The goods shall conform to any affirmation of fact or promise made part of the basis of the bargain. ie. auto odometer
b. The goods shall conform to any description of them which is made part of the basis of the bargain. ie. catalog
c. The whole of the goods shall conform to any sample or model of the goods which is made part of the basis of the bargain. ie. flight attendant uniform
2. It is not necessary to say “warranty” or “guarantee”, nor is it necessary for a seller to have knowledge of the falsity of a statement made by him in order to be liable for breach of express warranty.
3. A mere affirmation of the value of the goods or a statement purporting merely to be the seller’s opinion does not create a warranty [UCC 2-312 (2)]. ie. puffing. However, if the seller is an expert, such as an attorney or an appraiser, and he gives his opinion as such, then he may be liable for breach of warranty.
B. Warranty of Title (UCC 2-312). A seller warrants that the title conveyed is good and its transfer is rightful and that the goods are not encumbered by a security interest.
C. Implied Warranties
1. Warranty of Merchantability (Merchant Rule). It is the obligation of a merchant that the goods are reasonably fit for the general purpose for which they are manufactured and sold and that they are of fair, average, merchantable quality. ie. clothes, food, auto, packaging
2. Warranty of fitness for a particular purpose. Any seller impliedly warrants that goods, new or used, are reasonably fit for the particular purpose of the buyer for which the goods are required if at the time of contracting:
a. the seller has reason to know such particular purpose, and
b. the seller has reason to know that the buyer is relying on the seller’s skill and judgment to furnish suitable goods.
ie.
hiking shoes, pizza ovens
D. Disclaimers or modifications of warranties
1. Express exclusions
a. Warranty of title may be excluded only by specific language or certain circumstances such as a sheriff’s sale.
b. Warranties may be negated by not making promises or clear language to that effect.
2. The implied warranty of merchantability may only be disclaimed in writing that mentions the word merchantability and uses clear, conspicuous language to that effect.
3. The implied warranty of fitness for a particular purpose must be disclaimed in a writing that is conspicuous.
4. Implied warranties may be disclaimed with the phrase “as is”.
5. Implied warranties are not applicable to obvious defects.
E. Privity of contract. At common law, recovery was not allowed for breach of contract unless the plaintiff was in privity of contract with the defendant. Most states have abolished privity or relaxed the rules. [If a buyer of Estee Lauder make-up passed the make-up onto her friend, the friend can directly sue Estee Lauder instead of the buyer in the event that the make-up was harmful.]
1. Horizontal privity. The UCC relaxed the horizontal privity rules and allows recovery for injuries to the buyer’s family and guests.
2. Vertical privity. The UCC relaxed the vertical privity rules and allows recovery for the buyer, family, and his guests from remote sellers in the chain of title.
F. Miscellaneous.
1. A buyer must give the seller reasonable notice of breach of warranty.
2. Contributory negligence is not a defense to a breach of warranty, but voluntary assumption of risk is a defense.
3. Warranty exists only in connection with a sale of goods, not a service.
A. Legal grounds available for recovery
1. Express warranty
2. Implied warranty
3. Fraudulent misrepresentation
4. Negligence
5. Statutory duty
6. Strict liability in tort
B. Strict liability in tort
1. The liability is only on the person in the business of selling the product. In order to recover, the product must be in defective condition or be unreasonably dangerous. It extends to personal injury and property damage to the consumer (402A of Restatement of Torts).
2. Requirements
a. Defendant sold the product in a defective condition or it was unreasonably dangerous.
b. Defendant was engaged in the business of selling the product.
c. The defective condition was one which made the product unreasonably dangerous to the consumer or it was unreasonably dangerous to the consumer.
d. The defect or unreasonably dangerous condition existed at the time it left the defendant’s hands.
e. The plaintiff sustained personal injury or property damage.
f. The defective or unreasonably dangerous condition was the proximate cause of such injury or damage.
3. Types of defective
conditions
a.
Manufacturing defect. The item does not meet engineering specifications.
b.
Design defect. Hazardous because the design is inadequate
c. Inadequate warning. Buyer must prove that there was inadequate warning of danger and lack of appropriate directions for safe use. This arises out of foreseeable danger of physical harm from use.
d. Unreasonably dangerous. Item contains danger beyond that which would be contemplated by the ordinary consumer. ie. MSG, platform shoes, Suzuki Samurai
Action Recipient
Offeror Offeree
Promisor Promisee
Donor Donee
Lessor (landlord) Lessee (tenant)
Grantor (seller) Grantee (buyer)
Mortgagor (homeowner) Mortgagee (bank)