An introduction to the fundamentals of dynamic business law and business ethics chap015

Chapter 15 Ethical DilemmaAccording to the “perfect tender” rule of Uniform Commercial Code UCC Section 2-601, if goods or tender of delivery fail in any respect to conform to the contra

Chapter 15

Sales and Lease Contracts:

Performance, Warranties, and

Remedies

Chapter 15 Ethical Dilemma

According to the “perfect tender” rule of Uniform Commercial Code (UCC) Section 2-601,

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

the legal right to accept the goods, reject the entire shipment, or accept part and reject

part Obviously, this is an extremely “pro-buyer” rule, giving the buyer great flexibility in

terms of how to respond to less-than-perfect goods, or a less-than-perfect delivery For

example, if the buyer orders ten (10) pink plastic flamingoes to be delivered by the last

day of the calendar year, and the seller delivers five (5) pink plastic flamingoes on

December 31, the buyer has the following options available under the UCC: 1) The buyer can accept the entire nonconforming shipment; 2) The buyer can reject the entire

shipment; or 3) The buyer can accept part and reject part of the shipment

From an ethical standpoint, should the buyer accept that portion of the shipment which

conforms to the contract? In the above example (and again, from an ethical perspective), should the buyer accept the five (5) pink plastic flamingoes delivered on December 31?

In the fast-paced business world, is perfection too exacting of a standard to impose on a

merchant seller?

Chapter 15 Case Hypothetical

Determined to carry on the hilarious tradition of placing a number of pink plastic

flamingos in another person’s yard as a practical joke, and with several co-workers in

mind, Dorothy Hayes orders 100 pink plastic flamingos (for a total contract price of $500) from Tropical Novelties of Tampa, Inc The contract specifies delivery of the flamingos to Dorothy’s home in Poughkeepsie, New York on or before September 1

On August 31, Amalgamated Package Service (A P S.) delivers five large boxes to

Dorothy’s home With much anticipation, Dorothy tears open the boxes, only to find 50

pink plastic flamingos, 50 short of the specified contract quantity

Disappointed that Tropical Novelties did not satisfy its “part of the bargain,” and realizing that $500 is a large amount to pay for a practical joke, Dorothy decides to terminate the

contract She calls Tropical Novelties, speaks with a sales representative, notifies the

seller that she is canceling the contract due to its non-performance, and informs the seller that she will be returning the 50 flamingos by package delivery service the following day Tropical Novelties demands that she keep the 50 flamingos, notifies her that they will ship the remaining 50 the following day, and assures her that she will be held responsible for

paying the $500 contract price

Chapter 15 Case Hypothetical

Fred G Dare Appliances, Inc sold a $2,000 refrigerator to W.H Pool Per the

terms of the agreement, the buyer was to pick up the appliance on July 1, and pay

for it in full before taking possession July 1 came and went, and the buyer did not

appear Fred G Dare, the owner of the store, is certain that W.H Pool breached

refrigerator in Fred G Dare Appliances, Inc.’s contract with W.H., and the “resale”

price of $200 to Sam.) Fred’s reasoning is that W.H breached the contract, and

that he is simply exercising his resale right Fred’s brother-in-law, an attorney, once told him that if a customer breaks a purchase contract, the seller has the right to

resell the good to a substitute buyer, and then recover any damages from the

original, breaching buyer

Chapter 15 Case Hypothetical

Hale “Billy” Hatfield is an avid banjo player and bluegrass aficionado Billy wants to purchase a new banjo for his appearance at the local “Bluegrass in the Park” festival scheduled for August 15.

On June 1, Billy orders a “Timber Rattler” brand banjo from Cates Banjo Company of Mountain View, West

Virginia The “Timber Rattler” is custom-made, and the contract specifies a purchase price of $4,000 The

contract indicates a delivery date of August 10, allowing ample time for production of the banjo, and enough

time for Billy to make his “gig.”

August 10 “comes and goes,” and Cates Banjo fails to deliver the instrument When Billy contacts the owner

of Cates Banjo, Richmond Cates, he learns that non-delivery was due to a month-long backlog of orders Billy knows that he can ill-afford to wait for his “Timber Rattler,” and he cancels his contract, regrettably, with Cates Banjo.

On August 12, Billy orders a pre-produced banjo from Babson Instruments, Inc., at a contract price of $6,000

By rush delivery, the Babson banjo arrives at Billy’s home on August 14, and he is able to make the

“Bluegrass in the Park” festival with banjo “in hand.” By Billy’s estimation, the Babson instrument is no true

substitute for the “Timber Rattler,” but he is willing to keep it, and is reasonably satisfied with it.

Billy’s neighbor is an attorney Billy shares the above facts with his lawyer/neighbor, and asks him if he will

take the case, suing Cates Banjo for $2,000 (the difference between the price of the Cates banjo, and the

price of the Babson banjo,) plus associated expenses of litigation.

Chapter 15 Case Hypothetical

Recall from the Chapter 10 Case Hypothetical and Ethical Dilemma

that Lily Ledbetter was seriously injured in an automobile accident

when the steering wheel of a new car she had just purchased detached from the steering column (the steering wheel literally came off in her

hands), causing Lily to crash into a culvert In terms of drafting the

personal injury complaint against Fjord Motors, Inc (the manufacturer

of the sedan) and Bjorn Fjord Motors, Inc (the dealership), what

theories of warranty liability should Lily’s attorney include? Are there

any non-warranty (i.e., non-Uniform Commercial Code) theories of

liability that might be applicable in this case?

Chapter 15 Case Hypothetical

Aristotle Mythos is having a “mid-life crisis,” in large part because he is 50 years old, and he realizes that most people

do not live to be 100 In an attempt to conquer his depression, and to prove that he is equivalent to a 20-year-old (at

least in spirit,) Mythos plans to climb Mount Zeus, the highest peak in his ancestor’s homeland of Greconia.

In preparation for his climb, Mythos patronizes the local “outdoors” shop, Athena’s Garden, and asks to speak with a

trained sales associate Mythos specifies that he will be climbing Mount Zeus, and that he will need a tent and

sleeping bag to survive the wind and elements on two nights during his ascent and descent The associate selects a

tent and sleeping bag from a wide variety of possibilities, and Mythos leaves the store a “happy camper.”

Mythos begins his climb the following day, and successfully reaches his check point, halfway to Zeus’ peak, before

nightfall He prepares his campsite, and looks forward to some much-needed rest Unfortunately, he has a fitful night, shivering in his sleeping bag below a partially-collapsed tent, with the wind and the cold “getting the best of” Mythos

and his camping gear.

In the daylight of the following morning, Mythos fully awakens to realize that the toes on both of his feet have turned a sickening shade of blue-purple, and he realizes with great disappointment that he will not be able to fulfill his dream of climbing Mount Zeus Further, upon closer examination of his tent and sleeping bag, both are trademark-stamped

“The Young Mythologist,” gear intended for backyard camping by children.

As a result of his misfortune, Mythos must have four toes (two toes on each foot) amputated, and he incurs medical

expenses of $58,000 for treatment and rehabilitation Mythos’ doctor has rated him with 20% permanent partial

disability as a result of his toe amputations.

Is Athena’s Garden legally responsible for Mythos’ medical expenses and partial disability? If so, on what theory?

The Basic UCC Performance

Obligation

• Sellers and lessors are obligated to transfer

and deliver conforming goods

• Buyers and lessees are obligated to accept

and pay for conforming goods in

accordance with terms of contract

• “Good faith” required in performance and

enforcement of every contract

“Good Faith”

• Definition: Honesty in fact

• In transaction between merchants, UCC

also imposes obligation of reasonable

commercial standards of fair dealing

(“commercial reasonableness”)

“Perfect Tender” Rule

States that if goods or tender of delivery

fail in any respect to conform to contract,

buyer/lessee has right to:

1) accept the goods;

2) reject entire shipment; or

3) accept part and reject part

Exceptions to “Perfect Tender” Rule

• Industry Standards

• Prior Dealings Between Parties

• Exceptions Outlined in Parties’ Agreement

• Seller’s/Lessor’s Right to Cure

• Destroyed Goods

• “Substantial Impairment”

• “Commercial Impracticability”

“Commercial Impracticability”

Doctrine

Delay in delivery or non-delivery may not, in

court’s discretion, constitute breach if

performance made impracticable because

contingency has occurred that was not

contemplated when parties reached

agreement

Inspection, Rejection and Revocation of

Acceptance

• Seller/lessor must provide buyer opportunity to

inspect goods

• “Reasonableness” governs inspection process

• Post-inspection, buyer has option to accept, partially

accept, reject, or revoke acceptance

-UCC guidelines govern right to exercise particular

options post-inspection

• Buyers/lessees must give reasonable notice upon

exercising right of rejection/revocation of

Warranties

Definition: Seller’s promise(s)

regarding certain characteristics of

good(s) sold

“Express” Warranty Versus

“Implied” Warranty

• Express Warranty: Explicitly stated

in contract

• Implied Warranty: Automatically (by

operation of law) applied to contract

Types of Warranties

Warranties of Title

• Passage of good title

• Implied promise of no liens/judgments

against title

• Implied promise that title not subject to

claims of intellectual property (copyright,

patent, or trademark) infringement

Types of Warranties

Express Warranties

• Description of good’s physical nature or its use

• May be found in advertisements or brochures

• May be material term of contract

• Salesperson’s oral promise concerning good can

give rise to express warranty

• Buyer’s reliance on seller’s representations

generally means those representations become

Types of Warranties: Implied Warranties

• Implied Warranty of Merchantability (Definition): Warranty

based on reasonable expectation of product performance

• Good purchased must:

-Pass without objection in trade/market for similar goods -Be of fair quality (within the product’s description)

-Be fit for “ordinary use”

-Have “even kind, quality and quantity”

-Be adequately packaged and labeled

Types of Warranties: Implied

Warranties

Implied Warranty of Fitness For Particular

Purpose

(Definition): Warranty that arises when seller

knows purpose for which buyer purchasing

goods, and buyer relies on seller’s judgment to

recommend/select certain product

Seller does not have to be merchant to make

this warranty

Types of Warranties: Implied

Warranties

Implied Warranty of Trade Usage

(Definition): Warranty that arises as

result of generally-accepted trade

practices

Warranty Rights of Third Parties:

Third Party Beneficiaries of Warranties

Seller’s warranties may extend to:

• Buyer’s household members and guests

• Any “reasonable and foreseeable” user

• Anyone injured by good

Warranty Disclaimers and Waivers

Methods of Disclaiming/Waiving Warranties:

• Seller does not make express warranties

• Seller disclaims implied warranties in clear,

unambiguous, conspicuous language

• Buyer fails/refuses to examine goods

• Buyer fails to file suit within applicable

statute of limitations period

UCC Remedies Available to Seller/Lessor

When Buyer/Lessee In Breach of

UCC Remedies Available to

Buyer/Lessee When Seller/Lessor In

• Obtain “Specific Performance”

• Reject Non-Conforming Goods

• Revoke Acceptance of Non-Conforming Goods

• Accept Non-Conforming Goods and Seek

Damages

Liquidated Damages

• Definition: Damages identified before contract

breach occurs

• General Rule: Parties are free to negotiate a

liquidated damages contract clause

• General Rule: Courts will enforce liquidated

damages provisions, so long as they are

non-punitive

• UCC Section 2-718: Allows non-breaching

seller to claim against breaching buyer 20% of

purchase price or $500, whichever is less, as

liquidated damages

Modifications/Limitations to Remedies

Otherwise Provided by the Uniform Commercial

Code

• General Rule: Parties to sales and lease contracts

are allowed to modify/limit remedies

• UCC Sections 2-719 and 2A-503 provide that

parties are allowed to create an agreement making

it clear the remedies outlined by their agreement are the exclusive remedies available to them

• Courts generally uphold modifications/limitations to

remedies unless stipulated remedies “fail in their essential purpose”