Lecture Dynamic business law, the essentials (2/e) - Chapter 15: Sales and lease contracts

Chapter 15 - Sales and lease contracts: Performance, warranties, and remedies. After reading this chapter, you will be able to answer the following questions: What is the difference between conforming and nonconforming goods? What is the perfect tender rule? What is the right to cure? What is commercial impracticability? What are the implied warranties of title, merchantability, and particular purpose?

Chapter 15

Sales and Lease Contracts:

Performance, Warranties, and

Remedies

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 acceptance

Warranties

Definition: Seller’s promise(s) regarding

certain characteristics of good(s) sold

• 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 express

warranties, and part of contract

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

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

• 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”