Chapter 19 – Formation of Terms of Sales Contracts


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  • Hyperlink is to the court’s 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 contract…Design 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 2–201(1) of the Uniform Commercial Code—Sales—the 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 UCC’s 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 website. Noble Roman’s is a franchisor of pizza restaurants. Noble Roman’s franchisees order supplies approved by Noble Roman’s. 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 Roman’s 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 Roman’s appealed.
  • Court: “Noble Roman’s 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 Roman’s 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 Roman’s 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 Roman’s 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 2–401(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, within Massachusetts. As a result, the “sale” of the tickets, as defined by the code, occurs in Massachusetts. Consequently, the trial court’s 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” [1–201(19)] and a buyer has given value if he has given any consideration sufficient to support a simple contract [1–201(44)]
  • Hyperlink is to the court’s 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. TP’s 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 mattresses they could not be sold as such; no sales could be made to TP dealers; and the representation was made that TP has confirmed the mattresses would not have tags on them. Third, both the timing of the attempted sales, and the use of a 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 court’s opinion in pdf. Charles Capshaw entered into a written contract with Rachel Hickman to purchase Hickman’s 1996 Honda Civic EX for $5,025. Contract provided, among other things, that “the title will be surrendered upon the new owner’s 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 vehicle’s glovebox. They agreed the vehicle was to remain parked in Hickman’s 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 enrichment—promissory 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 [2–326(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 [2–326(1)(b)]. Under a sale or return, title and risk of loss are with buyer. While the goods are in buyer’s possession, they are subject to claims of his creditors [2–326 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 merchant’s creditors.
  • True. False. CIF (cost, insurance, and freight) means that the price of goods includes seller’s 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 seller’s own risk and expense True.
  • True. False. Tom and Katy’s 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 Sam’s (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 1–201(9)].
  • The correct answer is (d).
  • The correct answer is (b). FOB destination [2–319(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.
  • Chapter 19 – Formation of Terms of Sales Contracts

    1. 1. C H A P T E RFormation and Terms of 19 Sales Contracts Merchants 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) 19-1
    2. 2. Learning Objectives• Analyze 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 buyer• Apply UCC’s rules about risk of loss• Distinguish between sale or return and sales on approval 19-2
    3. 3. The UCC and Sale of Goods• The Uniform Commercial Code (UCC or Code) govern most commercial transactions within the United States• Under 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 services – Does not specifically apply to trade in services 19-3
    4. 4. If a Dispute Arises…• 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 Automo . 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) 19-4
    5. 5. 19-5
    6. 6. Article 2 A• Leasing large goods, such as manufacturing or agricultural equipment, is common• UCC Article 2A applies to a lease of goods – The District of Columbia and all states except Louisiana have adopted UCC Article 2A 19-6
    7. 7. Details of Sales Contracts• Interpreting a sales contract is easier with common rules of interpretation: – Trade practices refers to using words common in a particular industry • Example: “case” has a different meanings for different industries – If price was omitted, UCC 2-305 fills the gap by providing the term: reasonable price at the time for delivery 19-7
    8. 8. Details of Sales Contracts• An outputs contract is an agreement in which buyer purchases all produce of seller – Example: 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 buyer’s production to the buyer – Example: Textiles Inc. must provide all fabric required for production to T-Shirts LLC 19-8
    9. 9. Noble Roman’s, Inc. v. Pizza Boxes, Inc .• Facts: – Franchisor Noble Romans and Pizza Boxes entered into letter agreement for manufacture of boxes that distributor Multifoods would order – Agreement included clause: “In the event that the total of 2.5 million boxes are not manufactured, Noble Roman’s 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 19-9
    10. 10. Noble Roman’s, Inc. v. Pizza Boxes, Inc.• Appellate Opinion: – Contract language is that of requirements contract – No meeting of the minds on how many boxes Pizza Boxes would ultimately produce – Course of performance (UCC 2-208) shows Pizza Boxes invoiced Multifoods as purchaser – Unambiguous clause states Noble Roman’s liability for printing prep charges only – Reversed and remanded with instructions 19-10
    11. 11. Details of Sales Contracts• 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 implied 19-11
    12. 12. Details of Sales Contracts• 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 notice• Standardized shipping terms customarily used in sales contracts to aid in deciding which party bears risk of loss 19-12
    13. 13. Title to Goods• Title (evidence of legal ownership) to goods cannot pass from seller to buyer until goods are identified to the contract [UCC 2–401(1)]• Parties may agree when title passes – If no agreement, title to goods passes to buyer when seller completes obligations of delivery• Passage of title determines who bears risk of loss if goods damaged during shipment 19-13
    14. 14. Title to Goods• Fundamental rule: buyer cannot receive better title to goods than seller had – If seller was thief, buyer does not obtain good title 19-14
    15. 15. Title to Goods: Exception to Rule• Under UCC 2-403(1), a seller who has a voidable title may pass good title to a good faith purchaser for value – Voidable title: gained by fraudulent means – Good faith [UCC 1–201(19)] means “honesty in fact in the conduct or transaction concerned” 19-15
    16. 16. Tempur-Pedic International, Inc. v. Was • Facts: – Tempur-pedic (TP) made donations to Waste to Charity (WTC) for Hurricane Katrina victims • Donation contract conditioned on non-resale – TP discovered that the mattresses were being sold in various ways, including from trucks and e-Bay – TP sued WTC and CSS (reseller) for breach of contract and fraud • Issue: Was CSS a good faith purchaser? 19-16
    17. 17. Tempur-Pedic International, Inc. v. Waste to Charity, Inc.• Opinion: – TP voluntarily made donation to WTC, thus WTC acquired voidable title to the property – CSS, though, was not a good faith purchaser: • Mattress price substantially below market value • Tags had been removed from mattresses • CSS knew TP didn’t authorize sale of used mattresses • Corporate charter of ADI, seller to CSS, had been revoked during relevant time period – Motion for preliminary injunction granted 19-17
    18. 18. Title to Goods: Exception to Rule• A buyer in ordinary course is a person who gains good title because s/he – in good faith and without knowledge that the sale to him is in violation of the ownership rights of a third party, and – buys goods in the ordinary course of business of a person selling goods of that kind (other than a pawnbroker) [UCC 1– 201(9)] 19-18
    19. 19. Title to Goods: Exception to Rule• 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 business 19-19
    20. 20. Risk of Loss in Shipping• Common law placed risk of loss on the party who had technical title at time of loss• UCC provides specific rules: – Contracting parties, subject to the rule of good faith, may specify who bears risk of loss in the agreement [UCC 2–509(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 2–509(1)(a)] 19-20
    21. 21. International Sale of Goods• United Nations Convention on Contracts for the International Sale of Goods (1980) provides rules governing risk of loss in sale of goods contracts• International Chamber of Commerce publishes a list of common international shipping terms known as INCOTERMS 19-21
    22. 22. Common Shipping Terms• 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 – Unless parties specify shipment method, contract is generally construed as a shipment contract• Destination contract: seller must deliver goods to specific destination bearing risk and expense of delivery 19-22
    23. 23. Shipment Contracts• FOB (free on board) point of origin: seller must deliver goods free of expense and at seller’s 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 seller’s own risk and expense [2–319(2)] 19-23
    24. 24. Shipment Contracts• CIF (cost, insurance, and freight): price of goods includes seller’s cost and risk to load, ship, and insure goods [2–320]• C & F: same as CIF, except seller not obligated to insure [2–320] 19-24
    25. 25. Destination Contracts• FOB destination: FOB term plus destination for the goods puts expense and risk of delivering to that destination on the seller [2–319(1)(b)]• Ex-ship: places expense and risk on seller until goods are unloaded from whatever ship is used [2–322]• 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 [2–324] 19-25
    26. 26. Capshaw v. Hickman• Tender of delivery requires that seller put and hold conforming goods at buyer’s deposition and give the buyer any notification reasonably necessary to enable him to take delivery• In this case, question remains as to why Hickman gave car keys to Capshaw, but car was left in Hickman’s driveway until Capshaw’s check cleared 19-26
    27. 27. Sales on Trial• 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 person – Sale on approval, sale or return, or consignment – Risk of loss depends on terms of entrusting 19-27
    28. 28. Test Your Knowledge• True=A, False = B – An outputs contract is an agreement in which buyer purchases all the production of seller – CIF (cost, insurance, and freight) means buyer covers risk to load, ship, and insure goods – FOB (free on board) Port of Miami means that seller must deliver goods to the Port of Miami at seller’s risk and expense, including loading goods on board 19-28
    29. 29. Test Your Knowledge• True=A, False = B – Shipment contract means that buyer must arrange for carrier to pick up and transport goods – FAS (free alongside ship) means that seller must deliver goods alongside the vessel at the port at seller’s own risk and expense – A consignment is not a sale, but an entrusting in which the consignor bears the risk of loss 19-29
    30. 30. Test Your Knowledge• True=A, False = B – UCC Article 2 governs most sale of goods transactions in the United States – Tom agrees to mow Katy’s lawn during the summer. Katy failed to pay Tom as agreed. The provisions of UCC Article 2 apply to Tom and Katy’s contract. – INCOTERMS were developed by the United Nations to determine title to goods 19-30
    31. 31. Test Your Knowledge• Multiple Choice – Ike’s Bikes sells motorcycles. Sam’s Used Cars & Cycles (Sam’s) sold Ike a used motorcycle. Ike believes the bike belonged to Sam’s since Sam’s produced papers that looked official. Sam’s had stolen the bike from Ted. Ike may: a) sell the bike since he was a buyer in the ordinary course of business with good title b) not sell the bike since it was stolen c) sell the bike to any customer, but Ted may sue Ike for damages and will win since Ted is the rightful owner of the bike 19-31
    32. 32. Test Your Knowledge• Multiple Choice – Pacific Paper Co. (Pacific) and BoxCo had a contract in which Pacific must provide all cardboard for BoxCo’s box production. This type of contract is known as a(n): a) outputs contract b) destination contract c) supply contract d) requirements contract e) none of the above 19-32
    33. 33. Test Your Knowledge• Multiple Choice – Choi ordered 100 crystal vases from Kristal in New York. The contract stated the goods were to be delivered “FOB Choi’s, 111 Main, Cityville, TX.” The truck overturned en route and the vases were destroyed. Choi must: a) pay Kristal the contract price and order again since Choi contracted for the risk of loss b) notify Kristal to resend the order since Kristal contracted for the expense and risk of delivering to the destination 19-33
    34. 34. Thought Questions• Jefferson said, “Merchants have no country.” Do you agree with Jefferson? How might Jefferson view current international business practices? 19-34