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Legal Environment
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Quote of the Day
“A commodity appears at first sight an
extremely obvious, trivial thing. But its
analysis brings out that it is a very strange
thing, abounding in metaphysical
subtleties and theological niceties.”
Karl Marx,
German political philosopher
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2
Legal Environment
Development of Commercial Law



As trade increased throughout history, the
need for a uniform, modernized business law
grew greater.
In 1952, the Uniform Commercial Code was
published by a group of scholars whose goal
was to draft a modern law of commerce.
The UCC has been revised several times,
most recently in 2001.
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Click here to view the text of the UCC on the internet.
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Legal Environment
Scope of Article 2
 Article 2
• UCC §2-102: Article 2 applies to the
sale of goods, things that are
movable, other than money and
investment securities.
 Article 2A
• Article 2A governs the leasing of
goods.
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Legal Environment
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Merchants
 UCC §2-104: A merchant is someone
who routinely deals in the particular
goods involved, or who appears to have
special knowledge or skill in those
goods, or who uses agents with special
knowledge or skill in those goods.
 The UCC frequently holds a merchant
to a higher standard of conduct than a
non-merchant.
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Legal Environment
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Formation Basics: §2-204
 UCC §2-204 provides three important
rules:
• The parties may make a contract in any
manner that sufficiently shows that they
reached an agreement.
• Knowing the moment of making of the
contract is not critical.
• One or more terms may be left open.
Commercially reasonable terms will be
assumed by the courts.
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Legal Environment
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Statute of Frauds
 UCC §2-201 requires a writing for any
sale for goods worth $500 or more.
• Writing Sufficient to Indicate a Contract
– In general, the writing must be signed by the
defendant.
• Incorrect or Omitted Terms
– Under the UCC, a court may enforce a bargain
even though one or more terms were left open.
• Enforceable Only to Quality Stated
– The Code will enforce the contract only up to the
quality of goods stated in the writing.
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Legal Environment
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Merchant Exception
 When two merchants make an oral
contract, and
• one sends a confirming memo to the other
within a reasonable time, and
• the memo is sufficiently definite that it could
be enforced against the sender, then
• the memo is also valid against the
merchant who receives it, unless he objects
in 10 days.
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Legal Environment
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Added Terms: Section 2-207
 Under §2-207, an acceptance that
adds or alters terms will often create a
contract.
Click once to start self-building graphic.
Offeree does
NOT intend
to accept
NO
CONTRACT
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OFFER
Offeree intends
to accept
Accepts
terms
Adds
terms
Changes
terms
Contract
Usually
forms a
contract
Usually
forms a
contract
Legal Environment
Accepts IF offerer
accepts new
terms
NO contract (is
a new offer)
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Additional or Different Terms
 Additional: those that raise issues not
covered in the offer.
• When both parties are merchants,
additional terms generally become part of
the bargain.
 Different: contradict terms in the offer.
• Cancel each other out; if there is no clear
oral agreement, the Code supplies its own
terms to cover prices, delivery dates and
places, warranties, and other subjects.
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Legal Environment
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Buyer’s Remedies
 Conforming goods satisfy the contract
terms. Non-conforming goods do not.
 Inspection -- The buyer generally has
the right to inspect the goods before
paying or accepting.
 May reject non-conforming goods, but
the seller has the right to cure, by
delivering conforming goods before the
contract deadline.
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Legal Environment
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Buyer’s Remedies (cont’d)
 Cover
• If the seller breaches, the buyer may
”cover” by reasonably obtaining substitute
goods.
• Buyer may then obtain the difference
between the contract price and the cover
price, plus incidental and consequential
damages, minus expenses saved.
 Incidental and Consequential Damages
• An injured buyer is generally entitled to
incidental and consequential damages.
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Legal Environment
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Seller’s Remedies
 Stop or refuse delivery
 Resale
• The seller may recover difference between
the resale price and contract price, plus
incidental damages, minus expenses saved.
 Action for the Price
• The seller may recover the contract price if:
– the buyer has accepted the goods, or
– the seller’s goods are conforming and he is
unable to resell after a reasonable effort.
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Legal Environment
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Product Liability
 When goods cause injury, there is a
question of product liability.
 There are three main issues related to
product liability cases:
• Warranty -- a contractual assurance that
goods will meet certain standards.
• Negligence – unreasonable conduct by the
defendant.
• Strict Liability – policy which holds the
defendant liable regardless of his behavior.
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Legal Environment
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Express Warranties
 An express warranty is one that the
seller creates with his words or actions.
 Any affirmation of fact--or any promise-can create an express warranty.
 Any description of the goods can create
an express warranty.
 Any sample or model can create an
express warranty.
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Legal Environment
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Implied Warranties
 Are created by the Code itself, not by
any act or statement of the seller.
 Implied Warranty of Merchantability
• Unless excluded or modified, a warranty
that the goods shall be merchantable is
implied in a contract for their sale, if the
seller is a merchant of goods of that kind.
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Legal Environment
Implied Warranties (cont’d)
 Implied Warranty of Fitness for a
Particular Purpose
• When the seller at the time of contracting
knows about a particular purpose for which
the buyer wants the goods, and knows that
the buyer is relying on the seller’s skill and
judgement, there is (unless excluded or
modified) an implied warranty that the
goods shall be fit for such purpose.
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Disclaimers and Defenses
 Disclaimer: a statement that a particular
warranty does not apply.
• Oral Express Warranties – may be disclaimed.
• Written Express Warranties – may NOT be
disclaimed.
• Implied Warranties of Merchantability – may
disclaim, but must use word “merchantability”
and the disclaimer must be conspicuous.
***NOTE: Many states prohibit a seller from
disclaiming implied warranties in the sale of
consumer goods.
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Legal Environment
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Negligence
 In negligence cases, plaintiffs most
often raise one or more of these claims:
• Negligent design
• Negligent manufacture
• Failure to warn
 Where a sales contract includes proper
disclaimers or remedy limitations, a
buyer barred from a negligence case
may have no remedy at all.
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Legal Environment
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Strict Liability
 Need not prove that the defendant’s
conduct was unreasonable.
 Strict liability may be imposed if:
• The defective condition is unreasonably
dangerous to the user.
• Seller is in business to sell this product.
• The product reaches the user without
substantial change.
 Strict liability may be imposed EVEN if:
• The seller exercised all reasonable care.
• There is no contractual relationship.
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Legal Environment
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Contemporary Trends
 Strict liability may be imposed based on
design, manufacture or failure to warn.
 Tests to measure design and warning
cases include:
• Consumer expectation: if the design causes
the product to be less safe than expected
• Risk-utility tests: weigh the value of the
product, gravity and likelihood of the danger,
feasibility of a safer design, and adverse
consequences of a safer design.
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Legal Environment
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Negotiable Instruments


Commercial paper is a contract to pay money.
It can be:
• A Substitute for Money
• A Loan of Money

Types of Negotiable Instruments
• Note (also called a promisory note) is a promise to
pay money.
• Draft is an order directing someone else to pay
money for you (e.g., checks).
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Legal Environment
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Negotiability
 The possessor of non-negotiable
commercial paper has the same rights-no more, no less--as the person who
made the original contract.
 The possessor of negotiable
commercial paper has more rights than
the person who made the original
contract.
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Requirements for Negotiability
 The Instrument Must:
• Be in Writing.
• Be Signed by the Maker or Drawer.
• Contain an Unconditional Promise or Order
to Pay.
• State a Definite Amount of Money.
• Be Payable on Demand or at a Definite
Time.
• Be Payable to Order or to Bearer.
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Negotiation
 Negotiation means that an instrument
has been transferred to the holder by
someone other than the issuer.
• To be negotiated, order paper must first be
indorsed and then delivered to the
transferee.
• Bearer paper must simply be delivered to
the transferee; no indorsement is required.
 An indorsement is the signature of the
payee.
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Legal Environment
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Holder in Due Course
 A holder in due course has an
automatic right to receive payment for a
negotiable instrument (unless issuer
can claim one of a few “real” defenses).
 Requirements for Holder in Due Course
• Under §3-302 of the UCC, a holder in due
course is a holder who have given value for
the instrument, in good faith, without notice
of outstanding claims or other defects.
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Notice of Outstanding
Claims or Other Defects
 The instrument is overdue
 The instrument is dishonored
 The instrument is altered, forged, or
incomplete
 The holder has notice of certain claims
or disputes
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Legal Environment
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Defenses
 Real and personal defenses are valid
against an ordinary holder; only real
defenses can be used against a holder in
due course.
 Real Defenses
• Forgery, Bankruptcy, Minority, Alteration, Duress,
Mental Incapacity, Illegality, and Fraud in the
Execution
 Personal Defenses
• Breach of Contract, Lack of Consideration, Prior
Payment, Unauthorized Completion, Fraud in the
Inducement and Non-Delivery
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Legal Environment
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Consumer Exception
 A consumer credit contract is one in which
the seller is also the lender.
 In such cases, the Federal Trade
Commission requires a specificallyworded notice to be included on the
contract, making it non-negotiable.
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29
Legal Environment
“The Uniform Commercial Code
enables merchants to form
contracts more quickly and easily.
But along with this increased
facility goes greater responsibility,
since informal discussions may
suddenly turn into… a contract.”
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Legal Environment
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