Advanced Business
Law (BPP433/85)
SALES/PRODUCT LIABILITY
2007 Winter Quarter
Week 6
Instructor: David Oliveiri
Advanced Business Law BPP 433
Learning Objectives
Just What Legal Rules Apply to the
Production and Sales of Goods to
Customers?
Managerial Implications -- Constraints,
Risks, Opportunities
Advanced Business Law BPP 433
How Law/Regulation
Affects Business – Review
Owners
Employees
Creditors/Suppliers
Land
Labor
Venture
Capital
Ent. Talent
FORMING
Advanced Business Law BPP 433
Customers
Competitors
The “Public”
OPERATING
Behavior Toward Customers –
A Thicket of Regulation/Rules
Contexts – Product Development, Contracting, Selling,
Service After Sales
State Common Law of Contracts and UCC (State Statutes) Big
Factors, BUT…
Other State/Federal Legislation Applies To Product and
Service Sales Process/Afterward (S&R42, 24):
 Need for Qualifying Information/Price of Credit (Truth in Lending,
Fair Credit Reporting Act)
 Discrimination in Granting Credit
 Deception/Mistake (UCC Art 2, FTC Act, Lemon Laws,
Telemarketing Acts, Internet Sales Laws)
 Product Liability
Advanced Business Law BPP 433
Behavior Toward Customers –
A Thicket of Regulation/Rules
THE MANAGERIAL OPPORTUNITY –
PRODUCT/SALE LIFECYCLE
• Outline Business
Process
UNDERSTAND
RISKS/
OPPORTUNITIES
• Proceduralize
•Forms
•Manuals
• Training/Decision
Rights/Incentives
• Review Processes/
Mine Data
Advanced Business Law BPP 433
•Leadership
•Functional Depts.
•InHouse Counsel
•Retained Counsel
Law of Sales –
Conceptual Fit
• Property =
PROPERTY
LAW
Real +
Personal
• Sales = UCC
+ Non-UCC
Sales
CONTRACT
LAW
SALES LAW
• Contracts =
Sales + Other
• Primarily
STATE LAW
Advanced Business Law BPP 433
Some UCC vs. Contract
Law Differences
Contract
UCC Law of Sales
Contract must include all material
terms.
Open terms permitted if
parties intend to make a
contract
Counteroffers
Acceptance must be a mirror image of
offer. Counteroffer and conditional
acceptance are rejections.
Battle of Forms.
Modification of
Contract
Consideration is required.
Consideration is not
required.
Irrevocable
Offers
Options.
Options.
Firm offers up to three
months’ duration binding
without consideration.
Statute of
Frauds
Writing must include all material
terms.
Writing must include
quantity term. Exceptions:
special
mfg. goods;
specially
confirmation by merchants;
delivery or payment and
Acceptance; admissions.
Definiteness
Contract Law Compared with Law of Sales
Advanced Business Law BPP 433
UCC Sales Law
(Article 2) Rationale
Purpose – To Modernize, Clarify, Simplify, and Make
Uniform the Law of Sales
Minimize Transaction Costs on Basic Transactions
– Marshalling Terms
– Negotiating
– Drafting
Create Transactions Costs on Variant Terms
Concept of “Default Rules” v. Mandatory Rules -- Deviation Allowed
[Example: “If no price is specified, and delivery is made, the price is a
reasonable one at the time of delivery”]
Advanced Business Law BPP 433
UCC Sales Law
(Article 2) Principles
Freedom/Efficiency of Contract – Reflecting Preference of
Majority
Good Faith – Honesty in Conduct or Transaction Concerned;
Observance by Merchant of Reasonable Commercial Standards
Unconscionability – Refusal of Court to Enforce a Contract
Resulting from and Unfair Bargaining Process or with Oppressive
or Grossly Unfair Provisions
Course of Dealing – Previous Conduct Establishing a Common
Basis for Interpreting Agreement
Usage of Trade – Practices or Methods Regularly Followed in a
Place, Vocation, or Trade
Advanced Business Law BPP 433
Selected UCC Rules
Applicable to Merchants
Section of UCC
2-103(1)(b)
Merchant Rule
Good faith
Chapter in Text
Where Discussed
12
2-201
Confirmation of oral contracts
9, 12
2-205
Firm offers
7, 12
2-207(2)
Battle of the forms
7, 12
2-312(3)
Warranty of title
14
2-314(1)
Warranty of merchantability
14
Sales on approval
13
2-402(2)
Retention of possession of goods by seller
13
2-403(2)
Entrusting of Goods
13
2-509(3)
Risk of loss
13
2-603(1)
Duties after rightful rejection
13
2-327(1)(c)
Advanced Business Law BPP 433
Battle of the Forms
Yes
Is acceptance identical to offer?
Contact formed based on
offeror’s terms
No
Is acceptance expressly
conditional upon assent to
additional or different terms?
Yes
Contract formed
No
Does acceptance include
different terms?
Yes
Then,
No
Does acceptance include
additional terms?
No contract formed
No
(1) different terms cancel each
other out, or
(2) offeror’s terms control, or
(3) additional term test applied
Contract formed based on offeror’s terms
without additional terms
Yes
Advanced Business Law BPP 433
Continues on next slide…
Battle of the Forms
(cont.)
Are both parties merchants?
No
Contract formed based on offeror’s
terms without additional terms
Yes
Does offer limit acceptance to
its terms?
Yes
No
Do additional terms materially
alter the offer?
Yes
No
Has the offeror objected to the Yes
additional terms?
No
Advanced Business Law BPP 433
No
Has offeror assented to the
additional terms?
Yes
Contract formed with
additional terms
When Does the UCC
Apply to a Transaction?
Sales Transactions in “Goods”
“Goods” = Moveables (Time of Sale); Not Real Property, Not
Intangibles (Stocks, Bonds…), Not Money
Includes Incidental Services [Example: Installation + Set-Up];
Not Services Alone
Lease Included If “Sale Subject To Security Interest” [Example:
Lease car for 15 years. End-of-Term Option to Buy for $1.]
Does Not Include “Normal” Security Interests [Example: Sell
Car 1/1 For $100, Agree to Buy Back 7/1 for $105.]
Advanced Business Law BPP 433
Once UCC Art 2 Applies, …
Forming Deal
Performance of Deal
Quality of Performance
Remedies at Breakdown
Advanced Business Law BPP 433
Forming a Sales Contract
“Consent to Agreement”
Model v. Formal Offer/Acceptance
Offer-Varying Acceptance – Battle of the Forms
– Acceptance Contains Terms Not in Offer
– Generally, Exchange of Standardized Writings
– Detailed Rules to Resolve
Implied Terms – Trade Usage, Course of Dealing, Course
of Performance
Statute of Frauds – >= $5,000 – Mandatory Rule
Advanced Business Law BPP 433
Performance
Allocating Risk of Loss
Via Poor Performance
Insecurity & Adequate Assurance of Performance
Anticipatory Repudiation
Tender, Inspection, Acceptance, Rejection, Cure
Generally, Risk of Loss Follows Control
Self-Test P 5, 7
Advanced Business Law BPP 433
Tender of Performance
By Seller
Identification of Goods
Shipment
contract
Destination
contract
Goods held by
bailee without
moving
Seller holds
goods for buyer
Duly delivered?
Seller holds
goods for buyer
at destination?
Seller tenders
document of
title?
Seller notifies
buyer that goods
are held at his
disposal?
No
Yes
No
Yes
Yes
No
Yes
Breach
Breach
1
Advanced Business Law BPP 433
No
Breach
2
3
4
5
Continued on next slide… (match arrow numbers)
Tender of Performance
By Seller (cont.)
1
Yes
2
3 Yes
Yes
4
5
No
Bailee
acknowledges
buyer’s right to
possession?
No
Proper
contract?
Notifies
buyer?
Yes
No
Notifies Yes
buyer of
shipment?
No
Breach
Advanced Business Law BPP 433
Yes
No
Breach
Yes
Breach
Tender
Yes
Performance by the Buyer
OR
Buyer rejects goods
Goods
conform
Breach
by buyer
Goods
conform
Goods do not
conform
Seller
cures
defect
Seller
does not
cure
Buyer
rejects
Buyer
accepts
Breach
by buyer
Buyer
liable for
price
Advanced Business Law BPP 433
Buyer accepts goods
Breach
by seller
Buyer
liable for
price
Goods do not
conform
Buyer
revokes
acceptance
Buyer
retains
goods
Breach
by seller
Passage of Risk of Loss
in Absence of Breach
Agreement by
parties?
Yes
As allocated
by agreement
No
Trial
sale
Sale on
approval?
Yes
Contract
involving
carrier
Shipment
contract?
No Yes
1
No
2
Advanced Business Law BPP 433
Goods in
possession
of bailee
Negotiable
document
of title?
Yes
3
No
Goods in
possession
of buyer
Risk of loss
passes to buyer
at time of
contract
All other
sales
Seller is a
4
merchant
Seller is
not
5 a
merchant
Risk passes
to buyer
upon receipt
of goods
Risk passes
to buyer
upon tender
of goods
Continued on next slide… (match arrow numbers)
Passage of Risk of Loss
in Absence of Breach (cont.)
1
Yes
2
No
Yes
Sale or
return
Risk on
seller until
approved
3
No
Destination
contract
Advanced Business Law BPP 433
No
Risk shifts upon
buyer’s receipt
of document
Yes
Risk on seller
until delivered
to carrier
Risk on
buyer until
returned
Yes
Risk on
seller until
goods
tendered at
destination
Risk shifts
to buyer
upon
tender of
document
Non-negotiable
document of
title?
No
No
document
of title
Risk shifts to buyer upon written
acknowledgment by seller or bailee
Warranties
Allocating Risk of Quality, Given Performance
Express Warranties
Implied Warranties
– Fitness for Particular Purpose
– Merchantability
Disclaiming Warranties – Rules
Products Liability Distinguished – Remedies and Parties
– Privacy of Contract
Self-Test – P3, 10
Advanced Business Law BPP 433
Warranties
Type of
Warranty
How Created
What is Warranted
How Disclaimed
Title
• Seller contracts to
sell goods
• Good title
• Rightful transfer
• Not subject to lien
Express
•
•
•
•
• Conform to affirmation • Usually not possible
• Conform to promise
• Conform to sample
model, or description
Affirmation of fact
Promise
Description
Sample or model
Merchantability • Merchant sells
goods
Fitness for a
particular
purpose
• Seller knows buyer
is relying on seller
to select goods
suitable for buyer’s
particular purpose
Advanced Business Law BPP 433
• Specific language
• Circumstances giving reason to know that
seller does not claim title
• Fit for ordinary
purposes
• Adequately contained,
packaged, and labeled
•
•
•
•
•
Must mention “merchantability”
If in writing must be conspicuous
As-is sale
Buyer examination
Course of dealing, course of performance,
usage of trade
• Fit for particular
purpose
•
•
•
•
•
No specific words necessary
In writing and conspicuous
As-is sale
Buyer examination
Course of dealing, course of performance,
usage of trade
Remedies
Allocating Loss of Transactional Breakdown
Advanced Business Law BPP 433
Buyer’s Remedies
Obligation
-oriented
Goods-oriented
 Have a security interest
Buyer rightfully
rejects goods
Buyer
justifiably
revokes
acceptance
Seller fails to
deliver
Seller
repudiates
Cancel
 Have a security interest
Cancel
Cancel
Cancel
Buyer accepts
nonconforming
goods
Advanced Business Law BPP 433
 Recover identified goods
if seller is insolvent
 Replevy goods
 Obtain specific
performance
 Recover identified goods
if seller is insolvent
 Replevy goods
 Obtain specific
performance
Money-oriented
 Recover payments made
 Cover and recover damages
 Recover damages for
nondelivery
 Recover payments made
 Cover and recover damages
 Recover damages for
nondelivery
 Recover payments made
 Cover and recover damages
 Recover damages for
nondelivery
 Recover payments made
 Cover and recover damages
 Recover damages for
nondelivery
 Recover damages for breach of
warranty
Seller’s Remedies
Buyer’s Breach
Seller’s Remedies
Obligationoriented
Buyer wrongfully
rejects goods
Cancel
Buyer wrongfully
revokes
acceptance
Cancel
Buyer fails to
make payment
Cancel
Buyer repudiates
Cancel
Smith & Roberson’s Business Law
Advanced Business Law BPP 433
Chapter 25
Goods-oriented
Money-oriented
• Withhold delivery of goods
• Stop delivery of large
shipment in transit
• Identify conforming goods to
the contract
• Withhold delivery of goods
• Stop delivery of large
shipment in transit
• Identify conforming goods to
the contract
• Withhold delivery of goods
• Stop delivery of large
shipment in transit or of any
shipment if buyer is insolvent
• Identify conforming goods to
the contract
• Reclaim goods upon buyer’s
insolvency
• Withhold delivery of goods
• Stop delivery of large
shipment in transit
• Identify conforming goods to
the contract
• Resell and recover damages
• Recover difference between unpaid
contract and market prices
or lost
profits
• Recover price
• Resell and recover damages
• Recover difference between unpaid
contract and market prices
or lost
profits
• Recover price
• Resell and recover damages
• Recover difference between unpaid
contract and market prices
or lost
profits
• Recover price
• Resell and recover damages
• Recover difference between unpaid
contract and market prices
or lost
profits
• Recover price
Products Liability
Non-UCC Regulation of Quality/Function –
Unique Business Risk Characteristics/ Wide Coverage
Liability for Injury/Damage by Defective Products
Reflects Chain of Distribution Reality
– Supplier of Components, Manufacturer, Intermediary ( Wholesaler,
Distributor, Dealer), Retailer, Purchaser, User
– Bystander – Beyond Customers
Potential Defendants – Often Indirect Contractual
Relationship; No Privacy
Legal Rules (Mostly State Law) Evolved As Manufacturing
and Commerce Evolved
Advanced Business Law BPP 433
Products Liability
Today’s Rule: Strict Liability
for Injury/Damage from Defective Product
Manufacturing Defects
Design Defects
Warning Defects
Advanced Business Law BPP 433
Manufacturing Defects
Non-Conformity to Manufacturer’s Design [Example: Seat
belt improperly attached to car frame]
Need Not Show Inadequate Manufacturing Materials
Need Not Show Improper Inspection
Rationale:
– Hard to Pinpoint Negligence
– Manufacturer in Superior Position to Reduce Harm [Example:
Research, Cost-Effective Statistical Sampling]
– Manufacturer Can Better Spread Cost of Defects When Not CostEffective to Eliminate [Example: Mouse in Coke Bottle]
Advanced Business Law BPP 433
Design Defects
Occurs in Entire Product Line [Examples:
Faulty blueprint, bad specification, bad choice
of materials for product]
Can Design Ever be Risk-Free? [Example:
Knives]
Proof Standards:
– Consumer Expectations -- Jury?
– Risk/Benefit Test -- Hindsight?
Advanced Business Law BPP 433
Warning Defects
Problem of “Complete” Information on Product
Risks/Benefits
Proof Standard: Is Purchaser in Best Position to
Decide Benefits Outweigh Risks [Example:
McDonald’s Coffee]
Advanced Business Law BPP 433
Defenses to Product
Liability Claims
Standard Negligence Defenses – Contributory
Negligence, Comparative Negligence (Reduces
Damages), Assumption of Risk
Product Misuse – [Exception: Foreseeable
Misuse] [Examples – Chainsaw cutting upward
v. using chainsaw to cut holiday turkey]
Disclaimer of Product Liability – Not an Option
Advanced Business Law BPP 433
Management Issues
Insurance v. Self-Insure?
Corrective or Protective Measures?
Liability Runs With Corporation!
Advanced Business Law BPP 433
Bottom Lines; Q&A
Behavior Toward Customers (Pre-Sale and Post-Sale)
Highly Regulated
UCC Article 2 Sales Rules = Default Rules
UCC Article 2 Sales Rules Have a Bias Toward
Contracting/ Transacting
Products Liability = Non-UCC Regulation of Quality
Function
Direct Seller-Buyer Relationship Unnecessary for Strict
Product Liability
Advanced Business Law BPP 433