Contracts and Sale of Goods
Harris v. Time. Three year old boy received an offer as follows: “Joshua Gnaizda, I’ll
give you this versatile new calculator watch free just for opening this envelope.” On
the inside – hidden by the envelope it said – “And mailing this Certificate today”
requiring him to buy Fortune Magazine.
•False Advertising
•Unilateral Contract?
•Promissory Estoppel?
Contracts - Promise




Benefits Society to Enforce Promises
Common law v. UCC
Contract Law is based on state law
Bi-lateral v. Unilateral Contracts
Contract Defined
An agreement that can be enforced in court, formed
by two or more parties who agree to perform
or to refrain from performing some act now or in
the future.
§1: The Uniform Commercial Code

Contracts Across State Lines
–
–
–

How UCC works among states
Benefits of UCC
All states adopted except Louisiana
UCC Article 2: Sale of Goods.
–
–
–
Modifies common law of contracts of
some areas.
UCC 2 preempts common law.
Where UCC 2 is silent, common law
governs
Re: Plantation Shutter Co. v. Ezell,
p. 317, Case Presentation Special
interior shutters for his home. Free
installation
§2: The Scope of Article 2




Sale of Goods. Article 2 applies to the “sale of goods.”
– “Sale.” A “sale” is the passing of title of “goods” to/from a “merchant”
(seller or buyer) for a price (money, goods, services, etc).
– Good v. Service
 Lohman v. Wagner (2004). Pig “farrow to finish” program. Does UCC
apply? Service of raising pigs or sale of goods? Mixed purpose
contracts – look for predominant purpose – sale of goods or service –
that controls.
“Merchant.” A “merchant” has special business expertise and is not a casual
buyer/seller.
Real Estate. UCC does not apply, unless can be severed (e.g. trees).
Services. Generally contracts for services are not governed by UCC2.
§1: Good Faith Requirement


Good Faith is the foundation of every UCC commercial
contract.
Good faith means honesty in fact.
Generally judging state-of-mind
–

Merchants are held to a higher standard of care than nonmerchants.
–
Observance of reasonable commercial standards of fair dealing in
the trade.
Exxon Case
Exxon stations argued the Exxon violated good faith under UCC by
charging stations more than they could get gas from “jobbers.”
Exxon argued that it met good faith by charging a commercially
reasonable price.
Requirements of a Contract
The four requirements that constitute what
are known as the elements of a contract are:
AGREEMENT
CONSIDERATION
CAPACITY
LEGALITY
Requirements of the Offer
Intent
There must be a serious,
objective intention by the
offeror to become bound
by the offer. Nonoffer
situations include:
(a) expressions of
opinion; (b) statements of
intention; (c) preliminary
negotiations; and
(d) advertisements,
catalogues, and circulars.
Definiteness
The terms of the
offer must be
sufficiently
definite to be
ascertainable by
the parties or by a
court.
Communication
The offer must be
communicated to
the offeree.
Presentation Case: Advertisement as Offer, Leonard
v. PepsiCo
Groups 19 & 12
Link To Commercial
http://www.youtube.com/watch?v=ZdackF2H7Qc
Arbitration Clauses
Harris v. Blockbuster
Case Illustration 9.3, p. 323




Harris sued blockbuster because
Blockbuster entered into a contract
with Facebook that caused
Blockbuster customer movie
selections to be disseminated on
Facebook.
Blockbuster’s online contract had an
arbitration clause that Harris agreed
to.
Blockbuster also stated:
“You agree to review these
Terms and Conditions of Use
periodically and your continued
use of this Site following such
modifications will indicate your
acceptance of these modified
Terms and Conditions….”
Is the arbitration clause/contract valid
or is it illusory because Blockbuster
can change at any time?
AT&T Case – Nov 9, 2010
•US Supreme Court Case
•$30.22 sales tax on “free phone”
•Arbitration clause prevents class
action lawsuits
•Plaintiffs argue the clause is
“unconscionable”
• Arbitration Clause Details
•AT&T must pay a minimum of
$7,500 if it loses
•AT&T pays all arbitration fees
•Supreme Court Ruled April 2011.
AT&T Mobility LLC v. Concepcion.
Termination of an Offer





Counteroffer
Revocation by offeror
Rejection by the offeree
Lapse of time
Death or incapacity of either party
Noncompete without pay raise
Consideration

Legally Sufficient
–
–

To be legally sufficient, consideration must involve a legal
detriment to the promisee, a legal benefit to the promisor,
or both.
One incurs a legal detriment by doing something that one had no
prior legal duty to do.
UCC. UCC does not require consideration for a contract
modification. Common law does.
Contracts Contrary to Statute
USURY
Occurs when a lender makes a
loan at an interest rate above the
lawful maximum. The maximum
rate of interest varies from state
to state.
GAMBLING
Gambling contracts that
contravene (go against) state
statutes are deemed illegal and
thus void.
SABBATH LAWS
Laws prohibiting the formation
or the performance of certain
contracts on Sunday. Such laws
vary widely from state to state,
and many states do not enforce
them.
LICENSING STATUTES
Contracts entered into by
persons who do not have a
license, when one is required by
statute, will not be enforceable
unless the underlying purpose of
the statute is to raise government
revenues.
Contrary to Public Policy and Quasi Contract

Contrary to Public Policy
–
Restraint of trade

–
Unconscionable



–
–
Covenant not to compete
Jones v. Star Credit
Corp. (1969). $300
freezer for $1,234.
Fraud is not present.
Excessive price and
unequal bargaining
positions.
Adhesion Contract
Exculpatory Clauses (exclude liability for fraud,
intentional injury, or illegal acts)
Quasi Contract - Implied In Law
Quasi Contract
Unjust enrichment
Houseboat example, fear factor,
Statute of Frauds - UCC


Sale of goods over $500 must have a signed writing to be enforceable.
Exceptions
–
–
–
–
–

Between merchants – if within a reasonable time a writing confirms the contract
Specially manufactured goods.
Admissions by breaching party.
Partial performance (or complete performance – if payment made and goods received).
Merchant doesn’t object within 10 days.
Oral agreement enforceable after written confirmation between merchants.
job for “remainder of his life” End-of-Chapter Q: 1, p. 349
•New company offered 8% commission
•Current company said it would offer 10% commission to get employee to stay – plus employment
for life (except disability or dishonesty)
•Relationship soured and employee fired.
•Sued for permanent – job
•Was there consideration?
•Does Statute of Frauds apply?
Separate Contract Issue - Language Limiting Liability in a Contract
Puget Sound Financial LLC v. Unisearch, Inc. (1976). Searched for
liens and missed one. Invoice said “liability limited to amount of fee” or
$25. Puget used Unisearch and received this notice 47 times.
Parol Evidence

No Oral Evidence. Terms of a written agreement intended to be the
final expression of parties’ intentions, cannot be contradicted by prior
or contemporaneous agreements.

Exceptions to the rule:
–
–
–
–
–
–
Contracts subsequently modified.
Voidable or Void contracts.
Contracts containing ambiguous terms.
Prior dealing, course of performance, or usage of trade.
Contracts subject to orally agreed-on conditions.
Contracts with an obvious or gross clerical error that clearly would not
represent the agreement of the parties.
End-of-Chapter Q: 14, p. 352. Williams v. Spitzer Autoworld.
•
•
•
•
Williams purchased a 2004 GMC Yukon from Spitzer
He was to receive a trade in allowance of $15,500 for his 2003 Ford Explorer
The contract said “This was the entire agreement between the parties”
Williams sued Spitzer stating he and Spitzer had reached a prior oral agreement
that he would receive a trade-in allowance of $16,500 – he said he failed to
notice the difference.
Presentation Case, Oakley Fertilizer (P) v.
Continental Ins. (D) (2009) , page 341
Groups 8 & 1
Oakley Fertilizer
v.
Acceptance: Additional Terms UCC
elimination of common law “mirror image” rule


Either Non-Merchant. If either party is a
non-merchant, the contract is formed
according to original terms of the offer.
Both Merchants. If both parties are
merchants, contract incorporates new terms
unless:
–
–
–

Material Alternations
–
–

(1) original offer expressly limits terms, or
(2) material change, or
(3) offeror objects within reasonable time.
Disclaimers or warranties
Arbitration clause
Different Terms. UCC position less clear.
Some courts treat as a new term others find
contract is formed and use gap-filling
provisions.
§4: Formation of
Sales Contracts Under UCC


Common Law. At common law once a valid
offer is unequivocally accepted, a binding
contract is formed.
UCC is more flexible, and allows for open
pricing, payment, and delivery terms.
 Open Price Term: If parties have not agreed on pricing, court can
determine “reasonable price at the time of delivery.” UCC2-305.
 Open Payment Term: Unless otherwise agreed, payment is due
on delivery (COD). UCC2-310(a).
 Open Delivery Term: Unless otherwise agreed, buyer takes
delivery at the Seller’s place of business. UCC2-308(a).
 Open Quantity: generally courts will not impose a quantity.
UCC2-306. End-of-Chapter Q: 2, p. 349.
Presentation Case: Discussion Case, Promissory
Estoppel, Tour Costa Rica v. Country Walkers
Groups 6 & 3
Examples of each
termination of catering job 5 days before picnic
End-of-Chapter Q 6, p. 350 also End-of-Chapter Q: 7
•$7,000 contract for catering
•Cancelled 5 days before
•Contract required full payment if cancelled
•Plaintiff asserts it's an unlawful penalty clause
Types of Damages
Compensatory
Damages
Consequential
Damages
Punitive Damages
Nominal Damages
Liquidated Damages
Liquidated Damages,

Facts (End-of-Chapter Q: 3)
–
–
–
–
Ameritech Business Pages – Sells ads to its phonebook
Ameritech failed to place Ad for customer (it made a
mistake)
Customer, Trimble, sued for lost business revenue.
Clause in signed contract read:
“if publisher should be found liable for loss or damage due to a failure on the part of the publisher or its
directory, in any respect…. The liability shall be limited to an amount equal to the contract price for the
disputed advertisement, or that sum of money actually paid by the customer toward the disputed
advertisements, whichever sum shall be less, as liquidated damages, and not as a penalty…”
–


Trimble not charged
Issue - Is this enforceable?
Question - What is this clause called?
Mitigation of Damages


When breach of contract occurs, the innocent injured
party is held to a duty to reduce the damages that he
or she suffered.
Duty owed depends on the nature of the contract.
End-of-Chapter Q 7, p. 350
Diaz v. Learjet Liquidated Damages Ques
Diaz purchased a Learjet:
• He singed a contract with a $250,000 nonrefundable deposit.
• Learjet expected to make $1.8 million on the sale
• Diaz breached the contract and wanted his $250,000 back
• Learjet sold Diaz’s jet for a $1.88 million dollar profit
• Learjet was building jets under capacity and could have sold 2
• Should Learjet have to return the deposit?
Specific Performance


Equitable Remedy. An equitable remedy
calling for the performance of the act
promised in the contract.
Unique Goods. Specific performance is only
available in special situations, such as
– those involving contracts for the sale of
unique goods or land, or
– when monetary damages would be an
inadequate remedy.

Personal Services. Specific performance is
not available as a remedy in breached
contracts for personal services.
Special UCC Rules
§2: Obligations of the
Seller- UCC – Tender of Goods

Tender. Seller has a duty to “tender” delivery of “conforming goods.” Meaning
with reasonable notice, at a reasonable hour, In a reasonable manner, Exactly, unless
otherwise agreed.

Non- Carrier
–
–

Buyer picks up at Seller’s place of business or, if Seller has no place of business,
then Seller’s residence.
If both parties know the goods are elsewhere (at a warehouse), then place of delivery
is where the goods are.
Carrier
–
Shipment contracts. Seller has a duty to:




–
Put goods into hands of independent carrier.
Make contract for transportation.
Obtain and promptly deliver or tender to the Buyer any documents necessary.
Promptly notify Buyer that shipment has been made.
Destination contracts. Seller has duty to:

Tender the goods at a reasonable hour and hold conforming goods at the
Buyer’s disposal for a reasonable period of time.
The Perfect Tender Rule UCC

Buyers’ Rights for Sellers Failure of Perfect Tender
–
–
–

Accept the goods;
Reject the entire shipment; or
Accept part and reject part.
Seller has the right to “Cure” if:
–
–
Agreed time of performance has not yet expired; or
If Seller had reasonable grounds to expect that Buyer would accept nonconforming goods, i.e., these goods are better than goods ordered, or
Buyer has accepted non-conforming goods in the past
§3: Obligations of the
Buyer UCC and Right to Inspect

Buyer Obligations.
–
–

Receive Goods.
Make Payment.
Right to Inspect. Buyer has right to inspection
before paying:
–
–
Costs of inspection borne by Buyer.
However, C.O.D. give Buyer no right to inspect.
Buyer Breach: Seller Remedies

Goods in Seller’s Possession
–
–
–
–
–
Withhold Goods. Seller may withhold delivery of the goods:
Rescind Contract. Seller may rescind the contract.
Identify Goods. Seller may identify the goods to the contract.
Sell Material. Seller may sell raw materials.
Re-sell the goods

–

Sue Buyer for breach of contract.
Goods in Transit
–
–

Recover damages
Goods are “in transit” when Seller has tendered goods to Carrier.
Seller has the right to stop the goods in transit if:
 Buyer is insolvent - Seller can stop entire shipment of goods.
 Buyer is in breach - Seller may stop a whole truckload or whole container.
Goods in Buyer’s Possession
–
–
Sue for Purchase Price. Seller may sue for the purchase price.
Reclaim Goods. Seller can reclaim goods received by an insolvent Buyer if
demand made within 10 days of receipt.
Seller Breach: Buyer Remedies
Goods in Seller’s Possession

Buyer Wants Goods
–
–

Specific performance or replevin
Recover goods from Seller if Seller becomes
insolvent within 10 days after receiving first payment.
Buyer Does Not Want Goods
–
–
Rescind contract.
Cover or do not cover and sue for breach of contract.
Risk of Loss for Goods


Title. Sale of goods requires different rules
than real property transactions: risk should
not always pass with title.
UCC replaces title with
–
–
–
identification,
risk,
and insurable interest.
Risk of Loss in the case of
Breach of Contract

Generally breaching party bears ROL.

Seller’s Breach.
–
–

Rejection - risk stays with seller.
Revocation of acceptance - risk passes back to seller to the extent that
buyer’s insurance does not cover the loss.
Buyer’s Breach. Goods are identified, risk passes to buyer for a
reasonable amount of time after seller learns of the breach, to the
extent that seller’s insurance does not cover loss.
§4: Insurable Interest



Identification. Buyer has an insurable
interest in goods that have been identified.
Title/Security Interest. Seller has an
insurable interest in goods as long as they
retain title or a security interest.
Both at Same Time. Both buyers and sellers
can have an insurable interest at the same
time.
Ganno v. Lanoga Corp. (2003). End-of-Chapter Q: 12. Ganno
purchased a 12 foot beam and the Building Center put it in his truck
without tying it down. It fell out at an intersection and when he picked
it up, the other end was struck by a car shattering his knee. Risk of
loss passed.
§2: When Title Passes

Title can pass:
–
–
–

Upon physical delivery, or
When agreed to by the parties, or
If no agreement, depends on whether contract is shipment or destination
contract:
 Shipment: title passes at time and place of shipment. ROL passes to
Buyer when tendered to carrier
 Destination: title passes when goods are tendered at the destination.
ROL passes to Buyer when goods tendered at destination.
Delivery Without Movement of Goods Title passes when agreed by
the parties, or
–
–
–
With document of title: when and where document delivered.
Without document: when sales contract is made, if goods have been
identified or when identification occurs if they have not been identified.
If Seller is a merchant, ROL passes when buyer takes physical possession
of goods.
Windows Inc. v. Jordan Panel System Corp. (1999). “delivery to New York City” Goods
properly packaged but broken during shipping via Consolidated (a carrier). When terms ambiguous a
strong presumption exists for a shipping contract. End-of-chapter Q: 12, p. 352
Skip – requirements and options contracts
End-of-Chapter Q: 2, p. 249


Carl Merritt contacted R&P Products about
selling RxP Gas Kicker, a fuel additive as a
private label product.
The agreement stated the following:
–
–
$10 for consideration
R&P agrees to sell RxP Gas Kicker for


–

$1.25 per 2.5 oz bottle
$1,280 per 55 gallon drum
R&P agrees to guarantee shipment within 14
days of an order
Dispute arose and Merritt sued for specific
performance under a requirements contract.
RXP argued it was an options contract.