Business Law for the Entrepreneur
and Manager
Chapter 5 – Sales Law and the Uniform Commercial Code
Frank Cavico and Bahaudin G. Mujtaba
© Cavico & Mujtaba, 2008
Chapter Topics
•
•
•
•
Formation Of The Sales Contract
Title And Risk Of Loss
Warranties
Performance And Remedies
– Summary
© Cavico & Mujtaba, 2008
SALES LAW AND THE UNIFORM
COMMERCIAL CODE (UCC)
• The Uniform Commercial Code (UCC) governs contracts for the sale
of goods and which makes some major changes in the old common law
of contracts. The UCC is designed to change the common law to
reflect modern commercial practices, particularly the mass distribution
of goods to consumers
• The Uniform Commercial Code has several major sections, called
Articles, which seek to extensively regulate commercial transactions
• The UCC’s Article 2 “just” applies to the “sale of goods”
• Article 3 deals with commercial paper transactions; and Article 4 deals
with banking transactions
• It is of great consequence that the UCC states that implied in every
UCC contract is a covenant of good faith and fair dealing, in which the
parties are deemed to promise not to do anything to hinder, impair,
frustrate, or destroy the reasonable expectations and legitimate rights
of the other contract party to enjoy the “fruits” of the contract
© Cavico & Mujtaba, 2008
Formation of the Sales Contract
• UCC changes have “relaxed” the old common law rules pertaining to
the formation of a binding contract
• The first area in the formation of the Sales contract is the irrevocability
of the offer
• The UCC has a unique option dealing with the revocability of offers,
called a “merchant’s firm offer”
• The second area in the formation of the sales contract deals with the
definiteness of the agreement
• A fixed price is not essential to a valid UCC sales contract
• Also permissible in UCC contracts are “agreements to agree” by the
parties to set the price of the goods in the future, agreements to refer
the pricing of the goods to a third party, and even a contract provision
in which one of the contract parties reserves to himself or herself the
right to fix the price in the future
© Cavico & Mujtaba, 2008
• The quantity provision in a contract is one term that both the common
law and the UCC concur
• If no time for performance is stated in the UCC contract, then the rule
is the same as the common law
• It is also quite permissible under the UCC, and perhaps the common
law too, to have a valid contract with an open delivery provision
• The UCC makes some major changes in relation to the common law:
– Acceptance by shipment and an acceptance with additional terms
– Modification of a sales contract is valid even without new or different
consideration
– The UCC’s Statute of Frauds becomes operative when the price for the
goods is $500 or more
– Bringing into the law of sales the equitable concept of fairness in the guise
of “unconscionability.”
© Cavico & Mujtaba, 2008
Title and Risk of Loss
• One major problem arises if there is a passage of time after the formation
of the sales contract and the eventual transfer of ownership to the buyer
• The UCC’s risk of loss rules determine which party, the buyer or the
seller, bears the loss when, without the fault of either party, some harm
comes to the goods prior to or during their delivery to the buyer
• There are three important general UCC risk of loss rules :
– First, if there is a risk of loss provision in the sales contract which specifies at
what point the risk of loss shifts from the seller to the buyer, the provision
controls the risk question.
– Second, presuming no such contract provision, if the goods are shipped by a
carrier from the seller to a buyer, it is essential to determine the type of carrier
contract. If the carrier contract is a shipment contract, the risk of loss passes
to the buyer upon delivery of the goods by the seller to the carrier; but if the
carrier contract is a destination contract, the risk passes to the buyer only
when the goods arrive at the destination and the buyer is so notified.
– Third, in most other risk of loss situations, the key factor is whether or not the
seller is a merchant
© Cavico & Mujtaba, 2008
Warranties
• Warranties can concern the title to goods or the quality of
the goods. Warranties can be express, that is, created by the
words or actions of the seller, or implied, that is, imposed
automatically by the law
• There are three types of express warranties: 1) affirmation
of fact or promise, 2) conformity to description, and 3)
conformity to model or sample
• In addition to the express warranties which are explicitly
made by the seller of goods, the UCC implies certain other
warranties simply because a sale of goods is made in a
certain manner. These implied warranties are imposed
regardless of the seller’s intentions and despite the fact that
the seller has made no statements or promises regarding
the goods
© Cavico & Mujtaba, 2008
• There are three very important implied warranties created by the UCC –
merchantability, fitness for a particular purpose, and wholesomeness
• The standard for merchantability includes several criteria: 1) the goods
must be fit for the ordinary purposes for which the goods are used; 2)
the goods must meet normal commercial standards for goods of that
type; 3) the goods must do their ordinary job safely; 4) the goods must
be around the middle range of quality (and not the highest); and 5) the
goods must be adequately packaged and labeled
• Warranties can be in certain circumstances disclaimed by the seller, and
thereby excluded from the sales transaction
• the seller can disclaim and exclude warranties; but any disclaimer must
be “conspicuous,” that is, a reasonable person should be aware of the
disclaimer
© Cavico & Mujtaba, 2008
• In order to prove a breach of warranty, a plaintiff must
show the following: 1) a sale of goods; 2) a warranty was
made and not disclaimed; 3) the goods did not conform to
the warranty; 4) the plaintiff was injured; and 5) that the
plaintiff’s injuries were factually and proximately caused
by the non-conforming goods
• She or she may be able to recover damages as the
following: 1) any loss of value in the goods or the fair
market value of the goods; 2) consequential damages, such
as loss of goodwill and lost profits; 3) property damages;
4) personal injury damages; and 5) incidental damages
• The rule of law is that in order to recover for breach of
warranty, the buyer must give notice of the breach within a
reasonable time after the breach is discovered
© Cavico & Mujtaba, 2008
Performance and Remedies
• Performance of the sales contract can be divided into two
basic areas: first, the seller’s obligation, which is to
deliver conforming goods; and second, the buyer’s
obligation, which is to accept and pay for the goods
• The rule of law is that a seller fully performs his or her
delivery obligation by making a “tender” of delivery
• The UCC’s “perfect tender” rule holds that if the goods or
the tender of delivery fail in any respect to conform to the
contract, the buyer is not obligated to except them
© Cavico & Mujtaba, 2008
• There are some exceptions to the “perfect tender” doctrine:
– Cure Doctrine: If the seller makes a tender of delivery which is
deficient, but where the time of performance has not yet expired, the
seller can cure any defects by promptly notifying the seller of his or
her intention to cure and then making a conforming delivery before
expiration of the time for performance
– The second exception deals with installment contracts and holds that
when goods are required or authorized to be delivered in separate
lots, the buyer can reject a particular installment only if the defect
substantially impairs the value of the installment
– The third exception is the doctrine of commercial impracticality
which not only may discharge performance but also may excuse a
delay in performance
© Cavico & Mujtaba, 2008
Summary
• The sales contract and its vital components,
including title and risk of loss, warranties,
performance, and remedies, as well as
global legal perspectives, and management
strategies, particularly terms of sale in
international trade, are all to be conducted
in accordance to the guidelines provided by
the UCC and the CISG.
© Cavico & Mujtaba, 2008
Reference
1.
2.
Cavico, F. & Mujtaba, B. G., (2008). Business Law for the Entrepreneur
and Manager. ILEAD Academy Publications; Davie, Florida, USA. ISBN:
978-0-9774-2115-2.
Cavico, F. and Mujtaba, B. G. (2008). Legal Challenges for the Global
Manager and Entrepreneur. Kendal Hunt Publishing; United States.
© Cavico & Mujtaba, 2008