SALES AGREEMENTS: UCC ARTICLE 2 AND PRACTICAL CONSIDERATIONS First Run Broadcast: June 24, 2014 1:00 p.m. E.T./12:00 p.m. C.T./11:00 a.m. M.T./10:00 a.m. P.T. (60 minutes) UCC Article 2/Sales governs virtually all sales contracts for tangible goods. It imposes detailed requirements for the validity and enforceability of sales contracts, timelines for buyers to accept or reject the delivery of goods, procedures for a seller s repudiation of contracts, and remedies for a variety of breaches. UCC Article 2 also establishes an extensive framework of express and implied warranties, their general scope and how a seller can disclaim or limit liability, and the measure of a buyer s damages on breach. Ensuring compliance with UCC Article 2A can be a daunting task and has become challenging with the spread of e-commerce. This program will provide you with a guide to the legal and practical framework of sales contacts under UCC Article 2, including essential elements for validity, the timeline of a contract, seller braches and buyer remedies, express and implied warranties, and much more. Legal and practical framework of UCC Article 2/Sales contracts essential components and red flags Timeline of a sales contract contract period, delivery of product, repudiation by seller, acceptance or rejection by buyer Seller s breach repudiation, failure to deliver, non-conforming product and the buyer s remedies Express and implied warranties disclaimers, limitations, types and measure of damages Warranties of merchantability, fitness for a particular purpose, title and against infringement Special issues related to installment contacts UCC Sales contracts in in e-commerce Speaker: Christopher Tompkins is a partner in the Chicago office of Jenner & Block, LLP, where his practice as a litigator who focuses on resolving disputes for clients in complex commercial and technology-related matters. He counsels clients in such areas as breach of contract, the Uniform Commercial Code, equipment leasing, business torts, and intellectual property. He has handled all phases of litigation in state and federal court and before arbitration tribunals, including prelitigation investigation, motion practice, discovery, working with expert witnesses, trial and appeal. Previously, Mr. Tompkins served as a legislative intern for the National Council of Commissioners on Uniform State Laws where he worked on legislation related to commercial law. Mr. Tompkins received his B.A., cum laude, from The Catholic University of America and his J.D., magna cum laude, from Loyola University Chicago School of Law.
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Sales Law: Contract Formation & Breach Christopher Tompkins Jenner & Block Chicago (o) (312) 840-8686 ctompkins@jenner.com
Timeline Of A Typical Sale Pre-Acceptance Remedies Post-Acceptance Remedies Contract On September 1 National Motors contracts to buy 100 widgets from Acme. Tender of Delivery On September 30 Acme delivers 100 widgets. Acceptance On October 1 National Motors inspects & accepts 100 widgets. 1
CONTRACT FORMATION 2
Contract Formation Under The UCC Reduced Emphasis On Formalities: UCC 2-201 -- 0nly term that must be in writing under the UCC s statute of frauds is quantity. UCC 2-207 -- contract can be formed even if parties not in complete agreement. Electronic Contracting: UETA & E-Sign validate contracts formed electronically. Any symbol, such as typed name on an e-mail, can be a signature. Can accept terms you haven t seen. 3
Battle of the Forms UCC 2-207. Additional Terms In Acceptance Or Confirmation. (1) A definite and seasonable expression of acceptance or a written confirmation which is sent within a reasonable time operates as an acceptance even though it states terms additional to or different from those offered or agreed upon, unless acceptance is expressly made conditional on assent to the additional or different terms. (2) The additional terms are to be construed as proposals for addition to the contract. Between merchants such terms become part of the contract unless: (a) the offer expressly limits acceptance to the terms of the offer; (b) they materially alter it; or (c) notification of objection to them has already been given or is given within a reasonable time after notice of them is received. (3) Conduct by both parties which recognizes the existence of a contract is sufficient to establish a contract for sale although the writings of the parties do not otherwise establish a contract. In such case the terms of the particular contract consist of those terms on which the writings of the parties agree, together with any supplementary terms incorporated under any other provisions of this Act. 4
Rejection of Mirror Image Rule UCC 2-207(1): A definite and seasonable expression of acceptance or a written confirmation which is sent within a reasonable time operates as an acceptance even though it states terms additional to or different from those offered or agreed upon, unless acceptance is expressly made conditional on assent to the additional or different terms. 5
How is Acceptance Determined? By signing the other side s contract document; By otherwise evidencing agreement to the other side s contract document, such as by signing a letter accepting the other document; by e-mail, by clicking I Accept Through court admission; By evidencing agreement through course of dealing. 6
Determining Contract Terms Where Documents Conflict UCC 2-207(2): The additional terms are treated as proposals for addition to the contract. Between merchants such additional terms become part of the contract unless: (a) the offer expressly limits acceptance to the terms of the offer; (b) they materially alter it; or (c) notification of objection to them is given. 7
Additional Terms Additional terms are provisions addressing an issue that is addressed in one of the contract documents, but not the other. Additional terms become part of the contract, unless they are material. 8
Material Additional Terms A material additional term is one that would result in surprise or hardship if incorporated without express awareness by the other party. Official Comment 4. Terms such as warranty disclaimers are generally thought to be material. Official Comment 4. Terms such as a reasonable limitation on time for complaints are generally thought to be not material. Official Comment 5. Materiality is a question of fact for the court or jury. 9
Different terms? Different terms are conflicting terms. They address the same issue, but reach inconsistent results. For example, the purchase order and invoice call for a different method of delivery. UCC 2-207(2) does not expressly address different terms. 10
The Knock-Out Rule Most jurisdictions follow the Knock-Out rule. Under the knock-out rule, different terms in the purchase order and the invoice are dropped from each. They are replaced by the appropriate gap-filler provisions of the Code. 11
UCC 2-207(2) in a Nutshell Where invoice and purchase order contain different or additional terms from each other, the contract consists of Terms in offer not in conflict with acceptance; Non-material additional terms, and Code s gap-filler provisions. 12
Contract Formation Through Conduct Contract documents may not form contract, such where acceptance is made expressly conditional under UCC 2-207(1). However, often the parties proceed as if there is a contract despite the lack of a binding agreement based on the documents exchanged. In the event of a dispute, the contract consists of the terms on which the writings of the parties agree, together with any supplementary terms provided by the UCC. UCC 2-207(3). Most jurisdictions reject the Last Shot rule. 13
UCC WARRANTIES 14
Potential Warranties Under The UCC Express Warranties. Representation regarding the quality or nature of goods that was part of the basis of the bargain. UCC 2-313. Implied Warranties. Implied warranty of merchantability. UCC 2-314. Implied warranty of fitness for a particular purpose. UCC 2-315. Warranty of title and against infringement. UCC 2-312. 15
Sources Of Express Warranties Oral representations Contract documents Catalogs Brochures Specifications Plans & Blueprints Product manuals Correspondence Inspection Reports Appraisals Packaging & Labels Package Inserts Material Safety Data Sheets Advertisements Models & Samples 16
Basis Of The Bargain Focus is whether or not the claimed warranty was part of the bargain between the parties. While some case law still carries over the requirement of reliance from the Uniform Sales Act, it is not necessarily required under the UCC. Official Comment 3 to the UCC 2-313 suggests that a seller s affirmation of fact is presumed to be a part of the basis of the bargain and no particular reliance need be shown. The basis of the bargain limitation has been read to exclude representations that could not have been part of the agreement, such as statements remote in time to the sale. 17
Specific Language; Fact Or Puffing? Words such as guarantee, warranty or specific intent to create a warranty are not required. UCC 2-313(2). However an affirmation merely of the value of the goods or a statement purporting to be merely the seller s opinion or commendation of the goods does not create a warranty. Id. 18
Implied Warranty Of Merchantability Unless disclaimed or modified, all sales of goods by a merchant of goods of that kind include an implied warranty of merchantability. UCC 2-314(1). 19
Merchantability To be merchantable, the goods must: pass without objection in the trade under the contract description; and in the case of fungible goods, are of fair average quality in the trade under the contract description; and are fit for the ordinary purpose for which such goods are used; and run, within the variations permitted by the agreement, of even kind, quality and quantity within each unit and among all units involved; and are adequately contained, packaged, and labeled as the agreement may require; and conform to the promises or affirmations of fact made on the container or label if any. UCC 2-314(2). Other implied warranties may arise from course of dealing or usage of trade. UCC 2-314(3). 20
Fitness For A Particular Purpose If not disclaimed or modified, a sales contract may also contain an implied warranty of fitness for a particular purpose. To establish the warranty of fitness for a particular purpose, the buyer must establish: 1. the seller had reason to know of the particular purpose for which the buyer bought the goods; 2. the seller had reason to know the buyer was relying on the seller s skill or judgment to select suitable goods; and 3. the buyer actually relied on the seller s skill or judgment. UCC 2-315. 21
Warranty Of Title & Against Infringement The Seller warrants that it will convey good title, free from any security interest, lien or other encumbrance of which Buyer has no knowledge. UCC 2-312(1). The warranty of title is not strictly an implied warranty and may only be disclaimed in accordance with the provisions of UCC 2-312(2), which requires language informing the buyer that the seller does not claim title and is selling only the right or title that he may have. A merchant also warrants that goods will be delivered free of any rightful claim of infringement. UCC 2-312(3). However, a buyer must hold a seller harmless for infringement where it furnishes specifications. Id. 22
Potential Limitations On Warranties Sellers can limit or modify warranty liability in one of two ways: 1. Disclaim or modify applicable warranties. UCC 2-316. 2. Modify or limit the remedies for breach of warranty. UCC 2-719. 23
Disclaimer Of Express Warranties Words or conduct creating or negating express warranties are to be construed as consistent when possible but negations or limitations are inoperative if the provisions cannot be harmonized. UCC 2-316(1). An integrated writing may exclude extrinsic evidence of other express warranties. UCC 2-202(b). 24
Disclaimer Of Implied Warranties To exclude or modify the implied warranty of merchantability, the disclaimer must mention merchantability and must be conspicuous. UCC 2-316(2). A disclaimer of the implied warranty of fitness for a particular purpose must be in writing and must be conspicuous. UCC 2-316(2). Use of language such as As Is and With All Faults is also sufficient to disclaim implied warranties. UCC 2-316(3)(a). 25
Disclaimer Of Implied Warranties Implied warranties may also be disclaimed in other ways: A buyer s examination of the goods or a sample can exclude implied warranties for defects the examination ought to have revealed. UCC 2-316(3)(b). Course of dealing, course of performance or usage of trade may exclude or modify implied warranties. UCC 2-316(3)(c). 26
Limitation Of Remedies A seller can also limit warranty exposure by limiting remedies available for breach of warranty. An agreement may provide for remedies in addition to or in substitution of those provided by the UCC, such as limiting remedies to repair or replacement or limiting damages to the purchase price. UCC 2-719(1)(a). An agreement may limit or exclude consequential damages, unless that exclusion is unconscionable. UCC 2-719(3). If the limited remedy fails of its essential purpose a buyer may resort to any UCC remedy. UCC 2-719(2). 27
BREACH 28
Seller s Breach Generally a Seller can breach a contract for sale of goods by: Repudiating its obligation to deliver before the delivery date; Failing to deliver the goods; Delivering the goods late; or Delivering defective or non-conforming goods. 29
Repudiation Pre-Acceptance Remedies On September 15 Acme states it will not deliver. Contract On September 1 National Motors contracts to buy 100 widgets from Acme. 30
Repudiation & Adequate Assurances What is Repudiation? A party repudiates a contract by expressing an intention not to honor his obligations under the contract, or by taking action that demonstrates he will not perform. (UCC 2-610 cmt. 1.) Adequate Assurance of Future Performance. Parties may request adequate assurance if reasonable grounds exist for insecurity regarding performance. (UCC 2-609(1).) Failure to provide adequate assurance is a repudiation of the contract. (UCC 2-610(4).) 31
Buyer s Rights After Repudiation If Seller repudiates, and the loss will substantially impair the value of the contract, the Buyer may: Wait for performance (UCC 2-610(a)); or Resort to any remedy for breach (UCC 2-610(b)); and Suspend his own performance (UCC 2-610(c)). Seller may retract its repudiation by indicating it will perform unless: The buyer has cancelled the agreement; or The buyer has changed his position or stated he considers the repudiation final. (UCC 2-611(1).) 32
Failure to Deliver Pre-Acceptance Remedies On September 30 Acme fails to deliver. Contract On September 1 Natinoal Motors contracts to buy 100 widgets from Acme. 33
Failure to Deliver Seller may also breach the contract by failing to deliver the goods. The date of delivery will be either: The date specified in the contract; or If no time is specified, within a reasonable time. (UCC 2-309(1).) The place of delivery will either be: The manner specified in the contract; or If no place or means of delivery is specified, the Seller s place of business. (UCC 2-308.) 34
Non-Conforming Delivery Pre-Acceptance Remedies After inspection National Motors discovers widgets are defective or order is incomplete. Contract On September 1 National Motors contracts to buy 100 widgets from Acme. Tender of Delivery On September 30 Acme delivers 100 widgets. 35
Tender Of Non-Conforming Goods Where the Seller tenders non-conforming goods, the Buyer may: Reject all the goods; Accept them all; or Accept any commercially acceptable units and reject the remainder. (UCC 2-601.) 36
Seller s Cure Of Non-Conformity Where tender of delivery is rejected because it is nonconforming, but the time for delivery has not yet expired, Seller may notify Buyer of his intention to cure and make conforming delivery within the time provided by the contract. (UCC 2-508(1).) If Seller had reasonable grounds for believing Buyer would accept non-conformity, Seller is permitted a reasonable time to make conforming tender. (UCC 2-508(2).) 37
Installment Contracts A contract which calls for delivery in separate lots to be separately accepted is considered an Installment Contract. (UCC 2-612(1).) A breach with respect to one or more installments is a breach of the whole contract only if the value of the entire contract is substantially impaired. (UCC 2-612(3).) The entire contract will be reinstated if Buyer pursues a remedy for only the defaulted installments and demands performance of future installments. (UCC 2-612(3).) 38
Installment Contracts For installment contracts, the Buyer must accept an installment if the value of the installment is not substantially impaired and the Seller gives adequate assurance that the non-conformity will be cured. (UCC 2-612(2).) Buyer can only cancel the contract based on a single non-conforming delivery if the breach substantially impairs the value of the entire contract. (UCC 2-612(3).) 39
Rightful Rejection Buyer must notify the Seller that the goods are rejected within a reasonable time after delivery, or within the time for rejection set forth in the contract. (UCC 2-602.) Notification should specify the defects, since the Buyer will not be able to recover for unidentified defects if the Seller could have remedied them had he received such notice. (UCC 2-605.) If both parties are merchants, failure to identify the defects upon request can waive rights to recovery. (Id.) 40
Buyer s Duties Upon Rejection If Buyer has possession, he must store the goods for a sufficient time for Seller to reclaim them, at Seller s expense. (UCC 2-602.) If Buyer does not receive shipment instructions, Buyer may return the goods at Seller s expense, or resell them for Seller s account, offset by Buyer s expenses for storage and sale. (UCC 2-604.) Buyer may have a duty to take reasonable efforts to sell perishable goods. (UCC 2-603(1).) 41
Pre-Acceptance Remedies Pre-Acceptance Remedies Contract On September 1 National Motors contracts to buy 100 widgets from Acme. Tender of Delivery On September 30 Acme delivers 100 widgets. Acceptance On October 1 National Motors inspects & accepts 100 widgets. 42
Pre-Acceptance Remedies Under UCC 2-711 Buyer may cancel the contract (if the breach goes to the whole), recover any portion of the price already paid, and either: Cover by obtaining substitute goods and recover the difference between the cost of substitute goods and the contract price, plus incidental and consequential damages, but less any expenses saved (UCC 2-712); or Recover the difference between the market price at the time the Buyer learned of the breach and the contract price, plus incidental and consequential damages, but less any expenses saved (UCC 2-713). 43
Buyer s Incidental Damages Buyer s incidental damages are defined as expenses reasonably incurred in inspection, receipt, transportation and care and custody of goods rightfully rejected, any commercially reasonable charges, expenses or commissions in connection with effecting cover and any other reasonable expense incidental to the delay or other breach. (UCC 2-715(1).) 44
Buyer s Consequential Damages Buyer s consequential damages are defined as (a) any loss resulting from general or particular requirements and needs of which the seller at the time of contracting had reason to know and which could not reasonably be prevented by cover or otherwise; and (b) injury to person or property proximately resulting from any breach of warranty. (UCC 2-715(2).) 45
Buyer s Recovery Of Goods If the Seller fails to deliver the goods by the contract date, or repudiates the contract before then, the Buyer can, under certain circumstances, recover the goods themselves, as an alternative to the cover remedy and market price remedies. (UCC 2-711(2).) 46
Buyer s Recovery Of Goods When the goods are unique or other circumstances justify specific performance. (UCC 2-716(1)). When the goods have been identified to the contract, and the Seller becomes insolvent within 10 days after receipt of the first installment payment. (UCC 2-502); or the Buyer is unable to purchase substitute goods or circumstances indicate efforts to do so would be unsuccessful. (UCC 2-716(3).) 47
Breach Discovered After Acceptance Post-Acceptance Remedies Widgets are defective when used on production line Contract On September 1 National Motors contracts to buy 100 widgets from Acme Tender of Delivery On September 30 Acme delivers 100 widgets Acceptance On October1 National Motors inspects & accepts 100 widgets 48
Acceptance Of Goods The Buyer accepts the goods when the Seller has tendered delivery, the Buyer has had adequate opportunity to inspect them, and the Buyer: Tells the Seller the goods conform to the contract; Tells the Seller the goods will be accepted despite nonconformity; Fails to reject the goods by notifying the Seller within a reasonable time; or Takes action inconsistent with Seller s ownership of the goods. (UCC 2-606(1)). 49
Revocation Of Acceptance? Buyer can revoke acceptance of goods within a reasonable time after he discovers or should have discovered their non-conformity if: The non-conformity of the goods substantially affects their value, and the Buyer accepted the goods based on a reasonable assumption seller would cure and seller has failed to do so; or When the Buyer had not discovered the non-conformity either due to the difficulties of discovery or seller s assurances of conformity. (UCC 2-608(1)-(2).) If acceptance is properly revoked, the measure of damages will be based on non-delivery. 50
Consequences Of Acceptance After accepting the goods, if the acceptance is not properly revoked, the Buyer must pay the contract price. (UCC 2-607(1).) Acceptance waives ability to revoke acceptance due to nonconformity Buyer knew about at the time unless the goods were accepted with the reasonable assumption that non-conformity would be cured. (UCC 2-607(2).) Acceptance gives rise to the duty to notify Seller of any nonconformity within a reasonable time of discovery. (UCC 2-607(3).) After acceptance, Buyer has the burden of proving breach of warranty. (UCC 2-607(4).) 51
Breach Of Warranty The primary remedy for non-conforming goods after acceptance is breach of warranty. A contract for sale of goods may have several warranties: Express warranties. (UCC 2-313.) Implied warranty of merchantability. (UCC 2-314.) Implied warranty of fitness for a particular purpose. (UCC 2-315.) Warranty of title and against infringement. (UCC 2-312.) 52
Damages For Breach Of Warranty After acceptance, Buyer may recover any damages resulting in the ordinary course of events from the seller breach as determined in any manner which is reasonable. (UCC 2-714(1).) The standard formula for breach of warranty damages is the difference between the value of the goods at time and place accepted and the value the goods had they been as warranted, plus, in a proper case (i.e. they were foreseeable), incidental and consequential damages. (UCC 2-714(2).) 53
Special Circumstances In special circumstances a Buyer may establish losses that do not fit within the standard breach of warranty damage formula to ensure full compensation for its losses. (UCC 2-714(2).) 54
Excuses For Seller s Non-Performance Prior breach by Buyer. Buyer s repudiation. Buyer s failure to accept conforming delivery. Buyer s failure to make payments. Unexpected difficulties with performance. Casualty to identified goods. (UCC 2-613.) Commercial impracticability. (UCC 2-615.) Force majeure clause. 55
Commercial Impracticability Performance as agreed has been made impracticable by the occurrence of a contingency the non-occurrence of which was a basic assumption on which the contract was made or by compliance in good faith with any applicable foreign or domestic governmental regulation or order whether or not it later proves to be invalid. (UCC 2-615(a).) 56
Buyer s Breach A Buyer can breach by: Repudiating obligation to accept or pay for goods. Refusing to accept conforming goods. Wrongful revocation of acceptance. Failure to pay. 57
Seller s Remedies Upon a buyer s breach, UCC 2-703 permits a seller to: Withhold or stop delivery. Identify goods to the contract. Recover the goods. Resell the goods. Seek damages for non-acceptance, or in appropriate cases price. 58
Seller s Damages Difference in market price at the time of tender and the unpaid contract price plus incidental damages. UCC 2-708(1). Where difference in price is inadequate to fully compensate, the profit the Seller would have earned plus incidental damages. UCC 2-708(2). A seller can recover the unpaid price for any accepted conforming goods, goods lost or destroyed after risk of loss passes, or goods seller is unable to resell after reasonable efforts. UCC 2-719. 59
Questions? 60