Chapter 15 - Sales and lease contracts: Performance, warranties, and remedies. After reading this chapter, you will be able to answer the following questions: What is the difference between conforming and nonconforming goods? What is the perfect tender rule? What is the right to cure? What is commercial impracticability? What are the implied warranties of title, merchantability, and particular purpose?
Chapter 15 Sales and Lease Contracts: Performance, Warranties, and Remedies McGrawưHill/Irwin Copyrightâ2013byTheMcGrawưHillCompanies,Inc.Allrightsreserved The Basic UCC Performance Obligation Sellers and lessors are obligated to transfer and deliver conforming goods • Buyers and lessees are obligated to accept and pay for conforming goods in accordance with terms of contract • “Good faith” required in performance and enforcement of every contract 152 “Good Faith” • Definition: Honesty in fact • In transaction between merchants, UCC also imposes obligation of reasonable commercial standards of fair dealing (“commercial reasonableness”) 153 “Perfect Tender” Rule States that if goods or tender of delivery fail in any respect to conform to contract, buyer/lessee has right to: 1) accept the goods; 2) reject entire shipment; or 3) accept part and reject part 154 Exceptions to “Perfect Tender” Rule • Industry Standards • Prior Dealings Between Parties • Exceptions Outlined in Parties’ Agreement • Seller’s/Lessor’s Right to Cure • Destroyed Goods • “Substantial Impairment” • “Commercial Impracticability” 155 “Commercial Impracticability” Doctrine Delay in delivery or non-delivery may not, in court’s discretion, constitute breach if performance made impracticable because contingency has occurred that was not contemplated when parties reached agreement 156 Inspection, Rejection and Revocation of Acceptance • Seller/lessor must provide buyer opportunity to inspect goods • “Reasonableness” governs inspection process • Post-inspection, buyer has option to accept, partially accept, reject, or revoke acceptance -UCC guidelines govern right to exercise particular options post-inspection • Buyers/lessees must give reasonable notice upon exercising right of rejection/revocation of acceptance 157 Warranties 158 Warranty Definition: Seller’s promise(s) regarding certain characteristics of good(s) sold 159 “Express” Warranty Versus “Implied” Warranty • Express Warranty: Explicitly stated in contract • Implied Warranty: Automatically (by operation of law) applied to contract 1510 Types of Warranties Warranties of Title • Passage of good title • Implied promise of no liens/judgments against title • Implied promise that title not subject to claims of intellectual property (copyright, patent, or trademark) infringement 1511 Types of Warranties Express Warranties • Description of good’s physical nature or its use • May be found in advertisements or brochures • May be material term of contract • Salesperson’s oral promise concerning good can give rise to express warranty • Buyer’s reliance on seller’s representations generally means those representations become express warranties, and part of contract 1512 Types of Warranties: Implied Warranties • Implied Warranty of Merchantability (Definition): Warranty based on reasonable expectation of product performance • Good purchased must: -Pass without objection in trade/market for similar goods -Be of fair quality (within the product’s description) -Be fit for “ordinary use” -Have “even kind, quality and quantity” -Be adequately packaged and labeled -Conform to promises made on package/product label 1513 Types of Warranties: Implied Warranties Implied Warranty of Fitness For Particular Purpose (Definition): Warranty that arises when seller knows purpose for which buyer purchasing goods, and buyer relies on seller’s judgment to recommend/select certain product Seller does not have to be merchant to make this warranty 1514 Types of Warranties: Implied Warranties Implied Warranty of Trade Usage (Definition): Warranty that arises as result of generally-accepted trade practices 1515 Warranty Rights of Third Parties: Third Party Beneficiaries of Warranties Seller’s warranties may extend to: • Buyer’s household members and guests • Any “reasonable and foreseeable” user • Anyone injured by good 1516 Warranty Disclaimers and Waivers Methods of Disclaiming/Waiving Warranties: • Seller does not make express warranties • Seller disclaims implied warranties in clear, unambiguous, conspicuous language • Buyer fails/refuses to examine goods • Buyer fails to file suit within applicable statute of limitations period 1517 UCC Remedies Available to Seller/Lessor When Buyer/Lessee In Breach of Contract • • • • • • Cancel Contract Withhold Delivery Resell/Dispose Of Goods Sue to Recover “Benefit of Bargain” Stop Delivery Reclaim Goods 1518 UCC Remedies Available to Buyer/Lessee When Seller/Lessor In Breach of Contract • • • • • • • • Cancel Contract Obtain “Cover” Sue to Recover Damages Recover Goods Obtain “Specific Performance” Reject Non-Conforming Goods Revoke Acceptance of Non-Conforming Goods Accept Non-Conforming Goods and Seek Damages 1519 Liquidated Damages • Definition: Damages identified before contract breach occurs • General Rule: Parties are free to negotiate a liquidated damages contract clause • General Rule: Courts will enforce liquidated damages provisions, so long as they are non-punitive • UCC Section 2-718: Allows non-breaching seller to claim against breaching buyer 20% of purchase price or $500, whichever is less, as liquidated damages 1520 Modifications/Limitations to Remedies Otherwise Provided by the Uniform Commercial Code • General Rule: Parties to sales and lease contracts are allowed to modify/limit remedies • UCC Sections 2-719 and 2A-503 provide that parties are allowed to create an agreement making it clear the remedies outlined by their agreement are the exclusive remedies available to them • Courts generally uphold modifications/limitations to remedies unless stipulated remedies “fail in their essential purpose” 1521 ... to Remedies Otherwise Provided by the Uniform Commercial Code • General Rule: Parties to sales and lease contracts are allowed to modify/limit remedies • UCC Sections 2-7 19 and 2A-503 provide... must: -Pass without objection in trade/market for similar goods -Be of fair quality (within the product’s description) -Be fit for “ordinary use” -Have “even kind, quality and quantity” -Be adequately.. .The Basic UCC Performance Obligation • Sellers and lessors are obligated to transfer and deliver conforming goods • Buyers and lessees are obligated to accept and pay for conforming