McCann
Sales
Fall 2010
SALES OUTLINE
I. BASIC PRINCIPLES OF SALES TRANSACTIONS
Scope of Uniform Commercial Code Article 2
§2-201 provides that the UCC “applies to transactions in goods” so the UCC does not govern transactions in services.
“Good” is defined in §2-103(k) on p. 3.
Goods and Services
How do courts determine whether a contract involves a service or a good?
The Predominant Factor Test à Under this test, the court determines “whether their predominant factor, their thrust, their purpose, reasonably stated, is the rendition of service, with goods incidentally involved (e.g., contract with artist for painting) or is a transaction of sale, with labor incidentally involved (e.g., installation of a water heater in a bathroom).” BMC Industries (11th Circuit, p. 29).
While no one factor is determinative, the court in BMC Industries notes several significant factors:
1) The language of the contract à Words such as “purchase” and use of “buyer “ and “seller” usually indicate that the transaction is for goods rather than services
2) The manner in which the transaction was billed à When the contract prices does not include the cost of services, or the charge for goods exceeds that for services, the contract is more likely to be one for goods
3) Mobility
NOTES
· Equipment/Machinery Contracts à Even though the equipment/machinery must be designed and manufactured by the seller, courts characterize such activities as “specially manufactured goods” under the definition of “goods” in Article 2.
· Construction Contracts à Construction Contracts are not covered by Article 2 if the object is to build a house or other “turn key” facility. This is because the final “product” is not movable.
Goods and Information
In Advent Systems (p. 44), the Third Circuit held that software is a “good” within the meaning of Article 2. Although computer software is “the product of an intellectual process,” the court reasoned that once it is in the form of a disc or other medium that is “tangible, movable and available in the marketplace,” software is transformed into a good. The court based its decision on two important policy considerations: (1) the importance of software to the commercial world and (2) the advantages to be gained by establishing a precedent that can be uniformly applied in future cases.
The Relationship of the Commercial Code and Common Law
§1-103(b) provides that unless displaced by the UCC, the common law applies. Specifically, the UCC supersedes the common law as it pertains to:
· Contract Formation
o §2-204 eliminated the need to find an offer and acceptance in contracts for the sale of goods
o §2-206 validates the parties’ behavior/performance as a means of determining whether they entered into a contract
o §2-201 relaxed the Statute of Frauds requirement considerably (see p. 55 for more details)
· The Terms of the Contract
o Gap Fillers (See §2-305, §2-308, §2-309)
o Battle of the Forms à §2-207 recognizes that contracts may be formed despite the parties’ use of non-matching forms
· Modification
o Under the common law, parties needed consideration in order to modify a contract. However, §2-209 eliminated the need for consideration in order to facilitate sales transactions.
Regulation of Private Conduct
The Doctrine of Unconscionablility
§2-302 authorizes courts to deny enforcement of “unconscionable” agreements. Although the UCC does not define “unconscionable,” the issue is not one of fact for the jury because the UCC specifically provides that the issue is one for the court. The doctrine serves the purpose of negating an advantage gained through oppression (substantive unconscionability) and unfair surprise (procedural unconscionability). However, the doctrine seldom applies. In El Paso Natural Gas (p. 62) the court said “[o]ne’s right to negotiate a bargain, to exercise free will, to choose a path, and to even make a bad deal must be admitted and respected.”
RULE from El Paso Natural Gas à “[I]t must be shown that the agreement in question arose through procedural and substantive abuse.” Procedural abuse means that unfairness tainted the negotiation process leading to the agreement’s formation. Substantive abuse means that the contract itself is oppressive. See p. 65 for examples of procedural and substantive abuse.
* The overarching consideration is determining whether a contract is “unconscionable” is the sophistication/bargaining positions of the parties. *
The Obligation of Good Faith
§2-103(j) defines “good faith” as “honesty in fact and the observance of reasonable commercial standards of fair dealing.” The good faith obligation spans the entire Commercial Code and is a question of fact for the jury.
The good faith obligation applies to “performance and enforcement” of contracts, but not to negotiation of contracts.
Changed Circumstances
§2-615 enables sellers to escape their obligation due to some unforeseen changed condition.
The Relationship of CISG to Underlying Law
The Parol Evidence Rule
The parol evidence rule op
f title.” Some jurisdictions still hold that “a breach of warranty of title occurs only when an outstanding superior title exists.”
Breach of Warranty of Title Damages
* See below
Good Faith Purchase of Goods
Sales by Agents
“A principal is bound in circumstances where an agent had apparent authority as well as circumstances in which a third party had reason to believe that an agent had power to act for its principal.” (Book, p. 111)
Good Faith Purchase
Where B steals goods from A and resells the goods to C who is unaware of how B obtained the goods, A may recover the property from C because B’s title was void.
Where B fraudulently induces A to sell, and then B sells the goods to a Bona Fide Purchaser (BPP), B has “voidable title” and A’s cannot recover the property from the BFP.
This principle is set forth in §2-403.
In Nowlin Jewelry (p. 113), a TX court said that a “transaction of purchase” under §2-403 must be a voluntary transaction.
What is BFP? à A person who purchases a good in good faith with an honest belief that the seller had the right to make a sale. The test for good faith is the actual belief of the party and not the reasonableness of that belief. Nowlin Jewelry.
“Entrusting” and “Buyers in Ordinary Course”
§2-403 provides that “Any entrusting of possession of goods to a merchant that deals in goods of that kind gives him power to transfer all rights of the entruster to a buyer in ordinary course of business.”
The rationale behind the provision is that the risk of loss through fraudulent transfer should lay with the owner of the goods since he can select the merchant to whom he entrust his property. Porter v. Wertz (p. 122).
Example: Jan leaves her watch with a jeweler to be repaired. The jeweler sells both new and used watches. The jeweler sells Jan's watch to Kim a customer, who does not know that the jeweler has no right to sell it. Kim, as a good faith buyer, gets good title against Jan's claim of ownership. Kim, however, obtains only those rights held by the person
