PART

PART

Sales

Formation & TermsProduct Liability

Performance of Sales ContractRemedies for Breach of Sales

Contracts

4

McGraw-Hill/Irwin Business Law, 13/e

© 2007 The McGraw-Hill Companies, Inc. All rights reserved.

Formation & Terms

PA ET RHC 19

“Merchants have no country. The mere spot they stand on does not constitute so strong an attachment as that from which they draw their gains.”

Thomas Jefferson, U.S. president and merchant, in a letter to Horatio G. Spafford (March 17, 1814)

Learning Objectives

Definitions of basic terminologyTerms (details) of sales contractsThe nature of “title”Title & third partiesRisk of lossSales on trial, approval, or

consignment

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Uniform Commercial Code (UCC) governs most commercial transactions in the United States and Article 2 covers the sale of goods Does not literally apply to trade in

services United Nations Convention on Contracts

for the International Sale of Goods (1980) provides rules governing risk of loss in international sale of goods contracts

The Sale of Goods

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Choice of Law

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Title (evidence of legal ownership) to goods cannot pass from seller to buyer until goods are identified to the contract [UCC 2–401(1)] Fundamental rule: buyer cannot receive

better title to goods than seller had Exception: Seller who has a voidable

title may pass good title to a good faith purchaser for value

Title to Goods

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UCC 2– 403(2): a buyer in the ordinary course of business may gain good title because s/he (a) in good faith and without knowledge

that the sale violates ownership rights of third party, and

(b) buys the good(s) from a merchant selling goods of that kind [UCC 1–201(9)]

Another Exception to Rule

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Trade practices are words commonly used in a particular industry

In an outputs contract, buyer purchases all the production of seller

In a requirements contract, seller agrees to provide all buyer’s requirements

Standardized shipping term are used to identify which party bears risk of loss

Common Rules of Interpretation

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FOB (free on board) point of origin: Seller bears expense and risk to deliver goods to place designated

FAS (free alongside ship): Seller bears expense and risk to deliver goods alongside vessel

CIF (cost, insurance, and freight): Price includes seller’s cost to load, ship, and insure the goods

C & F: Same as CIF without insurance

Common Shipping Terms

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Sale on approval, sale or return, or consignment is a common commercial practice in which seller of goods entrusts possession of goods to buyer to either give buyer an opportunity to decide whether to purchase or to resell them to a third person

Sales on Trial

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Test Your Knowledge

True=A, False = B UCC Article 2 governs most sale of goods

transactions in the United States Tom agrees to mow Katy’s lawn. Katy

failed to pay Tom as agreed. UCC Art. 2 applies to the contract between Tom and Katy.

An outputs contract is an agreement in which buyer purchases all the production of seller

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Test Your Knowledge True=A, False = B

CIF (cost, insurance, and freight) means buyer covers risk to load, ship, and insure goods

FOB (free on board) Port of Miami means that seller must deliver goods to the Port of Miami at seller’s risk and expense, including loading goods on board

FAS (free alongside ship) means that seller must deliver goods alongside the vessel at the port at seller’s own risk and expense

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Test Your Knowledge Multiple Choice

Ike’s Bikes sells motorcycles. Sam’s Used Cars & Cycles (Sam’s) sold Ike a used motorcycle. Ike believes the bike belonged to Sam’s since Sam’s produced papers that looked official. Sam’s had stolen the bike from Ted. Ike may: (a) sell the bike since he was a buyer in the

ordinary course of business and has good title (b) not sell the bike since it was stolen (c) sell the bike to any customer, but Ted will

win a lawsuit against Ike for damages since Ted is the rightful owner of the bike

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Test Your Knowledge

Multiple Choice Pacific Paper Co. (Pacific) and BoxCo had

a contract in which Pacific must provide all cardboard for BoxCo’s box production. This type of contract is known as a(n): (a) outputs contract (b) destination contract (c) supply contract (d) requirements contract (e) none of the above

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Test Your Knowledge Multiple Choice

Choi ordered 100 crystal vases from Kristal in New York. The contract stated the goods were to be delivered “FOB Choi’s, 111 Main, Cityville, TX.” The truck overturned en route and the vases were destroyed. Choi must: (a) pay Kristal the contract price and order

again since Choi contracted for the risk of loss

(b) notify Kristal to resend the order since Kristal contracted for the expense and risk of delivering to the destination

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Thought Questions

Jefferson said, “Merchants have no country.” Did globalization begin in his time? Do you agree with Jefferson?

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