Sales Law(redirected from Contract Formation)
The law relating to the transfer of ownership of property from one person to another for value, which is codified in Article 2 of the Uniform Commercial Code (UCC), a body of law governing mercantile transactions adopted in whole or in part by the states.
The sale of a good, or an item that is moveable at the time of sale, is a transaction designed to benefit both buyer and seller. However, sales transactions can be complex, and they do not always proceed smoothly. Problems can arise at several phases of a sale, and at least one of the parties may suffer a loss. In recognition of these realities and of the basic importance of orderly commerce to society, legislatures and courts create laws governing sales of goods.
The most comprehensive set of laws on sales, the Uniform Commercial Code (UCC), is a collection of model laws on an assortment of commercial activities. The UCC itself does not have legal effect; it was written by the lawyers, judges, and professors in the American Law Institute (ALI) and the National Conference of Commissioners on Uniform State Laws (NCCUSL). All states have adopted the UCC in whole or in part by enacting the model laws contained in its 11 articles.
Article 2 of the UCC deals with the sale of goods. All states with the exception of Louisiana have enacted at least some of the model laws in Article 2. Laws on the sale of real estate and the sale of services are different from laws on the sale of goods, and they are excluded from Article 2. A service contract may be covered by the provisions in Article 2 insofar as it involves the transfer of goods, and courts may use Article 2 as a reference for interpreting laws on the sale of services. Some contracts are a blend of the sale of goods and the sale of services and may be covered by Article 2. For example, the service of food by a restaurant may be considered, for some purposes, a contract for a sale of goods (U.C.C. § 2-314).
Article 2 covers sales by both private individuals and merchants. Merchants are persons engaged in the business of buying or selling goods. A small number of provisions apply only to merchants, but otherwise the provisions cover all sales.
A contract for the sale of goods can be made in any manner that shows agreement between the buyer and seller. A contract may be made orally or in writing or through any other conduct by both parties that acknowledges the existence of a contract.
To form a contract, one of the parties must make an offer, the other party must accept the offer, and consideration, or something of value, must be exchanged. An offer may be revoked without any loss to the offeror if the revocation is made before the other party accepts the offer and gives consideration. However, an offer may not be revoked for up to 90 days if it is (1) accompanied by an assurance that the offer will be kept open; (2) made by a merchant; and (3) in writing signed by the offering merchant (U.C.C. § 2-205).
If a party accepts an offer but in the process of accepting changes material terms of the offer, the acceptance may be considered a counteroffer. A counteroffer eliminates the first offer, and no contract is formed until the original offeror accepts the counteroffer and consideration is exchanged. In contracts between merchants, additional or different terms by the offeree become part of the contract unless (1) the offer expressly limits acceptance to the terms of the offer; (2) the new terms materially alter the contract; or (3) the offeror objects within a reasonable time.
Many basic principles of contract law also apply to the sale of goods. The Statute of Frauds requires that an agreement to sell goods at $500 or more must be in writing or it cannot be enforced in court. The writing must be signed by the party to be charged, it must contain language indicating that a contract has been made, and it must identify the parties to the contract and the quantity of goods sold. There are a few exceptions to the Statute of Frauds.
A sales contract that is Unconscionable may be struck down in whole or in part by a court. A sale is unconscionable if a person in a superior bargaining position dictates terms that are grossly unfair to the other party. A court will determine whether a sale is unconscionable by examining the circumstances at the time the contract was made. Courts rarely find unconscionability in sales between merchants because merchants generally are more sophisticated in sales negotiations than are non-merchants.
Parties to a sale sometimes do not include all the terms of the sale at the time the agreement is made. Such omissions will not destroy the agreement if the parties intend to add terms at a later date. If the parties wish to modify an existing sales contract, the modifications should be in writing if they increase the value of the sale to $500 or more.
Issues Arising Prior to Performance
Performance is the fulfillment of a promise in the contract. Many issues can arise in a sales contract after the contract is made and before a party's performance is required.
Sometimes performance may be made impracticable. If the goods are completely destroyed before the risk of loss has passed to the buyer, and the goods have not been destroyed through the fault of either party, the seller may be excused from performing. Risk of loss is responsibility for any damage or destruction of goods; the parties may decide in the contract when the risk of loss of the goods passes from the seller to the buyer. If the goods are only partially destroyed or have deteriorated, the buyer may demand to inspect the goods and either void the contract or accept the goods with a reduction in the contract price.
A seller may avoid performing only if the destroyed goods were specifically identified when the sale was made. For instance, if the sale is of a lamp handpicked by the buyer, the destruction of that particular lamp would excuse the seller's performance, and the seller would not be liable to the buyer for the loss. However, if the contract is simply for a lamp of a specific description, the seller could tender any lamp that meets the description, and the buyer would not be excused from performing.
There are two situations in which a party must make a substituted performance in case the agreed method of performance becomes impracticable. First, when the goods cannot be transported by the agreed-upon method of transportation, the seller must use available transportation that is a commercially reasonable substitute. Second, if an agreed-upon method of payment fails, the buyer must use a commercially reasonable substitute method of payment if one is available. If a party fails to substitute transportation or payment, that person could be liable to the other party for losses resulting from the failure.
In some cases the purpose of a sale may be frustrated by circumstances beyond the control of both buyer and seller. For example, assume that a party agrees to buy one thousand T-shirts in anticipation of a local rock concert. If the concert is cancelled after the sales contract is made, the buyer may escape the contract under the doctrine of frustration of purpose.
At times it may appear to a party that the other party will be unable to perform by the expected date. For example, assume that a party agrees to sell goods on credit. If the buyer becomes financially insolvent before the goods are delivered, the seller may demand cash before delivering the goods. If the goods are in transit, the seller may instruct the carrier to withhold delivery of the goods. A party is considered insolvent if he or she cannot pay debts as they come due, has ceased to pay debts, or has liabilities that exceed assets.
If a party has reasonable grounds to feel insecure about the other party's ability to perform, the insecure party may demand assurances before performing. For example, a seller may be insecure if a buyer falls behind in payments, or a buyer may feel insecure if a seller delivers defective goods to another party and those goods are of a kind similar to those expected by the buyer. In such cases the concerned party may demand assurances such as an advance payment or some other Affirmative Action, and if the other party does not provide any assurance, the concerned party may withhold performance. Alternatively, if the other party gives the assurance, the concerned party must follow through on his obligations. Precisely what constitutes an effective assurance is a Question of Fact that depends on the nature of the goods, the size of the contract, the length of time until performance, and similar considerations. In any case a concerned party may not make commercially unreasonable demands on a party prior to performance and then withhold performance if the other party does not meet the demands.
If a party unequivocally declares an unwillingness to perform prior to the time of performance, the other party may consider the declaration an anticipatory breach of the sales contract. An anticipatory breach operates in the same way as an actual breach and gives the nonbreaching party the right to sue for losses resulting from the breach. A refusal to give assurances after a demand for assurances may be considered an anticipatory breach. A party may retract a repudiation if the retraction is made before the aggrieved party cancels the contract.
Generally, the seller's primary obligations are to transfer ownership of the goods and deliver the goods. A seller may agree with the buyer to perform other obligations. For instance, a seller may agree to package or label the goods in a certain way or service the goods for a specific period of time.
A seller should convey the title to the goods free from any security interest or other lien or claim, unless the buyer was aware at the time of the sale that other persons had a claim to the goods. If the sales contract does not specify a time of delivery, the seller should deliver the goods within a reasonable time after the contract is made. Delivery should occur in one shipment unless the parties agree otherwise. If the sales agreement does not indicate where the goods are to be turned over, the delivery of the goods should occur at the seller's place of business. The tender of the goods should be at a reasonable hour of the day, and the buyer should have the ability to take the goods away.
If the goods are in the possession of a third party, or bailee, at the time of the sale, the seller must arrange matters with the bailee so that the buyer may take possession. If the goods are to be transported, there are two ways to handle delivery. The buyer and seller may agree to a shipment contract, in which case the seller must arrange for the transportation. In a shipment contract, the seller's duties for delivery are complete as soon as the goods are delivered to the carrier. With a destination contract, the seller's obligation to deliver does not end until the goods are delivered to the buyer or at a selected location.
In the context of the sale of goods, a Warranty is concerned with identifying the kind and quality of the goods that are tendered by the seller. The two basic types of warranties are express warranties and implied warranties.
An express warranty is any representation or affirmation about the goods made by the seller's words or conduct. For example, the description of the goods in the sales contract constitutes an express warranty that the goods will conform to the description.
Implied warranties are warranties that are imposed on sellers by law. A warranty of merchantability is implied in every sales contract. This warranty is a promise that the goods pass without objection in the trade, are adequately packaged, conform to all promises or affirmations of fact on the container, and are fit for the ordinary purposes for which such goods are used. The Implied Warranty of merchantability also includes a promise that multiple goods will be of even kind and quality.
Another implied warranty recognized by courts is the warranty of fitness for a particular purpose. This warranty requires that goods be fit for an identifiable, particular purpose. It is effective only if the seller has reason to know of any particular purpose for which the goods are required and also knows that the buyer is relying on the seller's expertise to select suitable goods.
Some sellers attempt to disavow any responsibility for the quality of their merchandise. Sellers may not disclaim the warranty of merchantability unless they use the word "merchantability" in the disclaimer, which may be oral or written. If written, the disclaimer clause or term must be conspicuous. The implied warranty of fitness for a particular purpose may be disclaimed in writing, but it cannot be disclaimed orally. In some states, statutes or court decisions prohibit the disclaimer of warranties in consumer sales.
If a seller fails to tender goods, the buyer may choose one of three remedies. First, the buyer may seek damages from the seller. Damages are the total financial losses resulting from the failure to tender. Generally, damages for non-delivery consist of the market price of the goods minus the sale price. Market price is figured by determining the market price at the time the buyer learned of the breach at the place the tender was to have been made.
Second, the buyer may cover or purchase similar goods elsewhere and then recover for losses resulting from the purchase. If the purchase price of replacement goods is greater than the original sale price, the buyer may recover the difference from the seller. The buyer must cover in Good Faith, without delay, and on reasonable terms. When a seller is unable to perform a sale as agreed, the buyer should try to minimize his or her damages by covering the loss. If an aggrieved buyer fails to make reasonable efforts to cover, a court may reduce any damage award to account for the failure.
Third, a buyer may force the seller to perform by taking the seller to court and obtaining an order for Specific Performance or maintaining an action for Replevin. An action for specific performance may be ordered if the goods are unique and in other proper circumstances. Goods may be considered unique if the buyer is unable to find the goods elsewhere. An action for replevin is a method of recovering goods that is similar to specific performance. Replevin is allowed where the goods are specifically identified in the contract and the buyer is unable to cover the goods after a reasonable effort, or the circumstances indicate that the buyer will be unable to cover. If a buyer has paid only part of the sale price and the seller becomes financially insolvent within ten days of the first payment and is unable to tender the goods, the buyer may pay any remaining balance and sue to obtain the goods. This would give the buyer the goods and prevent the seller from using the goods to pay other debts.
If the buyer elects to collect damages after covering or damages for non-delivery, the buyer may collect additional damages called incidental damages and consequential damages. Incidental damages are those resulting from the seller's breach. These include expenses incurred in inspection, receipt, transportation, care, and custody of goods rightfully rejected; any commercially reasonable charges or expenses incurred in covering; and any other reasonable expense incident to a delay in tender of the goods or other breach on the part of the seller. Consequential damages include any loss that results from requirements of which the seller is aware at the time of contracting and that could not have been prevented by cover or other method, and foreseeable and avoidable injuries to persons or property resulting from a breach of warranty.
In some cases the buyer and seller may agree in the sales contract to Liquidated Damages. Generally, a liquidated damages clause is placed into a sales contract to fix damages at a certain amount in case a party is unable to perform. A court may strike down a liquidated damages clause if it does not bear a reasonable relationship to actual damages or anticipated damages.
If a seller tenders nonconforming goods, or goods that do not meet the specifications in the sales contract, the tender constitutes a breach of the contract. In such a situation, the buyer may either accept or reject the goods. Any recovery by the buyer will depend on whether the buyer accepts or rejects the goods.
A buyer has the right to inspect goods before accepting them. If the goods are nonconforming, the buyer may accept the goods and recover from the seller the difference between the value of the goods as warranted and their actual value with the defects.
A buyer may elect to reject nonconforming goods. To reject goods, the buyer must take some positive action to give the seller notice of the rejection. If the seller can cure the problem, the buyer should tell the seller why he is rejecting the goods or risk a reduction in damages. In transactions between merchants, a buyer should specify the problem to the seller if the seller makes a written request for a full and final written statement of all defects on which the buyer bases the rejection.
A seller has the right to cure nonconforming goods if he gives notice to the buyer and if conforming goods can be delivered before the last date for delivery under the sales contract. In any case a buyer may agree to extend the time for delivery of conforming goods. In some cases a buyer may have no choice. Under section 2–508(2) of the UCC, if a seller sends nonconforming goods that he reasonably believed would be acceptable, the seller has additional time to deliver conforming goods if he gives notice of such intent to the buyer.
If a buyer rejects goods, the buyer may not exercise any ownership over the goods. The buyer must hold the goods for a reasonable time and permit the seller to remove them or await instructions from the seller. If the seller issues instructions to the buyer, the buyer should follow any reasonable requests. For example, if the goods are perishable and the seller has no local agent, the buyer should attempt to sell the goods for the account of the seller. The buyer then could recover the difference between the amount that the buyer could have made with the goods and the amount that the buyer actually received.
If the buyer rejects nonconforming, nonperishable goods and the seller has no agent near the buyer, the buyer should follow instructions from the seller. If the seller issues no instructions, the buyer may either store the goods for the seller's account, reship the goods to the seller, or sell the goods for the seller's account. An aggrieved buyer may then recover any losses incurred in storing, shipping, or reselling the goods.
If a buyer rejects nonconforming goods and cannot sell them, the buyer may hold the goods for the seller and recover the difference between the market price of the goods as warranted and the value of the goods as delivered. A buyer also may ask for specific performance. If the seller is unable to provide the goods as requested, the buyer may recover any money already paid toward the sale plus any consequential or incidental damages resulting from the breach.
A buyer's basic obligations are to accept the goods and pay the sale price. If the goods are nonconforming, the buyer may reject the goods. If the goods conform to the specifications of the sales contract and the buyer wrongfully rejects them, the seller may choose one of four options, or a blend of two or more options.
First, the seller may sue for damages. The amount of damages for a wrongful rejection would be the sale price minus the market price of the goods, measured at the time and place of the tender. Second, the seller may sue for the price of the goods, but only if the goods cannot be resold in the seller's ordinary course of business or if circumstances indicate that resale efforts will be fruitless. Third, the seller could cancel the contract, putting an end to shipments and reserving the right to sue for damages or collect unpaid balances. Fourth, the seller could resell the goods to a third party and recover the difference between the sale price and the resale price plus any incidental damages.
The resale of wrongfully rejected goods presents a few special problems. Under section 2–706 of the UCC, the sale may be either public or private. A private sale is made personally by the seller, whereas a public sale is made with public notice and carried out by a sheriff or at a publicly held auction. In either case the sale must be commercially reasonable in method, manner, time, place, and terms. Furthermore, the seller must notify new buyers that the goods are being resold under a breached contract to disclose the potential for legal conflict.
A seller who resells wrongfully rejected goods must inform the original buyer of the resale. If wrongfully rejected goods are perishable, the seller need not give notice to the buyer of the time and place of the resale. If the resale of wrongfully rejected goods is at a public sale, only goods identified in the contract may be sold, and the sale must be made at a usual place for public sale, provided that such a site is reasonably available. If the goods are not in view of bidders at a public sale, the public notice of the sale must state the place where the goods are located, and the seller must give bidders an opportunity to inspect the goods. If the seller resells the goods for a price higher than the price in the original sales contract and the extra profit covers costs incident to the resale, the seller has no damages, and the original buyer is not liable to the seller for the wrongful rejection.
In sales where the buyer pays a deposit and then wrongfully rejects the goods, the seller may keep the goods and the deposit. However, a seller is not entitled to a deposit that far exceeds his or her actual or expected damages. Under section 2–718 of the UCC, a buyer is entitled to restitution of any amount by which the sum of the payments already made exceeds either (1) the amount of any reasonable liquidated damages clause, or (2) 20 percent of the value of the total performance for which the buyer is obligated under the contract, or $500, whichever amount is smaller.
When a buyer accepts a seller's tender of conforming goods, the buyer is obligated to pay the sale price contained in the contract for sale. In some cases the parties may fail to agree to a price or choose to leave the price terms open. Under section 2–305 of the UCC, if a price term is left open, the price should be set in good faith at a reasonable market price at the time of delivery. If the parties intend that there is to be no contract unless a price is agreed to or fixed by a particular market indicator and the parties ultimately are unable to agree to a price term, there is no contract. In such a case the buyer must return any goods received, and the seller must return any money paid by the buyer.
Generally, a buyer has the right to pay in any manner observed in the business unless the seller demands a particular form of payment. Unless the parties agree otherwise, payment should be made when the goods are delivered to the buyer. A buyer does not have the right to inspect the goods if they are delivered cash on delivery or on similar terms, or if the contract provides for payment before inspection.
Installment contracts have a few of their own special rules. An installment contract calls for periodic performances over a length of time. The parties may agree to make payments in any way, but if the sale price can be divided, the buyer usually makes payments on installment contracts upon each delivery of goods.
Buyers in installment sales do not have the same full rights of rejection as buyers in other sales. If a seller tenders an installment of nonconforming goods, the buyer may reject the installment only if it substantially impairs the value of that installment and cannot be cured. Under section 2–612 of the UCC, if the nonconformity is not substantial and can be cured by the seller, the buyer must accept a nonconforming installment and sue for damages.
The tender of one nonconforming installment in an installment contract for sale does not always constitute a total breach of the entire installment contract. Generally, a non-breaching party to an installment contract may cancel the contract only when a breach or cumulative breaches substantially impair the value of the entire contract.
The NCCUSL and the ALI began work in the late 1980s on a revision to Article 2 of the UCC. Work on the project seemed to be finished in 1999, when the ALI approved what it thought was the final draft of the revision. However, opposition from certain important industries, including software manufacturers, led to the withdrawal of the revision. It was feared that many states would refuse to adopt the changes because of this opposition.
The controversy surrounding the revision has centered on software, downloadable information and "smart goods." These types of goods, which include cars, refrigerators, and other appliances, use computer programs to enhance their performance. By 2002 the drafters' latest revision excluded "information" from the definition of goods, thus removing the downloading of electronic information from the reach of the Article. However, the comment section to the draft noted that Article 2 would cover the sale of smart goods, even though these goods include computer programs.
After years of work, the NCCUSL and ALI in May of 2003 adopted the revised version of Article 2. After its final review, which was being completed in 2003, the revised Article 2 will be sent to the states for their considerations in adopting the revised version. The process of state adoption will likely take a number of years.
American Law Institute. Available online at <www.ali.org> (accessed August 10, 2003).
National Conference of Commissioners on Uniform State Laws. Available online at <www.nccusl.org> (accessed August 10, 2003).
"Sales." 1994. SMH Bar Review.