M - 3 Contracts: Part 3

Question 1

What is the difference between a merchant and someone just selling goods out of their home? Are merchants held to a higher standard under the UCC rules?

Answer 1

A merchant is someone who is considered an “expert” under the UCC rules and they are subject to a higher standard, compared to someone who is just selling things at a garage sale. Merchants could be stores for example.

Question 2

Are merchants held to a standard of fair dealings? Is this the same for common law?

Answer 2

Yes they are, they have to make sure that the deal is fair under UCC rules. Under common law, the deal does not have to be fair, so it is important to note.

Question 3

Under the common law, if you want the offeror to keep the offer open, you have to buy an option. Does this same rule apply to merchants?

Answer 3

If a merchant promises to keep an offer open for you, in writing, then they have to honor that promise (maximum three months). Exception, if you want more than three months than you have to pay for that. No consideration is needed for this. For common law and most UCC cases, you have to buy an option to keep that offer open.

Question 4

For accepting an offer, how do the UCC rules differ from the common law rules?

Answer 4

You can accept in any way you want, unless the seller specifies in the contract, that they want you to accept a certain way.

UCC does not follow the mirror image rule, and you can minor changes to the contract and they will go through.

Question 5

When making minor changes to a contract under UCC, whose minor changes will govern the contract?

Answer 5

Unless the sale is between two merchants, then the offeror’s original terms will govern the contract.

Now if the offer is between two merchants, then the offeree’s terms will govern the contract.

Lastly, if a major change is made to a contract, that is not okay, and that would be a counteroffer.

Question 6

How does the UCC rules differ from common law when it comes to performance of a contract? For example, what happens if under UCC if they ship the wrong order? What is the exception?

Answer 6

Under common law, if someone order’s 17 red dresses and you ship 16 red and 1 pink, that is not a breach of contract. It was a mistake, but not a breach.

Same example above, but under UCC, that is a breach of contract. The order has to be perfect, or else we have a breach.

The exception is if you attach a letter. Let’s say, you ship the dresses but explain why you shipped pink. Maybe you ran out of red, that is not a breach, but rather a counteroffer.

NOTE: This acceptance only applies to unilateral contract’s, where someone accepts the offer by performance. For example you place an order, and they ship it with the note. That is okay.

This does not work under bilateral, where someone promises instead of performance. For example, you place the order and someone promises to get you the dresses. They send the wrong dress and attach a note. This will not work, only works for unilateral.

Question 7

How do auctions work under the UCC? What does “with reserve” and “without reserve” mean?

Answer 7

The auctioneer is the offeree, and the people bidding are the offeror’s. The highest bid “normally” wins, and when the auctioneer hits his hammer on the table, that means acceptance.

With reserve, means that if the auctioneer does not feel like the bid is high enough, he can choose not to sell.

Without reserve, the auctioneer has to sell to the highest bidder.

Question 8

How are modifications to contracts different from UCC to Common Law?

Answer 8

Under common law, you can ask for changes in the contract, and if the seller agrees, you have to pay them some sort of consideration. If you don’t, and the seller backs out of the modification, then it does not become enforceable.

Under UCC, you can modifications, and if the seller agrees, no consideration or payment is needed.

Question 9

Under UCC, how can payments be made? What are the exceptions?

Answer 9

You can make a payment via check, or any way you want, unless the seller demands a certain type of payment. If they demand cash, they have to give the buyer reasonable time to obtain the cash.

Question 10

Under the statue of frauds, what is the time frame you can use fraud as a defense under common law, and UCC?

Answer 10

Common law - 4 to 6 years.

UCC - Up to 4 years, as of the date of the breach. Not when the contract was signed.

Question 11

Under the UCC, if the goods are over 500 dollars, it has to be in writing. What are the four exceptions?

Answer 11

S - Contracts for specially manufactured items. You had to communicate your needs and wants to the manufacturer, so they count that as some sort of writing.

W - If the merchant send the buyer a written confirmation of the order, and the buyer does not object after 10 days, no writing is needed.

A - If it has been admitted in court, no writing is needed.

P - If the performance already happened, then no writing is needed.

Question 12

What type of writing will suffice under the UCC?

Answer 12

Does not have to be a formal contract.

Can be stated in more than one writing

Can be emails, texts, etc.

Must be signed by the defendant, and a have essential terms (quantity).

Question 13

What are exceptions where quantity is not needed under UCC?

Answer 13

Seller agrees to supply all the buyers’ needs for the a period of time.

Output contract: Seller agrees to sell to the buyer everything it produced over a period of time.

Question 14

Under common law, Impossiblity is a defense that can be used to show the contract cannot be performed. Is this the same for UCC?

Answer 14

Yes, but UCC takes it one step further. If it is “Impracticable”, that is also a defense to get out of the contract.

Question 15

As a general rule, what is the seller’s basic duty when it comes to holding and shipping good?

Answer 15

Usually, all the seller needs to do is hold the item for the buyer, and give the buyer enough notice so they can come and pick up their order.

Question 16

What does it mean for the risk of loss to pass to the buyer?

Answer 16

This means that when a seller sells something to the buyer, whoever owns the good, are the ones that have risk of loss. For example, if you go to the ice cream truck and order some ice cream. You pay the driver and they hand you your ice cream cone. You drop it and it goes everywhere. Since you have the ice cream cone, you bear the risk of loss, the ice cream driver is not responsible for giving you a refund.

Question 17

What are the steps for the risk of loss to pass the buyer?

Answer 17

Step 1: The goods must be identified. This is when the seller finds the product and marks it, segregates it, or uses some method to identify the good to that specific buyer.

Step 2: Parties must agree on contract terms. If both parties spell out in their contract when the risk of loss is transferred from buyer to seller, the agreement will govern the passing. Most of the time this is not spelled out, and the agreement is silent, which applies in step 3.

Step 3: This is when the risk of loss is not spelled out in the contract. Rules apply but see other flashcard for the rules.

Question 18

For step 3: Default rules apply in the absence of an agreement. What are the two categories that this can apply too?

Answer 18

Non carrier cases - Default rule, seller has no duty to ship the goods, and the buyer will pick them up. This applies for both merchants and sellers just selling for fun.

Carrier’s case - Parties agree that the seller will ship the goods.

Question 19

When does the risk of loss pass to the buyer under noncarrier cases for sellers and merchants?

Answer 19

For noncarrier merchants:

• If not a merchant, the risk of loss passes to the buyer as soon as the seller says you can pick up the goods. For example: at a garage sale, you pay for a TV but tell the seller to hold the TV until you and your buddy go pick up a truck to carry the TV. On the way back, the TV was destroyed by a fire. Since the seller said it was ready to pick up, that is when the transfer or risk passed, and they can keep your money.
• If the seller is a merchant, than the risk of loss only passes upon delivery. They have to hand the goods to the buyer.

Question 20

When does the risk of loss pass to the buyer under carrier cases?

Answer 20

It depends if the shipment is a shipment contract or a destination contract.

A shipment contract means that, once the item is in the truck ready for shipment, then the risk of loss passes to the buyer. Has to be in the truck, just on the doc is not good enough.

A destination contract means that the risk of loss is not passed until the item has been delivered to the buyer. Until it is delivered, the seller holds the risk.

Question 21

How can you tell if it is a shipment contract or destination contract?

Answer 21

Look for what comes after FOB.

If it is FOB, seller’s city - it is a shipment contract

If it is FOB, buyer’s city - Then it is a destination contract.

Question 22

What if the seller ships the wrong goods. When would risk of loss pass to the buyer under this scenario?

Answer 22

The risk of loss stays with the seller, since they did not provide the goods specified in the contract. If the buyer decides to accept these goods anyway, then they accept the risk of loss.

Question 23

What is a perfect tender?

Answer 23

This is under the UCC where the seller needs to make all the goods perfect. Under common law there is not a breach but UCC there is. So if you sell the wrong goods under UCC, then this is a breach. Any defects at all, the buyer can return.

Question 24

What are the four types of warranties? Which ones are implied and what does that mean?

Answer 24

Express Warranty - This is something that enticed the buyer to buy the goods. These can be oral or in writing.

Implied Warranty of title - Seller owns the title and they have the right to sell it.

Implied warranty of merchantability - Goods sold from a merchant must fit the ordinary purpose intended.

Implied warranty of fitness for a particular purpose - Goods sold must be fit for buyers particular purpose.

The last three are implied, and those are warranties put into place by law.

Question 25

What is an express warranty? What are some examples?

Answer 25

These are any statement of fact by the seller, that enticed the buyer to buy that item. This can be any fact, description, or sample or model made by the seller.

Educes the buyer to buy the goods, and must involve facts. Statement of opinion does not imply express warranty.

For example, you say the car is new or can go 0-60. That is an express warranty that is held.

Note, this has to be before the purchase of the item, not after.

Question 26

Are express warranties only made my merchants?

Answer 26

No, can be made any seller and can be oral or written.

Question 27

What is implied warranty of title? How can this be disclaimed?

Answer 27

This is implied in every contract by law basically stating this:

The seller has a good title to that item

They have the right to transfer that title

There are no liens on that title, more higher standards for merchants.

To be disclaimed you have to come out and say it with specific language, or any circumstances where the seller shows they do not have title (auctioneer). You have to say “I do not warrant title.”

Question 28

What is Implied warranty of merchantability? Can this be disclaimed?

Answer 28

This is when a merchant sells a good, there is an implied warranty that the goods are fit for their ordinary purpose. (Ex: Car is road ready).

Made only by merchants, but the buyer does not have to be a merchant.

Yes, if the merchant says “as is” or “with all faults” then there may be something wrong with it. Can be oral or in written.

Question 29

What is Implied warranty of fitness for a particular purpose? Can this be disclaimed?

Answer 29

This can be made by any seller, does not need to be a merchant. The seller must know the particular purpose for the good and the buyer is relying on them to select the goods.

Yes, have to say “as is” or “with all faults”, or just straight up disclaiming. Can be disclaimed writing or orally.

Question 30

Can their be both an implied warranty of merchantability and implied warranty of fitness for a particular purpose?

Answer 30

Yes, if you have a car shop, and someone comes to you because they need a car that can tow a boat. You have two warranties. One since you are a merchant, and second because the buyer is relying on you for a specific good that can tow their boat.

Question 31

If someone is injured by a defective product, who can sue? The buyer or anyone that was injured?

Answer 31

Anyone can sue, if you let someone borrow your watch and it explodes, the person borrowing it can sue the seller.

Question 32

What is anticipatory repudiation? What are the consequences?

Answer 32

This is when the buyer or seller indicate in advance that they will not perform their portion of the contract. For example, an auditor is scheduled for an audit that week, and they say the week before that they will not show up. (Both common law and UCC)

The good guys (nonbreaching party): they can sue immeditly, cancel the contract, demand assurances, or wait until time of performance and then sue them.

The repudiating party, can withdrawl their repudation until the other party acts on it, if they act on it.

Question 33

What is right to demand assurances if reasonable ground exists?

Answer 33

Under the UCC and common law, this is when the buyer, has reason to believe, that the seller will not perform. For example, you heard the CPA firm that you are hiring, is having money problems and might go out of business.

The buyer can make a written demand for assurance of performance from that party. If the reasonable party does not provide assurance within a reasonable time you can sue now, cancel the contract, wait for performance and sue later.

Cannot sue for punitive damages, that is only fraud.

Question 34

What is duty to mitigate? What are some examples?

Answer 34

You are not going to get damages for anything that could have been reasonably avoided.

Under common law, if your tenant breaches, you can’t keep suing them every month and hope that they pay. You as a landlord have to make an effort to replace that tenant and avoid damages.

Under UCC, you cannot keep using a product if it hurts you. If you keep using it, those damages could have been avoided. This is for both the buyer and the seller.

Question 35

What are some of the remedies if the buyer breaches?

Answer 35

The seller can cancel and sue for damages

Seller can resell the goods, and if they got any losses on the resale, the difference between the contract price and what they got, they can sue the seller for.

Seller can withhold delivery or cancel the delivery if they already have been shipped.

Question 36

Can the seller sue the buyer for the full amount of the contract?

Answer 36

Yes, if they cannot find a buyer.

Let’s say it was custom made goods, and they cannot find a buyer. Or, after the risk of loss has passed to the buyer, the seller can sue for the whole price.

If the buyer already paid and the risk of loss has already passed to the buyer, the seller can keep the full contract price.

Question 37

What are liquidated damages under the UCC?

Answer 37

This is a cause in the contract that specifics what the amount would be in a breach of contract. This is both the same for UCC and common law.

Unique to UCC, if there is no liquidated damage clause, if they buyer made a downpayemnt, you can keep the lesser of 500 or 20% of the sales price.

Question 38

What happens if the seller breaches?

Answer 38

Buyer can reject for any nonconformity, under UCC they must make a perfect tender, buyer can cancel and sue for damages.

Reject all of the goods,

Reject some of the goods

Accept all of the goods.

Question 39

Can the buyer inspect the goods prior to paying? Can they do this for a COD (cash on delivery)?

Answer 39

Yes, the buyer can inspect the goods before accepting. They cannot do that under a COD. This is when a UPS driver delivers your goods, and they demand payment prior to delivery.

Upon inspection, if the goods are nonconforming, the buyer can

• Reject the goods, revoke acceptance of the good, cancel the contract, or sue for damages. Note: This is very different from common law, seller still has to pay for minor breaches and so on.

Damanges are usually the difference between the vaule of the conforming goods and the value of the goods delivered, plus incidental and consequential damages.

Question 40

What can the buyer do if the goods were never delivered?

Answer 40

The buyer can do a “cover”, where they cancel the contract, and buy the goods someplace else. Once they do that, they can sue the original seller, for the price of the goods they purchased the goods and the contract price of the original seller.

Question 41

What can you do if you don’t “cover”?

Answer 41

You can sue for the difference between the market price and the contract price.

Question 42

What is right to specific performance or replevin?

Answer 42

If the goods are unique and the buyer cannot cover, they can demand that specific performance if they are unique.

This is also called replevin, where the good is wrongfully in the hands of the seller.

Question 43

What can you do if you the seller goes bankrupt, but you put a deposit on those goods?

Answer 43

You can ask for the good instead of suing in court. They have to be indentified for this to work.

Question 44

What is entrusting?

Answer 44

This is when someone steals your good and sells to an innocent third party. Can you get the good back? Yes.

Now if a merchant does this, you probably will not get your good back. This is like, if you give your watch to a jeweler to replace the battery, but they sell your watch instead. If it is a family heirloom, than you can probably get it back.