What are we
trying to “make sure” we are doing? We are attempting to transfer or deliver
conforming goods. But what happens
if the agreement is unclear or otherwise unstated?
GOOD FAITH 4737.02
• Obligations of good faith and commercial
reasonableness underlie every sales and lease contract under the
U.C.C. If these obligations are not met,
it forms a basis for later suit for breach of contract. Section 1-203 provides:
“Every
contract or duty within this Act imposes an obligation of good faith in its
performance and enforcement.”
èThe U.C.C.’s good faith requirement cannot be waived or disclaimed.ç
• “Good faith” means honesty in fact.
• In the case of a merchant, “good faith” means honesty in fact and the observance of reasonable commercial
standards of fair dealing in the trade. (In other words, the U.C.C. holds
merchants to a higher standard than
ordinary persons.)
OBLIGATIONS OF THE SELLER OR LESSOR:
TENDER OF DELIVERY 4737.05
PROBABLY THE MOST IMPORTANT OBLIGATION OF THE SELLER
OR LESSOR IS TO TENDER CONFORMING GOODS TO THE BUYER OR LESSEE!
• Tender of
Delivery requires that the seller
(1) have
and hold conforming goods at the disposal of the buyer, and
(2) give
the buyer reasonable notice to enable the buyer to take delivery.
• Unless
the parties have agreed otherwise,
(1) the
goods must be tendered for delivery at a reasonable
hour and kept available for a reasonable period
of time for the buyer to take possession; and
(2) all
goods called for by the contract must be tendered in a single
delivery, unless the circumstances are such that either party can
rightfully request delivery in lots.
PLACE OF DELIVERY 4737.05b
The UCC provides for the place of delivery if the
contract does not otherwise so state. Obviously, the parties can otherwise
agree. But lacking
agreement:
• Non-Carrier
Contract: Where the contract does not designate the place of delivery
for the goods,
(1) if the buyer is to pick them up from
the seller, the place of delivery is the seller’s place of
business or residence, if the seller has no regular place of business; or
(2) if
the goods are being held by
a bailee, the place of delivery is the
location of the goods.
• Shipment
(Carrier) Contract: Unless otherwise agreed, the seller must
(1) deliver
the goods to a carrier;
(2) make a contract,
reasonable according to the nature of the goods and their value, for transport
of the goods;
(3) obtain
and promptly deliver to the buyer any documents of title necessary for the
buyer to take possession of the goods from the carrier; and
(4) promptly
notify the buyer that shipment has been made.
PERFECT TENDER RULE 4737.05c
• Perfect Tender Rule: If the goods delivered or the tender of
delivery fail in any respect to conform with
the terms of the contract, the buyer has the right to (i)
accept the goods, (ii) reject the entire shipment, or (iii) accept part and
reject part.
• Exceptions
to the Perfect Tender Rule
• Agreement
of the Parties: Exceptions can be agreed to by the parties in their
contract.
• Right
to Cure: When
any tender of delivery is rejected because of nonconforming goods, and the time for
performance has not yet
expired, the seller can
(i) notify the buyer of the seller’s intention to cure and then
(ii) repair,
adjust, or replace the nonconforming goods within the time for performance
specified in the contract.
• Substitution
of Carriers: When the agreed upon manner of delivery proves
impracticable or unavailable, through no fault of either party,
(i) the seller may,
at his or her own expense, use a commercially reasonable substitute,
(ii) the use of which will constitute
sufficient tender. (maybe
an agreed upon carrier has gone on strike or out of business- another carrier
could then be used)
• Installment
Contract: Where a contract requires or authorizes delivery in two or more separate lots, to be accepted and paid
for separately,
(i) the buyer may reject tender only if the nonconformity
substantially impairs the value of the installment
and cannot be cured;
(ii) the
entire installment contract is breached only
when one or more nonconforming installments substantially impairs the value of
the entire contract; and
(iii) if
the buyer subsequently accepts a nonconforming installment without
notifying the seller of cancellation, the contract is reinstated.
• Commercial Impracticability: When occurrences,
unforeseen by either party at the time the contract was made (e.g., a change in
applicable law, destruction of goods), make performance commercially
impracticable,
(i) the rule of
perfect tender no longer applies, and
(ii) delay in delivery or nondelivery
in whole or in part is not a breach of
contract, provided that
(iii) the seller notify the buyer as soon as
practicable of the delay or nondelivery; but
(iv) in the event that the seller is able to
at least partially perform, the seller is
obligated to
(a) allocate,
in a fair and reasonable manner, any remaining production and deliveries among
those to whom it is contractually obligated to deliver the goods, and
(b) notify the buyer of the allocation, which the
buyer is free to accept or reject.
The book uses the example of a citrus grower who contracted to
sell 2000 crates of oranges to a food chain, but then a part of the production
was not able to be shipped due to a pesticide that causes cancer having been
sprayed on some of the crop. Here, the
grower has to allocate the production to its customers and notify its
customers. However, the food chain does
not have to accept the allocation, and if so, the seller has no more liability
to the food chain and can use that allocated amount to supply its other
customers.
• Destruction of Identified Goods: The parties are excused from
performance, when
(1) an unexpected event, through no fault
of either party,
(2) destroys goods identified when the
contract was formed,
(3) before the risk of damage passed to the
buyer under the contract.
NOTE.: If the goods are only partially destroyed, the buyer may inspect them and
either (i) void the contract or (ii) accept the
damaged goods at a reduced price.
• Right of
Assurance: If one party has “reasonable grounds” to believe that the
other party will not perform as agreed, she
may, in writing, “demand adequate assurance of due performance” from the other
party. For example, someone has a 3
shipment deal, but the seller hasn’t been paid for two shipments already made
and accepted. The seller can demand assurances that he will be paid before making the 3rd
shipment.
• Duty of
Cooperation: If one party’s performance requires the cooperation of the
other party, the second party’s failure to cooperate relieves the first party’s
obligation to perform. For example, one
party ordered a large number of computers but won’t tell the seller where to
deliver the computers after repeated efforts by the seller to attempt delivery.
OBLIGATIONS
OF THE BUYER OR LESSEE
PAYMENT 4737.06b
• Payment Term:
When goods are sold on credit, the buyer’s obligation to pay is conditioned on the credit terms provided in the contract,
not when the goods are
delivered.
• Method of
Payment: Payment can be made by any means specified by the parties, or
by any reasonable means if the parties do not specify a method of payment. If
the seller insists on cash when a buyer tenders a check or credit card, the
seller must give the buyer reasonable time to obtain cash.
RIGHT OF INSPECTION 4737.06c
• Right of
Inspection: The U.C.C. requires that the buyer be given an opportunity
to inspect the identified goods as a condition precedent to the seller’s or lessor’s right to enforce payment under the contract. This is an absolute right.
• Unless otherwise agreed,
inspection can take place at any reasonable place and time and in any
reasonable manner, in light of the customs of the trade, past practices of the
parties, and the like.
• The buyer bears the cost of inspection.
• C.O.D.
Shipments: If the seller ships the goods to the buyer cash on
delivery (“C.O.D.”) without the buyer’s agreement to do so, the buyer may
rightfully reject the goods as nonconforming, since C.O.D. shipment does not permit the buyer to inspect prior to making
payment.
ACCEPTANCE AND
ANTICIPATORY
REPUDIATION 4737.06a,d,e,f,h
• Acceptance: A buyer can accept the delivered goods by:
(1) expressly accepting the shipment by words or
by conduct after reviewing same;
(2) failing to reject
the goods within a reasonable period of time
after having had the opportunity to inspect the goods; or
(3) in
the case of a sale of goods, acting in any manner inconsistent with the
seller’s ownership. (i.e., a resale)
• Anticipatory
Repudiation: If, before the time for a party’s performance, she clearly
communicates to the other party her intention not to perform, the second party may:
(1) Treat the repudiation as a
breach and sue, or
(2) Wait and see if the
repudiating party retracts her repudiation and performs as called for.
• Note.: In either case,
the non-repudiating party may suspend its own performance unless and until the
repudiating party performs.
LETTERS OF CREDIT
• Letter of Credit: A document by which a bank
(the issuer) agrees to pay a seller or lessor
of goods (the beneficiary) upon the beneficiary’s performance of some
agreed obligation to a buyer or lessee (the account party)
, who, in turn, agrees to
re-pay the issuer.
• As a consequence, distant
sellers are assured of receiving payment upon delivery and distant buyers are
assured of receiving delivery before making payment.
• Bill
of Lading: Documentation, typically required in
a letter of credit transaction, evidencing the beneficiary’s delivery of the
subject of the contract to the account party or some mutually agreed upon bailee (third party).
• The letter of credit is
independent of the underlying agreement -- that is, the issuer does not warrant either party’s performance.
Rather, the issuer makes payment on receipt of the bill of lading or other document
evidencing performance, and is not obligated to otherwise determine whether
performance has been properly made. Therefore, any breach by the beneficiary or
account party must be pursued against the breaching party and not the
issuer.