SALES AGREEMENTS: UCC ARTICLE 2 AND PRACTICAL CONSIDERATIONS First Run Broadcast: June 24, 2014 1:00 p.m. E.T./12:00 p.m. C.T./11:00 a.m. M.T./10:00 a.m. P.T. (60 minutes) UCC Article 2/Sales governs virtually all sales contracts for tangible goods. It imposes detailed requirements for the validity and enforceability of sales contracts, timelines for buyers to accept or reject the delivery of goods, procedures for a seller’s repudiation of contracts, and remedies for a variety of breaches. UCC Article 2 also establishes an extensive framework of express and implied warranties, their general scope and how a seller can disclaim or limit liability, and the measure of a buyer’s damages on breach. Ensuring compliance with UCC Article 2A can be a daunting task and has become challenging with the spread of e-commerce. This program will provide you with a guide to the legal and practical framework of sales contacts under UCC Article 2, including essential elements for validity, the timeline of a contract, seller braches and buyer remedies, express and implied warranties, and much more.

• Legal and practical framework of UCC Article 2/Sales contracts – essential components and red flags

• Timeline of a sales contract – contract period, delivery of product, repudiation by seller, acceptance or rejection by buyer

• Seller’s breach – repudiation, failure to deliver, non-conforming product – and the buyer’s remedies

• Express and implied warranties – disclaimers, limitations, types and measure of damages • Warranties of merchantability, fitness for a particular purpose, title and against

infringement • Special issues related to installment contacts • UCC Sales contracts in in e-commerce

Speaker:

Christopher Tompkins is a partner in the Chicago office of Jenner & Block, LLP, where his practice as a litigator who focuses on resolving disputes for clients in complex commercial and technology-related matters. He counsels clients in such areas as breach of contract, the Uniform Commercial Code, equipment leasing, business torts, and intellectual property. He has handled all phases of litigation in state and federal court and before arbitration tribunals, including pre-litigation investigation, motion practice, discovery, working with expert witnesses, trial and appeal. Previously, Mr. Tompkins served as a legislative intern for the National Council of Commissioners on Uniform State Laws where he worked on legislation related to commercial law. Mr. Tompkins received his B.A., cum laude, from The Catholic University of America and his J.D., magna cum laude, from Loyola University Chicago School of Law.

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Sales Agreements:

UCC Article 2 and Practical Considerations Teleseminar

June 24, 2014 1:00PM – 2:00PM

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Sales Law:Contract Formation & Breach

Christopher TompkinsJenner & Block – Chicago

(o) (312) 840-8686

ctompkins@jenner.com

Pre-Acceptance Remedies Post-Acceptance Remedies

Timeline Of A Typical Sale

1

Contract

On September 1National Motorscontracts to buy100 widgets fromAcme.

Tender ofDelivery

On September 30Acme delivers100 widgets.

Acceptance

On October 1National Motorsinspects & accepts100 widgets.

CONTRACT FORMATION

2

Contract Formation Under The UCC

• Reduced Emphasis On Formalities:– UCC § 2-201 -- 0nly term that must be in writing

under the UCC’s statute of frauds is quantity.

– UCC § 2-207 -- contract can be formed even if partiesnot in complete agreement.

• Electronic Contracting:– UETA & E-Sign validate contracts formed

electronically.

– Any symbol, such as typed name on an e-mail, can bea signature.

– Can accept terms you haven’t seen.

3

“Battle of the Forms”

UCC § 2-207. Additional Terms In Acceptance Or Confirmation.(1) A definite and seasonable expression of acceptance or a written confirmation

which is sent within a reasonable time operates as an acceptance even though itstates terms additional to or different from those offered or agreed upon, unlessacceptance is expressly made conditional on assent to the additional or differentterms.

(2) The additional terms are to be construed as proposals for addition to thecontract. Between merchants such terms become part of the contract unless:

(a) the offer expressly limits acceptance to the terms of the offer;

(b) they materially alter it; or

(c) notification of objection to them has already been given or is given within areasonable time after notice of them is received.

(3) Conduct by both parties which recognizes the existence of a contract is sufficientto establish a contract for sale although the writings of the parties do nototherwise establish a contract. In such case the terms of the particular contractconsist of those terms on which the writings of the parties agree, together withany supplementary terms incorporated under any other provisions of this Act.

4

Rejection of Mirror Image Rule

• UCC § 2-207(1):

“A definite and seasonable expression of acceptanceor a written confirmation which is sent within areasonable time operates as an acceptance eventhough it states terms additional to or different fromthose offered or agreed upon, unless acceptance isexpressly made conditional on assent to theadditional or different terms.”

5

How is Acceptance Determined?

• By signing the other side’s contract document;

• By otherwise evidencing agreement to the otherside’s contract document, such as– by signing a letter accepting the other document;

– by e-mail,

– by clicking “I Accept”

• Through court admission;

• By evidencing agreement through course ofdealing.

6

Determining Contract TermsWhere Documents Conflict

UCC § 2-207(2):– The additional terms are treated as proposals

for addition to the contract.

– Between merchants such additional termsbecome part of the contract unless:

• “(a) the offer expressly limits acceptance to theterms of the offer;

• “(b) they materially alter it; or

• “(c) notification of objection to them is given.

7

“Additional” Terms

• Additional terms are provisions addressing anissue that is addressed in one of the contractdocuments, but not the other.

• Additional terms become part of the contract,unless they are “material.”

8

“Material” Additional Terms

• A material additional term is one that would“result in surprise or hardship if incorporatedwithout express awareness by the other party.”Official Comment 4.– Terms such as warranty disclaimers are generally

thought to be material. Official Comment 4.

– Terms such as a reasonable limitation on time forcomplaints are generally thought to be not material.Official Comment 5.

• Materiality is a question of fact for the court orjury.

9

“Different” terms?

• “Different” terms are conflicting terms.

• They address the same issue, but reachinconsistent results.– For example, the purchase order and invoice call for a

different method of delivery.

• UCC § 2-207(2) does not expressly address“different terms.”

10

The “Knock-Out” Rule

• Most jurisdictions follow the “Knock-Out” rule.– Under the “knock-out” rule, different terms in the

purchase order and the invoice are dropped fromeach.

– They are replaced by the appropriate gap-fillerprovisions of the Code.

11

UCC § 2-207(2) in a Nutshell

• Where invoice and purchase order containdifferent or additional terms from each other, thecontract consists of

– Terms in offer not in conflict with acceptance;

– Non-material additional terms, and

– Code’s “gap-filler” provisions.

12

Contract Formation Through Conduct

• Contract documents may not form contract, such whereacceptance is made “expressly conditional” under UCC §2-207(1).

• However, often the parties proceed as if there is acontract despite the lack of a binding agreement basedon the documents exchanged.

• In the event of a dispute, the contract consists of theterms on which the writings of the parties agree,together with any supplementary terms provided by theUCC. UCC § 2-207(3).

• Most jurisdictions reject the “Last Shot” rule.

13

UCC WARRANTIES

14

Potential Warranties Under The UCC

• Express Warranties.– Representation regarding the quality or nature of goods that

was part of the basis of the bargain. UCC § 2-313.

• Implied Warranties.– Implied warranty of merchantability. UCC § 2-314.

– Implied warranty of fitness for a particular purpose. UCC § 2-315.

– Warranty of title and against infringement. UCC § 2-312.

15

Sources Of Express Warranties

• Oral representations

• Contract documents

• Catalogs

• Brochures

• Specifications

• Plans & Blueprints

• Product manuals

• Correspondence

• Inspection Reports

• Appraisals

• Packaging & Labels

• Package Inserts

• Material Safety DataSheets

• Advertisements

• Models & Samples

16

Basis Of The Bargain

• Focus is whether or not the claimed warranty was part of thebargain between the parties.

• While some case law still carries over the requirement of reliancefrom the Uniform Sales Act, it is not necessarily required underthe UCC.

• Official Comment 3 to the UCC § 2-313 suggests that a seller’saffirmation of fact is presumed to be a part of the basis of thebargain and no particular reliance need be shown.

• The “basis of the bargain” limitation has been read to excluderepresentations that could not have been part of the agreement,such as statements remote in time to the sale.

17

Specific Language; Fact Or Puffing?

• Words such as “guarantee,” “warranty” orspecific intent to create a warranty are notrequired. UCC § 2-313(2).

• However “an affirmation merely of the value ofthe goods or a statement purporting to bemerely the seller’s opinion or commendation ofthe goods does not create a warranty.” Id.

18

Implied Warranty Of Merchantability

• Unless disclaimed or modified, all sales of goodsby a merchant of goods of that kind include animplied warranty of merchantability. UCC § 2-314(1).

19

Merchantability

• To be merchantable, the goods must:– pass without objection in the trade under the contract description; and– in the case of fungible goods, are of fair average quality in the trade under

the contract description; and– are fit for the ordinary purpose for which such goods are used; and– run, within the variations permitted by the agreement, of even kind,

quality and quantity within each unit and among all units involved; and– are adequately contained, packaged, and labeled as the agreement may

require; and– conform to the promises or affirmations of fact made on the container or

label if any. UCC § 2-314(2).

• Other implied warranties may arise from course of dealing orusage of trade. UCC § 2-314(3).

20

Fitness For A Particular Purpose

• If not disclaimed or modified, a sales contract mayalso contain an implied warranty of fitness for aparticular purpose.

• To establish the warranty of fitness for a particularpurpose, the buyer must establish:1. the seller had reason to know of the particular purpose for

which the buyer bought the goods;2. the seller had reason to know the buyer was relying on the

seller’s skill or judgment to select suitable goods; and3. the buyer actually relied on the seller’s skill or judgment.

UCC § 2-315.

21

Warranty Of Title & Against Infringement

• The Seller warrants that it will convey good title, free from anysecurity interest, lien or other encumbrance of which Buyer hasno knowledge. UCC § 2-312(1).

• The warranty of title is not strictly an “implied warranty” and mayonly be disclaimed in accordance with the provisions of UCC § 2-312(2), which requires language informing the buyer that theseller does not claim title and is selling only the right or title thathe may have.

• A merchant also warrants that goods will be delivered free of anyrightful claim of infringement. UCC § 2-312(3). However, a buyermust hold a seller harmless for infringement where it furnishesspecifications. Id.

22

Potential Limitations On Warranties

• Sellers can limit or modify warranty liability inone of two ways:1. Disclaim or modify applicable warranties. UCC § 2-

316.

2. Modify or limit the remedies for breach ofwarranty. UCC § 2-719.

23

Disclaimer Of Express Warranties

• Words or conduct creating or negating expresswarranties are to be construed as consistentwhen possible but negations or limitations areinoperative if the provisions cannot beharmonized. UCC § 2-316(1).

• An integrated writing may exclude extrinsicevidence of other express warranties. UCC § 2-202(b).

24

Disclaimer Of Implied Warranties

• To exclude or modify the implied warranty ofmerchantability, the disclaimer must mentionmerchantability and must be conspicuous. UCC § 2-316(2).

• A disclaimer of the implied warranty of fitness for aparticular purpose must be in writing and must beconspicuous. UCC § 2-316(2).

• Use of language such as “As Is” and “With All Faults” isalso sufficient to disclaim implied warranties. UCC § 2-316(3)(a).

25

Disclaimer Of Implied Warranties

• Implied warranties may also be disclaimedin other ways:– A buyer’s examination of the goods or a sample can

exclude implied warranties for defects theexamination ought to have revealed. UCC § 2-316(3)(b).

– Course of dealing, course of performance or usage oftrade may exclude or modify implied warranties. UCC§ 2-316(3)(c).

26

Limitation Of Remedies

• A seller can also limit warranty exposure by limitingremedies available for breach of warranty.– An agreement may provide for remedies in addition to or in

substitution of those provided by the UCC, such as limitingremedies to repair or replacement or limiting damages to thepurchase price. UCC § 2-719(1)(a).

– An agreement may limit or exclude consequential damages,unless that exclusion is unconscionable. UCC § 2-719(3).

• If the limited remedy “fails of its essential purpose” abuyer may resort to any UCC remedy. UCC § 2-719(2).

27

BREACH

28

Seller’s Breach

• Generally a Seller can breach a contract for saleof goods by:– Repudiating its obligation to deliver before the

delivery date;

– Failing to deliver the goods;

– Delivering the goods late; or

– Delivering defective or non-conforming goods.

29

Pre-Acceptance Remedies

Repudiation

30

Contract

On September 1National Motorscontracts to buy100 widgets fromAcme.

On September 15Acme states it willnot deliver.

Repudiation & Adequate Assurances

• What is Repudiation?– A party repudiates a contract by expressing an intention

not to honor his obligations under the contract, or bytaking action that demonstrates he will not perform.(UCC § 2-610 cmt. 1.)

• Adequate Assurance of Future Performance.– Parties may request adequate assurance if reasonable

grounds exist for insecurity regarding performance. (UCC§ 2-609(1).)

– Failure to provide adequate assurance is a repudiation ofthe contract. (UCC § 2-610(4).)

31

Buyer’s Rights After Repudiation

• If Seller repudiates, and the loss will substantially impairthe value of the contract, the Buyer may:– Wait for performance (UCC § 2-610(a)); or

– Resort to any remedy for breach (UCC § 2-610(b)); and

– Suspend his own performance (UCC § 2-610(c)).

• Seller may retract its repudiation by indicating it willperform unless:– The buyer has cancelled the agreement; or

– The buyer has changed his position or stated he considers therepudiation final. (UCC § 2-611(1).)

32

Pre-Acceptance Remedies

Failure to Deliver

33

On September 30 Acmefails to deliver.

Contract

On September 1Natinoal Motorscontracts to buy100 widgets fromAcme.

Failure to Deliver

• Seller may also breach the contract by failing to deliverthe goods.

• The date of delivery will be either:– The date specified in the contract; or

– If no time is specified, within a reasonable time. (UCC § 2-309(1).)

• The place of delivery will either be:– The manner specified in the contract; or

– If no place or means of delivery is specified, the Seller’s placeof business. (UCC § 2-308.)

34

Pre-Acceptance Remedies

Non-Conforming Delivery

35

After inspection National Motors discoverswidgets are defective or order isincomplete.

Contract

On September 1National Motorscontracts to buy100 widgets fromAcme.

Tender ofDelivery

On September 30Acme delivers100 widgets.

Tender Of Non-Conforming Goods

• Where the Seller tenders non-conforming goods,the Buyer may:– Reject all the goods;

– Accept them all; or

– Accept any “commercially acceptable units” andreject the remainder. (UCC § 2-601.)

36

Seller’s Cure Of Non-Conformity

• Where tender of delivery is rejected because it is non-conforming, but the time for delivery has not yet expired,Seller may notify Buyer of his intention to cure andmake conforming delivery within the time provided bythe contract. (UCC § 2-508(1).)

• If Seller had reasonable grounds for believing Buyerwould accept non-conformity, Seller is permitted areasonable time to make conforming tender. (UCC § 2-508(2).)

37

Installment Contracts

• A contract which calls for delivery in separate lots to beseparately accepted is considered an “InstallmentContract.” (UCC § 2-612(1).)

• A breach with respect to one or more installments is abreach of the whole contract only if the value of theentire contract is substantially impaired. (UCC § 2-612(3).)

• The entire contract will be reinstated if Buyer pursues aremedy for only the defaulted installments anddemands performance of future installments. (UCC § 2-612(3).)

38

Installment Contracts

• For installment contracts, the Buyer must accept aninstallment if the value of the installment is notsubstantially impaired and the Seller gives adequateassurance that the non-conformity will be cured. (UCC §2-612(2).)

• Buyer can only cancel the contract based on a singlenon-conforming delivery if the breach substantiallyimpairs the value of the entire contract. (UCC § 2-612(3).)

39

Rightful Rejection

• Buyer must notify the Seller that the goods are rejectedwithin a reasonable time after delivery, or within thetime for rejection set forth in the contract. (UCC § 2-602.)

• Notification should specify the defects, since the Buyerwill not be able to recover for unidentified defects if theSeller could have remedied them had he received suchnotice. (UCC § 2-605.)

• If both parties are merchants, failure to identify thedefects upon request can waive rights to recovery. (Id.)

40

Buyer’s Duties Upon Rejection

• If Buyer has possession, he must store the goods for asufficient time for Seller to reclaim them, at Seller’sexpense. (UCC § 2-602.)

• If Buyer does not receive shipment instructions, Buyermay return the goods at Seller’s expense, or resell themfor Seller’s account, offset by Buyer’s expenses forstorage and sale. (UCC § 2-604.)

• Buyer may have a duty to take reasonable efforts to sellperishable goods. (UCC § 2-603(1).)

41

Pre-Acceptance Remedies

Pre-Acceptance Remedies

42

Contract

On September 1National Motorscontracts to buy100 widgets fromAcme.

Tender ofDelivery

On September 30Acme delivers100 widgets.

Acceptance

On October 1National Motorsinspects &accepts 100widgets.

Pre-Acceptance Remedies

• Under UCC § 2-711 Buyer may cancel the contract (if thebreach goes to the whole), recover any portion of theprice already paid, and either:– “Cover” by obtaining substitute goods and recover the

difference between the cost of substitute goods and thecontract price, plus incidental and consequential damages, butless any expenses saved (UCC § 2-712); or

– Recover the difference between the market price at the timethe Buyer learned of the breach and the contract price, plusincidental and consequential damages, but less any expensessaved (UCC § 2-713).

43

Buyer’s Incidental Damages

• Buyer’s incidental damages are defined as “expensesreasonably incurred in inspection, receipt,transportation and care and custody of goods rightfullyrejected, any commercially reasonable charges,expenses or commissions in connection with effectingcover and any other reasonable expense incidental tothe delay or other breach.” (UCC § 2-715(1).)

44

Buyer’s Consequential Damages

• Buyer’s consequential damages are defined as “(a) anyloss resulting from general or particular requirementsand needs of which the seller at the time of contractinghad reason to know and which could not reasonably beprevented by cover or otherwise; and (b) injury toperson or property proximately resulting from anybreach of warranty.” (UCC § 2-715(2).)

45

Buyer’s Recovery Of Goods

• If the Seller fails to deliver the goods by the contractdate, or repudiates the contract before then, the Buyercan, under certain circumstances, recover the goodsthemselves, as an alternative to the “cover” remedy andmarket price remedies. (UCC § 2-711(2).)

46

Buyer’s Recovery Of Goods

• When the goods are unique or other circumstancesjustify specific performance. (UCC § 2-716(1)).

• When the goods have been identified to the contract,and– the Seller becomes insolvent within 10 days after receipt of

the first installment payment. (UCC § 2-502); or

– the Buyer is unable to purchase substitute goods orcircumstances indicate efforts to do so would be unsuccessful.(UCC § 2-716(3).)

47

Breach Discovered After Acceptance

48

Widgets are defective whenused on production line

Contract

On September 1National Motorscontracts to buy100 widgets fromAcme

Tender ofDelivery

On September 30Acme delivers100 widgets

Acceptance

On October1National Motorsinspects &accepts 100widgets

Post-Acceptance Remedies

Acceptance Of Goods

• The Buyer “accepts” the goods when the Seller hastendered delivery, the Buyer has had adequateopportunity to inspect them, and the Buyer:– Tells the Seller the goods conform to the contract;

– Tells the Seller the goods will be accepted despite non-conformity;

– Fails to reject the goods by notifying the Seller within areasonable time; or

– Takes action inconsistent with Seller’s ownership of thegoods. (UCC § 2-606(1)).

49

Revocation Of Acceptance?

• Buyer can revoke acceptance of goods within areasonable time after he discovers or should havediscovered their non-conformity if:– The non-conformity of the goods substantially affects their

value, and the Buyer accepted the goods based on areasonable assumption seller would cure and seller has failedto do so; or

– When the Buyer had not discovered the non-conformity eitherdue to the difficulties of discovery or seller’s assurances ofconformity. (UCC §2-608(1)-(2).)

• If acceptance is properly revoked, the measure ofdamages will be based on non-delivery.

50

Consequences Of Acceptance

• After accepting the goods, if the acceptance is not properlyrevoked, the Buyer must pay the contract price. (UCC § 2-607(1).)

• Acceptance waives ability to revoke acceptance due to non-conformity Buyer knew about at the time unless the goods wereaccepted with the reasonable assumption that non-conformitywould be cured. (UCC § 2-607(2).)

• Acceptance gives rise to the duty to notify Seller of any non-conformity within a reasonable time of discovery. (UCC § 2-607(3).)

• After acceptance, Buyer has the burden of proving breach ofwarranty. (UCC § 2-607(4).)

51

Breach Of Warranty

• The primary remedy for non-conforming goods afteracceptance is breach of warranty.

• A contract for sale of goods may have severalwarranties:– Express warranties. (UCC § 2-313.)

– Implied warranty of merchantability. (UCC § 2-314.)

– Implied warranty of fitness for a particular purpose. (UCC § 2-315.)

– Warranty of title and against infringement. (UCC § 2-312.)

52

Damages For Breach Of Warranty

• After acceptance, Buyer may recover any damages“resulting in the ordinary course of events from theseller breach as determined in any manner which isreasonable.” (UCC § 2-714(1).)

• The standard formula for breach of warranty damages isthe difference between the value of the goods at timeand place accepted and the value the goods had theybeen as warranted, plus, in a proper case (i.e. they wereforeseeable), incidental and consequential damages.(UCC § 2-714(2).)

53

Special Circumstances

• In “special circumstances” a Buyer may establish lossesthat do not fit within the standard breach of warrantydamage formula to ensure full compensation for itslosses. (UCC § 2-714(2).)

54

Excuses For Seller’s Non-Performance

• Prior breach by Buyer.– Buyer’s repudiation.

– Buyer’s failure to accept conforming delivery.

– Buyer’s failure to make payments.

• Unexpected difficulties with performance.– Casualty to identified goods. (UCC§ 2-613.)

– Commercial impracticability. (UCC§ 2-615.)

– Force majeure clause.

55

Commercial Impracticability

• Performance as agreed has been made impracticable bythe occurrence of a contingency the non-occurrence ofwhich was a basic assumption on which the contractwas made or by compliance in good faith with anyapplicable foreign or domestic governmental regulationor order whether or not it later proves to be invalid.(UCC§ 2-615(a).)

56

Buyer’s Breach

• A Buyer can breach by:– Repudiating obligation to accept or pay for goods.

– Refusing to accept conforming goods.

– Wrongful revocation of acceptance.

– Failure to pay.

57

Seller’s Remedies

• Upon a buyer’s breach, UCC § 2-703 permits aseller to:– Withhold or stop delivery.

– Identify goods to the contract.

– Recover the goods.

– Resell the goods.

– Seek damages for non-acceptance, or in appropriatecases price.

58

Seller’s Damages

• Difference in market price at the time of tender and theunpaid contract price plus incidental damages. UCC § 2-708(1).

• Where difference in price is inadequate to fullycompensate, the profit the Seller would have earnedplus incidental damages. UCC § 2-708(2).

• A seller can recover the unpaid price for any acceptedconforming goods, goods lost or destroyed after risk ofloss passes, or goods seller is unable to resell afterreasonable efforts. UCC § 2-719.

59

Questions?

60