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Flashcards in Sales Deck (45):
1

Creation of Letters of Credit and General Right

  • A letter of credit can be issued in any form that is a record and is authenticated by a signature, or in accordance with the agreement of the parties, or standard practice of financial institutions
  • Consideration is not required
  • A letter of credit can be revocable, if so provided in the letter. In an international sale of goods where shipment is overseas, the letter is irrevocable, unless otherwise agreed.
  • The buyer's issues with the goods cannot be raised as objections to payment if the terms require payment upon delivery. The correspondent bank cannot substitute its judgment on performance of a contract for the terms of the letter of credit. Parties who want performance-based issues to be satisfied prior to payment must provide for those requirements in the letter of credit.

2

Under a nonnegotiable bill of lading, a carrier who accepts goods for shipment must deliver the goods to:

  • Any holder of the bill of lading.
  • Any party subsequently named by the seller.
  • The seller who was issued the bill of lading.
  • The consignee of the bill of lading.

The consignee of the bill of lading. When a seller places goods with a common carrier for delivery, a bill of lading is issued which represents title to the goods and the right of the holder to take possession of the goods. The seller who is issued a bill of lading is the consignor and does not get the right to receive the shipment. That right goes to the consignee, the party to whom the carrier has promised to deliver the goods in the bill of lading.

3

In deciding a controversy involving the question of who has the risk of loss, the court will look primarily to

  • The intent of the parties manifested in the contract.
  • The shipping terms used by the parties.
  • Whether title has passed.
  • The insurance coverage of the parties.

The intent of the parties manifested in the contract. The UCC rules concerning risk of loss only apply if the parties have not allocated risk of loss in their contract.

4

Grill deals in the repair and sale of new and used clocks. West brought a clock to Grill to be repaired. One of Grill’s clerks mistakenly sold West’s clock to Hone, another customer. Under the Sales Article of the UCC, will West win a suit against Hone for the return of the clock?

  • No, because the clerk was not aware that the clock belonged to West.
  • No, because Grill is a merchant to whom goods had been entrusted.
  • Yes, because Grill could not convey good title to the clock.
  • Yes, because the clerk was negligent in selling the clock.

No, because Grill is a merchant to whom goods had been entrusted. If a person entrusts possession of goods to a merchant, or to his/her agent, who deals in those goods, a good-faith purchaser for value obtains title to those goods unless s/he knew the merchant or agent did not own the goods.

  1. One who purchases in good faith from another who has voidable title takes good title
    • Good faith—purchaser unaware of facts that made previous title voidable
    • One may obtain voidable title by purchasing with a check that is later dishonored

EXAMPLE: A purchases 1,000 widgets from B. B had purchased these from C but B’s check had been dishonored by the bank before A purchased the widgets.  A was unaware of these facts. B’s title was voidable but A takes good title as a good-faith purchaser.

5

Yost Corp., a computer manufacturer, contracted to sell 15 computers to Ivor Corp., a computer retailer. The contract specified that delivery was to be made by truck to Ivor’s warehouse. Instead, Yost shipped the computers by rail. When Ivor claimed that Yost did not comply with the contract, Yost told Ivor that there had been a trucker’s strike when the goods were shipped. Ivor refused to pay for the computers. Under these circumstances, Ivor

  • Is obligated to pay for the computers because Yost made a valid substituted performance.
  • Is obligated to pay for the computers because title to them passed to Ivor when Ivor received them.
  • May return the computers and avoid paying for them because of the way Yost delivered them.
  • May return the computers and avoid paying for them because the contract was void under the theory of commercial impracticability.

Is obligated to pay for the computers because Yost made a valid substituted performance. When the agreed manner of delivery of goods becomes commercially impracticable through no fault of either party, a commercially reasonable substituted performance by the seller must be accepted by the buyer. In this case, since the truckers’ strike caused Yost’s delivery by truck to be commercially impracticable, Yost’s delivery by rail is considered a valid substituted performance. Therefore, Ivor is obligated to pay for the computers.

6

Under the UCC Sales Article, a firm offer will be created only if the

  1. Offeree is a merchant.
  2. Offeree gives some form of consideration.
  3. Offer states the time period during which it will remain open.
  4. Offer is made by a merchant in a signed writing.

Offer is made by a merchant in a signed writing. 

In order to have a firm offer under the UCC, the offer must be made by a merchant offeror in a signed writing which gives assurance that the offer will be held open. There is no requirement that the offeree also be a merchant. A firm offer does not need to state the period of time for which it is irrevocable. If no time period is stated, the offer will be irrevocable for a reasonable period of time, not to exceed 3 months. A firm offer need not be supported by consideration to be irrevocable.

7

UCC Firm Offer Requirements

Firm offer—a written, signed offer concerning the sale of goods, by a merchant, giving assurance that it will be held open for a specified time is irrevocable for that period, not to exceed 3 months

  1. Note that only offeror need be a merchant under this rule
  2. If firm offer does not state specific time, it will remain open for reasonable time, not to exceed 3 months
  3. Written form may be supplied by either party as long as it is signed by merchant-offeror

8

When do title and risk of loss for conforming goods pass to the buyer under a shipment contract covered by the Sales Article of the UCC?

  1. When the goods are identified and designated for shipment.
  2. When the goods are given to a common carrier.
  3. When the goods arrive at their destination.
  4. When the goods are tendered to the buyer at their destination.

When the goods are given to a common carrier.

This contract is a shipment contract not a destination contract; therefore the goods only need to get to the carrier, the shipping point, to transfer title and risk of loss.

9

On Monday, Wolfe paid Aston Co., a furniture retailer, $500 for a table. On Thursday, Aston notified Wolfe that the table was ready to be picked up. On Saturday, while Aston was still in possession of the table, it was destroyed in a fire. Who bears the loss of the table?

  1. Wolfe, because Wolfe had title to the table at the time of loss.
  2. Aston, unless Wolfe is a merchant.
  3. Wolfe, unless Aston breached the contract.
  4. Aston, because Wolfe had not yet taken possession of the table.

Aston, because Wolfe had not yet taken possession of the table.

Provided there is no agreement to the contrary and neither party is in breach, risk of loss will in the case of a merchant seller, pass to the buyer on physical receipt of the goods.  In this situation, Aston Co., a merchant, will bear the loss of the table since Wolfe had not yet taken possession of it.

10

The Uniform Commercial Code provides for a warranty against infringement. Its primary purpose is to protect the buyer of goods from infringement of the rights of third parties. This warranty

  1. Only applies if the sale is between merchants.
  2. Must be expressly stated in the contract or the Statute of Frauds will prevent its enforceability.
  3. Protects the seller if the buyer furnishes specifications which result in an infringement.
  4. Cannot be disclaimed.

Protects the seller if the buyer furnishes specifications which result in an infringement.

In a sale by a merchant, the merchant warrants that the goods are free from a rightful claim of infringement of patent or trademark by third parties. (A seller will be protected against liability under a warranty against infringement if the buyer furnishes the specifications used to manufacture the product that infringes upon another party’s patent or trademark rights.)

11

Under the UCC, an action for breach of the implied warranty of merchantability by a party who sustained personal injuries may be successful against the seller of the product only when

  1. The injured party is in privity of contract with the seller.
  2. The seller is a merchant with respect to the product involved.
  3. An action based on strict liability in tort can also be successfully maintained.
  4. An action based on negligence can also be successfully maintained.

The seller is a merchant with respect to the product involved.

Under the UCC, every merchant seller of goods implicitly warrants that the goods are fit for the ordinary purpose for which such goods are used, are adequately packed and labeled, and conform to the promises or affirmation of fact made on the package or label. An injured party may recover under any one of the three theories of liability: breach of warranty, negligence, or strict liability. The injured party must only establish one of these theories in order to be successful against a seller.

12

On April 5, Anker, Inc. furnished Bold Corp. with Anker’s financial statements dated March 31. The financial statements contained misrepresentations which indicated that Anker was solvent when in fact it was insolvent.  Based on Anker’s financial statements, Bold agreed to sell Anker 90 computers, “FOB—Bold’s loading dock.”  On April 14, Anker received 60 of the computers. The remaining 30 computers are in the possession of the common carrier and in transit to Anker.

If on April 28, Bold discovered that Anker was insolvent, then with respect to the computers delivered to Anker on April 14, Bold may

  1. Reclaim the computers upon making a demand.
  2. Reclaim the computers irrespective of the rights of any subsequent third party.
  3. Not reclaim the computers since 10 days have elapsed from its delivery.
  4. Not reclaim the computers since it is entitled to recover the price of the computers.

Reclaim the computers upon making a demand

A seller who discovers that an insolvent buyer has received goods on credit may reclaim the goods by making a demand for their return within 10 days after receipt of the goods by the buyer. This 10-day limitation, however, does not apply if the buyer made a written misrepresentation of its solvency within 3 months prior to its receipt of the goods. Anker’s fraudulent financials constitute a written misrepresentation of solvency; therefore, Bold may demand return of the goods even though 14 days have passed.

13

Moreno Company contracted with a common carrier to have goods transported that she had sold to a customer FOB destination. The contract between the common carrier and Moreno specified in clear terms that liability of the common carrier is limited to $100 per shipment unless a higher limit is chosen by paying more. Moreno did not select a higher limit. The goods, worth $900, were destroyed in transit. Which of the following is not true?

  1. If the cause of the loss was a flood, the common carrier is not liable for any damages.
  2. The clause limiting liability to a $100 limit is invalid as against public policy.
  3. If the goods were damaged because Moreno improperly packaged the goods, the common carrier is not liable for any damages.
  4. The common carrier is liable for $100 at most but may be liable for no damages.

The clause limiting liability to a $100 limit is invalid as against public policy. Common carriers are allowed to limit liability to a dollar amount specified in the contract.

The common carrier is not liable for losses called acts of God.

14

Calvin Poultry Co. offered to sell Chickenshop 20,000 pounds of chicken at 40 cents per pound under specified delivery terms. Chickenshop accepted the offer as follows:

“We accept your offer for 20,000 pounds of chicken at 40 cents per pound per city scale weight certificate.”

Which of the following is correct?

  1. A contract was formed on Calvin’s terms.
  2. Chickenshop’s reply constitutes a conditional acceptance, but not a counteroffer.
  3. Chickenshop’s reply constitutes a counteroffer and no contract was formed.
  4. A contract was formed on Chickenshop’s terms.

A contract was formed on Chickenshop’s terms.

Between merchants, additional and different terms become part of the contract unless they materially alter it, notification of objection to them is given within a reasonable time, or the original offer expressly limited acceptance to the terms of the offer. The additional and different term added by Chickenshop is neither material nor contrary to the terms of the original offer. And the original offer did not expressly limit acceptance to its terms. Therefore, a contract was formed on Chickenshop’s terms.

15

Sand Corp. sold and delivered a photocopier to Barr for use in Barr’s business. According to their agreement, Barr may return the copier within 30 days. During the 30-day period, if Barr has not returned the copier or indicated acceptance of it, which of the following statements is correct with respect to risk of loss and title?

  1. Risk of loss and title passed to Barr.
  2. Risk of loss and title remain with Sand.
  3. Risk of loss passed to Barr but title remains with Sand.
  4. Risk of loss remains with Sand but title passed to Barr.

Risk of loss and title remain with Sand.

Provided there is no agreement to the contrary and neither party is in breach, both risk of loss and title to goods being purchased on a sale on approval basis remain with the seller until the sale is completed. Since in this case Barr has not indicated acceptance of the copier, the sale is incomplete, and the risk of loss and title remain with Sand during the 30-day period.

16

In deciding a controversy involving the question of who has the risk of loss, the court will look primarily to

  1. The intent of the parties manifested in the contract.
  2. The shipping terms used by the parties.
  3. Whether title has passed.
  4. The insurance coverage of the parties.

The intent of the parties manifested in the contract.

The UCC rules concerning risk of loss only apply if the parties have not allocated risk of loss in their contract.

Risk of loss is independent of title under UCC, but rules regarding the transfer of both are similar as in common law.  

17

Flax telephoned Sky Corp. and ordered a specially manufactured air conditioner for $1,900. Subsequently, Flax realized that he miscalculated the area which was to be cooled and concluded that the air conditioner would not be acceptable. Sky had already completed work on the air conditioner, demanded payment, and was unable to resell the unit at a reasonable price. If Flax refuses to pay and Sky brings an action seeking as damages the price plus reasonable storage charges of $50, Sky will recover

  1. Nothing, because of the Statute of Frauds.
  2. Only its lost profit.
  3. The full $1,950.
  4. Only $1,900.

The full $1,950. When a buyer fails to pay the price as it becomes due, the seller may recover the purchase price of the goods identified to the contract plus incidental damages if the seller is unable to resell them at a reasonable price after making a reasonable effort. Sky Corporation will be able to recover the purchase price of $1,900 plus the incidental costs of $50 for storage for a total of $1,950 from Flax.

18

Tint is suing the manufacturer, the wholesaler, and the retailer for bodily injuries caused by a snowblower Tint purchased. Under the theory of strict liability

  1. Contributory negligence on Tint’s part will always be a bar to recovery.
  2. Privity will be a bar insofar as the wholesaler is concerned if the wholesaler did not have a reasonable opportunity to inspect.
  3. Tint may recover despite the fact that he cannot show that any negligence was involved.
  4. The manufacturer will avoid liability if it can show it followed the custom of the industry.

Tint may recover despite the fact that he cannot show that any negligence was involved.

Under strict liability a seller engaged in the business of selling a product is held liable for injuries caused by that product if it was in a defective and unreasonably dangerous condition when sold. A seller is, therefore, liable regardless of whether he was negligent or at fault for the defective condition of the product. Finally, a seller engaged in the business of selling the product is defined to include not only the buyer’s immediate seller, but also the prior sellers in the distribution chain such as the wholesaler and manufacturer.

Defense of contributory negligence, comparative negligence, disclaimer or lack of privity is unavailable

19

Under the UCC Sales Article, the warranty of title may be excluded by

  1. Merchants or nonmerchants provided the exclusion is in writing.
  2. Nonmerchant sellers only.
  3. The seller’s statement that it is selling only such right or title that it has.
  4. Use of an "as is" disclaimer.

The seller’s statement that it is selling only such right or title that it has.

This answer is correct. Under the UCC, every seller warrants that the goods sold are free from any security interest or lien of which the buyer has no actual knowledge. This warranty of title may only be disclaimed by specific language or circumstances which give the buyer reason to know that s/he is receiving less than full title. A seller’s statement that s/he is selling only such right or title that s/he has will exclude the warranty of title.

20

Olsen purchased a used van from Super Sales Co. for $350. A clause in the written contract in boldface type provided that the van was being sold “as is.” Another clause provided that the contract was intended as the final expression of the parties’ agreement. After driving the van for 1 week, Olsen realized that the engine was burning oil. Olsen telephoned Super and requested a refund. Super refused but orally gave Olsen a warranty on the engine for 6 months. Three weeks later the engine exploded. Super’s oral warranty

  1. Is invalid since the modification of the existing contract required additional consideration.
  2. Is invalid due to the Statute of Frauds.
  3. Is valid and enforceable.
  4. Although valid, proof of its existence will be inadmissible because it contradicts the final written agreement of the parties.

Is valid and enforceable.

The parol evidence rule states that a written agreement intended by the parties to be final and complete is binding on the parties and may not be contradicted by proof of prior or contemporaneous oral agreements. Subsequent modifications (i.e., a later oral agreement), however, may be proven provided the Statute of Frauds, if applicable, is met. In this case, the Statute of Frauds is of no concern since the sale of the van is not for $500 or more. Moreover, under the UCC, the modification of an existing contract does not require additional consideration. Accordingly, Super’s subsequent oral warranty is valid and enforceable.

21

Tint is suing the manufacturer, the wholesaler, and the retailer for bodily injuries caused by a snowblower Tint purchased. Under the theory of strict liability

  1. Contributory negligence on Tint’s part will always be a bar to recovery.
  2. Privity will be a bar insofar as the wholesaler is concerned if the wholesaler did not have a reasonable opportunity to inspect.
  3. Tint may recover despite the fact that he cannot show that any negligence was involved.
  4. The manufacturer will avoid liability if it can show it followed the custom of the industry.

Tint may recover despite the fact that he cannot show that any negligence was involved.

Under strict liability a seller engaged in the business of selling a product is held liable for injuries caused by that product if it was in a defective and unreasonably dangerous condition when sold. A seller is, therefore, liable regardless of whether he was negligent or at fault for the defective condition of the product. Finally, a seller engaged in the business of selling the product is defined to include not only the buyer’s immediate seller, but also the prior sellers in the distribution chain such as the wholesaler and manufacturer.

22

Ace Auto Sales, Inc. sold Williams a secondhand car for $9,000. One day Williams parked the car in a shopping center parking lot. When Williams returned to the car, Montrose and several policemen were waiting. It turned out that the car had been stolen from Montrose who was rightfully claiming ownership. Subsequently, the car was returned by Williams to Montrose. Williams seeks recourse against Ace Auto Sales who had sold him the car with the disclaimer of "any and all warranties". Which of the following is correct?

  1. Since Ace Auto Sales’ contract of sale disclaimed "any and all warranties" arising in connection with its sale to Williams, Williams must bear the loss.
  2. Since Ace Auto and Williams were both innocent of any wrongdoing in connection with the theft of the auto, the loss will rest upon the party ultimately in possession.
  3. Had Williams litigated the question of Montrose’s ownership to the auto, he would have won since possession is nine-tenths of the law.
  4. Ace Auto will bear the loss since it breached the warranty of title.

Ace Auto will bear the loss since it breached the warranty of title.

In any contract for the sale of goods, unless specifically disclaimed, the seller extends a warranty of title to the buyer. Such a warranty is neither express nor implied but warrants that the seller has good title to the goods, that the transfer of said title is rightful, and that the buyer will have knowledge of all liens against the property at the time of transfer. Williams, the buyer, was not informed of all liens against the property; thus, Ace Auto must bear the loss since it violated the provisions of the title warranty.

23

Baker fraudulently induced Able to sell Baker a painting for $200. Subsequently, Baker sold the painting for $10,000 to Gold, a good-faith purchaser. Able is entitled to

  1. Rescind the contract with Baker.
  2. Recover the painting from Gold.
  3. Recover damages from Baker.
  4. Rescind Baker’s contract with Gold.

Recover damages from Baker.

Baker fraudulently induced Able to sell the painting to Baker; therefore, Baker only held a voidable title for the painting. A person with a voidable title may transfer good title to a good-faith purchaser. Thus, Able has no course of action against Gold, a good-faith purchaser. However, Able is entitled to recover damages from Baker.

24

Park purchased from Derek Truck Sales a truck which had serious mechanical problems. Park learned of the defects 6 months after the date of sale. Five years after the date of sale Park commenced an action for breach of warranty against Derek. Derek asserts the statute of limitations as a defense. Which of the following statements made by Derek is correct?

  1. A clause in the original contract reducing the statute of limitations to 9 months is enforceable.
  2. Park was required to bring the action within the statute of limitations as measured from Derek’s tender of delivery.
  3. Park was required to bring the action within the statute of limitations as measured from the time the breach was discovered or should have been discovered.
  4. Park is precluded from asserting under any circumstances that the statute of limitations stopped running.

Park was required to bring the action within the statute of limitations as measured from Derek’s tender of delivery.

Statute of limitations for sale of goods is 4 years

  • An action for breach must be commenced within this period
  • Parties may agree to reduce to not less than 1 year but may not extend it
  • Statute of limitations begins running when the contract is breached, EXCEPT for when...

If the warranty does not explicitly extend to future performance, a cause of action for breach accrues at tender of delivery. Derek Truck Sales, a merchant, has sold a truck with serious mechanical problems, thereby breaching the implied warranty of merchantability. An implied warranty by definition, is not explicit; and, therefore, Park’s cause of action for breach of the implied warranty of merchantability accrued when delivery of the truck was tendered. Since the parties did not agree to otherwise reduce the statutory period, the 4-year limitations period established by the UCC controls; and Park must, therefore, file his lawsuit within 4 years of tender of delivery.

25

In general, the UCC Sales Article applies to the sale of

  1. Goods only if the seller is a merchant and the buyer is not.
  2. Goods only if the seller and buyer are both merchants.
  3. Consumer goods by a nonmerchant.
  4. Real estate by a merchant for $500 or more.

Consumer goods by a nonmerchant.

The Sales Article of the UCC applies to the sale of goods. Although certain provisions apply only to transactions between merchants, the general scope of the Article extends to sales between nonmerchants as well.

26

Dill purchased a computer from Park, who regularly sells computers to the general public. After receiving payment in full, Park tendered delivery of the computer to Dill. Rather than take immediate delivery, Dill stated that he would return later that day to pick up the computer. Before Dill returned, thieves entered Park’s store and stole Dill’s computer. The risk of loss

  1. Remained with Park since title had not yet passed to Dill.
  2. Remained with Park since Dill had not yet received the computer.
  3. Passed to Dill upon Park’s tender of delivery.
  4. Passed to Dill at the time the contract was formed and payment was made.

Remained with Park since Dill had not yet received the computer.

Provided there is no agreement to the contrary and neither party is in breach, risk of loss will ordinarily pass upon tender of delivery. However, because Park is a merchant seller the risk of loss does not pass until the buyer takes receipt of the goods.

27

Jerry saw a watch at a shop that both sells and repairs used watches. Jerry knows that this watch was left at the shop by Brett for repairs. Jerry then buys the watch from an employee of the shop who mistakenly thought it was for sale. Which of the following is true?

  1. Jerry obtains title to the watch since he paid for the watch.
  2. Jerry obtains title to the watch since the shop mistakenly sold the watch.
  3. Jerry does not obtain title to the watch since he is not a good-faith purchaser.
  4. Jerry does not obtain title to the watch since the shop made the mistake.

Jerry does not obtain title to the watch since he is not a good-faith purchaser.

28

Under the UCC Sales Article, if a buyer wrongfully rejects goods, the aggrieved seller may

  • Resell the goods and sue for damages
  • Cancel the agreement

YES for BOTH.

Under the UCC Sales Article, if the buyer refuses to accept the goods upon delivery, the seller has the right to resell the goods. In addition, if the difference between the market value and the contract price is inadequate to place the seller in as good a position as performance would have, then the seller can sue for lost profits plus incidental damages. Also, since the buyer wrongfully rejected the goods and breached the contract, the seller may cancel the agreement.

29

An oral agreement concerning the sale of goods entered without consideration is binding if the agreement

  1. Is a firm offer made by a merchant who promises to hold the offer open for 30 days.
  2. Is a waiver of the nonbreaching party’s rights arising out of a breach of the contract.
  3. Contradicts the terms of a subsequent written contract that is intended as the complete and exclusive agreement of the parties.
  4. Modifies the price in an existing, enforceable contract from $525 to $475.

Modifies the price in an existing, enforceable contract from $525 to $475.

An oral agreement modifying an existing contract for the sale of goods needs no new consideration to be binding. If the contract, as modified, is for the sale of goods for a price less than $500, the Statute of Frauds does not apply, and the oral modification is enforceable.

30

If goods have been delivered to a buyer pursuant to a sale or return contract, the

  1. Buyer may use the goods but not resell them.
  2. Seller is liable for the expenses incurred by the buyer in returning the goods to the seller.
  3. Title to the goods remains with the seller.
  4. Risk of loss for the goods passed to the buyer.

Risk of loss for the goods passed to the buyer.

Under the UCC, in the case of a sale or return contract, risk of loss and title pass to the buyer according to the shipping terms of the contract. Thus, generally the risk of loss and ownership will be with the buyer while the goods are in the buyer’s possession.

Sale or return--goods may be returned even if they conform to the contract

  • Both risk of loss and title return to seller if and when goods are returned to seller
  • Return of goods is at buyer’s expense
  • Buyer retains risk of loss during shipment back to seller if returns goods

31

Doral Inc. wished to obtain an adequate supply of lumber for its factory extension which was to be constructed in the spring. It contacted Ace Lumber Company and obtained a 75-day written option (firm offer) to buy its estimated needs for the building. Doral supplied a form contract which included the option. Ace Lumber signed at the physical end of the contract but did not sign elsewhere. The price of lumber has risen drastically and Ace wishes to avoid its obligation. Which of the following is Ace’s best defense against Doral’s assertion that Ace is legally bound by the option?

  1. Such an option is invalid if its duration is for more than 2 months.
  2. The option is not supported by any consideration on Doral’s part.
  3. Doral is not a merchant.
  4. The promise of irrevocability was contained in a form supplied by Doral and was not separately signed by Ace.

The promise of irrevocability was contained in a form supplied by Doral and was not separately signed by Ace.

In order for a firm offer to be effective, it must be contained in writing signed by a merchant offeror. If the offeree supplies the form which contains a firm offer clause, the merchant offeror must separately sign that clause, otherwise it will be ineffective against the offeror.

32

Thorn purchased a used entertainment system from Sound Corp.  The sales contract stated that the entertainment system was being sold “as is.”  Under the Sales Article of the UCC, which of the following statements is(are) correct regarding the seller’s warranty of title and against infringement?

  • I.Including the term “as is” in the sales contract is adequate communication that the seller is conveying the entertainment system without warranty of title and against infringement.
  • II.The seller’s warranty of title and against infringement may be disclaimed at any time after the contract is formed.
  1. I only.
  2. II only.
  3. Both I and II.
  4. Neither I nor II.

Neither is correct.  

Statement I is incorrect because title generally passes when the seller completes his/her performance with respect to physical delivery. Selling goods "as is" is not adequate communication that the seller is conveying the goods without warranty of title or against infringement. Statement II is incorrect because any disclaiming of seller’s warranty of title or against infringement should take place before the contract is formed.

33

Wally, a CPA and a neighbor of Rita’s, offered to sell Rita his power chain saw for $400. Rita stated that she knew nothing about chain saws but would buy the saw if it were capable of cutting down the trees in her backyard, which had an average diameter of five feet. Wally assured Rita that the saw “would do the job.” Relying on Wally’s assurance, Rita purchased the saw. Wally has created a warranty that

  1. The saw is of an average fair quality.
  2. The saw is fit for the ordinary purposes for which it is used.
  3. The saw is capable of cutting the trees in Rita’s backyard.
  4. Is unenforceable because it is not in writing.

The saw is capable of cutting the trees in Rita’s backyard.

Under the stated facts, Wally is creating the implied warranty of fitness for a particular purpose. This warranty is created when the seller (merchant or nonmerchant) has reason to know the buyer’s particular purpose and knows the buyer is relying on the seller’s judgment to provide appropriate goods. This warranty guarantees the goods are fit for the buyer’s particular purpose. It is the implied warranty of merchantability that guarantees the goods are of an average fair quality and are fit for ordinary purposes, but Wally did not create this warranty since he is not a merchant-seller. Since the warranty of fitness for a particular purpose is an implied warranty, there is no requirement that it be in writing.

34

Gibbeon Manufacturing shipped 300 designer navy blue blazers to Custom Clothing Emporeum. The blazers arrived on Friday, earlier than Custom had anticipated and on an exceptionally busy day for its receiving department. They were perfunctorily examined and sent to a nearby warehouse for storage until needed. On Monday of the following week, upon closer examination, it was discovered that the quality of the linings of the blazers was inferior to that specified in the sales contract. Which of the following is correct insofar as Custom’s rights are concerned?

  1. Custom can reject the blazers upon subsequent discovery of the defects
  2. Custom must retain the blazers since it accepted them and had an opportunity to inspect them upon delivery.
  3. Custom’s only course of action is rescission.
  4. Custom had no rights if the linings were of merchantable quality.

Custom can reject the blazers upon subsequent discovery of the defects

The buyer has a reasonable time in which to reject defective goods. Discovering the defect on Monday would be considered within a reasonable time, considering the goods had been delivered on Friday.

35

If a contract for the sale of goods includes a C&F shipping term and the seller has fulfilled all of its obligations, the

  1. Title to the goods will pass to the buyer when the goods are received by the buyer at the place of destination.
  2. Risk of loss will pass to the buyer upon delivery of the goods to the carrier.
  3. Buyer retains the right to inspect the goods prior to making payment.
  4. Seller must obtain an insurance policy at its own expense for the buyer’s benefit.

Risk of loss will pass to the buyer upon delivery of the goods to the carrier.

The shipping term "C&F" (cost and freight) means that the purchase price includes both the cost of the goods and the cost of delivering the goods to the shipper. Under such agreements, the risk of loss and title to the goods pass when the seller places the goods in the appropriate carrier’s hands.

36

Kirk Corp. sold Nix an Ajax freezer, Model 24, for $490. The contract required delivery to be made by June 23. On June 12, Kirk delivered an Ajax freezer, Model 52, to Nix. Nix immediately notified Kirk that the wrong freezer had been delivered and indicated that the delivery of a correct freezer would not be acceptable. Kirk wishes to deliver an Ajax freezer, Model 24, on June 23. Which of the following statements is correct?

  1. Kirk may deliver the freezer on June 23 without further notice to Nix.
  2. Kirk may deliver the freezer on June 23 if it first seasonably notifies Nix of its intent to do so.
  3. Nix must accept the nonconforming freezer but may recover damages.
  4. Nix always may reject the nonconforming freezer and refuse delivery of a conforming freezer on June 23.

Kirk may deliver the freezer on June 23 if it first seasonably notifies Nix of its intent to do so.

Seller has the right to "cure" nonconforming performance when there is still time left for performance under the contract. To do so a seller must seasonably notify the buyer of his intention to cure, and must tender conforming goods within the original time specified by the contract.

37

On April 5, Anker, Inc. furnished Bold Corp. with Anker’s financial statements dated March 31. The financial statements contained misrepresentations which indicated that Anker was solvent when in fact it was insolvent.  Based on Anker’s financial statements, Bold agreed to sell Anker 90 computers, “FOB—Bold’s loading dock.”  On April 14, Anker received 60 of the computers. The remaining 30 computers are in the possession of the common carrier and in transit to Anker.

With respect to the remaining 30 computers in transit, which of the following statements is correct if Anker refuses to pay Bold in cash and Anker is not in possession of a negotiable document of title covering the computers?

  1. Bold may stop delivery of the computers to Anker since their contract is void due to Anker’s furnishing of the false financial statements.
  2. Bold may stop delivery of the computers to Anker despite the fact that title had passed to Anker.
  3. Bold must deliver the computers to Anker on credit since Anker has not breached the contract.
  4. Bold must deliver the computers to Anker since the risk of loss had passed to Anker.

Bold may stop delivery of the computers to Anker despite the fact that title had passed to Anker.

A seller is entitled to stop the delivery of goods in the hands of a carrier if an insolvent buyer who is not in possession of the document of title refuses to pay cash. Therefore, Bold may stop delivery of the computers since Anker refuses to pay in cash and is not in possession of the document of title.

38

To be enforceable, a residential real estate lease must

  1. Require the tenant to obtain liability insurance.
  2. Entitle the tenant to exclusive possession of the leased property.
  3. Specify a due date for rent.
  4. Be in writing.

Entitle the tenant to exclusive possession of the leased property.

A residential real estate lease must entitle the tenant to exclusive possession of the leased property during the duration of the lease unless otherwise agreed in the lease.

A lease generally may be oral if the lease term is less than 1 year.

39

Cain and Zen Corp. orally agreed that Zen would specially manufacture a machine for Cain at a price of $40,000. After Zen completed the work at a cost of $30,000, Cain notified Zen that it no longer needed the machine. Zen is holding the machine for Cain and has requested payment from Cain. Despite making reasonable efforts, Zen has been unable to resell the machine for any price. Zen has incurred warehouse fees of $500 for storing the machine. If Cain refuses to pay Zen and Zen sues Cain, the most Zen will be entitled to recover is

  1. $0
  2. $30,500
  3. $40,000
  4. $40,500

$40,500

When a buyer breaches the contract as it becomes due, the seller may recover the full purchase price of the goods identified to the contract plus incidental damages if the seller is unable to resell the goods at a reasonable price after making a reasonable effort. Thus, in this case, Zen would be allowed to recover the purchase price of $40,000 plus the $500 of incidental damages for storage.

40

Under the Sales Article of the UCC, which of the following requirements must be met for a writing to be an enforceable contract for the sale of goods?

  1. The writing must contain a term specifying the price of the goods.
  2. The writing must contain a term specifying the quantity of the goods.
  3. The writing must contain the signatures of all parties to the writing.
  4. The writing must contain the signature of the party seeking to enforce the writing.

The writing must contain a term specifying the quantity of the goods.

To satisfy the Statute of Frauds under the UCC, the writing must provide sufficient evidence of a contract for the sale of goods, the signature of the party to be charged, and the quantity term.

41

On May 1, Frost entered into a signed contract for the sale of 5,000 pounds of sugar to Kemp Co. at $.30 per pound. Delivery was to be made on June 10. Due to a sudden rise in sugar prices, Frost sent Kemp a letter stating that it would not sell the sugar to Kemp. Kemp received the letter on May 15 at which time the market price of sugar was $.40 per pound. Although Kemp could have reasonably purchased sugar elsewhere in the market, it chose not to do so. On June 10, the market price of sugar was $.50 per pound. In addition to incidental damages, Kemp is entitled to damages of

  1. $500.
  2. $500 plus consequential damages.
  3. $1,000.
  4. $1,000 plus consequential damages.

$500

Frost’s letter to Kemp constituted anticipatory repudiation. Anticipatory repudiation discharges the nonrepudiating party (Kemp) from the contract and gives this party two options: (1) sue immediately for breach of contract or (2) for a commercially reasonable time, ignore the breaching party’s repudiation and wait for the repudiating party to perform at the appointed time. If the repudiating party does not subsequently perform, the nonrepudiating party may then sue for breach. The market value to be used in computing the buyer’s damages would be the market value at the time the buyer learned of the breach. Kemp learned of the breach on May 15 when the seller repudiated the contract. Consequently the market value used in computing Kemp’s damages is $.40 per pound. Thus, Kemp’s damages are $500 [5,000 pounds × ($0.40 − $.30)].

42

Which of the following contracts is not governed by Article 2 of the Uniform Commercial Code and is thus governed by the Common Law Rules?

  1. Ran purchases an elegant chess set that was carved out of wood 100 years ago.
  2. Ran hires a contractor to remodel her home using expensive materials.
  3. Ran buys a portable radio for $50.
  4. Ran buys an old painting from a private party for $10,000.

Ran hires a contractor to remodel her home using expensive materials.

Article 2 of the UCC applies to contracts for the sale of goods. Even though materials (goods) will be used when the contractor remodels the home, the predominate feature of the contract is service, not goods

“Goods” include tangible personal property (whether specially manufactured or not)

  1. Do not include sales of investment securities, accounts receivable, contract rights, copyrights, or patents
  2. UCC applies whether sale is between merchants or consumers but some rules change if merchant involved

43

Which of the following factors will be most important in determining if an express warranty has been created?

  1. Whether the promises made by the seller became part of the basis of the bargain.
  2. Whether the seller intended to create a warranty.
  3. Whether the statements made by the seller were in writing.
  4. Whether the sale was made by a merchant in the regular course of business.

Whether the promises made by the seller became part of the basis of the bargain.

Any seller, not only a merchant seller, may create an express warranty by making any affirmation of fact or promise which forms part of the basis of the bargain. Such a warranty may be made either orally or in writing and will exist regardless of the seller’s intent.

44

Stubble sold some office furniture to Darwin, who gave Stubble a check for the purchase price, and immediately resold the furniture to Hernandez. Darwin’s check was subsequently returned due to insufficient funds. Hernandez had purchased this furniture in good faith, not knowing that Darwin had insufficient funds in his checking account. Which of the following is correct?

  1. Hernandez has good title to the furniture.
  2. Stubble may repossess the furniture from Hernandez.
  3. Stubble has title to the furniture.
  4. Hernandez may recover damages from Darwin for fraud.

Hernandez has good title to the furniture.

Darwin obtained voidable title when he purchased the furniture with a check that was later dishonored. Hernandez, as a good-faith purchaser, obtained good title by purchasing from Darwin even though Darwin only had voidable title.

45

Bell Co. owned 20 engines which it deposited in a public warehouse on May 5, receiving a negotiable warehouse receipt in its name. Bell sold the engines to Spark Corp. On which of the following dates did the risk of loss transfer from Bell to Spark?

  1. June 11 - Spark signed a contract to buy the engines from Bell for $19,000. Delivery was to be at the warehouse.
  2. June 12 - Spark paid for the engines.
  3. June 13 - Bell negotiated the warehouse receipt to Spark.
  4. June 14 - Spark received delivery of the engines at the warehouse.

June 13 - Bell negotiated the warehouse receipt to Spark.

Provided there is no agreement to the contrary and neither party is in breach, risk of loss to goods which are held in a warehouse for delivery without being moved will pass at the time the negotiable document of title is properly negotiated to the buyer. If the document of title is nonnegotiable, then the risk of loss passes a reasonable time after the buyer receives the document. Where there is no document of title representing the goods, risk of loss will pass once the warehouseman acknowledges the buyer’s right to the goods.