Overview of Contract Law
Contract law is one of the most important areas of commercial transactions. The ability of parties to deal with each other in a considered way, providing the necessary certainty that will foster cooperation rather than dispute, underpins almost all businesses. Without the benefit of contract law, for example, it would be extremely difficult to acquire goods from others, or to sell goods to others, in a way that everyone involved could have certainty that the deal was final and settled, or that it had been done on the basis of binding terms . The sale of goods is one of the key ways in which parties engage with each other, largely because of the simple nature of it. When you go into a shop or order something for delivery, you expect that you will then receive that item on the terms agreed between you and the seller. A sale of goods agreement is therefore a crucial contract – it helps ensure that parties are protected by the law no matter what types of goods they are acquiring or disposing of.
Elements of a Sales Agreement
The essential elements of a contract for the sale of goods are identical to the requirements for any other contract under the common law. The requirements are an offer by one party to contract that is accepted by another party along with the requisite consideration between the parties. Another coupling requirement is an intention to create a legal relationship and an understanding by the parties that their contract is to be legally binding.
The offer must be sufficiently clear and indicate a willingness on the part of the offeror (the one who makes the offer) to be legally bound in the event of acceptance by the offeree. An offer can be made in various ways including by a word or even mere conduct but in trying to establish the existence of an offer, the decision is dependent on an objective consideration of the circumstances in question. It has been said by the general principle that "an offer must be distinguished from an intention to offer, a bargain, an invitation to treat and a counter-offer".
Acceptance of a lawful offer makes a contract binding provided it is made in the way specified by the offeror at the time of the offer unequivocally and communicated to the offeror. It is important to note that in most cases the offeror is required to indicate the method by which acceptance may be communicated. The offeror may be so particular in the mode of communicating acceptance and thereby restrict the offeree to communicating acceptance in that specific way. If the offeror clearly states that the only mode of communicating acceptance will be by writing and delivering a letter then the offeror will be able to reject an acceptance that has been communicated by any other means. In addition an acceptance must correspond with the essence of the offer so that it does not introduce new terms or a deviation in any way. Where an offer has named a time limit for acceptance it can normally be accepted in that time period even if the acceptance is not communicated until after the time has elapsed as long as the offeror is not in some way responsible for the delay.
Although the common law indicated that a contract can arise even where the subject matter is incapable of specific identification, a contract for the sale of goods is not binding unless the goods are ascertained. A determination of the contract becomes possible once the subject matter is described in the contract with sufficient certainty and the quantity of goods is set out or a method for determining the quantity is mentioned in the contract. The fact that such issues may be mentioned in vague terms does not invalidate the contract.
The consideration required for a contract is a detriment suffered or a benefit obtained by a party in his favour or on behalf of the other party to the contract in consideration for some promise made by the other party. A party can either provide consideration by the conferring of a benefit or incurring a detriment, by which the other party is benefited or suffers a detriment.
The intention to create legal relations is required in a contract to establish the existence of an intention on the side of the parties that the agreement must be enforceable. An intending obligation must exist between the parties and it is always assumed in commercial transactions that the parties want the agreement to be legally enforceable unless the contrary is indicated.
Legal Rights and Responsibilities of Buyers and Sellers
The seller has an implied obligation to deliver the goods, while the purchaser has the corresponding obligation to pay the price. It is important to note that a valid contract cannot be formed without both parties having agreed to the terms of the contract.
A sales contract may have some general terms and conditions as well as special or individual terms and conditions which either party can negotiate and agree upon to fit the custom and circumstances of the transaction. When the terms and conditions are not individually negotiated, they are considered "standard terms and conditions" which usually are contained in a catalogue, manual or a website. In essence, such terms and conditions may be defined as those terms and conditions that apply on all or most occasions with minor variations.
The Rights of All Parties Contractual agreement between contracting parties invariably entails rights for each party both in respect of the delivery of the goods as well as payment of the purchase price. A proprietary interest in the goods sold does not require a separate agreement, other than that of sale. Ownership of property passes on agreement, unless the agreement provided for a suspensive condition, as in a sale on suspensive condition; or provided for a resolutive condition, as in a sale on condition. While the original agreement is operative, the purchaser becomes a tenant of the contract goods and is responsible for any loss or damage suffered, other than through reasonable wear and tear. In addition to such obligations, the seller may also be required by the agreement to deliver the goods, or to do so at a specified time or place.
Frequently Encountered Problems and Conflicts in Sale of Goods Transactions
Despite the creation of the Sale of Goods Act 1979 (SOGA), there remains a number of common pitfalls in sales of goods contracts and the resulting disputes that arise under such contracts.
Breach of Contract
The most obvious of these is for the purchaser to fail to pay. This results in a simple debt claim for the supplier to pursue, unless the contract contains on insolvency clauses preventing the risk of the purchaser becoming insolvent or a retention of title clause (discussed further below). The other common breach of contract is for the supplier to fail to deliver goods. As a matter of strict SOGA interpretation, this results in a claim for damages only, and a potential lost profits claim if any third party has to be utilized in order to buy-in the goods. However, SOGA (Section 49-53) also creates a right for an aggrieved purchaser to terminate the contract where the goods are not delivered within the time required by the contract (but only if time is of the essence of the contract).
Non-Conformity
Another frequent cause of dispute in sales of goods contracts is where the goods supplied do not conform to the contract, be it because they are defective or do not actually conform with the description used in the contract. For physical goods this is covered by section 3 SOGA. For all other goods it is covered by the Misrepresentation Act 1967 and the common law. They are also covered by the Supply of Goods and Services Act 1982, even if the contract contains no specification as to the quality of the goods. Rectification is possible at the election of the purchaser for a failure to apply the reasonable care to the goods even if there is no contractual term regarding the quality of the goods in question (section 14 SOGA). At the other end of the spectrum, a purchaser may terminate the contract (if time is of the essence) for a failure in that the goods have not arrived by the date required by the contract after the time for delivery has expired (Section 15A). Non-conformity can even result in damages being claimed for a lost profit as per the famous case of Hadley v Baxendale (1854) 9 Ex 341 (UK case law that is highly regarded). However, the most useful right provided by SOGA is that for the purchaser to obtain a replacement of the good or a repair (Section 16(1)(a)), and even where the defective good cannot be replaced or repaired, the remedy for a purchaser is a price reduction (Section 35). This occurs when the goods have less value than they would have if they had conformed to the contract.
Delivery Problems
There is little that is novel in the issue of delivery problems. In many cases of a sale of goods, delivery will occur once a purchaser arrives at the supplier’s premises, however if anything goes wrong with the delivery, the first question is whether the risk has passed to the purchaser or not. This is not a simple question since Section 32 SOGA creates a presumption that risk in bulk goods (like aggregates) passes as the goods pass through any entry to the premises that the buyer has purchased them from. Since in some cases, particularly on large construction sites, a customer may be required to give sections of their site over to the supplier (which can be the same as an agent of the supplier) there can be a dispute as to whether the goods have really passed onto a customer.
The Uniform Commercial Code (UCC)
The "Constitution" of the Sale of Goods: The Uniform Commercial Code
Lawyers and law students alike think of the Uniform Commercial Code ("UCC") as the "Constitution" of business. Local statutes may apply to specific business transactions but the UCC governs the sale or lease of goods between people or businesses located in different states.
In 1952, the National Conference of Commissioners on Uniform State Laws, in cooperation with the American Law Institute, drafted the UCC with one primary goal: provide nationwide standards to regulate the sale of goods and related transactions among businesses and individuals. The UCC, drafted first by the National Conference of Commissioners on Uniform State Laws, is adopted in some form by all 50 states. The UCC governs most aspects of the sale of goods that will be used in other states. In fact, the UCC even governs sales when the buyer and seller intend for the goods to stay in the same state in which they are purchased. The UCC covers the sale of personal property if it is "moveable" and is intended to be bought or sold. In general, the UCC covers the sale of goods costing $500 or more. The UCC applies to both individuals and businesses.
The UCC simplified the legal rules related to contracts as the law has evolved with technology . Among its many purposes, the UCC, where applicable, provides a remedy to the parties in the case of breach of contract. For example, if you buy a pair of shoes and they fall apart after you first wear them, you can return the shoes to the retailer and get your money back or get credit toward another purchase. If the retailer refuses, you have a cause of action for breach of contract. That means you can sue the retailer for the money you lost by buying the shoes. Remedies for breach also include performance by the other party and/or money damages. The UCC provides a standard way for parties dealing with the sale of goods to know what their rights are in the event a party fails to perform under the contract.
Without laws like the UCC, the parties in the above scenario would have no place to go except a lawyer’s office. While the lawyer could probably draw up a sales contract that would specify what happens in the event the shoes were defective, for the average person, the idea of dealing with the legalities of the purchase at the time of the transaction is not as easy or convenient as it might seem. The UCC, however, is meant to make life easier by creating standardized sales contracts and default provisions.
International Sale of Goods and the Vienna Convention (CISG)
The United Nations Convention on Contracts for the International Sale of Goods (CISG) governs the sale of goods by parties from different countries. It is intended to facilitate international trade by providing an uniform and fair body of rules by which international sales can be conducted. The CISG applies to the formation of an agreement of sale and the rights and obligations of the buyer and seller under such an agreement. It has been ratified by 88 countries, and governs contracts between parties who have their places of business in a member state. Although the United States is a signatory to the CISG, at the time the UCC was enacted, it did not become effective until September 1, 1967 so the provisions of the UCC apply to international sales which occurred prior to that date. The CISG does not apply to international sales of consumer goods.
Summary and Best Practices
Understanding contract law in these circumstances is crucial for both buyers and sellers for a number of practical reasons. Claiming ignorance of the contents of a contract is not likely to satisfy a court or any attorney. In addition, courts will enforce contracts even if one of the parties should not have entered into the contract due to their age or mental capacity as long as the other party did not have knowledge of that fact. For these reasons, it is always important for individuals and businesses to remember the following:
• Always read all documents carefully before signing.
• Ask questions when you do not understand the terms of a contract which could be extremely important to you .
• Seek legal advice from a qualified attorney prior to signing a contract – it is almost always a good investment and there are some attorneys that will not charge you to review a contract and give you some advice.
• Consider negotiating important terms in the contract to avoid problems later being forced into arbitration.
• Seek legal advice prior to signing a warranty agreement which may prevent you from seeking redress for defective products.
It is also important for businesses to keep in mind when drafting a contract with a consumer to make sure it meets the requirements of Colorado law.