Commercial Law: Micro-Maker and Lacey - Assignment Example

GUIDANCE FOR Read the scenario below and then answer each of the questions that follow. Your objective should be to demonstrate a sound understanding of the principles of contract/commercial law that apply to the situations that follow, AND, where appropriate, highlight the difference that adopting the standard form contract might make to the outcome of any dispute. Refer to the Sale of Goods Act 1979 (as amended) and the standard form contract that has been referred to throughout the module. Micro-Maker is a small company involved in the manufacture of microwave ovens. One of its main customers is a large department store called Lacey with many branches around the country. The business arrangements between buyer and seller have developed along the following lines: Micro-Maker provide a demonstration model of each of its microwaves to the relevant Lacey store. Lacey does not pay for the demonstration models at this stage. Customers of Lacey who select Micro-Maker microwaves are given an approximate delivery date. Lacey then puts in an order to Micro-Maker together with a 10 per cent deposit on the value of the goods ordered and Micro-Maker sends microwaves to the relevant store via an independent carrier. Lacey pays the balance owing on each microwave on 60 days credit. Lacey delivers the microwave to the customer using its own van and driver. When a demonstration model has been in the shop for some time, Lacey sells it off at a knock-down price and, at that stage, the price becomes payable to Micro-Maker. Micro-Maker is concerned that the volume of business has grown considerably since the start of the relationship and feels that it might be appropriate to formalise the contractual arrangements. They want to adopt a standard form contract and ask you for advice. ANSWER ALL QUESTIONS (and ignore any aspects of insurance when advising who would bear the loss) QUESTION 1 [20 marks] (a) Describe the legal rules for ascertaining ownership of goods and comment specifically on ownership and risk as regards the microwaves at each stage in the distribution chain. Applying the Sale of Goods Act of 1979, the following legal rules are necessary for the ascertaining of ownership of goods regarding a contract agreement between Micro-maker, a small manufacturer of microwaves and Lacey, a chain of departmental stores. 1. Rule 1.—Where there is an unconditional contract for the sale of Microwave ovens between Micro-maker and Lacey, the property in the microwave ovens passes to Lacey when the contract is made, and it is immaterial whether the time of payment or the time of delivery, or both, be postponed. 2. Rule 2.—Where there is a contract for the sale of microwave ovens between Micro-maker and Lacey, and the Micro-maker is bound to do something to the microwave ovens for the purpose of putting them into a deliverable state, the property does not pass until the thing is done and Laceyr has notice that it has been done. 3. Rule 3.—Where there is a contract for the sale of microwave ovens between Micro-maker and Lacey in a deliverable state but the Micro-maker is bound to weigh, measure, test, or do some other act or thing with reference to the microwave ovens for the purpose of ascertaining the price, the property does not pass until the act or thing is done and the Lacey has notice that it has been done. 4. Rule 4.—When microwave ovens are delivered to Lacey on approval or on sale or return or other similar terms the property in the microwave ovens passes to Lacey:— (a) when Lacey signifies its approval or acceptance to Micro-maker or does any other act adopting the transaction; (b) if Lacey does not signify its approval or acceptance to the Micro-maker but retains the microwave ovens without giving notice of rejection, then, if a time has been fixed for the return of the microwave ovens, on the expiration of that time, and, if no time has been fixed, on the expiration of a reasonable time. Concerning the passing of risks between Micro-maker and Lacey, the following statements derived from the Sales of Goods Act of 1979 are applicable: (1) Unless otherwise agreed, the goods remain at the Micro-maker’s risk until the property in them is transferred to Lacey, but when the property in them is transferred to Lacey the microwave ovens are at the Laceys risk whether delivery has been made or not. (2) But where delivery has been delayed through the fault of either Lacey or Micro-maker the microwave ovens are at the risk of the party at fault as regards any loss which might not have occurred but for such fault (b) In view of the fact that Lacey will not be paying for the goods for some time, what advise would you offer Micro-Maker as regards the risk of non-payment ? Bridge (1998) highlights that Micro-maker may run into the following problems as regards the risk of non-payment from Lacey: Insolvency: Micro-maker may become insolvent and incapable of running its routine business activities because it lacks liquidity. Loss of value: The microwave ovens produced by Micro-maker may lose their nominal values if they are held for a long time without payment. Financial friction: Owning Micro-maker for a long time may result in financial friction as the two companies argue and disagree on several issue relating to money. QUESTION 2 [20 marks] (a) if the goods were damaged in a fire while in the shop waiting to be sold, who would bear the loss - Micro-Maker or Lacey ? Lacey would bear the loss in this regard, because the microwave ovens have already been delivered to Lacey (Atiyah et al, 2005). (b) if the goods were stolen from the Micro-Makers delivery van while in transit to one of Lacey’s shops, who would bear the loss ? Referring to subsection 33 of the Sale of Goods Act of 1979: Where Micro-maker agrees to deliver the microwave ovens at its own risk at a place other than that where they are when sold, Lacey must nevertheless (unless otherwise agreed) take any risk of deterioration in the goods necessarily incident to the course of transit. Whether it is deterioration or being stolen, Micro-maker would bear the loss in this regards. QUESTION 3 [ 10 marks] Micro-Maker delivers a consignment of general order microwaves to Lacey and Lacey discover that they are a different model from the ones which were ordered. What rights would Lacey have ? Applying the principles of Sales of Goods Act of 1979, the following situations may occur: (1) Where Micro-maker delivers to Lacey a model of goods other than Micro-maker contracted to sell, Lacey may reject them, but if Lacey accepts the microwave ovens so delivered it must pay for them at the contract rate. (2) Where Micro-maker delivers to Lacey a model of microwave ovens other than Micro-maker contracted to sell, Lacey may accept the goods included in the contract and reject the rest, or Lacey may reject the whole. QUESTION 4 [ 20 marks] Lacey discovers that on some of the models the outside of the microwave is slightly scratched. Some of Laceys customers might protest and refuse to take delivery. Outline the remedies available to Lacey as regards these particular goods. If Lacey discovers that some of the models the outside of microwave are slightly scractched, Duncan et al (1987) suggests that the following remedies are available to Lacey: Request for the repair after inspection; because it has the legal right to inspect the delivered microwave ovens. Lacey may decide to reject some or all othe faulty microwaves. Lacey may request for replacement of the faulty microwaves. But Lacey would not be able to outrightly cancel the contract except Micro-maker refuses to either repair or replace the faulty models. QUESTION 5 [ 20 marks] Consider the following additional scenario .. Micro-Maker is becoming concerned about Laceys financial position. Although Lacey is not insolvent, it did not include the stipulated 10 per cent deposit with its latest order of general models. In addition, Micro-Maker has not received payment for several demonstration models which it believes Lacey has sold on to customers. Micro-Maker is particularly worried as it has just sent several consignments of demonstration and general order models by two lorries to various Lacey shops and wonders if it will ever be paid. Another three consignments of demonstration models are waiting at the warehouse ready to be delivered to the independent carrier. What if any steps can Micro-Maker take to protect their position in these circumstances ? Bradgate et al (2007) explains that Micro-maker has the following rights about the microwave ovens already sold or are on the way to Lacey, if Lacey refuses to keep up with the regualar payments as stipulated in the contract. i. Micro-maker can exercise lien over the goods. A right of lien is a right to retain the possession of goods as security for payment of the price. Micro-maker would withhold the rest microwave ovens until Lacey balances up the payment. ii. Stoppage in transit: Micro-maker can decide to stop the goods already in transit to Lacey. This is done to register displeasure at the way Lacey defaults in the payment of previously delivered goods. iii. Resale: A seller who has exercised the right of lien and the stoppage in transit of certain goods may end up reselling them. Micro-maker may decide to resell all the remaining mocrowave ovens to a willing buyer and immediately cancels the contract it has had with Lacey. QUESTION 6 [ 10 marks] Micro-Maker has now learnt that Lacey is, in fact, insolvent. (a) What obligations would they have to deliver Demonstration models to the Warehouse? In a situation where by the buyer suddenly went bankrupt, Wood (2007) explains that the seller has the right to terminate the contract it has had with the insolvent buyer. This means that Micro-maker isn’t under any obligations to keep delivering demonstration models to Lacey after it has been announced that the company has become insolvent. (b) What rights would they have to recover Models already despatched and in transit ? Micro-maker would have to seek a litigation that would allow it to recover models it has already despatch to Lacey or in transit (Barnes et al, 2000). Exercising its right of stoppage, Micro-maker can order all microwave ovens shipped to Lacey’s across the country returned immediately. (c) What rights would they have to recover Models in Lacey’s stores ? Barnes et al (2000) believes Micro-maker may not be able to recover all Models in Lacey’s stores except there is a legal order that can make such an action possible. The Models at Lacey’s stores may have been paid for; therefore, it would be illegal for Micro-maker to recover them. References 1. Bridge, Michael (1998), The Sale of Goods, New York; Oxford University Press US. 2. Atiyah, P.S, Adams, J.N. & MacQueen, Hector L. (2005), Sale of Goods, London; Pearson/Longman, 2005 3. Sales of Goods Act of 1979 (This Act is reproduced with amendments as at 1st October 2003. Crown Copyright material is reproduced with the permission of the Controller of HMSO and the Queens Printer for Scotland). 4. Duncan, Richard, F. & Lyons, William H. (1987), The Law and Practice of Secured Transactions: Working with Article 9, London; Law Journal Press. 5. Bradgate, Robert & White, Fidelma (2007), Commercial Law, Oxford; Oxford University Press. 6. Wood, Philip (2007), The Law and Practice of International Finance Series, London; Sweet & Maxwell. 7. Barnes, James A., Dworkin, Terry Morehead & Richard, Eric L. (2000), Law for Business, New York; Irwin/McGraw-Hill. Read More