Accountants’ Liability. Contracts for the Sale of Goods. Warranties, Product Liability and Remedies.

Accountants’ Liability

The liability of professionals to their clients is based on contract law and negligence. For accountants and lawyers, additional obligations and liabilities are imposed by codes of ethics and licensing.

Contractually, a professional owes a duty to a client to honor the terms of the contract, which may include time constraints, fee limitations and scope of work. It is imperative that these terms be discussed in advance and carefully worded to avoid ambiguity in interpretation. Failure to perform as per the contract will subject the professional to damages incurred by the client as a result of the professional’s breach.

Negligence involves a duty of care, which if breached results in economic harm to the client. The duty of care is not spelled out in a contract but includes the standard of care, knowledge and judgment generally accepted by the members of a profession, as well as standards imposed by codes of ethics or licensing requirements.

A significant source of concern for accountants is the Sarbanes-Oxley Act of 2002. This act imposes requirements on a public accounting firm providing auditing services to a company:

• that has securities registered under Section 12 of the Securities Exchange Act of 1934

• is required to file reports under Section 15(d) of the Securities Exchange Act of 1934; or

• files a registration statement not yet effective under the Securities Exchange Act of 1933.

The Sarbanes-Oxley Act provides numerous regulations for public accountants preparing financial statements for publically traded companies. One regulation is that public accountants cannot perform both audit and non-audit services for a client. Non-audit services include bookkeeping, appraisal or valuation services, management functions, investment-advising services and others.

Accountants can be liable to clients for committing fraud. The elements of fraud include:

1. misrepresentation of a material fact

2. intent to deceive

3. reliance on misrepresentation

4. actual injury to innocent party

An accountant commits actual fraud if he or she intentionally misstates a material fact and a client reasonably relied on the fact. The accountant commits constructive fraud if he or she is grossly negligent in the performance of said duties.

Contracts for the Sale of Goods

A contract for the sale of goods is an agreement between a buyer and a seller. To form a contract, one party must initiate an offer, another party must accept, the offer, which forms the agreement. Something of value (consideration) must be exchanged. The parties must have mental capacity and the contract must have a legal purpose.

A sale of goods is defined as transfer of title to tangible personal property for a price. A price may include the payment of money, exchange of other property or the performance of services. Sales contracts are governed by Article 2 of the Uniform Commercial Code (UCC). Article 2 covers the sale of goods, including cars, boats, electronics and clothing (UCC 2-105). It specifically does not cover the sale of

1. Services

2. Intangibles, such as investment securities, such as stocks and bonds

3. Insurance policies and commercial paper

4. Real estate

5. Bailments

6. Gifts

At common law once a valid offer is unequivocally accepted, a binding contract is formed. The UCC allows for open pricing, payment and delivery terms, even if terms are undefined. Indefiniteness in the open terms is acceptable as long as the parties intended to make a contract and there is a reasonable basis for a court to grant a remedy. (UCC 2-204)

Unless the offer specifies a method of acceptance, the UCC allows for any reasonable means of acceptance of a contract. When the party accepting the contract includes additional terms, the contract is formed according to the original terms without the added terms if only one party to the contract is a merchant. If both parties are merchants, the contract will include the new terms unless the original offer specifically limits terms or the terms represent a material change to the contract or the offer or objects in a reasonable time.

Sales of goods in the United States are regulated by Article 2 of the Uniform Commercial Code (UCC). Adopted by most states, the UCC is a collection of suggested laws that provide uniformity for resolving issues that arise in commercial transactions. Article 2 applies to sales between merchants and non-merchants. A merchant is "a person who deals in goods of the kind or otherwise by his occupation holds himself out as having knowledge or skill peculiar to the practices or goods involved in the transaction" (U.C.C. § 2-104).

International sales of goods are generally governed by the Convention on Contracts for the International Sale of Goods (CISG), which is similar to Article 2 of the UCC. The CISG does not apply to goods purchased for personal or household use, ships or aircraft, securities, negotiable instruments and goods sold at auction.

The UCC is a complicated compilation of laws. Let’s examine some of the most important parts of the UCC, with emphasis on the parts related to sales, e-commerce and contracts.

Warranties, Product Liability and Remedies

A warranty is an assurance or guarantee by the seller or lessor of certain facts concerning the goods being sold or leased. If the seller breaches a warranty, the buyer can recover damages or rescind the contract. There are two primary types of warranties, express and implied.

Express warranties encompass statements of fact or promises of performance that are expressly agreed to by the parties and become the basis of the buyer’s bargain. Only statements of fact create express warranties.

Implied warranties are not expressly made by the seller but inferred at law based on the conduct of the parties, circumstances or nature of the transaction.

Product Liability

In addition to the warranties, recovery in a product liability case may be based on negligence, fraud or strict tort liability.

Negligence

An injured party may recover if they can show that the seller was negligent in preparing or manufacturing the article or failed to provide appropriate instructions or warnings of danger.

Fraud

A party may recover if the distributor or manufacturer makes false statements with knowledge they of the falsehood or with reckless indifference to their truthfulness.

Strict Tort Liability

A party may recover under strict tort liability if the product was defective and unreasonably dangerous at the time it left the control of the manufacturer or distributor and causes harm. The claimant may be a purchaser, consumer or third party and need not show intent or knowledge. However, the seller can use the defense of assumption of risk.

Remedies for Breach

When one of the parties breaches the contract, the other party has various remedies under the UCC, depending on the circumstances involved. To determine which remedy applies, it is important to know which party has possession of the goods, the status of goods in transit and whether the buyer has rejected or accepted the goods.

Title and Risk of Loss

Historically, title dictated rights and responsibilities; however, the UCC replaces title with identification, risk and insurable interest. For interest to pass to the buyer, goods must be (1) in existence and (2) identified as specific goods in the sales contract. Identification takes place when specific goods are designated as the subject matter of the contract. Identification gives buyer the right to obtain insurance on the goods and recover from third parties who damage the goods.

When does title pass?

The default for passage of title is by agreement between the buyer and seller. Absent an agreement, UCC 2-401 permits title to pass to the buyer at the time and place the seller performs by delivering the goods. If the parties do not determine a set time and place, the title passage is determined based on whether the parties have a shipment or destination contract.

If goods are damaged or destroyed in transit, which party bears the financial loss, buyer or seller?

Risk of loss does not automatically pass with the title. Contracts may specify when risk of loss passes from the seller to the buyer. Absent contract provisions, the UCC provides risk of loss passes to buyer depending on whether delivery is with or without movement of the goods.

When does insurable interest exist?

The buyer has an insurable interest in goods that have been identified. The seller has an insurable interest in goods as long as they retain title or a security interest. Both buyers and sellers can have an insurable interest at the same time.

Incoterms® consist of 11 standard international trade terms used in international sales contracts to define the responsibilities of the buyers and sellers related to costs, transportation and risks at specific points in the transaction. Incoterms® are maintained by the International Chamber of Commerce and assign the responsibility for arranging transportation, insurance and customs clearance between buyers and sellers. Intcoterms® do not address passage of title. Some of the terms are also used in domestic shipment and delivery transactions. The most frequently used terms are summarized in the following table.