SALES & LEASES FINAL OUTLINE I.
Introduction a. Subject Matter—covers commercial law but not the entire field—does not cover things like service contracts, a contract of guarantee (loan), etc. b. UCC Parents i. National Conference of Commissions on Uniform State Laws 1. Draft uniform laws 2. Commissioners representing each state in a commission that decides on uniform laws to work on, etc.---each state has one vote in the commission 3. Process a. Appoint a drafting committee b. Appoint a reporter who is an expert in that area of the law and who drafts c. Hold a public meeting so commissioners can make policy decisions d. Come up with a final statute that is approved by commission as a whole and left to the commissioners to get passed as law in their state ii. American Law Institute 1. Where the various Restatements come from 2. Comprised of practitioners, academics, judges, etc and they are elected to serve 3. Restatement is not the law—just a compilation of what the law is—only becomes a law if a court turns to it and gives it precedential value c. Uniformity—has been weakened as revisions have been made and not all states have passed as law d. Code Overview i. Article 1: General Provisions 1. This applies throughout the code so always check it if dealing with a code covered transaction 2. Revised in 2001—only 33 states have adopted new Article 1 (Virginia included) 3. Changes when revised (for class purposes we go with Revised Article 1) a. Allows parties to choose the law of any state (as opposed to a state involved) when dealing with a non-consumer contract---nobody has enacted this change b. Redefined “good faith”—used to be “honest in fact” or “a pure heart”— the revision injected an objective component calling for your behavior to conform to reasonable commercial standards of fair dealing---half of the states enacting revised Article 1 have rejected this—Virginia included 4. Important Sections: a. § 1-103(a)—purpose of the UCC i. Text: The UCC must be liberally construed and applied to promote its underlying purposes and policies which are: (1) to simplify, clarify, and modernize the law governing commercial transactions; (2) to permit the continued expansion of commercial practices through custom, usage, and agreement of the parties; and (3) to make uniform the law among the various jurisdictions
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ii. Gives internal rules of statutory construction—says it must be construed liberally to promote its underlying policies which are listed iii. Cited to introduce the decisions of other states on a particular issue your state has not dealt with—cases in other jurisdictions are given importance iv. Introduce findings of other states and argue to the judge that he needs to interpret in a similar fashion to promote the uniformity envisioned by the Code—so even if A seems better—go with B ways b/c more states go with B and Code says go with goal of uniformity b. § 1-103(b)—internal standard of statutory construction i. Text: Unless displaced by the particular provisions of the UCC, the principles of law and equity, including the law merchant and the law relative to capacity to contract, principal and agent, estoppel, fraud, misrepresentation, duress, coercion, mistake, bankruptcy, and other validating or invalidating cause supplement its provisions. ii. Purpose—allows common law defenses (like duress) to come into code cases iii. Says that other principles of law and equity can supplement the Code as long as they are not inconsistent with it—so you can used non-Code doctrines in a Code covered case via this provisions iv. Official Comment says that you can apply Code Rules to non-code sections v. Example—things like duress, mental capacity, etc. are not mentioned in Article 2 but that does not mean you cannot argue them if they are still consistent with it (need familiarity with the common law of contracts) 5. Defined Terms in 1-201 apply throughout the code a. In addition to these definitions, each article ahs definitions that apply to that article only. Article 2: Sales 1. Is an Amended Article 2 no state has adopted and we don‟t care about 2. Correct version of Article 2 to use is the one with $500 in 2-201 Article 2a: Personal Property Leases 1. Added latter—covers things like renting a car from Hurtz Article 3: Negotiable Instruments 1. Things like checks, notes, etc. 2. Most states have the 1990 version, not the 2003 amended version-NY has neither Article 4: Check collection processes and the bank-customer relationship 1. Most states have 1990 version Article 4a: Wholesale Wire Transfers Article 5: letters of credit (amended and revised in 1995 and enacted by most states) Article 6: deals with creditors and inventory in stores, etc.
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ix. Article 7: documents of title such as warehouse receipts, etc. 1. 2003 revisions that 30 states including Virginia have x. Article 8: investment property—most states have revised 1995 edition xi. Article 9: Secured Transactions 1. Revised in 1998 with new version taking affect in 2001 e. More General Code info: i. Comments after each section—they are not enacted by state legislatures and are therefore not law—many courts will however take the comments seriously but some jurisdictions do not want you to even cite to them (very small minority) ii. There is a permanent editorial board created by NCUSO and ALI and it is the PEB and they issue commentaries on current questions, etc. f. Sources of nonuniformity: i. The revision process—makes a period of nonuniformity ii. The code itself gives alternatives (i.e. § 2-318) iii. When a state enacts an article it might amend it iv. Sometimes the courts construe the text differently Scope of Article 2 a. First question to ask—does Article 2 apply to my transaction? b. § 2-102 i. End of the section—“this article does not impair or repeal any statute regulating sales to consumers, farmers or other specified classes of buyers.” 1. Some jurisdictions have special statutes external to the code that apply to certain types of buyers—these co-exist with Article 2 ii. Middle of the section—“it does not apply to any transaction which although in the form of an unconditional contract to sell or present sale is intended to operate only as a security transaction…” 1. Substance over form provision 2. Refers to instances where parties do not use Article 9 and structure their deal as a secured transaction 3. Example: you borrow $10,000 from him and he wants to protect himself—so the deal is structured in the following way: he agrees to buy your painting for $10,000 and then you agree to a second sale where you repurchase it later for 10,200 (200 represents the interest for the loan really) a. Article 2 does not apply to these types of sales which are really in substance secured transactions under Article 9 b. Can have secured transaction and sale of goods—you buy a car on credit and also give dealer lien to reposes it if you fail to pay—this has a legitimate sale and a legitimate secured transaction and Article 2 would govern the sale of the car part iii. Beginning part: “unless the context otherwise requires, this Article applies to transactions in goods….” 1. Definition of goods: 2-105(1) a. A Good is all things movable at the time of identification to the contract for sale…
i. Identification is when you know what product/good the seller is going to deliver to you—sometimes it is at contract formation, sometimes later 1. Buy TV from Sears—identification occurs not when you agree to buy but when they put your name on a TV in their warehouse ii. Important elements: 1. Movable at the time of identification to a contract for sale a. Identification occurs when you know what it is that the seller intends to deliver or has to deliver 2. Does not apply to leases, gifts, repairing things, storage 3. If there is no contract for sale, the thing is not a good a. Money normally excluded—but would not be if you are buying a rare coin collection, etc. b. Unborn young and crops can count as goods 2. What do we mean by transaction—does warehousing a car or getting it repaired count? a. Many clues in Article 2 allows us to comfortably conclude it applies to the sale of goods i. Clues that Section 2 only applies to goods 1. § 2-105(1) 2. § 2-106(1)—Goods must be both existing and identified before any interest in them may pass. Goods that are not both existing and identified are „future‟ goods. A purported present sale of future goods or of any interest therein operates as a contract to sell. 3. § 2-315—Implied warranty iv. General points on Contract for Sale of goods: 1. It applies to all contracts for goods—don‟t say something like it does not apply to consumer contracts a. If you sell your lawnmower to someone else Article 2 applies b. If you buy a lawnmower from Wal-Mart Article 2 applies c. If Wal-Mart is buying a lawnmower from John Deere—Article 2 applies 2. When deciding IF Article 2 applies do not worry about the identity of the parties—the character of the buyer and seller (merchant, non-merchant, etc.) does not matter for determining if Article 2 applies v. PROBLEM 1 1. Does Article 2 apply to an insurance policy? No 2. Does it apply to the sale of real property? No, because it‟s not movable 3. Does it apply to sale of a house apart from the reality? If the seller severs the house from the real estates, then yes. a. § 2-107—Goods to Be Severed from Realty i. (1) A contract for the sale of minerals or the like (including oil and gas) or a structure or its materials to be removed from realty is a contract for the sale of goods within this Article if they are to be
severed by the seller but until severance a purported present sale thereof which is not effective as a transfer of an interest in land is effective only as a contract to sell. ii. (2) A contract for the sale apart from the land of growing crops or other things attached to realty and capable of severance without material harm thereto but not described in subsection (1) or of timber to be cut is a contract for the sale of goods within this Article whether the subject matter is to be severed by the buyer or by the seller even though ti forms party of the realty at the time of contracting, and the parties can be identification effect a present sale before severance iii. (3) The provisions of this section are subject to any third party rights provided by the law relating to realty records, and the contract for sale may be executed and recorded as a document transferring an interest in land and shall then constitute notice to third parties of the buyer‟s rights under the contract for sale. 4. Does it apply to the sale of building materials as part of a construction project? Yes. 5. Does it apply to the sale of standing timber? Yes 6. Does it apply to the sale of a gym membership? No 7. Does it apply to the sale of electricity? Courts are split 8. Does it apply to the sale of the entire assets of a clothing store? Yes, but may be different in states that have Article 6. a. Article 6 assumes that creditors made the decision to extend credit to Harry at least in part on the fact that Harry owned the inventory. Article 6 concerns notification to creditors because Harry may decide to unload the inventory and then take off. Article 6 requires notification to creditors before transfer. If Harry disappears, then the creditors have rights against the buyer, thus it is the buyer who has to worry about compliance with Article 6. c. Mixed/hybrid Issue i. Example: builder buys pipe to put in your house (this is Article 2 contract)—after he puts it in there is a problem and it leaks—is your contract with the builder covered by Article 2? You now have some pipe, but there also was a services component to the contract 1. Hip replacement in hospital another example—and getting hair dyed at the salon (buying hair dye and the service to do it…) ii. Why does it matter if Article 2 applies or not? 1. This matters because Article 2 is outcome focused—warranties are breached regardless of the seller‟s fault. 2. On the other hand, the default rule for service contracts is effort oriented. a. You would have to prove that the builder didn‟t behave in a professional way, was negligent, or did something wrong. 3. You want the protection of Article 2 Warranties iii. Parties can put in the contract what it is or adjust warranties, etc. if they choose iv. Two Tests
1. Predominant Purpose Test a. Is it predominately a contract for goods or contract for services? Whatever the answer apply the corresponding law b. Weakness: it can be hard to determine a predominate purpose and applying whichever law you choose to the other part of the contract may be difficult to do—such as applying Article 2 to a service situation it was not intended to address i. This test is wack b/c it is unpredictable, subjective, and doesn‟t go with legislative intent b/c you can wind up applying a legal regime that wasn‟t designed for the problem. 2. Gravamen Test a. You determine which portion of the contract caused the problem and then apply the appropriate law (so if the goods were the problem apply UCC, if the installation, etc was a problem apply the common law of service contracts) b. Weakness: you may not know which caused the problem or perhaps both were the problem---also you have to apply two different sets of rules to different portions of the same contract—can be hard to divide like that i. You don‟t know what caused the harm necessarily—you have to try the entire case without knowing what rules the jury is going to apply. ii. You could have two parole evidence rules or statute of frauds, statute of limitations and two sets of contract formation rules. v. These mixed transactions usually come up in goods/services case, but there are other ways that this comes up. 1. For example, buying a bar—you are buying chairs and tables and other goods, but you are also buying the building (non-goods), intellectual property, and licenses. These are non-goods, but also not services. vi. Usually the plaintiff argues for the application of Article 2, but sometimes they argue for non-code law. 1. In the UCC, the statute of limitations begins when the goods have been tendered, not when the injury occurs. Thus if the injury happens six years later, the plaintiff may be out of luck. d. Software issues i. Issue: you may buy a disk at Circuit City for Turbo Tax and that is a good—but you can argue it is only a delivery system for the tax services offered….also now you can download software off the internet and not even get a disk, etc. ii. In 1991 there was a drafting committee to revise Article 2 and they thought about software. A study group was appointed to study software transactions. There were four possible recommendations: 1. Leave software contracts alone—let the courts wrestle with it and see what the problems are before we codify the area. 2. Draft something outside of the code 3. Draft a separate article
4. Let the Article 2 Committee make the changes necessary in order to accommodate software contracts. iii. They did suggestion 4, but NCULSA and the ALI couldn‟t agree, so NCUSLA drafted a separate statute called UCITA and only two states have enacted it: (Virginia and Maryland) 1. Other states have enacted bomb shelter provisions that would not allow big software companies to choose Virginia or Maryland as their source of law. 2. In other jurisdictions the courts may view software as being covered by Article 2, they may not but still apply Article 2 by analogy, they may not and apply a different law iv. Smart goods (goods with software inside them—something like a microwave) 1. Normally cases involving smart goods are settled by article 2 2. In UCITA jurisdictions most smart goods are Article 2, but the gravamen approach applies to computers (article 2 to goods and UCITA to software) e. Merchant status i. If the question is does Article 2 apply to my contract, the character of the parties is irrelevant. But the character of the parties is relevant within Article 2. There are 14 special rules for merchants and these rules uniformly hold merchants to a higher standard. ii. Definition of merchant in 2-104(1): 1. Merchant means a person that deals in goods of the kind or otherwise holds itself out by occupation as having knowledge or skill peculiar to the practices or goods involved in the transaction or to which the knowledge or skill may be attributed by the person‟s employment of an agent or broker or other intermediary that holds itself out by occupation as having the knowledge or skill. a. Can be a merchant in terms of either the practices or goods involved in a contract b. Having an agent with special knowledge or skill can make you a merchant as well iii. Goods v. Practices Merchant—Huh? Sometimes merchant status depends on the goods and sometimes on the practice involved. Sometimes just understanding the practices involved in the section is enough and sometimes you have to be a seller of the goods. 1. § 2-403(2)—merchant who deals in goods of that kind (special skill/knowledge is irrelevant) (gotta be a seller of those particular goods) 2. § 2-314—implied warranty of merchantability—goods of that kind—(skill or knowledge irrelevant) 3. § 2-201(2)—statute of frauds—between merchants (this provision deals with a practice). For purposes of this merchant provision, everyone in business would qualify as a merchant. 4. § 2-104, cmt. 2—even a university when it enters into a goods transaction would be a merchant for the purposes of these provisions. a. Comment—makes clear you can only be a merchant in a business capacity—not when acting privately such as Trump buying furniture for his house
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Often easy to tell if a merchant or not—just remember some sections you are a merchant with respect to the goods you deal with and others with respect to your practices ii. PROBLEM 3 a. There is no merchant grace period. If you look at the merchant cases, many of them involve family farmers. Usually the merchant provision that‟s involved is § 2-201(2) (statute of frauds). Even if you are a family farmer, you are holding yourself out as a merchant. If the court were to conclude that the small family farmer is a merchant, then the farmer loses. Cts have bent over backwards and have held that the small farmer is not a merchant. These cases are result driven. b. § 2-201(2): Between merchants if within a reasonable time a writing in confirmation of the contract and sufficient against the sender is received and the party receiving it has reason to know its contents, it satisfies the requirements of subsection (1) against such party unless written notice of objection to its contents is given w/in 10 days after it is received. c. Point from problem 3: no merchant grace period—when you decide to open a business selling hats you will be deemed a merchant in terms of that good—hats f. Lease agreement vs. Sale and a Security Interest i. Intro 1. Many transactions are called leases and will have a lessee, a lessor, and provision for rent however these are not necessarily leases as covered by Article 2A 2. If not a true lease in substance, it is a sale and security interest and the sale is governed by Article 2 you are actually a buyer and seller with the “rent” being the purchase price 3. Basic difference between a sale and lease a. With a real lease you rent car from hertz and at the end it goes back— when it goes back it has real value—in a lease the lessor retains residual interest that has value b. With a sale, they retain no interest with residual value—it is all yours ii. Hypos for § 1-203: Assume an item with a useful economic life of 5 years and assume the market price of the item would be $20,000 1. Term of 5 years and rent of $4,200 per year a. This is a sale—the entire life of the goods is covered by the term—when and if they are returned they will have no value remaining—the rent appears to be the purchase price plus a financing charge for purchasing over a period of time b. Economic substance tell us this is a sale even though it is called a lease 2. Term of 2 years and rent of $11,000 per year a. Version 1 i. There is still value when it is returned—there are still 3 years of useful economic life remaining ii. The rent amount looks like the purchase price—that is not controlling—here, the lessee simply got a bad deal iii. The substance of this deal tells us it is a lease b. Version 2
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i. Add in that the lessee has the right to purchase at the end of the 2 year period for $100 ii. Now does the lessor have an interest worth an economic value? 1. Yes but there is an option 2. This is a nominal option so you assume the lessee will exercise it at the end—because of that we say it won‟t go back to the lessor, so it is a sale 3. Again term of 5 years and again rent of $4,200/year BUT we have a right of termination (the lessee can terminate upon giving the lessor 30 days notice) a. Now the substance tells us this is a lease b. We no longer can confidently say that at the end of the term it will go back with no economic value/useful life remaining c. The chance of the lessee terminating and the lessor getting it back with economic life is too great to continue calling this a sale iii. Rule from Hypos: it is a sale if there is no termination right AND if it will go back to lessor with no value (they have no interest with value remaining) iv. § 1-203 1. Subsection (a)—tells courts to figure it out 2. Subsection (b)—if fulfilled, it is a sale a. If you have no termination and one of the 4 subparts is meant it is a sale i. (1) term is equal or greater than the useful economic life of goods ii. (2) lessee is bound to renew the lease or own the goods afterwards iii. (3) lessee can renew the lease with no additional consideration or with nominal consideration iv. (4) lessee has the option to become the owner for no additional consideration or for nominal consideration 3. Subsection (c): a list of factors that may make it seem like a sale but that are on their own inconclusive 4. Subsection (d): when you have “nominal consideration” or not v. PROBLEM 4 1. (a)—the lease provided that the lessee could terminate the lease at any time and return the computer to the lessor—it‟s a lease. 2. (b)—assume that there‟s no such option as described in (a), but the goods had no value at the end of the five-year period—it‟s a sale 3. (c)—if the option is not for a nominal amount, then it is a lease. g. International Sales i. CISG (Convention on the International Sale of Goods) created in 1980 and signed onto by most significant economic nations except Britain (US has signed) ii. It applies anytime two parties from member nations enter into a contract for goods 1. Has an opt-out provision that allows the parties to work outside of it 2. Most folks are not aware of it and thus do not opt out iii. If you want to opt out b/c your client would be better served—put in a provision saying the contract will be governed by the UCC as enacted in Virginia…. Statute of Frauds
a. 2-201Subsection 1 contains the statute of frauds and the remaining of 2-201 features exceptions to it b. Need to update—issue of $500 being low, signature part now making allowance for electronic signatures (UETA and E-SIGN attempt to deal with this) c. This is not a twenty-first century provision: i. The amount required is $500 ii. Writing/Signature requirement—this does not go with e-commerce. d. Some ways to deal with e-commerce: i. Uniform Electronic Transactions Act—UNITA—more than 40 states have enacted this. ii. A federal statute called Electronic Signatures in Global and National Commerce Act—ESIGN. 1. In those states that have enacted UNITA, E-SIGN does not apply. iii. These are not substantive statutes, but basically they put electronic signatures on the same status as writings and the parties have to agree to conduct their transactions electronically. e. 2-201 i. § 2-201 does not mean that you put the whole contract in writing. There just has to be: 1. a writing sufficient to indicate that a contract for sale has been made 2. it has to be signed by the party charged 3. there must be a quantity term, thus 4. “Sold to Mary, 100 tables” and signed is fine to satisfy the SOF. Subsection (2): exception to signature requirement ii. Subsection (2): exception to signature requirement 1. Example: buyer talks to seller on phone and they agree on a deal to buy 100 tables—the buyer then sends a confirmation to the seller saying this is to confirm our deal to purchase 100 tables a. Suppose market price goes up; seller will want to breach and buyer can do nothing b/c the seller has not signed the document—buyer cannot satisfy the statute of frauds b. On the flip side, if buyer wishes to breach because the price goes down— they cannot because the seller can satisfy the statute of frauds 2. Subsection 2 puts the two parties on an even playing field so neither can walk away from the deal 3. So once one side gives up their defense by sending a confirmation, the other side gives up theirs as well unless they object in writing within 10 days (you have to object to the contents meaning object the contract exists obviously—not just say the writing has the terms wrong (this would actually be admitting there was a contact)) 4. This applies when the deal is between merchants (likely merchants will mean anyone in business community who opens and reads mail, etc.—see discussion of merchants above) iii. Subsection (3): exceptions to the writing requirement—all give some other objective evidence that there was a contract 1. (a) Subsection (a)—“If the goods are to be specially manufactured for the buyer and are not suitable for sale to others in the ordinary course of the seller‟s
business and the seller, before notice of repudiation is received and under circumstances which reasonably indicate that the goods are for the buyer, has made either a substantial beginning of their manufacture or commitments for their procurement.” a. Covers specialty goods the seller has started to manufacture or procure in circumstances that reasonably indicate the goods are for the particular buyer b. Why? The fact that you are building these cabinets just for one person suggests that there was a contract. 2. (b) judicial admissions exception—if a party admits in a proceeding, pleading, etc. that a contract does in fact exist a. but the contract is not enforceable under this provision beyond the quantity of goods admitted. 3. (c) if payment has been made and accepted or the goods have been received and accepted (the money or goods being in the other party‟s hands provides some objective proof that some sort of contract did in fact exist) f. Other issues i. Signature requirements: 1-201(37) defines “signature” and it includes any symbol adopted with the intention of accepting the writing 1. Comment indicates that a letterhead or company seal could suffice if it is intended to connect them with writing 2. You could argue his letterhead which he writes on is sufficient to satisfy the signature requirement ii. Writing defined in 1-201(43) and it can include anything tangible can suffice iii. Can argue that true reliance by one party moves it out from under the statute of frauds— argument has been accepted by some courts and would be made under 1-103 that the Code has not displaced a promissory estoppel type argument 1. Argue against this by saying the exceptions in 2-201 are exhaustive 2. Suggested by language at the beginning which says “except as otherwise indicated in this section” 3. Revised Article 2 has removed this b/c they disagree with courts saying 2-201 did displace common law as it relates to statute of frauds iv. Installment contract issue: 1. What if it is not to be completed within 1 year? a. 2-201 may be satisfied, but can the party satisfy the common law statue of fraud requirement that the contract be fulfilled within a year? i. This depends on jurisdiction v. Requirement/Output contracts 1. Common law some courts did not like them because of the lack of mutuality: the buyer controls the quantity completely—not promising to actually buy anything; or the seller controls the quantity completely—not promising to actually produce anything 2. Code sees these as legitimate contracts and deals with them in 2-306 which is designed to control the discretion of the buyer/seller
a. Features a good faith obligation and says it can be for no quantity that is “unreasonably disproportionate to any stated estimate or prior output or requirement” 3. Another issue—there is no certain term so does it satisfy statute of frauds? You would have to say yes because it is recognized in section 2-306 g. PROBLEM 6 i. What are the issues in this problem? 1. Is it sufficient to indicate that there was a contract to sell?—placed the memo on a spindle marked “Orders” a. § 1-201(43)—Writing includes printing, typewriting, or any other intentional reduction to tangible form. 2. Are initials a signature? a. § 1-201(37)—Signed includes using any symbol executed or adopted with present intention to adopt or accept a writing. b. This provision makes it clear that a symbol is not necessary and in appropriate cases may be found in a bill head or letter head. The question always is whether the symbol was executed or adopted with present intention to adopt or accept a writing. 3. When Ross sent the confirmation letter, he gave up the SOF defense, because it is good against the sender. But Ross is now suing, but it wasn‟t signed by Scott. a. However, here there is an exception to the signature requirement, because both are merchants. Both give up the SOF if Scott does not object in writing within ten days. 4. Again remember that SOF is not conclusive on the issue of whether there was a contract and SOF is not conclusive as to any of the terms, except that it places a ceiling on the quantity. ii. Hypo: Suppose that Ross sends this confirmation off and Scott responds by saying immediately and in writing that no we have a contract for 1.5 tons. 1. This would be an acknowledgment that a contract has been made by Scott. h. PROBLEM 7 i. (a) Does the check satisfy § 2-201—Yes, b/c the quantity is indicated by the fact that Tank is singular. ii. (b) Even if the check does not meet the SOF, it‟s a payment under § 2-201(c) 1. This is a part payment—whether a part payment satisfies 3(c)—it does if the contract is for an indivisible item. If it‟s a divisible contract, a part payment is not enough. 2. Also, under 3(a) it is clear that this was specially manufactured for the city of Thebes. iii. (c)—Some courts have held that there is a promissory estoppel exception to the SOF. This would come in under § 1-103(b) and you would have to have real substantial reliance by one of the parties to take it out of the SOF. The other party would have to argue that promissory estoppel has been displaced by the code. 1. Promissory estoppel may be displaced because of: a. The comprehensiveness of § 2-201
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b. The term “except as otherwise provided”—may indicate that here you have all the exceptions to the SOF. i. Interaction with other SOF (i.e. contract to be performed over 1 year SOF). i. Hypo: Suppose we enter into an installment contract—every month you are going to deliver 100 pairs of shoes and you are going to do this for 15 months. Which SOF do you use? 1. Amended § 2-201(4)—A contract that is enforceable under this section is not unenforceable merely because it is not capable of being performed within one year or any other period after its making. 2. Thus if you satisfy § 2-201, it‟s good enough. j. PROBLEM 8—Issue—Does § 2-201(1) always require a specific quantity? i. § 2-306—Output, Requirements and Exclusive Dealings—The drafters of the code believed that requirements and output contracts were legitimate types of contracts. 1. (1)—a term which measures the quantity by the output of the seller or the requirements of the buyer means such actual output or requirements as may occur in good faith, except that no quantity unreasonably disproportionate to any stated estimate or in the absence of a stated estimate to any normal or otherwise comparable prior output or requirements may be tendered or demanded. 2. (2)—a lawful agreement by either the seller or the buyer for exclusive dealing in the kind of goods concerned imposes unless otherwise agreed an obligation by the seller to use best efforts to supply the goods and by the buyer to use best efforts to promote their sale. ii. § 2-306 is designed to reign in discretion by: 1. Good faith obligation 2. Unreasonably disproportionate standard: a. Stated estimate b. Past practice 3. Thus, a requirement term and an output term is sufficient for the SOFs. Usage of Trade—§ 1-303 and the Operation of Article 2 a. Definition of “agreement” in 1-201(b)(3)—it is the “bargain in fact” as found in language or inferred from the circumstances—it includes course of dealing, course of performance, or usage of trade (these three are then discussed in 1-303) b. Definition of “contract” in 1-201(b)(12)—it is the total legal obligation that results from the parties‟ “agreement” i. Sometimes the agreement is larger than the contract—A circle that is the agreement—but some may be illegal so the contract will not include that sliver of the agreement that is illegal ii. Sometimes the contract is larger than the agreement—suppose we agree to do a deal for 100 tables priced at $500/table but say nothing of the quality—quality is not part of the agreement/bargain in fact—but under the provisions of Article 2 the warranty of merchantability, etc. becomes a part of the contract c. § 1-303—Course of Performance, Course of Dealing, and Usage of Trade i. Usage of trade found in subsection (c): “any practice or method of dealing having such regularity of observance in a place, vocation, or trade as to justify an expectation that it will be observed with respect to the transaction in question…”
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1. If one exists it serves two possible functions: a. Can be used to give meaning to the language we use i. Example: we are in donut business and enter into a contract for a dozen donuts—usage of trade can tell us what that means— perhaps in the donut world it is always 13—in this case we go with that definition of a dozen instead of the definition in Webster‟s— we do it with the intention of honoring the parties‟ expectations b. Can be used to supplement/add terms to the agreement i. Ex: Suppose a usage of trade provides that for every dozen donuts you buy you get a free bagel—we say nothing in our deal about the bagel because it goes without saying—if we ignore the free bagel, we ignore the parties expectations—so we add the bagel as a term Course of dealing in subsection (b): it is a sequence of conduct concerning previous transactions between the parties to a particular transaction that is fairly to be regarded as establishing a common basis of understanding for interpreting their expressions and other conduct 1. In short—how the parties behaved in prior contracts that are similar 2. Example: we have entered into 5 past contracts for a dozen donuts—in each one 13 donuts were delivered—on our 6th deal we can assume that it was again actually for 13 donuts Course of Performance (a): how the parties have been behaving while performing this particular contract 1. You cannot have a course of performance in a one shot deal—if you have a deal to buy a table from someone there will be no course of performance 2. It comes up in installment contracts a. Suppose he is supposed to deliver 100 items each month for the next 100 months b. He delivers for the first 4 months short a few items and you do not object and then in the 5th month you object to him being short 4 items c. Seller will argue that the course of performance showed that 100 items was not really 100 items d. Buyer counters that he has been in breach all along e. Seller also looks at 1-303(f), which says course of performance can waive/modify a term—so by not objecting, the buyer modified the number of items term to be less than 100, or waived his right to claim breach later on (if a waiver, 2-209(5) says the buyer can reinstate the firm 100 item requirement of the contract by telling the seller they better have 100 next time—you just cannot claim breach for the past shortcomings) Why might a person object to this strategy? That is, saying instead that what should control is the language of the contract. 1. More certainty in adjudication 2. The person might actually want 100 items. If this were the case though, the buyer should object in the first month and ask for 3 more items. § 1-303(e): Except as otherwise provided in subsection (f), the express terms of an agreement and any applicable course of performance, course of dealing, or usage of trade
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must be construed whenever reasonable as consistent with each other. If such a construction is unreasonable: (1) express terms prevail over course of performance, course of dealing, and usage of trade; (2) course of performance prevails over course of dealing and usage of trade; and (3) course of dealing prevails over usage of trade. 1. 1-303(e) provides an order for applying these—says first you apply express terms and these in a way that is consistent—if you cannot achieve consistency to first turn to the express terms, then course of performance, then course of dealing, then usage of trade a. This section sets up an evidentiary hierarchy. 2. Columbia Nitrogen Case a. There was an express term for 31,000 tons. But phosphate prices declined precipitously. The buyer now wants to buy from someone else. The seller, then, lowers the price. The buyer still ordered less than a tenth of the contracted quantity. b. In this case, we are told that there is a usage of trade to meet the competitive situation or release the buyer from the contract. Here, the trade usage is clearly in conflict with the express terms, yet the court ruled in favor of the trade usage. c. What happened to the hierarchy here? Moral of the story, cts will sometimes disregard § 1-303(e). Parole Evidence Rule § 2-202 a. Intro i. It is all about proving terms ii. It assumes a contract exists and tries to determine what its terms are b. Don‟t confuse the parole evidence rule with the SOF. While both deal with writings, the parole evidence rule is all about proving terms and the SOF is not (except in regard to quantity). a. Hypo: you are negotiating a big deal and you have face to face conversations, telephone conversations, emails, letters and finally a written contractfollowing the writing, you have a few more face to face conversations and exchange a few more emails, etc. i. Parole evidence helps sort out what a court can consider when trying to determine what the actual agreement was ii. Normally these issues come up at trial when one party is trying to get in evidence of an email, conversation, etc. to prove x was a term in the agreement b. Parole evidence rule operates to kill off any communications, etc. that took place before the written agreement or with the written agreement (contemporaneous sources) (includes contemporary and prior oral statements and writing) c. Parole evidence rule does not kill off anything AFTER the written agreement—such things can still come into evidence to prove certain terms in the contract/agreement, etc. d. Applying the Parole Evidence Rule—first characterize the writing iii. Fully integrated writing (completely integrated/totally integrated) 1. Both parties intended for the final writing to constitute the final word regarding all of the terms—the writing was intended to evidence the entire deal 2. If fully integrated—no prior communication/writing can come in—can still use post communications, usage of trade, course of dealing, course of performance 3. BOTH parties must intend it to be the final say
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4. Integration clause—saying this is the entire deal a. May be enforceable between two sophisticated parties like IBM and DuPont b. If used in consumer contract like buying a car—consumer can argue they did not intend that—that they bought the goods because x was promised to them and that they don‟t know what integration means, etc. iv. Partially integrated 1. Parties intended the stuff in writing to be final, but never intended the writing to contain all the terms of their agreement 2. Court can consider usage of trade, course of dealing, course of performance to add terms 3. Court can also consider any other evidence to add terms that are CONSISTENT with the writing v. Not integrated 1. Neither party intended it to be final in respect to any term 2. Parole evidence rule not in affect at all—court can consider anything c. PROBLEM 9 i. There‟s evidence that this agreement was intended to be fully integrated, because both parties signed it, there was a merger agreement (all prior negotiations were merged into the written contract that contained all the terms of the agreement), there were lawyers involved, and it was 30 pages long. 1. If this were fully integrated than a precontract agreement could not come in. If it was partially integrated, then it could come in. 2. Here if it was a full integration it can‟t come in AND if it was a partial integration it can‟t come in because it is not a consistent term. § 2-326—Sale on Approval and Sale or Return; Consignment Sales and Rights of Creditors a. Text: (1) Unless otherwise agreed, if delivered goods may be returned by the buyer even if they conform to the contract, the transaction is: i. (a) a “sale on approval” if the goods are delivered primarily for use; and ii. (b) a “sale or return” if the goods are delivered primarily for resale. iii. (2) Goods held on approval are not subject to the claims of the buyer‟s creditors until acceptance; goods held on sale or return are subject to such claims while in the buyer‟s possession. iv. (3) Any “or return” term of a contract for sale is to be treated as a separate contract for sale under § 2-201 and as contradicting the sale aspect of the contract under § 2-202. b. There are two types of sales in which the buyer has a right to return: i. Sale on approval—the buyer is going to use the goods, but if the buyer doesn‟t like the goods, the buyer has the right to return it. ii. Sale or return—the buyer is not going to use the goods, but intends to resell the goods. You agree to buy the items, but you have the right to return the items in the event that you can‟t resell the items. c. § 2-326(3)—If the buyer has the right to return the goods, it has to be in writing!!! There is a great risk of fraud here. Even if the contract is partially integrated, you can‟t get a right to return into evidence. Offer and Acceptance
a. Intro: under strict contract principles, parties can have an exchange and each walk away thinking they have entered into a contract (one to deliver goods, one to buy goods) but in reality they have not b/c offer and acceptance were not correct the Code tries to downplay the common law mechanics of offer and acceptance and instead place an emphasis on protecting the expectations of the parties—if they think they have a contract, we want to provide them with a contract b. § 2-204—Formation in General. i. (1): can be made in “any manner sufficient to show agreement”—this includes the conduct of the parties—if they act like they have a contract then they have one ii. (2): the exact moment the contract was made can be undetermined iii. (3): rejects the common law rule of indefiniteness and says the parties need not have decided on all terms—some can be open (this is why we have all the gap fillers in Article 2); all the parties need is enough to determine a reasonably appropriate remedy they need to have the quantity and type of product….) 1. If parties say nothing about price, § 2-305 fills a gap in price with the “reasonable price” 2. If parties say nothing about a delivery date, § 2-309 fills the delivery gap by injecting “a reasonable time for delivery” c. § 2-206—Offer and Acceptance in Formation of Contract i. (1)(a): provides for acceptance being given in any manner and medium reasonable (common law rule was that acceptance had to be in the same manner as offer) (parties can require a certain form by saying so—so the offeror is technically still the boss of the manner of acceptance) 1. This section does not take away the power of the offeror to dictate how to accept, but the offeror has to do it unambiguously. ii. (1)(b): provides for acceptance by seller via prompt promise to ship or by prompt or current shipment of the goods (conforming or non-conforming)…if non-conforming goods sent it is not an acceptance if the seller notifies the buyer the non-conforming goods are being sent as an accommodation to the buyer 1. Hypo: Buyer orders brown shirts, but seller ships blue shirts (a counter-offer) a. Possibility 1: Buyer exercises dominion and control and its an acceptance. b. Possibility 2: Buyer opens the boxes, sees that they are blue and says, that‟s ok—this is an acceptance. c. Possibility 3: Buyer says—yo I wanted brown shirts (rejection of the counter-offer) d. This subsection wants to allow sellers to accommodate buyers without the risk of being in breach of a contract—so acceptance occurs with prompt shipment, but if sending non-conforming goods the seller can notify you and not be immediately in breach of the contract (it then does not operate as acceptance if he notifies you the buyer he is sending non-conforming goods) i. To permit sellers to accommodate buyers, this section allows sellers to ship blue shirts, making the shipment a counteroffer provided that the seller seasonably notifies the buyer. iii. PROBLEM 10
1. “Return by mail” doesn‟t necessarily mean “mail”—the offeror needs to be unambiguous. 2. Shipping the fuses in this case is an acceptance and a breach—the only way to prevent this shipment of non-conforming goods from being a breach is to warn the buyer that you are shipping something else and thus make it a counter-offer and not an acceptance. d. § 2-205: The Firm Offer Rule i. Intro: at common law an offeror can revoke their offer at any time—so at common law you can have the offeror tell you to take two days to think about it—and while thinking he can revoke the offer so long as there was no consideration given or no consideration substitute such as reliance ii. Rule 2-205 1. It applies only to merchants (holds merchants to a higher standard) a. If parties not merchants—it still requires consideration to keep an offer open 2. Merchant cannot revoke their offer if they have promised not to do so in writing (it must be in writing) 3. There also is a 3-month cap on holding the offer open (want more? Give consideration then) iii. PROBLEM 11 1. A promise not to revoke is viewed as any other promise under common law. Under common law, the seller would be in the clear because there was no consideration for keeping the offer open. 2. § 2-205 firm offer rule changes the common law rule: An offer by a merchant to buy or sell goods in a signed record that by its terms gives assurances that it will be held open is not revocable, for lack of consideration, during the time stated or if no time is stated for a reasonable time, but in no event may such period of irrevocability exceed three months. Any such term of assurance in a form supplied by the offeree must be separately signed by the offeror. a. This only applies to merchants. b. Contains a SOF type provision—the promise not to revoke has to be in writing and signed by the merchant who is making it. c. There is a 3-month cap. i. If the promise not to revoke is for 4 months, it is only unrevokable for 3 months. 3. In this problem there is no writing. e. § 2-207 and the Battle of the Forms i. Deals with two issues: 1. Deals with contract formation and if we even have a contract 2. Also deals with what the terms of that contract are ii. Problem it is intended to fix: 1. Known as battle of the forms: Buyer sends a purchase order—the buyer will fill in the Dicker terms (the terms that vary from one transaction to the next). In addition to dicker terms, there will be pre-printed boilerplate terms. In the boilerplate there could be a provision that there is no arbitration. The sell received the purchase
order and looks at the dicker terms. It‟s unlikely that the seller is going to read through the boiler plate. Suppose that the seller decides yes, we‟ll sell, fills out an acknowledgment form with the Dicker terms + boiler plate with an arbitration provision. At common law, because of this difference, the seller‟s term is a counteroffer and either party is free to walk away (mirror image rule). a. Problems: i. Both parties think they have a contract, so the mirror image rule gets in the way of the parties‟ expectations. 1. In this situation either party is free to walk away due to the mirror image rule—the sellers acknowledgement must mirror image the PO or it is considered a counteroffer ii. The last shot idea—in common law set up if parties went ahead with the deal, the person who sent in the last “counteroffer” would have their terms control—even if it was purely fortuitous that they sent the last document to the other side 1. Since seller normally fires the last shot it is a built in advantage for the seller a. If the seller ships the goods and the buyer receives them, the seller‟s terms control at common law because he sent the last form. 2. Hypo: In the situation described above the question is simply whether the acknowledgment was a definite and seasonable expression of acceptance. If the dicker terms match up, then it is a definite seasonable expression of acceptance because the assumption is that neither party paid attention to the boilerplate. iii. How to work through § 2-207 problems. 1. First question—is there a contract? You look to whether the second shot is a definite and seasonable expression of acceptance. If the problem term is in the boiler plate, then it is probably a definite and seasonable expression of acceptance. If the dicker terms match up, its going to send an expression of acceptance. 2. Second question—what are the terms? a. Most courts take the knock-out approach for the boilerplate b. Unless the seller uses conspicuous post comma language “unless acceptance is expressly made conditional on assent to the additional or different terms 3. Third question—despite the fact that there is no contract, do the party‟s go ahead and perform?—See § 2-207(3)—this is statutory knock-out rule—if a contract is not formed under (1), but the parties go ahead and perform, the terms of the contract consist of those terms that match up. Any additional terms are knocked out. 4. Confirmations—this section also applies to confirmations by only subsection 2. You can get additional materials in unless the other party objects or it materially alters the deal. Immaterial additional terms can come in by using a confirmation, if both are merchants.
iv. Other problem—Hypos (trying to fix the mirror image rule and seller has the last word problems) 1. Hypo 1: buyer sends form with Dicker terms and boilerplate to seller who sends back a form with the same Dicker termshowever seller form has an arbitration provision whereas the buyers did not a. Common law would say no contract due to the mirror image rule b. 2-207 first addresses the issue of contract formation i. 2-207(1) says no mirror image rule—a “definite and seasonable expression of acceptance or written confirmation which is sent within a reasonable time operates as an acceptance even though it states term additional to or different from those offered or agreed upon, unless acceptance is expressly made conditional on assent t to the additional terms…” ii. Anytime the Dicker terms line up he says you have a definite and seasonable expression of acceptance……so here we have a contract c. Next issue are what are the terms of this contract i. Turn to 2-207(2)unless both parties are merchants the additional terms are out unless agreed to ii. If you have merchants—additions become a part of the contract unless: 1. 2a) offer limits acceptance to terms of the offer 2. 2b) the additional terms materially alter the contract 3. 2c) if the party trying to slip in the terms had already been told no additional terms were to be added or if the party objects to the additional terms within a reasonable period of time iii. What “materially alters” the contract?—see comment 4—things like negating warranties, etc. iv. Comment 5 tells us what does not materially alter—providing for standard interest on overdue payments, etc. d. What about arbitration provision? Many courts have said it does materially alter so it would not become a part of the contract—however if this was an industry where arbitration clauses are standard it might… 2. Hypo 2: same as above except the buyer has a clause saying we will not use arbitration and the seller sends it back with an arbitration clause a. Do we have a contract? Seems like it is a definite and seasonable expression of acceptance b/c again the Dicker terms are the same b. What are the terms i. In the last hypo we went to subsection 2 to see if the terms would be added this time they are not additional terms, but contradictory terms ii. First Approach says subsection 2 deals with additional terms, it does not allow different terms to come in so this would not come into the contract
iii. Second Approach subsection 2 applies to different terms as well—here they would not come in because notice was given under 2(c)—by having a no arbitration clause buyer tells seller they are not interested in including one…. iv. Third approach judicially created approach taken by a majority of courts—knock out approach—court simply knocks out both provisions in this case the buyer would get what they want because the arbitration clause would be knocked out 3. Hypo 3: buyer says no arbitration and seller has arbitration clause AND language saying acceptance is conditioned on assent to additional/different terms a. Now this would be a counteroffer (can have a counteroffer this way, or by having a Dicker term like price or quantity, etc. different) b. Under subsection 1 we could not say this is a definite and seasonable expression of acceptance—so when the smoke clears there is no contract 4. Hypo 4: same as in three so no contract formed, but the parties go ahead and perform—seller ships goods, buyer receives and pays, and then later has a problem a. 2-207(3) tells us that if the parties behave in a manner indicating a contract exists, then we have a contract [just like in 2-204(1)] b. So we may again have the contract and we must determine the terms i. 2-207(3) has a knock out rule in it (statutory knock out)—says the terms of the contract are those terms on which the writings of the parties agree v. Confirmation and § 2-207 1. § 2-207 applies to confirmation as well 2. Confirmation assumes that there is a contract in existence in the first place—you have a telephone conversation and enter into a contract and then hang up and send a confirmation to the other party 3. Portions of § 2-207 do not make sense with confirmations a. Subsection 1 does not because we already have an acceptance and contract by definition of “confirmation” b. Subsection 3—same as above c. Subsection 2 makes sense—terms in confirmation become a part of the contract unless one of the three exceptions applies (and we are dealing with merchants) vi. Miscellaneous § 2-207 Problems 1. PROBLEM 12 a. Make sure you use the exact terms of the post-comma language. 2. PROBLEM 13 a. Humpty fires first. Kings Horses accepted, but changed the dicker terms. This is a counteroffer. Because the dicker terms don‟t match up, they don‟t have a contract. 3. PROBLEM 14 a. Most jurisdictions have held that an arbitration clause is material. 4. PROBLEM 15
a. There was a two -year warranty provision in the buyer‟s form. Seller sent a form that disclaimed all warranties. Assuming that these terms are in the boilerplate, the seller‟s response was a definite seasonable expression of acceptance and a contract was formed. i. Most jurisdictions would then apply the knock-out rule and the buyer would get the benefit of Article 2‟s implied warranty of merchantability. b. If it does not appear in the fine print, then there is no contract. However the seller delivered the tugboat and the parties were behaving like they have a contract. Therefore, you drop down to subsection (3) and the conduct makes the contract. Now the statutory knock-out rule applies and buyer still gets the benefit of Article 2‟s implied warranty of merchantability. 5. PROBLEM 16 a. There is no contract because of conduct vii. More Hypos: 1. § 2-206 states that a shipment of nonconforming goods still operates as an acceptance unless the seller notifies the buyer. How nonconforming can the nonconforming goods be? If the buyer would know from the circumstances that there would not be a risk of being misled, it should be a counteroffer. See Cmt. 4 § 2-206. The question is not the degree of nonconformity, it is whether the shipment would have the potential to mislead the buyer. i. § 2-207 summary intended to allow small stuff to slip into the contract, but nothing major f. Gateway Problem—layer contract/rolling contract/pay now terms later contract i. Issue manifested with goods contracts and software contracts ii. Goods Issue 1. Call in and order computer it arrives and in box are documents with terms—one is arbitration provision, the other says you accept the computer and all terms if you don‟t return the computer within 30 days iii. Judge in Gateway says 2-207 does not apply because there is one form—Frisch says that is all wrong—Cmt. 1—„This section is intended to deal with written confirmations (orally) or one or both sending formal memoranda” iv. Resolution a. In case judge said the offer was Gateway shipping box and as offeror they can control acceptance which is what they did b. Other side—apply 2-207 saying the phone conversation to order it was the offer and the documentation in the box was confirmation—since the buyers are not merchants but consumers no additional terms can come in under 2-207(2) c. Or contract was made over the phone and the buyer/consumer knew the additional terms would be in the box because they are always there—by ordering they agreed to any reasonable terms coming with the computer…. g. Shrink (Clip) Wrap cases i. On line transactions where a box pops up saying “click if you agree” ii. Issue is if you manifest assent to terms by clicking the box
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iii. Cases are fairly consistent in holding that you are bound by the terms presented h. Browse Wrap cases i. You are told the contract is subject to terms located at another location that you have to go to and look at the terms ii. Issue—have you assented to these terms? iii. Courts look at how difficult it is to get to the site and how easy the terms are to read once there, etc. 1. If site difficult to maneuver to, the less likely a court will find you assented to the terms 2. The more difficult the terms are to read, the less likely it is the court will decide you assented to the terms Warranties a. Warranty of Title i. Is it an express warranty or implied? 1. It is not expressed, but also is not implied—reason is the disclaiming of warranties under § 2-316(3)(a)—even if you disclaim warranties, people buying the goods will think that they at least own the goods no matter how well they work or do not work—it is not implied because we do not “as is” disclaimers to apply to it ii. Statute of limitation issues: you find out 6 years after buying a painting that it was stolen and the normal limitation under Article 2 is 4 years from when the goods are tendered— Amended Article 2 tries to address this iii. Doctrine of Derivative Title 1. First Part: Nemo Dat—you cannot transfer a better interest than what you have a. So if he has no title in the table and he transfers it to you, you get nothing—if he has a partial interest, you get that, etc. b. Exceptions to Nemo Dat i. § 2-403(1)—a person with voidable title can transfer good title to a good faith purchaser for value ii. How do you get voidable title? iii. Look at the list in 2-403(1)—1(b) says if the buyer pays with a bad check they get voidable title—if they turn around and sell the item to X, what does X have? 1. Nemo Dat says voidable title—but the exception for a good faith purchaser for value applies and X can get good title under 2-403(1) 2. X now transfers to Z who knows the item was bought with a bad check by the original buyer—Z still gets good title— if Z had bought from original buyer nemo dat would apply and he would have voidable title just like that buyer—but here, since X had good title X can pass good title—we want to preserve X‟s market for the good (this is the Shelter Principle) 2. Second Part: Shelter principle—you cannot do worse—this has very few exceptions
3. Look at both transferor and transferee to determine title iv. § 2-403(2)—another exception to Nemo Dat 1. Hypo: you own a watch and take it to a repair store (that also sells watches—it is a merchant) and leave it there to get fixed (they have possession but no title) customer walks in and sees your watch in the customer display case and buys it— what title does this buyer get (you did nothing wrong and neither than the buyer) a. You can think nemo dat—store had no title so they conveyed no title 2. 2-403(2) says if you entrust goods to a merchant in goods of that kind—the merchant can convey all rights of you, the entruster, to a buyer in the ordinary course of business a. Ordinary course of business is not the same as a good faith purchaser for value—buyer in ordinary course of business must buy from someone in the business of selling (him selling his kitchen table does not count) b. Best you can do now is to bring claim against store for conversion or something akin to it 3. Suppose a thief takes your watch to the store to fix after stealing it from you—a buyer in the ordinary course of business buys it—they get the merchant‟s title under nemo dat which is zero and the title of the entruster which is zero 4. Black letter rule for goods—if someone buys from a “take it” thief nemo dat says they get zero title—no exception exists that allows anyone post thief to acquire good title 5. Con person/scammer—like someone writing bad checks—can sell to someone and the buyer may get voidable title and have the power to transfer good title to a good faith purchaser a. Why? When you are tricked, you are voluntarily giving me your watch— you intend to give me good title—you‟re putting the whole thing in motion and enabling me to sell to a good faith purchaser. This is different from a person who takes the watch. 6. Multiple cases dealing with issue of what it takes to be a “merchant who deals in goods of that kind” 7. General rules: a. Voidable title—good faith purchaser for value b. Entrusting—transfer title of entrustor and his own title v. “Vouching in” under § 2-607(5) 1. Retailer interaction with manufacturer they cannot implead in suit due to personal jurisdiction issues—you notify the manufacturer and say come join the lawsuit in Virginia—if you don‟t you will be bound by all findings of fact even though you are not a party to it and we cannot make you be a party to it 2. He thinks it has serious constitutionality issues—forcing someone to live with outcomes of litigation when contacts are lacking for jurisdiction? a. Argument allowing it is they knew when they sold the goods so they actually consented to the exercise of jurisdiction vi. Miscellaneous Problems 1. PROBLEM 19
a. Warranty of title encompasses a quiet enjoyment aspect to it—that you‟re not going to have to litigate the issue. The warranty of title is breached if the third party claim is colorable. 2. PROBLEM 20 a. “The product is sold „as is‟ and seller makes no warranties, express or implied, as part of this sale”—won‟t disclaim the warranty of title. b. Suppose you buy a car from a car dealership and you borrow money from GMAC and you top making payments and the repo. guy comes out and repossesses my car instead of your car. ???????? c. There‟s no warranty of title if you buy a watch in the men‟s bathroom b. Express Warranties: § 2-313 i. § 2-313(2)—You do not have to say the word warranty or guarantee to create an express warranty and the salesperson need not have the intention of creating the warranty however mere puffery is not enough (affirmation of value of goods, sellers‟ opinion or commendation, etc.) 1. Puffery—sales talk—something like “you look great in that car”—can be difficult to identify—something like “this car is mechanically sound” seems to ride the fence 2. Important: You have to be able to distinguish between warranty creating statements and puffing (sales talk). ii. § 2-313(1)—how to create express warranties: 1. (1)(a)—An affirmation of fact or promise by the seller, which relates to the goods and becomes part of the basis of the bargain creates an express warranty that the goods shall conform to the affirmation or promise. 2. (1)(b)—Can be created by a description of the goods (goods must conform to the description) a. Description is not just words; it can be showing blueprints, technical specifications, etc. 3. 1(c)—Created by a model or sample a. Goods must conform to that model or sample iii. To create an express warranty, the affirmation, description, model, etc. must be a part of the “basis of the bargain” 1. “Basis of the bargain” is likely not simply a substitute for reliance 2. Comment 3says you do not need reliance for an affirmation of fact—it is presumed to be a part of the agreement—burden on seller to prove that it should not be a. If the seller cannot meet this burden, the buyer has the benefit of an express warranty. 3. Comment 7timing not essential—you can have a post sale expressed warranty—it can constitute a modification to the contract as a warranty a. Many courts say the sale must be “hot” in order for a post sale affirmation to become an expressed warranty b. Because there can be post-sale warranties, reliance is not necessary. 4. Comment 8all statements by seller will become part of the “basis of the bargain” unless good reason is shown for them not to
5. As a practical matter you will introduce evidence of reliance, etc. to strengthen your rebuttal of their claim it was not a basis of the bargain…. 6. Most courts utilize the following test: a statement goes to the basis of the bargain if its natural tendency is to induce the buyer to buy a. Consequence of thisif you tell a salesperson “well that is great but I could care less about that feature” it becomes clear it was not a part of your decision to buy and the seller can then argue it was not an expressed warranty iv. Issues from problems 1. Do you forfeit warranty on condition of car/good by getting a second opinion? a. No probably not; you can argue you would not have even have been interested in taking it for a second opinion without the statement/affirmation, etc. 2. Pay attention to second part of 2-313(1)(a)—says the affirmation/promise must relate to the goods a. What if the claim is someone famous uses the good—argue it is a warranty but if it does not work argue it was a false representation made to induce you to purchase 3. Issue of parole evidence rule—if there is a fully integrated writing it may be hard to introduce other evidence you want to prove the warranty, etc. 4. Sophisticated sellers will include language in contract saying the salesperson cannot make any reps or warranties a. Code does not deal with this—probably try to argue it is unconscionable and void per public policy, etc. 5. Privity issues with advertisements—if in a non-privity situation remember the Code does not displace everything—you may be able to argue common law warranty, etc. a. In non-privity situation the first hurdle is the “seller” language of 2-313 i. Some courts ignore ii. Some honor and go with common law remedy b. Article 2 does not currently deal with this issue 6. Buyer seeing an advertisement before purchasing? a. Some courts says you need to have seen the ad (in both common law context and Article 2) i. Idea is because 2-313 speaks of “basis of bargain”how can it be a basis of the bargain if you never see it? v. PROBLEM 21 1. (a) “A-1 shape”/ “mint condition”—this is puffing a. Why? Because you have to be able to give the expression an exact definition. 2. (b) Warranty 3. (c) Puffing 4. (d) Warranty—because its based on an inspection a. the more the seller says about the goods, the more likely it is that it is going to be a warranty.
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b. this problem has the issue of a second opinion. Seller would say that it wasn‟t the basis of the bargain because you didn‟t take it seriously. The buyer would say that you don‟t have to rely solely on one statement. PROBLEM 22 1. a(1) finest—perhaps—the brand name Expensopaper is an express warranty 2. a(2) goes up easily—not a warranty 3. a(3) can be put up with any paste—warranty 4. a(4) dries immediately—warranty 5. a(5) would look wonderful—not a warranty 6. a(6) was used by Mary Magic—See § 2-313(1)(a)—the warranty has to relate to the goods themselves. Here there may be misrepresentation liability, but it is not a warranty. Other issues 1. Salesman shows the buyer a book of wallpaper samples—this is a description warranty, not a sample warranty. a. Cmt. 6—this section includes a sample actually drawn from the bulk of goods that is going to be a part of the sale. b. Cmt. 5—a description need not be by words—sometimes pictures work better than words. 2. Don‟t forget the parole evidence rule in this area. a. If there is a fully integrated writing that‟s produced, you are going to have difficulty introducing evidence of whatever it is you want to prove if its not stated in the writing. There may be a writing for example that says „members of our sale staff do not have authority to make warranties about the product.‟ PROBLEM 23 1. In this problem Hair, Inc. would argue that it wasn‟t the basis of the bargain. 2. What if he buys a wig from the wig store and it was manufactured by Hair, Inc.? a. Privity issues--§ 2-313 says “the” seller, not sellers b. Advertisements do create an express warranty in certain jxns. i. Some courts ignore “the” ii. Some courts use § 1-103 and bring in the common law warranty Amended Article 2 Approach to non-privity issues 1. The advertising industry went ballistic—they argued: a. Under no circumstances should an advertiser be liable for a breach of warranty, because: i. Advertising is always puffing—no consumer ever takes advertising seriously. ii. To hold manufacturers liable for what they say in ads violates the First Amendment (response: there‟s no 1st Amendment protection for lies) b. If you are going to impose liability with this new section, then you should require pre-sale notice on the part of the buyer. i. Contract law is about protecting expectations—it would be a windfall to the buyer.
2. The drafting committee made a compromise that the buyer had to see the ad. a. Most courts have held that you have to see the ad. c. Implied Warranty of Merchantability; Usage of Trade— § 2-314 i. First—notice the seller must be a merchant that deals in goods of that kind (not the case with other code remedies) ii. It is part of the deal unless disclaimed or modified under 2-316 iii. Policy reasons 1. Reason this applies to merchants and not him selling an item to us is that when we buy from Wal-Mart we have more of an expectation it will actually work a. You trust merchants to give you good goods—you expect them to work 2. Also a merchant in theory can afford to spread the risk of faulty products out over a broader group—everyone pays a little bit extra with the purchase price— individual seller does not have this capability a. Merchants are in a position to spread the loss (prices and insurance) iv. No definition of “merchantable” but standards are provided in § 2-314(2) and if you do not meet the standards you are not merchantable 1. 2-314(2)(a)—“pass without objection in the trade under the contract description”—this one gets a lot of action a. Merchantability of a new car is different than the merchantability of a used car even though each is covered by the warranty 2. 2-314(2)(c)—“are fit for the ordinary purposes for which such goods are used”— even bigger section a. Goods must be okay goods—not the best, but they have to do what they are supposed to do—toaster oven has to toast bread, etc. v. Remember it can be disclaimed vi. Schaffer v. Victoria Issueorder wine at restaurant and it causes injury to dude 1. Issue of a mixed contract—buying the wine, but also the service of having it poured, etc. 2. Under § 2-314 the serving for value of food or drink to be consumed either on the premises or elsewhere is a sale. 3. Would it be a defense to the restaurant that it was not negligent in any way connected with the handling of the wine glass a. No defense because it is strict liability. vii. Hypo: go into grocery store, pick up a soda bottle and it explodes on you and you are injured—do you have a claim against the store for breach of the implied warranty of merchantability? 1. 2-314 requires “contract for their sale” and you have not entered into one yet really—you are just looking at it and haven‟t purchased it yet 2. You can argue the store has offer with it being on shelf and you accept by lifting the item off the shelf (2-206(1) says acceptance can occur however) 3. Can argue usage of trade in store business—customer can unilaterally rescind by putting it back on the shelf—have contract formed but customer can still walk away viii. Will a defense of “I was not negligent” work against implied warranty of merchantability?
1. No because all warranties are issues of strict liability ix. Hypo—Serving free drinks in a casino in a chipped glass—issue here is it is not for sale but was free 1. You could perhaps argue you are actually paying because you have to be playing blackjack to get a free drink, etc. x. It is not static—what is merchantable can change with time—example of the car trunk that does not open from inside in problem 28 xi. PROBLEM 24 1. Merchantability litigation effects third parties—it is a political question in many ways (i.e. cigarettes, alcohol, fast food). 2. Officer Krumpky hypo: a. The fact that he said “good car” is not an express or implied (?) warranty because he is not a merchant. xii. PROBLEM 25 1. Natty sued the manufacturer on implied warranty of merchantability theory, because the automobile was not reasonably safe. 2. The manufacturer‟s defense was that it was fit for an ordinary purpose. 3. See also Daniell v. Ford Motor Co.—woman became locked in her car trunk, but she was trying to commit suicide. a. Court held no breach of implied warranty. d. Implied Warranty of Fitness for a Particular Purpose: § 2-315 i. Text: Where the seller at the time of contracting has reason to know any particular purpose for which the goods are required and that the buyer is relying on the seller‟s skill or judgment to select or furnish suitable goods, there is unless excluded or modified under the next section an implied warranty that the goods shall be fit for such purpose. ii. Intro points: 1. Most courts require that the buyer‟s purpose be different from the ordinary purpose (see comment 2) a. If you go into shoe store your purpose cannot just be walking around town in them—no warranty of particular purpose here if shoes fall apart (go with merchantability) b. If you tell clerk you are climbing a mountain and need shoes that can withstand tough rocks and 20 below temperatures you have a fitness warranty 2. He cannot think of a time where you would have a fitness warranty without also having an expressed warranty—importance of this is that you cannot disclaim an expressed warranty but can disclaim implied warranties… a. You should claim both breaches because you can‟t disclaim an express warranty, but you can disclaim an implied warranty. iii. Problem points 1. Issue—if you don‟t say what you are using the product for, seller can argue that you did not rely on their skill or knowledge at all….. 2. Webster v. Blue Ship Tea Room case a. Fish bone in fish chowder gets lodged in ladies‟ throught and she says it is not merchantable
b. Natural vs. foreign substance; she loses (if natural substance these jxns say it is okay) c. Expectations jxn she might prevail—except people often find bones in chowder and she should have known b/c she grew up in New England iv. PROBLEM 26 1. Wren does not have a claim for implied warranty because the heater does what it is supposed to do. 2. Wren does not have a claim for particular purpose because he didn‟t rely on the skill and judgment of the seller. That is, he did not ask Jones‟ opinion. a. But Wren could say that Jones knew what the room looked like, let him buy the heater and in fact Wren was relying on Jones‟ opinion. v. PROBLEM 27 1. For the odor, there would be a claim for breach of merchantability 2. For the wrong color, there would be a claim for particular purpose vi. PROBLEM 28—Food cases 1. There are two approaches to food cases: a. Natural substances v. foreign substances—if it was natural food, there would be no liability (in some jxns). The modern trend is to abandon this distinction b/c it is artificial. We are trying to protect expectations and everyone knows that martini olives don‟t have pits. That is, you are not expecting to find a pit in a martini olive. 2. Allergy cases—Look at § 2-314(2)(c)—the hypo is that there was a product that wasn‟t labeled for allergy purposes and someone has an allergic reaction. a. Whether there is a breach of merchantability depends on how many people have this allergy. e. Disclaimer of Warranties: § 2-316 i. Policy: there is a tension here between freedom of contract and paternalism. There must be some regulation because there is a real risk of overreaching on the part of the sellers and a risk of surprise on the part of the buyers. ii. § 2-316(1)—you cannot disclaim an express warranty it b/c it is inherently inconsistent to do so 1. Disclaimer of express warranty can still be relevant—if you say there are no express warranties you can then argue there is no way it was a basis of the bargain and therefore was not an express warranty in the first place 2. You can disclaim the implied warranties of merchantability and fitness for a particular purpose a. Some jxns will not allow you to disclaim the implied warranty of merchantability on goods that are new b. Did not make Article 2 revisions—in theory you are saying the consumer is not allowed to negotiate for a lower price if they want—remember in theory the price is tied to the existence of the warranty, etc. 3. Other issue in (1) is the parole evidence rule—this cancause you problems when trying to get in evidence on what warranty, etc. existed—perhaps argue the agreement was not intended to be fully integrated so you can get in more
iii. § 2-316(2)—safe harbor provision—has the exact language you need to disclaim the warranties of merchantability and fitness—if seller complies with this subsection the warranties no longer exist 1. First part has language for warranty of merchantability and second has language for warranty of fitness for a particular purpose 2. Can be verbal disclaimer OR in Writing—if in writing is must be conspicuous 3. Again argument over allowing these to be waived a. Pro-consumer people say using term “merchantability” is not good safe harbor because average consumer does not know what it means b. Folks saying they should be allowed to waive b/c consumer should be allowed to get the best price if they want… iv. § 2-316(3) 1. 3(a)—not a safe harbor because it says “unless the circumstances indicate otherwise…” regardless you can potentially waive by saying “as is” or “with all faults” or other language the buyer understands to be an exclusion of warranties a. His issue—why take the risk trying to disclaim under this when you have the option to be completely safe under the safe harbor of subsection 2?? b. Buyer could always argue that the circumstances indicate otherwise 2. 3(b): says if the buyer inspects the goods, there is no implied warranty regarding any defect that the buyer should have discovered a. Side issue—at what point does a car cease to be a car? You have the express warranty of what the item is—when does it lose its car-ness? v. § 2-316(4) 1. Says seller can choose to allow all remedies, etc. if you want and protect yourself as a seller by limiting the remedies available—seller can say the sole remedy is repair or replacement, etc. vi. PROBLEM 30 1. “This is the entire contract, and there are no other matters agreed to by the parties that are not contained herein.”—This is called a merger clause. The parties intend for the writing to be a full integration. a. Most courts have taken the position that this clause is only evidence of what the parties intended. b. When there is a consumer involved, it depends on how sympathetic the consumer is. Thus, the consumer‟s argument is that I don‟t know what the parole evidence or integration rule is. 2. “There are no other express or implied warranties except those contained herein.” a. Portia would argue that you can‟t disclaim an express warranty. b. The car dealership would argue that it was not the basis of the bargain. 3. “No salesperson has the authority to give express warranties other than those contained herein.”—See cmt. 2 § 2-316 a. This provision ahs to be conspicuous vii. Nimrod problem issues: 1. Who is the seller—see definition in § 2-103 sends us to 2-106 for definition of a sale it is passing title—he says here the title goes from only to buyer so you
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are not likely the seller, you are the dealer—no warranty really—but problem says assume both dealer and “seller” are “sellers” Good Faith--§ 1-304 1. Text: every contract or duty within the UCC imposes an obligation of good faith in its performance and enforcement. 2. There is no obligation of good faith when it comes to the contract‟s formation. 3. Thus, you have to tie the bad faith of the other party to a particular performance or a particular code section. PROBLEM 31 1. Issue: whether the buyer can later complain about the fact that there is no engine in the car. a. Seller argues no—that aspect was disclaimed when you didn‟t look under the hood to see. b. Buyer—but in order to lose the benefit of an implied warranty, the buyer has to refuse to look under the hood. c. In order for there to be a refusal, there has to be a demand. PROBLEM 32—Issue of modification and assent 1. You can‟t assume that someone is going to agree to limit their rights. The buyer doesn‟t assent to a disclaimer automatically. 2. Most courts have held that post-sale disclaimers are ineffective. 3. There‟s a privity issue here—are we going to hold Ford responsible for what‟s in the booklet even though Ford didn‟t sell to the buyer. a. If Ford is saying things about the car, then Ford should have to stand behind those statements. i. But because of the privity issue, have to find a non-code warranty. b. These cases are called pass through warranties—the cases where independent dealers hand to the buyer documentation prepared by the manufacturer with the manufacturer‟s authority. c. Warranty in the Box is a variation of a pass through warranty i. For example, you go to Wal-Mart to buy your GE toaster oven and you open the box and there‟s a toaster oven and documentation prepared by GE. Issues in other problems: 1. Merger clause saying it was intended to be fully integrated—has affect on what evidence you can use to prove warranty, etc. a. If dealing with two sophisticated parties it will suffice b. If dealing with a consumer the court may take sympathy on them 2. Side comment on bad faith/good faith? 3. If seller wants to escape under subsection 3(b)—buyer inspection—when you fail to inspect—they must have demanded that you inspect—not just said that you could 4. Pass through warranties—stuff in your car glove compartment when the dealer sells it to you—actually from the manufacturer but dealer hands it to you 5. “Warranty in the box”—buy the toaster oven from Wal-Mart that is made by GE and in the box will be documentation from GE regarding the good
xii. Limitations on the Warranty 1. Wilson Trading Corp. case—the yarn faded and buyer yelled breach of merchantability. a. Rule: there is an obligation on the buyer to notify the seller 2. § 2-607(3)(a)—where a tender has been accepted, the buyer must within a reasonable time after he discovers or should have discovered any breach notify the seller of breach or be barred from any remedy. xiii. Damages: 1. Types in Article 2 a. General damages— these damages are designed to compensate the buyer for the loss of value that the buyer expected to receive from the seller. Different ways to measure general damages in the code. b. Incidental damages—2-715(1) gives examples in terms of buyer and 2710 gives examples in terms of aggrieved seller i. These are like response damages—out of pocket expenses you incur as a consequence of the breach (storage expenses, for example) c. Consequential damages—two types discussed in 2-715(2) i. Value that the buyer expected to gain from 3rd parties ii. Foreseeability and mitigation obligation. 1. The buyer is forced to communicate any special need to the seller a. Ex: If I go purchase a camera, you have no reason to know that I‟m a professional cameraman iii. Personal injury iv. Property loss v. The seller cannot get consequential damages. 1. This can matter under a few circumstances 2. Ex: I take out a loan to buy goods and plan on paying back to the loan w/ the profit from the goods a. You repudiate and I have trouble paying off the loan; So I have to pay interest on the loan b. I sue you and want to recover for this i. Most cts have held that this is considered consequential damages and not incidental 2. Buyer has all three types available—seller cannot get consequential damages 3. PROBLEM 33 a. § 2-719(3)—Consequential damages may be limited or excluded unless the limitation or exclusion is unconscionable. Limitation of consequential damages for injury to the person in the case of consumer goods is prima facie unconscionable but limitation of damages where the loss is commercial is not. i. The big items of damages are always the consequential damages. It would behoove sellers to eliminate the buyer‟s right to recover
consequential damages. Most commercial contracts will say that you can‟t recover consequential damages. ii. In this problem, it is clear for this person that the snowmobile is consumer goods, thus any attempt to deprive them of consequential damages for personal injury is prima facie unconscionable. iii. $1200 = general damages, because all buyers would experience the same loss if their goods blew up. Consequential damages in this case are disclaimed; however, since its personal injury in a consumer case, it is prima facie unconscionable. BUT for the property damage, he would not recover, unless the consequential damages provision was dependent of the repair and replace provision and the repair and replace provision failed of its essential purpose. In this case the incidental damages could be recovered if the repair and replace remedy failed of its essential purpose. b. 2-719(2) says if the provided remedy “fails in its essential purpose” you can then get other remedies i. This is important he says and comes up a lot in the context of “repair or replace” remedy provisions—making them the exclusive remedies available… 4. Repair and Replace Remedy a. In the event of a breach, the sole remedy is replacement or repair of defective parts. i. The seller can make warranties, but cut back on remedies to reduce the risk. b. The purpose of this remedy is to provide the buyer with good goods. c. Typical hypo: There is an exclusive remedy for repair and replace. The seller repairs the problem, but it is still not working right. At some point we should pull the plug on the seller‟s remedy to repair. In this case the remedy fails of its essential purpose. You then have available all of the other remedies available under Article 2. d. Another hypo: Suppose in addition to the exclusive repair and replace remedy, the seller is also disclaiming liability for consequential damages. As long as the repair and replace remedy is working, the consequential damages exclusion is redundant. What happens when the remedy fails? i. Dependent clauses—usually in a consumer contract— consequential damages provision drops out. ii. Independent clauses—non-consumer contracts iii. You could indicate in your contract what you intend f. Defenses in Warranty Actions i. Notice—§ 2-607(3)(a) 1. “the buyer must within a reasonable time after he discovers or should have discovered any breach notify the seller of the breach or be barred from any remedy…” 2. DON‟T FORGET THIS SECTION!!!
a. When it says “any breach” and being barred from “any remedy” it means just this b. Buyer can be totally screwed if they do not give the seller this notice 3. Can a complaint in a lawsuit satisfy need to give seller notice a. Courts split on this issue 4. What is reasonable time to give notice—comment 4 suggests it is a different time for consumers than for merchant buyers 5. What about privity issue? a. Comment 8 says even non-privity parties with claims under the code are required to give notice b. Not all courts agree on this 6. PROBLEM 34 a. Pearl, a farmer, exhibited samples of her apples. Warranty by description. Dave agrees to pay $3 per bushel for her apples. They weren‟t as good as described by the warranty. Claims breach of express warranty. Dave then sends the apples to his agent to have them sold. They only sell for $1.50 per bushel. i. General damages—the purpose is to compensate the aggrieved party for the loss of the value. See § 2-714(2). ii. Dave finds out about the breach, but doesn‟t say anything and waits until Pearl bills him for the apples. 1. Dave didn‟t give timely notice, assuming 60 days is more than a reasonable time period. 2. Which means that he is barred from ANY remedy. 7. PROBLEM 35 a. Two issues in this problem: i. Here the seller knew he was breaching, so it might not make sense that the buyer had to notify the seller. But it doesn‟t matter what the nature of the breach is. ii. Is the buyer required to threaten the litigation when it notifies? No. The content of the letter was fine “We are disappointed . . .” 1. Cmt. 4—just have to let the buyer know that there is a problem. b. Hypo: Suppose you deliver non-conforming goods and you delivered late and there‟s a breach. Instead of notifying, you file suit. Then the seller argues that there was never a notification. The question is then whether a complaint can satisfy § 2-607(3)(a). i. Courts are split 8. More on notice a. Cmt. 8—even non-privity parties who have claims under the Code are required to give notice. b. Cmt. 4—what‟s a reasonable time for consumers may be longer. ii. Burden of proof issues
1. In a warranty suit—the buyer has burden of proving creation of the warranty, its breach, and its causal connection to the injury, and of course that there was an injury 2. Sometimes it is very hard to establish the breach a. See Flippo case—person sued for implied warranty of merchantability when she got bitten by a spider when she tried on the pants. She purchased the pants…no breach of warranty. She was injured even before she bought the pants—but it could be like the exploding bottle hypo. iii. Non-privity--§ 2-318—Third Party Beneficiaries of Warranties Express and Implied. 1. Intro— a. He says today likely would not be included—we had it when drafted because at that time there was no strict products liability like we have today—only thing available was negligence which is very hard to prove b. Section is intended to provide non-privity buyers with a floor of protection c. Very dependent on your jurisdiction—do research!!! d. Comment 3 says this is a floor and is not intended to prevent courts from creating more protections for the buyer. 2. § 2-318 is relevant if you bring suit against the manufacturer—vertical privity a. If you invite your friend over and you plug in the toaster oven and it explodes and your friend is injured. Your friend asserts a claim against Wal-Mart—described as horizontal non-privity. b. If your friend were to assert a claim against the manufacturer, in order to distinguish it, some people refer to that as diagonal non-privity. 3. Terminology a. Vertical non-privity you buy toaster oven from Wal-Mart and want to bring suit against GE the manufacturer—you are in the chain of distribution b. Horizontal non-privity friend comes over and the toaster oven explodes and harms them—they are not in the chain of distribution—suppose they try to sue Wal-Mart you have horizontal non-privity c. Diagonal non-privity now your friend wants to sue GE the manufacturer 4. Alternative A a. Extends warranty to “any natural person” in “the family or household of the buyer or who is a guest in his home if it is reasonable to expect that such person may use, consume, or be affected by the goods and who is injured in person by breach of the warranty” b. Flesh and blood means corporations, trusts, partnerships, etc. are not covered c. Limits things to personal injury claims d. THIS ONLY DEALS WITH HORIZONTAL PRIVITY ISSUE—no claim against manufacturer comes out of this i. it will give your guest who was injured a claim against Wal-Mart, but that‟s it—no claim against the manufacturer.
e. Must be a member of the buyer‟s family or guest in the home—does not help teacher injured when the toaster oven explodes in the teacher‟s lounge f. “A seller may not exclude or limit the operation of this section” i. Seller cannot provide warranties and say the covered parties are not beneficiaries of those warranties ii. If seller wants to cut the houseguest, family member, etc. out, they can eliminate the warranty altogether—for the covered parties to have an action, they must point to a warranty that was breached— if you get rid of warranties to buyer, you get rid of family members‟ ability to point to a breached warranty g. For this section—when looking for a warranty the relative contract is that between the buyer and the seller 5. Alternative B a. Tackles horizontal privity like A did, but also vertical and diagonal i. Extend warranty to “any natural person who may reasonably be expected to use, consume or be affected by the goods and who is injured in person by breach of the warranty…” b. Limited to personal injuries c. Allows the end user to bring suit against the manufacturer—extends the warranty between manufacturer and retailer vertically to buyer and diagonally to any foreseeable user d. Again liability is derivative—Must find warranty breached somewhere in somebody‟s contract i. Here, the seller-buyer contract is a candidate and the manufacturerretailer contract is as well, etc. 6. Alternative C a. Extends coverage to artificial entities (does so by removing the “natural person” requirement) i. Therefore, it includes corporations as beneficiaries b. Also drops the personal injury requirement i. If I bought a toaster oven and gave it to the school as a gift and it just doesn‟t work, the school would be able to sue the retailer or the manufacturer 7. PROBLEM 37 a. Sylvester Cayley sues the department store—don‟t need § 2-318 b. Sylvester sues the manufacturer—can‟t be in an alternative A jurisdiction c. Joan—all alternatives would work, but A and B would only work for personal injury. C would be the only one that would allow for economic loss. d. Children—same as Joan e. Mr. Gauss—not a member of the household or a guest in the home. He could only recover for the dead dog in an alternative C jurisdiction. iv. Strict Products Liability—§ 402A—Restatement of Torts
1. One who sells any product in a defective condition unreasonably dangerous to the user or consumer to his property is subject to liability for physical harm thereby caused to the ultimate user or consumer, or to his property. a. Economic loss doctrine (varies by jurisdiction)—basically says if loss is economic you cannot add a strict liability claim or a negligence claim to your UCC Article 2 claim (some jurisdictions will let you depending on how the loss occurs—was it dangerous, etc.) 2. Advantage of products liability claim a. No privity issue b. Don‟t have to worry about disclaimers b. No limitation of remedies in strict products liability like there can be under Article 2 c. Notice limitation of 2-607(3)(a) is nonexistent in products liability d. Statute of limitations—4 years under Article 2 beginning when the goods are tendered—strict liability is likely 2 years beginning when the damage occurs 3. Cmt. 7 following amended § 2-318 says that if the claim is personal injury or property damage merchantability, courts could look to strict products liability law. 4. PROBLEM 38 a. The axle snapped in two while dude was driving at a high rate of speed. A bystander was hit and the bystander‟s attorney had to decide which was the best cause of action against the retailer and manufacturer. i. Negligence—no good usually ii. § 2-314—depends on the jxn. 1. Alternative A would be bad b/c not a guest in the home. 2. Alternative B would be okay, but Alternative C would be the best. iii. Strict products liability—§ 402A gives a cause of action to users and consumers—the bystander was not a user or consumer. 1. You could respond to this by saying that there was a public policy justification for imposing liability here. 2. The restatement is not law (i.e. a statute), so it can be changed by the courts in light of policy. IX. Terms of the Contract A. Gap Filling a. As we said earlier—2-204(3) lets you have contracts with terms missing—therefore Article 2 is full of gap fillers b. 2-311(1) particulars of performance being left to be specified by one party does not prevent something from becoming a contract—the specification must simply be “made in good faith” and “within the limits set by commercial reasonableness.” c. 2-305 dealing with a price gap i. Subsection 1—if parties have said nothing on price ii. Subsection 2—if they have said something, the price that is fixed must be done so in good faith (that is the limitation on fixing party not getting out of control) 1. If there‟s a course of dealing, its part of the agreement…so it can‟t be a gap filler.
iii. If the buyer doesn‟t decide on the price, we have to let the seller decide; otherwise you couldn‟t measure damages. See subsection (3) B. Repudiation a. Repudiation is a manifestation of unwillingness of one party to perform in advance of the time of performance. That constitutes a breach. i. Supposed to pay for painting on April 20th and he says now (in March) that he is not paying ii. He has no obligation to pay until the 20th but is saying now that he will not pay b. Consequences of saying a repudiation is a present breach i. The unimportant consequence is that you can now sue him today—but who really cares when you can sue ii. More importantlyin absence of repudiation what do you have to do to be in breach yourself? (in contracts we have principle of constructive conditions of exchange) 1. To put him in breach on April 20th you have to show up and tender your performance—his duty to pay is conditioned on your performance and likewise your duty to hand it over is conditioned on him paying 2. So at common law if both parties stay home there is no breach—to put the other party in breach you have got to show up yourself 3. So you cannot sell the painting to somebody else under the common law rule if you want damages from him 4. The idea of repudiation excuses the constructive condition and allows you to go ahead and sell the painting (however make sure he has really repudiated or you are in trouble because then you might be in breach) a. This is a dangerous game, because in the real world, no one is really going to repudiate. Usually you get “well, I don‟t know . . . things are tough, etc.” Hearing that you could decide that it‟s a repudiation and sell it to someone else, but in hindsight a court determines that it was just whining, then it wouldn‟t be a repudiation. c. § 2-610—Anticipatory Repudiation i. Notice there is no definition of repudiation—look within your jxn for a definition outside of the Code ii. If one party repudiates the aggrieved party can do one of three things 1. Under (a)—wait for performance by the repudiating party for a commercially reasonable period of time 2. Under (b)—you can treat it as a breach now and pursue whatever remedies are available (even if you have asked them to retract and told them you were waiting on their performance) 3. Under (c)—in any event, the non-repudiating party need not perform d. § 2-609—Right to Adequate Assurance of Performance i. Trying to resolve the issue of deciding if a party‟s whining about performance is actually a repudiation or just whining 1. You can say it is repudiation if you want but you run the risk of the court finding that it was not and then you may be in breach, etc. ii. Subsection 1: “when reasonable grounds for insecurity arise” you can demand in writing adequate assurance of performance
iii. Subsection 4—they must respond with assurances adequate under the circumstance and must do so within a reasonable time (no more than 30 days)—if not it is a repudiation iv. This is a much safer approach to take e. § 2-611—Retraction of Anticipatory Repudiation i. The repudiating party can take back their repudiation if the non-repudiating party has not cancelled the contract 1. In other words, as long as the nonrepudiator hasn‟t relied upon the repudiation. ii. No harm, no foul situation if they have not acted on your repudiation yet C. Unconscionability a. Theoretically for any party—not just consumers… b. When this is claimed successfully however it normally involves consumers c. § 2-302: i. Interestingly it provides for court to not force stuff that is unconscionable but never defines what unconscionability is…. d. Influential article on the matter—Leff i. Suggest there are two types of unconscionability 1. Procedural which is the result of bad bargaining—something wrong with the bargaining process—term in boilerplate was incomprehensible to average consumer, or it was take it or leave it deal with no chance to negotiate, etc. a. Maybe the buyer was pressured into the deal 2. Substantive, which means it actually is a grossly unfair bargain a. Grossly unfair term ii. Author says before a court refuses to enforce the contract or term, they should find both form of unconscionability—one on its own should not be enough 1. Most courts want to see both procedural and substantive e. § 2-302 makes this a question of law for the judge to decide as a matter of law, which allows the jurisprudence of unconscionability to evolve. i. Under § 2-302(2), before the judge can make a call, the court must hold a hearing so the parties can put on evidence about the commercial context of the term, etc. ii. § 2-108(4)—if a consumer succeeds on an unconscionability claim, the consumer is entitled to recover attorney‟s fees. If the consumer loses, the other party is entitled to a reasonable fee from the consumer, only if the consumer had no basis for the unconscionability claim. f. PROBLEM 44 i. Procedural unconscionability is the issue here. It probably is not procedural unconscionability though b/c the price term isn‟t something that is in the fine print. 1. Furthermore, everyone no matter how unsophisticated understands the price term. One could argue that a price term is never procedurally uncon. This guy didn‟t do any shopping around and we don‟t want to excuse bad shoppers. D. Identification of the Goods a. At identification, the property rights move to the buyer—§ 2-501 i. The buyer obtains: 1. A special property 2. An insurable interest b. § 2-501:
i. (1)(a),(b),(c) gives us the default rules for determining when identification occurs 1. These are default rules—so long as the goods are in existence the parties can agree for themselves at what point identification occurs ii. (1)(a): identification occurs when—“the contract is made if it is for the sale of goods already existing and identified” iii. (1)(b): if the contract is for the sale of future goods other than those described in paragraph c (crops or young), it happens when the goods are shipped, marked, or otherwise designated by the seller as goods to which the contract refers iv. (1)(c): if for the sale of young to be born within 12 months or crops to be harvested within 12 months or in the next normal harvest season—it occurs when the crops are planted or otherwise become growing crops or when the young are conceived…. v. As long as the goods are in existence the parties can say for themselves when identification occurs. c. Identification important because of its application to other sections i. § 2-716(3) is buyer right to replevin goods from seller and it all begins with goods being “identified to the contract” ii. § 2-613 again beings with identification d. Identification occurs when we know what it is the seller intends to deliver to the buyer or is required to deliver to the buyer. i. Sometimes identification occurs when the contract is formed—i.e. this particular Van Gogh painting. ii. Sometimes identification occurs down the road—i.e. when a TV is delivered in a few days. You don‟t know which TV will be delivered. Identification doesn‟t occur until the shipping label is on the TV box. e. PROBLEM 45 i. Fisherman—when the fish was caught ii. Elephant—as soon as it was born iii. Cmt. 5—identification of a fungible bulk—saying 50% of something is enough for 1(a). iv. When the widgets are marked—1(b). a. Problem issues: v. Remember the general idea that identification is when you can say—yep those are the goods we are talking about vi. Also remember on its own it has little significance—its significance is how it is incorporated into other Code sections E. Risk of Loss and Delivery Terms: No Breach a. Intro i. Talking risk of loss no breach here (skip risk of loss with breach) ii. What does it mean? If it is on the buyer they still must pay if goods lost, etc. 1. See § 2-709(1)(a) which says when buyer fails to pay the seller can recover the price plus incidental damages of “goods accepted or of conforming goods lost or damages within a commercially reasonable time after risk of their loss has passed to the buyer” iii. If risk of loss is on seller—they are in breach unless they get excused under an excuse section like § 2-613 iv. Clearly an important issue and clearly you want insurance once you have risk of loss
v. Before Article 2 risk of loss was determined by who had title—Article 2 downplays the significance of titlelooks to other factors that are more relevant such as who has possession—they are more likely to be able to take care of the goods and have insurance, etc. vi. 2-401tells us stuff in Article 2 applies irrespective of title—but it goes on to tell us when title does pass from buyer to seller—it can be important for non-article 2 issues 1. Automobile property tax, etc. b. § 2-509: Risk of Loss in the Absence of Breach i. Subsection 4 is important—“The provisions of this section are subject to contrary agreement of the parties and the provisions of this Article on sale on approval and on effect of breach on risk of loss.” 1. Therefore, these are just the default rules and the parties can contract who bears the risk of loss. ii. Subsection 1 applies when the seller is going to ship the goods using an independent third party carrier (Sears ships TV via UPS this is it—if they deliver themselves it is not) 1. 1(a): applies to shipment contracts a. If not required to deliver to a particular destination—risk of loss passes to buyer when the goods are duly delivered to the carrier 2. 1(b): applies to destination contracts a. If required to deliver them at a particular destination and goods are there and duly tendered by carrier—the risk of loss passes to the buyer when the goods are there and tendered, enabling the buyer to take delivery (if they are there and ready to go) iii. Subsection 2 applies to sale of warehouse goods—goods are held by bailee and thus delivered without being moved 1. § 2-509(2)(a) risk of loss passes to buyer when they receive possession or control of the negotiable document of title given to the seller by the warehouse 2. § 2-509(2)(b) risk of loss passes when acknowledgment of bailee (warehouse) to the buyer that they have a right to possess the goods a. When the warehouse says that the person has the right to get the wheat the risk of loss passes. i. An issue that has come up is whether the acknowledgment has to be made to the buyer when the risk of loss shifts. 1. Case law requires this acknowledgment. 3. § 2-509(2)(c) risk of loss passes when warehouse-issued non-negotiable document of title is in control and possession of the buyer a. As soon as the buyer acquires the ability, the right, the power to get the wheat from the warehouse, the risk of loss passes. iv. Subsection 3—if the seller is a non-merchant, the risk of loss goes to the buyer when the buyer receives the goods. If the seller is a merchant the risk of loss shifts at tender of the goods. c. More on 2-509(1) i. We have a seller shipping goods via an independent third party carrier ii. To decide if (a) or (b) applies you must ask if it is a shipment contract or a destination contract
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1. Shipment contract governed by (a) 2. Destination contract governed by (b) Shipment contracts: 1. § 2-503 is the tender section and 2-503(2) tells us to go to 2-504 to see how seller properly tenders in a shipment contract 2. § 2-504: says for proper tender—seller must turn the goods over to a common carrier and enter into a reasonable contract of carriage with the carrier (ice cream put in refrigerated truck) must also notify the buyer that the goods have been shipped—if you comply with this, then 2-509(1)(a) says the risk of loss has shifted to buyer 3. HYPO: Under § 2-509 1(a) the risk of loss goes to the buyer when it is shipped. The seller is in Richmond and the buyer is in LA. If it is a shipment contract, the seller will tender in Richmond by turning it over to the carrier. Under § 2-504 the seller must make a reasonable contract with the carrier. When the seller tenders in Richmond, the risk of loss shifts to the buyer. If the truck explodes in Ohio, it is the buyer‟s problem. Destination contract: 1. Go to 2-503(3)—says you must comply with 2-503(1) 2. § 2-503(1): says you have to hold conforming goods at buyer‟s disposition and give them notification reasonably necessary to let them come get them, etc. 3. If you comply with 2-503(1), the risk of loss passes to the buyer under 2509(1)(b) 4. HYPO: If the seller is in Richmond, the buyer is in LA, the seller will tender in LA by notifying the buyer that the goods are available to be picked up. How do you distinguish between a shipment and destination contract? 1. § 2-503 Comment 5 says the presumption is a shipment contract—only way to overcome this presumption is to include a mercantile term indicating it is a destination contract (address alone is not enough since you need address to ship goods to the buyer anyway) a. 2-319 through 2-324 give statutory definitions for a number of mercantile terms i. Mercantile terms indicate that the contract is a destination contract: FOB, FAS, CIF, etc. 1. § 2-319 through § 2-324—definitions of mercantile terms. These statutory definitions are default definitions. The parties can define for themselves what it means. 2. International chamber of commerce dictionary can tell you what these terms mean. § 2-319(4)—Documentary Transaction/Exchange: 1. Buyer in California and seller in Richmond—how do we protect both parties? 2. Seller takes goods and tenders them here in Richmond and turn them over to carrier—carrier gives them a negotiable bill of lading—seller still in control— they take bill of lading and get draft ordering payment—they take the documents to their bank in Richmond who sends them to buyer bank in LA who tells buyer
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we have draft ordering payment and a negotiable bill of lading evidencing shipment of goods 3. Buyer is supposed to go into bank and pay draft—bank sends money to Richmond bank and then gives buyer the bill of lading—at this moment buyer takes control of the goods 4. Other protection seller can use—letter of credit from buyer (they get from their bank)—then the bank pays and takes up collecting with buyer a. The most important letter of credit principle is called the independence principle where each contract is independent of the other: i. Buyer/seller contract ii. Buyer/bank contract iii. Letter of credit obligation to the seller from the bank. b. Thus suppose the buyer discovers that the seller has shipped nonconforming TV sets and says to its bank, don‟t pay the letter of credit. i. He couldn‟t do that b/c the letter of credit obligation is independent of the underlying contract. d. Important—in shipping contracts the seller has to notify the buyer that the goods have been shipped. If the seller never notifies the buyer, the risk of loss does not shift to the buyer and the seller would be in breach if anything happened to the goods. Performance of the Contract a. Intro i. § 2-301 “the obligation of the seller is to transfer and deliver and that of the buyer is to accept and pay in accordance with the contract” 1. Look at the contract which we know is the enforceable obligation of the parties— agreement, bargain in fact, Dicker terms and also terms added by Article 2 like the implied warranties, etc. ii. § 2-507(1)—Effect of Seller‟s Tender; Delivery on Condition 1. Tells us that the buyer‟s duty to pay is subject to conditionthe seller‟s tender of the goods (this is the default rule—the section says “unless otherwise agreed,” so we know the parties can do something else if they want) a. This envisions a face to face exchange, but in many cases, the parties will agree otherwise. The seller will sell on credit or the buyer will pre-pay and the seller will ship the goods. iii. § 2-511—Tender of Payment by Buyer; Payment by Check 1. Companion section and tells us that the seller‟s duty to tender and complete any deliver is conditioned on the tender of payment iv. These are the default rules—they picture a face to face deal v. Oftentimes, parties do different things like sell on credit, etc. b. Installment Contracts: § 2-612 i. § 2-612(1) defines an installment contract for us—when I agree to deliver 20 pairs of shoes to your store every month for the next 8 months 1. Also contains a “substance over form” statement—suppose we enter into 8 separate contracts to deliver 20 pairs in each—in this case it still falls under § 2612—cannot escape it by trying to label each as an independent deal
ii. When goods are tendered, the buyer has a choice. The buyer can accept the goods or the buyer can reject the goods. These two options are mutually exclusive. If the buyer accepts the goods, then § 2-709 says that the seller can accept the purchase price. It also provides that the seller can accept the purchase price when the buyer has accepted the goods even if the tender doesn‟t conform to the contract. 1. So, if you don‟t want to pay then you want to reject the goods. iii. § 2-612(2)—when the buyer is permitted to reject an installment: 1. You can reject any installment that is non-conforming if the non-conformity “substantially impairs the value of the installment” and the seller is not willing to or can‟t fix the problem 2. So if seller says they will cure, the buyer must accept the installment 3. Time issue: a. He says goes towards circumstance of “substantially impairs value of installment” and if they are able to cure—if you need them a day after they arrive it is a big problem—seller is out of luck and buyer can reject the entire installment 4. Comment 4 says substantial impairment of the value of the installment can not only turn on the quality of the goods, but also such factors as time, quantity, and assortment. 5. Judge the “substantial impairment of value” by the normal, or specifically known purposes of the contact-if you need stuff by a certain date—you need to let the seller know that iv. § 2-612(3) tells us when the buyer can cancel the entire contract 1. Buyer can call off the whole contract when one or more breaches by the seller substantially impairs the value of the whole contract 2. If the buyer can cancel the whole thing—they can recover damages for the breach of the entire contract 3. Dangerous for buyer to take advantage of this—What if they call off the contract and then later a court decides the value of the entire contract was not “substantially impaired” and therefore the buyer is in breach? a. Just like the issue when discussing repudiation before you cancel as the buyer you might want to demand adequate assurances from the seller under § 2-609 as a protection—if seller cannot provide it is repudiation by them v. Note the “substantial impairment of value” is consistent with the common law which requires a “material breach” to cancel a contract vi. PROBLEM 53 1. They aren‟t going to be delivered at the same time so it‟s an installment contract 2. The buyer can either accept or reject a. These are mutually exclusive options; can‟t do both at the same time 3. If the buyer accepts the goods, then the buyer is liable for the purchase price even if the goods don‟t conform to the contract a. If the goods don‟t conform to the contract, the buyer can recover damages against the seller
4. If the buyer accepted the statutes, the buyer would have a claim for damages for the price of the broken statute 5. If the buyer rejects, the buyer has no obligation to pay the purchase price a. The buyer can still recover damages from the seller 6. The buyer still has the power to reject even if everything is perfect a. If the rejection is wrongful, the seller can recover damages from the buyer 7. § 2-612(2) tells us when the buyer has the right to reject a. It adopts a substantial impairment rule 8. Here, one broken statute out of 20 doesn‟t substantially impair the value of that installment 9. § 2-612(3) tells us when the buyer can walk away from the deal a. It‟s a substantial impairment of value standard 10. What is it about the installments here that hints that the buyer can‟t cancel? c. Perfect Tender Rule (for one shot deals): § 2-601 i. This rule allows the buyer to reject or cancel if tender is not perfect (not just the goods that have to be perfect, but the time and method of delivery, etc.—it must all be perfect) 1. This rule does not apply to installment contracts 2. Remember this is a default rule—parties can do something like repair or replace as exclusive remedy, etc.—if you have an exclusive remedy like that, it goes without saying that the buyer cannot reject under §2-601 ii. Suppose 9 out of 10 goods conform—what can buyer do: 1. § 2-601(a) says that the buyer can reject the entire table (and then go after damages from the seller) 2. § 2-601(b) allows the buyer to accept the whole deal by paying the purchase price, and then they can recover damages for the defective one from the seller 3. § 2-601(c) allows the buyer to accept the nine good ones and reject the nonconforming one a. If the goods are one commercial unit you must accept or reject the whole thing, so if it is silverware set you cannot reject a bad fork and keep the rest; if it is 10 tables you can reject the bad one and keep the rest iii. § 2-601 is a powerful rule—lets the buyer get out for any reason whatsoever—this can be abused by the buyer (suppose the market price drops—they wait for seller to mess up one thing and they drop the whole deal) 1. Do to this we want to have protections for seller: a. One protection is the good faith obligation applying to the entire code— must exercise your UCC remedies in good faith—if the seller can show the only reason the non-conformity was an issue to the buyer was the change in market price, they could have a strong case against the buyer b. Other protection is seller‟s ability to cure iv. Two more points on § 2-601 1. First: difference between perfect tender and perfect goods a. Suppose he delivers table to you and it wobbles a bit—can he now reject the table because it is not perfect? i. Not necessarily—the perfect tender rule just says the seller must tender goods that conform perfectly to the contract
ii. So to reject this wobbly table, the buyer must argue that the wobbly table is non-conforming—perhaps it is a breach of the implied warranty of merchantability or fitness for a particular purpose, or an express warranty iii. Regardless, to reject the buyer must prove some breach---the goods do not have to be perfect, the tender must perfectly conform to the contract!!! v. HYPO: The contract price is $100, the market price is $100 at the time of contract. Soon after the parties enter into the contract, the market price drops dramatically to $80. This is a bad deal for the buyer. The seller delivers and it‟s a non-conforming delivery, but its not a material breach and only reduces the value of the goods by $2. $2 would be the buyer‟s damages. Under the material breach standard, the buyer is taking a $18 hit, but under § 2-601, the buyer can reject and the buyer can now buy the table for $80. This section allows the buyer to shift the risk of a market change to the seller. vi. HYPO: Suppose the contract is for the table and there is a little wobble. The perfect tender rule does not require perfect goods, but only that the tender conformed to the contract. To have the right to reject a wobbly table, have to argue that the wobble makes the table non-conforming. 1. To show that it is non-conforming you also have to take into account usage of trade and course of dealing. d. Cure: § 2-508—Cure by Seller of Improper Tender or Delivery; Replacement i. Intro 1. This is our seller‟s counter to the buyer‟s ability to reject so easily under the perfect tender rule 2. The seller‟s right to cure is not absolute—they must have the right to cure under 2-508(1) or 2-508(2) 3. Cure will prevent a buyer from rejecting the goods, but does not excuse the seller‟s breach—cure keeps the deal together, but buyer can deduct damages from purchase price, etc. (suppose there are incidental damages like getting the goods inspected, etc.) ii. § 2-508(1): 1. If a tender by seller is rejected and the time for performance has not yet expired, the seller may seasonably notify the buyer of his intention to cure and may then within the contract time make conforming delivery 2. Ex: If I agree to deliver by 3/15 and non-conforming tender is on 2/15, I have until 3/15 to deliver conforming goods (if I notify you that that is my plan—must notify) iii. § 2-508(2): 1. If the seller cannot cure by the delivery date, he may be allowed to cure after the delivery date in certain circumstances a. If the seller had reasonable grounds to believe that the tender would be acceptable to the buyer, the seller can have a reasonable time to cure— again, seller must notify buyer b. Purchase price reduction—it is not a method of cure, but it goes the sellers reasonable belief that the buyer would accept—if the table is wobbly and
the seller knocks 300 off purchase price, they may be surprised when the buyer does not accept it c. Knowledge by the seller of the non-conformity is not essential. iv. The event of acceptance drives this whole part of the UCC 1. Acceptance precludes rejection of the goods accepted. 2. Under § 2-513(1), the buyer has an inspection period—must be reasonable and reasonableness can depend on the type of goods. v. If seller tenders late—this breach cannot be cured vi. PROBLEM 55 1. Did they accept the car?—You have to talk about reasonable inspection period. They had only driven 3 miles from the car dealership. 2. The seller‟s counter to the rejection is cure. 3. But then there is also the shaken faith doctrine—Zabriski Chevrolet Case—with something like automobiles, if something goes wrong, the buyer‟s faith is shaken. vii. Wilson v. Scampli 1. Something wrong with a picture and the seller says let me inspect it so I know how to cure 2. The buyer says no you cannot inspect 3. Ct said the buyer had to allow the seller to inspect so they could figure out how best to cure e. § 2-711(3) i. When a buyer rejects, the goods go back to the seller; when the buyer revokes, the goods go back to the seller ii. If the buyer has paid all or a portion of the purchase price the buyer will want their money back before they give the goods back—this section protects the buyer iii. On a rightful rejection or justifiable revocation of acceptance, the buyer has a security interest in the goods in his possession…so the buyer can reject without returning the goods—but if the seller returns the purchase price, the buyer must return the goods iv. 2-706 tells us that if the seller does not return the buyer‟s money, the buyer can sell the goods f. Manner and Effect of Rightful Rejection: § 2-602 i. § 2-602(1): rejection must be within a reasonable time after delivery or tender AND you MUST NOTIFY THE BUYER ii. § 2-602(2)(a): after rejection, the goods belong to the seller—so once you reject the table it belongs to the seller again—you cannot have dinner on it, use it for work, etc.—you cannot “exercise ownership” of it after you reject iii. § 2-602(2)(b): if the buyer has a security interest he does not have to give up the goods— however, if not, he is under a duty after rejection to hold them with reasonable care at the seller‟s disposition for a time sufficient to allow the seller to remove them iv. § 2-602(2)(c): buyer has no other obligations in regard to goods rightfully rejected v. § 2-602(3)—seller‟s rights with respect to goods wrongfully rejected are covered by seller‟s remedy section vi. Potential exception to 2-602 is 2-603
1. If you have a merchant buyer and they reject goods of seller when seller has no business or agent in the market of rejection-the merchant buyer must follow the seller‟s reasonable instructions 2. So if it is reasonable you can have him store table someplace, etc.—however seller must indemnify them for any expenses incurred 3. Idea behind this is avoiding economic waste, etc. 4. If the goods are perishable, 2-603(1) says the merchant buyer has to sell the goods if the seller does not tell them what to do with them—he must try to get some value for them—cannot let them sit and go to waste in the corner 5. If the buyer is not a merchant, they can let the goods sit and go to waste or whatever—they have no obligation to seller except to keep them with reasonable care for reasonable time permitting seller to reclaim them g. Acceptance: § 2-606 i. Intro 1. Acceptance separates the world of rejection from the world of revocation—once you have accepted the goods there is no rejecting—only way buyer can avoid paying the purchase price is to revoke his acceptance (revocation is more difficult than rejection) ii. § 2-606(1)(a): acceptance occurs when after a reasonable opportunity to inspect the goods the buyer signals the seller they are conforming or that he will take them despite any non-conformities 1. Here, actions can speak louder than words 2. Even if buyer accepts, they can still have a claim for damages—acceptance does not mean you lose your right to any damages—simply put purchase price in seller’s column and the damages in the buyer column and net out the two 3. Remember § 2-607(3)(a)—when the buyer accepts goods they still have their claim for damages but they MUST NOTIFY THE SELLER OF ANY BREACH iii. § 2-606(1)(b): acceptance also occurs if the buyer fails to make an effective rejection (under 2-602(1)—which requires you to reject within a reasonable time period for it to be an effective rejection—so if you wait too long to reject, you accept) iv. § 2-606(1)(c): you accept when you do any act inconsistent with the seller‟s ownership 1. If you buy paper and then cut it up or print on it this is inconsistent with the seller‟s ownership rights 2. If you get unfinished furniture and paint it that is inconsistent with ownership, etc. v. § 2-606(2)—if you accept any part of a commercial unit you accept the entire commercial unit vi. Note on “netting out” buyer and seller column: 1. Parties may do it on their own 2. Ct may do it in judgment or may simply give you each a judgment against the other 3. Also, buyer‟s damages may exceed the purchase price claim—cash may actually flow to the buyer, etc. 4. Just remember—once buyer accepts, that gives the seller the right to the purchase price—any claims for damages due to breach we deal with later vii. Issue from Problems
1. If seller messes up tender under rule 2-504 by failing to notify the buyer or failing to enter a good carriage contract—the buyer can only reject if “material delay or loss ensues” 2. § 2-605 tells us that buyer must tell the seller what the problem is so the seller can utilize their right to cure a. Buyer must notify seller of defects ascertainable by reasonable inspection b. So if buyer tells the seller “I reject your tables because it wobbles…” or “I am rejecting your lobsters because they arrived dead or dying” etc. h. Revocation: § 2-608 i. Intro 1. If buyer has technically already accepted, but they do not want to pay the purchase price, they must revoke their acceptance 2. Accomplishes the same thing as rejection just at another time—has some similar rules a. Like rejection, when you revoke titles go back to seller b. If rejecting, buyer doesn‟t have to do anything with goods—same following a revocation c. If buyer has prepaid in either, they get security interest in the goods 3. Important difference from rejection: the standard a. Rejection is allowed under the perfect tender rule for anything b. You can only revoke if non-conformity “substantially impairs” the value (in other words the seller‟s breach must be material) i. But you have to take into account the buyer‟s circumstances when determining substantial impairment—its substantial impairment to that particular buyer. 4. Once buyer has accepted the goods, the only way to not pay the purchase price is through revocation (if you don’t want to pay you need to either not accept or try to revoke after you accept) ii. 2-608 1. Subsection one—key difference from rejection—can only revoke if the nonconformity “substantially impairs” the value (by commercial unit if dealing with commercial units) a. Substantial impairment of value takes into account the circumstances to determine what would substantially impair (if you have someone who is a below average cook and the temperature on the oven is off a bit it may be okay—BUT if you are dealing with a gourmet cook the temperature being off in the slightest could “substantially impair” the value of the oven to him) 2. Revocation takes place after buyer has used some—they need a reason to revoke a. § 2-608(1)(a): you can revoke if you accepted on the reasonable assumption that the non-conformity would be cured and it has not been seasonably cured b. § 2-608(1)(b): you can revoke if value is substantially impaired and you accepted it without discovering the non-conformity because either it was hard to discover or because of the seller‟s assurances
i. If when goods are tendered everything you can inspect looks fine, but then you use the goods and discover the problem, you can revoke 1. The non-conformity was a latent defect. ii. If you perform a less than vigilante inspection because the seller told you he already had it inspected, or something like that—you can revoke c. These two parts gives us three excuses as to why you did not reject—with an excuse you can now revoke if value was substantially impaired 3. § 2-608(2): a. Tells us that revocation must occur within a reasonable time from when the buyer discovers or should have discovered the grounds for revocation b. Revocation must also occur before a substantial change in the condition of the goods occursunless the change in condition is the result of the good‟s own defect i. Back to issue of if you cut up paper or paint unfinished furniture you can no longer revoke—you could however still go for damages for seller breach 4. Revocation is not effective until the buyer notifies the seller. iii. Two issues from book to watch out for: 1. Post-revocation Use: a. Buyer of mobile home either rejects or revokes acceptance of mobile home, BUT they continue to live in it i. Seller would argue that by continuing to use the home, you‟ve reaccepted, which negates the rejection ii. The buyer would argue, well what am I supposed to do, get kicked out on the street? iii. Similar situation with an essential piece of machinery iv. What is the consequence of post revocation OR post rejection use in such circumstances—most courts hold it is not “reacceptance” of any kind and that it does not negate the rejection or revocation if your behavior as the buyer is reasonable under the circumstances (living in a mobile home when you have nowhere else to go vs. eating off a table that is defective) 2. What can seller get back for the use you got out of the good? This is more likely with revocation which occurs after the buyer has had the goods a bit (revocation is down the road—rejection occurs sooner in the timeline) a. Conn. case where guy revoked acceptance of a Mercedes after having driven 63k miles in it i. That issue was resolved in favor of the buyer. b. Seller says buyer should not get full purchase price because of the use they got out of it—we should be compensated for that c. Most courts say in a situation where the buyer gets some value out of the good—the seller should get some credit for that
i. The buyer is being unjustly enriched. The seller should get credit for the use value of the car. § 1-103 would allow for the unjust enrichment provision to come in. iv. Problems: 1. Remember all this on acceptance, rejection, revocation, etc. is all the default rules—the parties can change if they want 2. If you buy something like a car with an exclusive repair or replace warranty (which we said was okay)—you cannot reject or revoke UNLESS the exclusive remedy “fails in its essential purpose”—once it fails in its essential purpose, you proceed as if it was not even there in the first place; so if something is really bad on repair or replace you may be able to revoke your acceptance at some point 3. § 2-609 will not be a factor once tender has occurred—this section only deals with when performance has not occurred and you want adequate assurance of performance v. PROBLEM 58 1. The seller does not have a right to cure when the buyer revokes the acceptance. 2. The first issue to discuss is whether there is an acceptance to see if its rejection or revocation. 3. Then you discuss whether she had the right to revoke. vi. PROBLEM 59 1. If the exclusive remedy is repair and replace, then she can‟t revoke the acceptance, but the buyer could argue the shaken faith doctrine. vii. PROBLEM 60 1. Author ordered an expensive computer. ION sent him the 745 model when he ordered a 740 model, but at the same price. He would have the right to reject because it was not a perfect tender. The 745 was delivered and it conformed. The seller had reasonable grounds to assume that the buyer would accept the modification. The sending of the better model was a modification and when he wrote the letter saying that he liked the computer, it was an acceptance. Cannot reject and cannot revoke because there is no substantial impairment. viii. PROBLEM 61 1. After his car broke down with the same defect six times, Zach decided to revoke his acceptance. The dealership went bankrupt and now Zach is thinking about a claim against the manufacturer. a. He‟s not in privity, but because of § 2-318 he may be able to assert a breach of merchantability as a third party beneficiary. b. Or he could claim that a warranty was made directly to him (as a consequence of the manufacturer‟s booklet) or it could be an advertising warranty. 2. Assuming there is a claim against the manufacturer, what are the remedies? a. Cannot reject or revoke because there was no transaction between Zach and the manufacturer. So you have to have privity to reject or revoke. b. The claim would be for damages. c. But see Carbolic Smokeball where the court found privity. i. Impossibility
i. Intro 1. Parties enter contract based on certain assumptions that sometimes turn out to be wrong—common law contracts deals with these via the doctrines of mutual mistake and unilateral mistake—you could bring either into a Code case via 1-103 a. The UCC does not have provisions for mistake, but you could bring these in under § 1-103, because there is nothing inconsistent in the code about these two doctrines. 2. Sometimes parties assume things about the future, but what happens when they are wrong and one party wants to get out of the deal? At common law, the answer was no with three exceptions: a. If the promisor was necessary to the performance of the contract and something happened to the promisor. b. Contract performance became illegal c. If a thing was necessary to the performance of the contract and something happened to the thing. 1. Excuse doctrines: a. Seller‟s typical excuse is the Doctrine of Impracticability, which includes impossibility although it goes broader as well b. Buyer‟s typical excuse will be Frustration of Purpose—again, in common law contracts and can be brought in by § 1-103 2. Incentive v. Capacity Cases: Important part of working with this is distinguishing incentive cases from capacity cases d. Incentive cases—doer can still do the deal but has lost his incentive due to change in price, etc. e. Capacity cases—doer can no longer do it or doing it would be extremely difficult f. If it is an incentive case the doer likely will not be excused—if capacity they stand a chance of being excused a. Can be hard to tell the difference: i. Wheat example—your crop is destroyed so you argue capacity but seller says it is incentive—you could go to wheat market and buy some for me—you just won‟t do it because you don‟t want to lose money b. These cases will only arise if the parties failed to decide on their own what would happen if a particular event occurred (parties in contract for a place to perform likely have clause saying what happens if the center is destroyed, etc.) c. With things like oil, uranium, etc., it is almost always found to be incentive and the doer loses out i. To protect yourself, just have clause in contract saying if price goes up I don‟t have to come through or your price goes up, etc. ii. PROBLEM 65 and 66 1. The risk of loss provision didn‟t apply because the seller hadn‟t identified the goods yet in Problem 65.
i.
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iii. iv. XI.
Remedies a. Intro
2. It still does not apply because there were 11 sundials exactly the same. The contract does not require a specific time piece. If the seller can substitute another piece its not a § 2-613 problem. 2-613: the True Impossibility section 3. Operates when goods are identified when the contract is made—MUST HAVE IDENTIFIED GOODS—and also when casualty to goods occurs without fault of either party and before risk of loss passes to buyer a. If the goods are a total loss, the contract is avoided b. If the loss is partial or the goods are so deteriorated that they no longer conform to the contract—the buyer gets to inspect the goods and see if he wants the contract avoided, or if he wants to accept them with allowances made in price for their deterioration in quality or quantity if he accepts the goods he has no further right against the seller Excuse by Failure of Presupposed Conditions—§ 2-615: seller‟s other option if § 2-613 does not apply 4. This section only excuses sellers (it says nothing about buyers) 5. It does not apply if the seller “assumed a greater obligation” a. If seller says I guarantee you I will make it work, don‟t worry about x, or you sit in living room to negotiate deal for wheat and radio says locusts are coming and the seller goes ahead and enters into it without saying anything about the deal being off if crop eaten, etc. 6. § 2-615(a) a. First requires performance to be “made impracticable” i. Goes back to incentive/capacity issue—if incentive practicability is not lost yet—if capacity it is likely now impracticable b. Must be made “impracticable” by “the occurrence of a contingency the non-occurrence of which was a basic assumption on which the contract was made….” i. Foreseeability requirement—the more foreseeable an event is, the harder it is to argue its non-occurrence was a basic assumption 7. § 2-615(b): if the seller‟s capacity to perform is only partly affected, they must allocate the remaining goods—they can take into account their own needs and regular customers not under contract for the goods, etc. a. Really about fairness for buyers—seller cannot give his whole stock to the one buyer he likes at the expense of all the others b. § 2-616 tells us that the buyer can either accept the amount that‟s offered OR refuse to accept their quota and walk away from the deal 8. § 2-615(c): seller must notify the buyer seasonably there will be a delay or nondelivery—if you are allocating goods under (b) you must tell buyer what their estimated quota will be § 2-613 requires performance to be completely impossible § 2-615 has more to it—deals with foreseeability of event causing loss, if it is truly impracticable, etc.
i. If seller delivers goods and buyer does not pay, the seller is entitled to the purchase price—this is risk of faulty rejection or revocation as we talked about ii. If seller, would you want to be entitled to goods or purchase price? 1. Probably the goods—having a right to the purchase price might not get you much given the fact they have already not paid once 2. To get purchase price: a. You have to file suit b. Get a judgment c. Enforce the judgment, which means that you have to look for assets, which may be tough. iii. General rule however in Article 2 is that you cannot get the goods back—all you have is a claim for the purchase price 1. There are exceptions to this rule—allow reclamation in two instances b. But there are exceptions to this general rule, called rights of reclamation: i. § 2-702—Seller‟s Remedies on Discovery of Buyer‟s Insolvency 1. Two types of insolvency: a. Equitable insolvency—cash flow insolvency; inability or unwillingness of debtor to pay debts as they mature—when debt is due you don‟t pay it b. Balance sheet insolvency—the value of what you own is less than the amount that you owe. c. HYPO: You own a piece of undeveloped property in downtown Richmond, but you‟re unemployed and you can‟t pay the debt…this is equitable insolvency, not balance sheet insolvency. d. Definition of insolvent for Code in 1-201(33) includes either test for insolvency 2. Successful reclamation excludes all other remedies with respect to them. a. That‟s because when the seller reclaims the goods, it is property that the seller is taking away from the buyer‟s other creditors. 3. The seller cannot reclaim the product that is made from the goods 4. HYPO: Seller sells hardware inventory to the debtor. The debtor is insolvent. Seller makes timely demand for the item, but before he can reclaim the item, the buyer has sold the item. a. Does my right of reclamation extend to the buyer who buys from the debtor? Under 2-702(3)—No b. The second buyer paid cash for the hammer. Does my right of reclamation extend to proceeds received by the first buyer? § 2-702 says no, even though Article 9 says yes. c. The bank says that it has a security interest on the goods. The seller says that his article 2 right of reclamation trumps the bank‟s Article 9 security interest—the security interest wins b/c the bank falls under the definition of purchaser. 5. The reclamation demand needs to be in writing and the seller has to sell in its ordinary course of business. ii. Cash Seller‟s Right of Reclamatin—§ 2-507(2)
1. Why do they even need reclamation if cash seller? Because things like checks count as cash 2. § 2-507(2)—“Where payment is due and demanded on the delivery to the buyer of goods or documents of title, his right as against the seller to retain or dispose of them is conditional upon his making the payment due.” 3. § 2-507(2) does not expressly forbid going after other damages—you could argue that after reclaiming his goods he could also pursue other damages c. § 2-502—Buyer‟s Right to Goods on Seller‟s Repudiation, Failure to Deliver, or Insolvency i. Generally this section deals with buyer getting goods from insolvent seller ii. § 2-502(1)(b) says that if seller insolvent within 10 days of receipt of first payment on price—the buyer can get his goods by paying the remainder of the purchase price 1. This was useless due to burden of showing seller went insolvent with 10 days of payment—this is very hard to do iii. § 2-502(1)(a) added in 2001: 1. Removes the insolvency requirement for consumer buyers—which means a consumer buyer who prepays can recover the goods from the seller IF the goods have been identified (you don‟t have to have paid full purchase price—just something) a. So always put money down even if seller says you don‟t have to… b. By putting money down you essentially are purchasing the remedy of specific performance under 2-502(1)(a) if you are a consumer buyer iv. You would be foolish not to prepay even a small amount. For $1 you can purchase the remedy of specific performance. v. HYPO: Suppose I sign a contract to buy a boat. The bank has an Article 9 security interest in all of the boats. This reclamation trumps the security interest. You ask the seller to hold onto the boat until May and the seller says fine and takes the check for $50,000. Before you get the boat, the boat store defaults on its loan from the bank. The bank comes in and repossesses the boats including yours. You go down to the bank and ask for your boat. The bank says no. You say but a buyer in the ordinary course of business takes free of any security interest. The bank says no—you‟re not a buyer in the ordinary course of business. At the time we repossessed the boats, you weren‟t a buyer because you hadn‟t taken possession of the goods. 1. To a majority of courts possession is necessary to be the buyer. 2. But today there‟s a different result because of revised Article 9—definition of buyer d. Liquidated Damages—§ 2-718(1) i. Intro 1. Liquidated damages provision says what the damages would be—included to give parties some certainty on what their risk is 2. If court sees the liquidated damages as a penalty it will be unenforceable and you will have to prove actual damages 3. If the provision is upheld, you collect that amount without having to prove any actual damages at all 4. Generally, to be upheld, liquidated damages provisions must be reasonable
ii. § 2-718(1): the liquidated damages must be “reasonable in light of the anticipated or actual harm caused by the breach, the difficulties of proof of loss, and the inconvenience or nonfeasiblity of otherwise obtaining an adequate remedy…” 5. 4th circuit court case with Hawaii sugar producers and boat company saying that the liquidated damages may not seem reasonable in light of the actual harm—but they are reasonable in light of the anticipated harm and were therefore enforceable iii. Liquidated Damages v. Limitation of Damages provision 6. Purpose of liquidated damages is to compensate—contractual pre-breach estimate of damages 7. Purpose of limitation of damages is to allocate risk amongst the parties, not to compensate e. The Breaching Buyer‟s Right of Restitution: § 2-718(2) iv. Can be viewed as a buyers remedy—a breaching buyer can potentially get back of portion of price paid to seller v. Also looks like seller remedy because it allows the seller to keep some of the money without proving any damages vi. Essentially, under § 2-718(2) the seller can keep without having to prove actual damages $500 or 20% of the contract price—whichever is less vii. Think of it like this—seller can go for their amount of actual damages, the amount of a liquidated damages provision, or this amount made available under § 2-781(2) 1. Most contracts won‟t have liquidated damages so seller is likely to keep the amount they can under § 2-718(2) and be done with it f. Seller‟s Remedies i. Intro 1. § 2-703 gives you an index of the sellers remedies, but it is not exhaustive 2. Remember the idea is to put the seller in the position they would have been in had the buyer performed—put another way our goal is protecting the seller‟s expectations and their expectation was the purchase price 3. Purchase price can be divided into three parts: a. Cost—reflects the cost to the seller of acquiring the goods b. Market price profit component—the difference between the market price for these goods and the seller‟s cost (first profit component) i. At a minimum the seller will be selling at the market price c. Contract price—difference between the contract price and the market price (if there is one) (this is the second profit component) 4. Remember question on chart is to always ask where the goods are when the smoke clears ii. Buyer has the goods 1. Only way we can protect the seller is to allow them to recover the contract price 2. § 2-709 provides for this—if the buyer has accepted the goods and has not rejected or revoked, they must pay the contract price a. Seller gets all three components of the purchase price b. Sounds like specific performance but is not—it is simply a measure of damages (specific performance you can go to jail for failing to do—we don‟t like that here)
c. § 2-709 also allows for seller to get incidental damages—but no consequential damages for seller 3. If buyer has the goods we have these options: a. Reclamation under 2-507(2) or 2-702 b. Actual damages/purchase price under 2-709 with incidental damages iii. Buyer does NOT have the goods (when the smoke clears) 1. Seller has finished goods a. Residual Measures i. 2-708(1): “the measure of damages…is the difference between the market price at the time and place for tender and the unpaid contract price together with any incidental damages, but less expenses saved in consequence of the buyer‟s breach” 1. This is our hypothetical resale by the seller—pretend they go into marketplace and sell the goods to somebody else 2. Sell the table for our make believe price/the market price 3. Seller gets components 1 and 2 back, but not component 3, which was any difference between the contract price and the market price 4. You go to buyer to get this third component—the rest comes from the pretend buyer at our pretend price/market price 5. Seller may not like this because suppose the court sets the market price wrong—they may go too high which means you lose money—gap between court‟s market price and the actual price you end up selling to third party 6. Sellers do not like this because it is not precise ii. § 2-706—gives seller the right to resell and measure the damages by the actual difference between the resale amount and the contract price 1. He says goods must be identified to contract for the seller to take advantage of this 2. 2-706(1) tells us the resale must be “made in good faith and in a commercially reasonable manner…” a. Protections for the buyer b. Commercially reasonable manner is a big protection 3. 2-706(2): seller can resell how they want but every aspect of the sale must be commercially reasonable—time, place, manner of sale, etc. 4. 2-706(3): if it is a private resale the seller must give the buyer reasonable notification of his intention to resell and fix damages under 2-706 5. 2-706(4) if the resale is a public sale (like an auction), the seller must give reasonable notice to buyer of the time and place of the auction
a. Telling difference between public and private resale can be difficult 6. This 2-706 is the better option for the seller—gives them opportunity to get more back potentially than if court sets market price and they cannot actually resell the goods for that 7. Can get incidental damages as well 8. If seller fails to comply with this section, we let them get damages under 2-708 instead iii. Problem issues—seller will want to go with whichever provision gives them the most money—buyer may make an unjust enrichment type argument if it is more than what the seller expected 1. Seller responds: I have cost of litigation to get damages, etc.—I am not truly overcompensated here iv. PROBLEM 70 1. F.O.B. Austin—shipment contract. Risk of loss shifts to the buyer. 2. For the seller to exercise the § 2-706 option, seller has to identify the goods to the contract right after the breach, but they didn‟t have to identify them when the contract was formed. a. § 2-704(1)(a) allows for post-breach identification 3. Market Price—need to know the time and place of tender. b. Lost Volume Seller § 2-708(2) i. Intro— 1. Lost volume seller is Sears selling you a TV—if you don‟t buy it is one less TV they will sell overall because they have the supply to meet demand—if he is selling his table he really just has one and theoretically doesn‟t care who it goes to. 2. Under normal damages provisions, they have a hard time recovering because they turn around and sell TV to somebody else for same price, etc. 3. They can be hard to identify—having the concept is good enough though ii. § 2-708(2) allows for the damages to be measured as lost profits 1. “Due credit for payments or proceeds of resale” does not make sense to apply to lost volume seller—this section was not made for them 2. Also says the profit should include reasonable overhead Profit boils down to being contract price minus your variable costs (not your fixed cost because this shift burdens of that to other products and allows the fact the
buyer did not come through to decrease your profit in other goods) 3. Also allows you to get incidental damages 4. § 2-708(2) also applies in two other situations—seller does not have finished goods and middleman sales. iii. PROBLEM 71 1. If Fun in the Sun is not a LVS and it has finished goods, you would apply § 2-708(1) (contract price - market price) and FIS walks away with 0 or § 2-706 (contract price retail price) and FIS walks away with 0. The buyer is off the hook except for incidental damages. 2. If FIS is a LVS, then it can recover lost profits under § 2708(2), which would be $800. 3. The question in determining LVS status is not whether it would be theoretically possible for the seller to make the second sale, but whether the seller WOULD have made the sale. c. No Market for Goods—§ 2-709 i. He is a seller who has this weird table for you that nobody else would want—there is no market price and little hope for resale because it is so unique ii. Allow seller to recover the contract price under § 2-709 iii. Seller needs to hold goods for the buyer—they cannot recover the full price from the buyer without being in a position themselves to turn the goods over to the buyer 2. Seller does not have finished goods a. Other two instances where 2-708(2) applies i. Now the “proceeds from resale” part makes sense b. Suppose our buyer breaches while the seller is still in the process of manufacturing the goods—§ 2-704 gives the seller options can choose either as long as it is commercially reasonable i. He can finish the goods—if he does this, when they are finished he will have finished goods and it moves us over into that box and he can pursue remedies that way ii. He can choose not to complete the goods—suppose he has a table top but did not do the table legs—in this situation we let him collect damages under § 2-708(2) c. § 2-708(2)—he can get his profit along with other things i. Can get “costs reasonably incurred”—don‟t want the cost for the materials eating away at the profit he was expecting had the deal gone through ii. Must deduct “payments or proceeds of resale”—suppose he knows somebody who takes unfinished table tops—he can sell it to him but must deduct that from buyer‟s damages
d. Middleman situation—he does not have the goods yet when the buyer repudiates, etc. viii. THE ABOVE ARE GENERAL DAMAGES—REMEMBER SELLER CAN ALSO GET INCIDENTAL DAMAGES—like paying storage for goods for reasonable time while trying to resell, etc. ix. NO CONSEQUENTIAL DAMAGES THOUGH a. Buyer‟s Remedies i. If the buyer has the goods—§ 2-709 tells us they must pay the purchase price—but what about the buyer recovering from the seller? ii. Seller does deliver the goods 3. § 2-714: Buyer‟s General Damages section a. (1): Buyer has accepted the goods and given notification; he can recover damages for any non-conformity b. (2): Formula for breach of warranty i. Difference in value between the expected value of the goods and the actual value of the goods—he thinks in most cases the price will be the expected value—so if they don‟t conform to warranty, they are worth less and buyer can recover that difference in value—whatever amount by which the breach of warranty depreciates the value of the goods ii. Assumes the buyer hasn‟t revoked the acceptance. 4. § 2-715: Buyer can also get incidental damages and consequential damages a. (1) Provides for incidental damages—includes reasonably incurred expenses like inspection, receipt, transportation, care and custody of goods rightfully rejected, etc. b. (2) Allows buyer to get consequential damages for seller‟s breach i. (a) this normally is lost profits— 1. There is a requirement for buyer to mitigate—the buyer has to take steps to stop the loss. 2. The type of damages, not the amount, had to be foreseeable by the seller at the time they entered into the contract— penalizes buyer for not disclosing special needs to seller ii. (b) covers injury to person or property proximately resulting from any breach of warranty 5. Buyer rejects goods or revokes acceptance (move us over to the other side damages) a. § 2-601—buyer‟s right to reject b. § 2-608—buyer‟s right to revoke the contract in part or in whole c. Remember: i. § 2-508 allows the seller a chance to cure if rejected at times ii. § 2-612 requires substantial impairment of value instead of perfect tender to reject an entire installment contract iv. Seller Does not Deliver the Goods: 1. § 2-713—pretends the buyers go and purchase the goods elsewhere and we give them as damages the difference between the market price and the contract price
a. Again we have issues of measurement not being exact, etc., so we allow the buyer to go into the marketplace and actually buy from a third party 2. § 2-712—buyer really purchasing from a third party—whatever amount they pay over, we let them get that from the seller a. This is called “cover” b. This is a more exact measure where the buyer goes out and actually buys from a third party. You get the difference between what you paid and what you would have paid. a. Again we need some controls since buyer is fixing the seller‟s remedy i. Must be made in “good faith” and “without unreasonable delay” ii. Must be a reasonable purchase iii. You get the difference in price less expenses avoided b. Again can still get incidental and consequential damages as stated in 2-715 c. If the buyer fails under 2-712 we let them get damages under 2-713 3. § 2-716: a. Allows the buyer to get specific performance when the goods are unique b. Buyer gets goods along with incidental and consequential damages v. Consequential Damages Claim—you don‟t have to prove your damages with absolute certainty, but it can‟t be based on pure speculation. That is, the consequential loss had to be foreseeable. 1. Usually the seller contracts out of provided consequential damages. 2. Attorney‟s fees are not consequential damages. 3. § 2-717 is a self-help provision that allows the buyer upon notifying the seller to deduct all or any of the damages from the price still due under the same contract. 4. When there is a new business, the idea of foreseeability comes up often. There‟s no track record of earnings so it‟s hard to measure consequential damages. vi. PROBLEM 75 1. There‟s an exclusive repair and replace provision. The dude tried to revoke his acceptance, but he can‟t do that because of the exclusive remedy. The other code remedies, such as revocation, only become available if the seller refuses or can‟t repair and replace. The buyer after revoking the acceptance, claimed a security interest in the truck. But the buyer only has a security interest if the revocation was rightful. 2. But assuming that the buyer did have a right to revoke, the buyer would have a security interest. The buyer wouldn‟t have to give back the truck until the seller gave back the purchase price. a. Incidental Damages—$50—recoverable. 3. Consequential damages—if the repair and replace provision had failed of its essential purpose, then the first thing you discuss is the consequential damages exclusion. a. If they are dependent—consequential damages exclusion falls out— consumer cases. b. If they are independent, consequential damages exclusion comes in— merchants vii. PROBLEM 76
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1. Under § 2-712—(cover price minus contract price minus expenses saved from breach). 2. The defense is that this is an unreasonable cover. a. Market price is relevant to the question of whether the cover price was reasonable. 3. You should always put evidence of market price in because if you don‟t recover under § 2-712, you will be trying to recover under § 2-713 viii. PROBLEM 77 1. You determine the market price and place at the time and place of tender. a. So you should also determine the cover price at the time and place of tender. 2. HYPO: Under § 2-713 market price is determined when the buyer learns of the breach. But, under § 2-610(a), the buyer has the option when the seller repudiates of doing nothing for a commercially reasonable time in which time the market place could increase. Thus, amended § 2-713 has the difference between the market price at the expiration of a commercially reasonable time after the buyer learns of the repudiation. a. Most courts take this approach today. Anticipatory Repudiation a. If one party to a contract makes a definite repudiation of the contract before the date set for performance, the other party can treat the repudiation as a breach and sue immediately. i. The common law also permits the innocent party to ignore the repudiation and await the performance date to see if the repudiator would retract the repudiation b. PROBLEM 80 i. Contract price is $5k ii. 7/10: At the time of the repudiation, when the seller told the buyer to forget about it, the MP in the relative location was $6k iii. 7/15: the MP was $7k iv. 10/18: date the seller was supposed to deliver; MP was $8k v. The buyer didn‟t cover so the buyer is seeking to recover the difference btwn contract price and MP vi. When do we determine MP? 1. § 2-713 says we determine MP the day the buyer learned of the breach a. Buyer knew of the repudiation on 7/10 2. What‟s your argument in support of 10/18 being the date? a. You have to bring 2-610 into the mix i. Allows to you to do nothing for a reasonable period of time b. Suggests that in order to reconcile 2-713 and 2-610, maybe we should use the middle date 3. Issue is whether learned of the breach means learned of the repudiation? a. Cts have been all over the place on this Statute of Limitations a. § 2-725 tells us it is 4 years from the time the cause of action accrued b. Parties can shorten the statute of limitations, but not to less than one year c. They cannot increase the statute of limitations
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d. Also takes care of problem warranty can cause—maybe you discover it is breached more than 4 years down the road, etc. i. With warranty of title or latent defect, this is still a real problem ii. But there is an exception in subsection 2—if the express warranty extends to the future performance of the goods then the SOL will run when the buyer did or should have figured out the defect. Finance Lease a. A finance lease is where a third party (lessor) buys the goods from the manufacturer because you want the goods. The lessor is buying the goods to assist you; it doesn‟t have an inventory of these machines. Then you lease it from the lessor. b. There are two contracts involved: i. Manufacturer to Lessor (Article 2) ii. Lessor to Lessee (Finance Lease—Article 2A) c. So what? i. The lessor in a finance lease is operating the same way as GMAC operates when it finances your car. If something happened to the car, you have no claim against GMAC. The only reason why the lessor acquired the machine was to help you out. How is the lessee protected? 1. Automatically under 2A, the lessee is a beneficiary of the warranties in the manufacturer/lessor contract (the supply contract). For example, if there is an implied warranty of merchantability, the lessee can recover. 2. Because the lessor is totally shielded from liability, before the lessee commits to the lease the lessor has to provide the lessee information about the kind of warranties that are in the supply contract.
