UCC Sales: Lawrence
UCC SALES OUTLINE
I. Scope of
Article 2
·
Article 2 applies to present
transactions in
goods and contracts to sell goods at
a future time. Courts must determine whether a transaction is governed by
Article 2.
§2-103(j), Good Faith: means
honesty in fact and the observance of reasonable commercial standards of fair
dealing.
A. What are
goods?
UCC 2-103(k) – goods means all things (including specially manufactured
goods) which are movable at the time of
identification to the contract for sale.
o
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.
§2-105(1)
o
Article 2 applies to existing goods and
future goods (goods that do not
exist at the time the contract was made).
o
Identification:
UCC 2-501(1) – The buyer obtains a special property and insurable
interest in goods by identification. Identification occurs:
(a) when the
contract is made if it is for the sale of goods already existing and identified;
(b) if the
contract is for future goods other than those in (c), they will be considered
identified when the goods are shipped, marked, or otherwise designated by the
seller as the goods to which the contract refers.
(c)
when the crops are planted or otherwise become growing crops (see
statute for full def.)
§
Insurable
interest – an interest in property which would allow the owner to insure it.
(one can’t insure someone else’s property).
o
Personal Property can be divided between goods
(tangibles) and intangibles (ex: licenses, trademarks). The question is what are
you buying? Are you buying the good or are you buying a person’s intellectual
power or ideas? The law generally tries to look past the form of a transaction
and focus on the functional reality.
o
There is a middle ground called Indispensable
Paper which has attributes of both tangible and intangible. It must be on paper,
so it is tangible, however the rights that the paper conveys is intangible.
Negotiable Instruments (negotiable documents) – ex: checks, promissory notes.
o
But we will focus on
goods.
o
Foster
v. Colorado Radio Corp.
§
Plaintiff,
§
The transaction involved both tangible
(furniture, equipment) and intangible (license) property.
§
The Trial Court concluded that the contract did
not fall within the UCC Article 2 b/c it did not deal w/ goods. It looked at the
contract as a whole, used the dominant
purpose test, and ruled that the dominant purpose was the sale of the
intangible goods (the license). The based their ruling on Epstein.
§
The Court of Appeals reversed in part and
affirmed in part. The court looked at the contract in two pieces, one for the
sale of goods and one for the sale of non-goods. The real property and the
intangible property parts of the contract are not w/in Article 2. However, the
furniture and equipment sales are governed by Article 2.
§
The Court of Appeals ruled that Epstein is
inapplicable to this case b/c in that case, the beauty service and the sale of
beauty products was inseparable and the main purpose was the service. But in
this case, there was no hybrid goods-service. It was only the sale of goods and
non-goods, so it can be separated so that some falls under Article 2 and some
doesn’t.
§
Most courts follow the dominant
purpose test where the whole transaction either falls under Article 2 or none of
it does. No separation.
B. What is a
transaction?
II. Offer and
Acceptance
UCC § 2-204, Formation in General
·
(1) A K for
the sale of goods may be made in any manner sufficient to show agreement,
including conduct by both parties which recognizes the existence of such a
K.
o
appropriate conduct
by the parties may be sufficient to establish an agreement
·
(2) An
agreement sufficient to constitute a K for sale may be found even though the
moment of its making is undetermined.
o
Directed primarily
to the situation where the interchanged correspondence does not disclose the
exact point at which the deal was closed, but the actions of the parties
indicate that a binding obligation has been undertaken
·
(3) Even if
one or more terms are left open a K for sale does not fail for indefiniteness
if the parties have intended to make a K and there is a reasonably certain
basis for giving an appropriate remedy.
o
If the parties
intend to enter into a binding agreement this subsection recognizes that the
agreement as valid in law despite missing terms, if there is any reasonably
certain basis for granting a remedy.
§
The more terms the
parties leave open, the less likely it is that they have intended to conclude a
binding agreement, but their actions may be frequently conclusive on the matters
despite omissions.
·
(4) Amended to include Electronic Transactions
o
Courts have said
that you don’t look at how one electronic agent worked with another electronic
agent; you still look at the parties’ behavior
UCC § 2-206, Offer and Acceptance in
Formation of Contract
·
(1) Unless otherwise ambiguously indicated by
the language or circumstances
o
(a) an offer to make a K shall be construed as
inviting acceptance in any manner and by any medium reasonable in the
circumstances.
§
Any reasonable
manner of acceptance is intended to be regarded as available unless the offeror
has made quite clear that it will not be acceptable.
§
This section is
intended to remain flexible and its applicability to be enlarged as new media of
communication develop or as the more time saving present day media come into
general use.
o
(b) An order or other offer to buy goods for
prompt or current shipment shall be construed as inviting acceptance either by a
prompt promise to ship or by the prompt or current shipment of conforming or non
conforming goods, but such a shipment of non conforming goods does not
constitute an acceptance if the seller seasonably notifies the buyer that the
shipment is offered only as an accommodation to the buyer.
§
Either shipment or
prompt promise to ship is made a proper means of acceptance of an offer looking
to current shipment.
§
Deals with the
situation where a shipment made following an order is shown by a notification of
shipment to be referable to that order but has a defect.
·
Such a non -
conforming shipment is normally to be understood as intended to close the
bargain, even though it proved to have been at the same time of the breach.
§
However, the seller
by stating that the shipment is non conforming and is offered only as an
accommodation to the buyer keeps the shipment or notification from operating as
an acceptance.
§
Countering the
unilateral K trick (book notes)
·
Under pre code law,
S could ship non conforming goods in response to an offer and then wait to see
what happened.
o
If B accepted goods,
then K resulted: with S as offeror of non conforming goods and B is the offeree
o
IF B brought suit, S
could avoid liability by denying the existence of a K b/c shipping non
conforming goods was not an act of acceptance requested by the B.
·
Under this
provision, shipment of nonconforming goods amounts to an acceptance (unless S
notifies B that shipment is being made as an accommodation) of the buyers offer.
·
(2) Where the beginning of a requested
performance is a reasonable mode of acceptance an offeror who is not notified of
acceptance within a reasonable time may treat the offer as having lapsed before
acceptance.
o
The beginning of
performance by an offeree can be effective acceptance so as to bind the offeror
only if followed within a reasonable time by notice to the offeror.
o
For the protection
of both parties it is essential that notice follow in due course to constitute
acceptance.
Book Notes:
§1-103(3)(b)
Unless displaced by a specific UCC provision, the C/L applies.
§
OFFER
·
The code defers to
many of the common law rules regarding offers.
o
E.g. advertisements,
circulars, and price quotas still are not viewed generally as offers.
o
Courts interpreting
the code will continue to follow the Common law.
It’s revolutionary because it’s saying that it’s not the only source of
law.
·
Restatement of
Judgments §24
o
An offer is the
manifestation of willingness to enter into a bargain so made as to justify
another person in understanding that his assent to his bargain is invited an
will conclude it.
§
ACCEPTANCE
·
Code:
unless the language or the circumstances make it clear that the offeror is
insisting on an exclusive method of acceptance, the offeree can accept in any
manner reasonable under the circumstances.
o
An
offeree who chooses
to accept by making a return promise can also do so by way any reasonable
medium.
§
Most offerees do so
by making a return promise or by beginning a requested performance/
o
Even though the
offeree’s conduct in beginning performace is treated as a return promise, it
does not have to be communicated to be effective.
§
Protects the
offerees reasonable reliance, but creates problems for the offeror
o
§2-206(2)
§
“where
the beginning performance is a reasonable mode of acceptance an offeror who is
not notified of acceptance within a reasonable time may treat the offer as
having lapsed before acceptance.”
·
Code balances
interests of the parties
o
E.g.
Tu: seller receives order of specially manufacture equip
§
Seller begins work,
but does not tell buyer and on Fri, buyer revokes.
§
On these facts, S’s
conduct amounts to an acceptance and the buyers revocation is ineffective.
·
The only issue is
whether the 3 day delay giving notice was unreasonable and cases to date give
little guidance to what is a reasonable time.
§ 2-205,
Firm Offers – An offer by a
merchant to buy or sell goods in a
signed writing which by its terms gives assurance that it will be held open
is NOT revocable, for lack of consideration, during the time stated, and if no
time is stated, for a reasonable time, but in no event may such period of
irrevocability exceed three months.
·
This only applies to
contracts for the sale of goods.
·
“signed” does not
have to be a complete signature.
UCC § 2-104(1),
“Merchant” – a person who
deals in goods of the kind, or by his occupation, holds himself out as having
knowledge or skill peculiar to the practice or goods involved in the
transaction.
§2-209- Modification, rescission and waiver
·
This section seeks to protect and make effective
all necessary and desirable modification of sales K without regard to the
technicalities which at present hamper such adjustments.
·
(1) an
agreement modifying the K within this needs no consideration to be binding.
o
Official Comment 2
to §2-209:
§
Even though don’t
need consideration to be binding, modifications made thereunder must meet the
test of good faith imposed by this act.
§
The test of good
faith between merchants or as against merchants includes observance of
reasonable commercial standards of fair dealing in the trade (§2-103), and may
in some situations require an objectively demonstrable reason for seeking a
modification.
·
Such matters as a
market shift which makes performance come to involve a loss may provide such a
reason even though there is no unforeseen difficulty as would make out a legal
excuse from performance under 2-615, and 2-616.
·
(2) An agreement in a signed record which
excludes modification or rescission except by a signed writing cannot be
otherwise modified or rescinded, but except as between merchants such a
requirement on a form supplied by the merchant must be separately signed by the
other party.
o
Comment 3 to §2-209:
§
Permits the parties
in effect to make their own SOF as regards any future modification of the K by
giving affect the clause in a signed agreement which expressly requires any
modification to be by signed writing.
·
But note that if a
consumer is to be held to such a clause on a form supplied by a merchant it must
be separately signed.
·
(3) The requirement of the statute of
frauds section of this Article (§ 2-201) must be satisfied if the K as modified
is within its provisions.
o
Comment 3 to §2-209
§
Subsections (2) and
(3) are intended to protect against false allegations of oral modifications.
·
“modification or
rescission” includes abandonment or other exchange by mutual consent.
·
It does not include
unilateral “termination”(§2-106) and cancellation §2-106(4).
o
Statute of Frauds
provisions are expressly applied to modifications by subsection (3).
§
Under these
provisions the delivery and acceptance test is limited to the goods which have
been accepted, that is, to the past.
§
“Modification” for
the future cannot therefore be fabricated up by oral testimony if the price
involved is $500,000 or more since the modification must be shown at least by an
authenticated memo.
·
Since a memo is
limited to its effect to the quantity of goods set forth in it there is
safeguard against oral evidence.
·
(4) Although an attempt at modification or
rescission does not satisfy the requirements of subsection (2) or (3) it can
operate as a waiver.
o
Official Comment 4:
§
This section is
intended to prevent contractual provisions excluding modification except by a
signed writing rom limiting in other respects the legal effect of the parties
actual later conduct. The effect of such conduct is further
regulated by subsection (5).
·
(5) A party who has made a waiver
affecting an executory portion of the contract may retract the waiver by
reasonable notification received by the other party that strict performance will
be required of any term waived, unless the retraction would be unjust in view of
a material change of position in reliance on the waiver.
Hill v. Gateway
2000, Inc.
·
Hill purchased a
computer from Gateway over the telephone. Included in the box was an arbitration
clause, which would govern any dispute if the customer did not return the
computer within 30 days. Hill kept the computer longer than 30 days.
·
Hill argues that
although they read the agreement, the arbitration clause did not stand out, and
they did not read the agreement closely.
·
The court ruled that
UCC §2-207 does not apply in a case b/c there is not a “battle of the forms”,
but only one form. The question is not whether the terms were added, but when
the contract was made.
·
If a contract was
formed at the time of the phone call, then there was an offer (by Hill) and the
acceptance (by Gateway). All of the terms in the agreement in the box are mere
proposals to add terms to the contract. So UCC §2-207 would apply, and since
Hill is not a merchant, the terms are not automatically added. But Judge
Easterbrook rules that there was no contract formed by phone call. The contract
was formed when Hill did not return the computer within 30 days. So the offer
was made by Gateway, and the acceptance was made by Hill. Thus, no terms were
added and UCC §2-207 is irrelevant.
Misc. Notes
·
It is not beneficial
to require parties to adhere to a formalistic creation of a contract. Some
indefinite terms should be allowed, and an indefinite term should not render a
contract void. Thus, the basis for UCC
§2-204.
·
During Hill’s
telephone call w/ Gateway, the telephone operator did one of two things: 1)
Promised to ship the computer or 2) shipped the computer. This seems to fall
under UCC § 2-206, which created the
contract at the moment of the telephone call. So why did the court rule that the
contract was formed only when Hill didn’t send the computer back w/in 30 days?
·
Prof. Lawrence says
that Judge Easterbrook arbitrarily decided that the contract was formed when
Hill didn’t send the computer back. The problem w/ Easterbrook’s analysis is
that if a contract was already formed at the time of the telephone call, then
the terms of the form w/ the computer can only be considered as proposals of
additional contract terms.
·
The Hill decision
has not gone down well w/ academics b/c it ignores and destroys fundamental
contract doctrine. It does not address the legal significance of the exchange
between the parties during the telephone call, b/c it is a classic case of
UCC § 2-206, which the court
ignored.
·
Other jurisdictions
have both supported and rejected this decision.
III.
Statute of Frauds
A. The Reasoning Behind the
Statute of Frauds (2-201)
o
Even though some contracts are properly formed,
there are some that will not be enforced unless they are reduced to writing.
o
This statute is designed to prevent fraudulent
testimony about contracts.
o
The writing does not necessarily mean that there
is a contract. It’s just that it is corroborative evidence other than oral
testimony.
o
The SOF creates a preliminary procedural hurdle
that the plaintiff must overcome b/f the case goes to the jury. If can’t get
past the hurdle (or through one of the exceptions), then SOF bars enforcement of
the contract.
B.
§ 2-201, Statute of Frauds
(1)
A contract for the sale of goods for the price of
$500 or more is NOT enforceable by way of action or defense
unless there is some writing
sufficient to indicate that a contract for sale has been made between the
parties and signed by the party
against whom enforcement is sought, or by his authorized agent or broker.
A writing is not insufficient b/c it omits or incorrectly states the term
agreed upon but the contract is NOT enforceable under this paragraph beyond the
quantity of goods shown in such writing.
·
This does not
require that all of the terms of the agreement be in writing. It does not even
require that all express terms be in writing. All that is explicitly required
for an effective writing is:
i) the
signature of the party against whom
enforcement is sought (or his authorized agent or broker);
§
Doesn’t have to be
signature exactly. Can be symbol, letterhead, printed name, etc.
§
UETA
(Uniform Electronic Transactions Act)
a) Electronic
signatures are OK
b) Computerized
contracting, where one person’s computer contracts w/ another. This can form a
contract even though no one reviews the contract or its terms. One can’t use the
defense that machines can’t make contracts, b/c the fact that you programmed the
machine is your manifestation of assent.
§
E-Sign Act
– provides that the documents are legally effective even though the electronic
signature is not in paper format.
ii)
sufficient information to
identify the parties and show that a contract for
sale exists between them;
iii) a
quantity term;
§
The quantity term
requirement is not stated in the rule, but was implied by the courts.
§
A contract will not
be enforced beyond the quantity shown in the writing.
§
The reason why
quantity is so important (but not price) is that quantity varies more than price
(which can be gap-filled by court). Also, quantity also affects the price
(Costco style).
iv)
Description of the item
(hereafter added by Prof. Lawrence) – since SOF only applies to sale of goods, a
description will indicate that we are dealing w/
goods;
AND
v) Must suggest that
this is a sales transaction.
·
The writing need not
be contained in a single document. Several writings can be used to satisfy the
Statute of Frauds. However, there is debate as to whether sufficient
cross-reference is required between the separate writings.
·
The production of
sufficient writing does not of itself establish that there is an enforceable
agreement. The defendant can still introduce evidence to show that, despite the
writing, the parties never entered into a binding agreement.
(2)
This is a
partial exception to the writing requirement of subsection (1) – Between
merchants, a writing that would
satisfy the SOF as to the merchant who signed it can also satisfy the SOF as to
another merchant who has not signed it, if written notice of objection is
not given w/in 10 days after the confirmation is received. The
seven requirements under this
section are:
·
This does not
necessarily mean that a contract was created b/c a defendant can still introduce
evidence that no contract existed or contained different terms. This only
prevents a defendant from using the SOF defense.
·
This section wants
to encourage the formation of contracts, especially over the phone. A contract
that is made over the phone should have a confirmation sent by at least one of
the parties.
·
If one party sends
this confirmation and the confirmation will bind the sender under subsection
(1), then the other party is bound as well, if they satisfy subsection (2).
·
HYPOS
– suppose Jones and
a)
b)
c)
d)
If Jones does receive the memo w/in a
reasonable time, but Jones doesn’t read it – this is a case that the
recipient does not know of the memo’s contents. However, Jones had “reason to
know of its contents”, meaning that he should have known. So,
e)
If a typo in the memo says that it is for
10 units, but the oral contract was actually for 100 units – If Jones sues
·
If
f)
If
g)
If Jones receives the memo, but then
immediately objects to the terms of the memo – Jones would have to send a
writing back to
h)
The objection letter by Jones to Ames is
sent w/in 10 days but was lost in the mail – Even though the confirmation
letter is required to by “physically received”, the written notice of objection
only needs to be “sent” (the code states “is given w/in 10 days). Thus, the
objection by Jones is effective b/c it was “given” w/in 10 days.
(3)
There are
three full (no writing involved)
statutory exceptions to the writing requirement:
(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, b/f notice of
repudiation is received and under circumstances which
reasonably indicates that the goods are
for the buyer, has made either a
substantial beginning of their manufacture or
commitments for their procurement;
OR
·
All of these
conditions must be satisfied. There are many pitfalls. Thus, not many situations
will qualify under this exception.
·
The difficult
provision of this exception is “under circumstances which reasonably indicate
that the goods are for the buyer…” It is difficult to satisfy this provision.
·
An oral contract for
the delivery of several units, that satisfies UCC 2-201(3)(a), is enforceable
for the entire contract quantity, even though the seller has only begun
manufacturing a part of the total quantity.
o
Prof. Lawrence does
not agree w/ the above rule and thinks the enforcement should be limited only to
the extent that the seller has committed to manufacturing. Furthermore, the
above rule seems to go against the spirit of the UCC in regards to the
importance of quantity.
(b)
if the party against whom enforcement is sought
admits in his pleading, testimony or
otherwise in court that a contract for sale was made, but the contract is not
enforceable beyond the quantity of goods admitted; OR
·
An admission does
not have to be a legal conclusion. Should pursue the facts which establish offer
and acceptance between the parties, since most laypeople don’t understand
whether a contract is formed. Thus, a layperson could deny it and not realize
that a contract was formed.
(c)
With respect to goods for which payment has been
made and
accepted or which have been
received and accepted.
·
Ex: Payment was made
to the seller and the seller accepts it. The corroborative evidence of the
existence of a contract is that the seller has accepted the payment.
·
Ex: Goods were
received and accepted by the buyer. Upon receipt, the buyer has a choice to
either refuse the goods or accept them. If the buyer accepts them, then this is
corroborative evidence that a contract was made.
·
The offer was an
oral offer to sell a Rolls Royce. $100 was made as a down payment.
·
The seller later
refused to sell the car, invoking the SOF defense under
UCC 2-201(1).
·
How can the buyer
enforce the contract?
o
The $100 down
payment can constitute a payment received by the seller and made by the buyer
under
UCC 2-201(3)(c).
Therefore, the SOF defense is eliminated from this UCC section.
§
The down payment was
only a small piece of the purchase price, and court must determine whether the
down payment can constitute a payment under the UCC.
o
The court focuses on
the intent of the drafters and looks at the Official Comments of the UCC, “where
the goods are apportionable, the contract is enforceable only as to the portion
for which payment has been made.”
o
The court holds that
this does constitute a payment because the car is an indivisible unit. We cannot
only enforce the portion for which payment has been made b/c the car is one
whole unit. Thus, the deposit constitutes payment and the SOF is eliminated.
o
The court wants to
advance the policy of avoiding disputes over quantity. This is a major theme
seen throughout the UCC Article 2.
C.
Non-Statutory Exceptions – Courts
use the following two doctrines to overcome the SOF requirements and give relief
to the plaintiff:
1) Equitable Estoppel – requires a showing by the
plaintiff that the defendant made one of the following affirmative
misrepresentations:
a) that the SOF had been satisfied;
b) that the D would prepare a signed writing in the future;
OR
c) that the SOF would not be used as a defense.
2) Promissory Estoppel – often requires a great deal
of reliance, sometimes amounting to “unconscionable injury.” Sometimes requires
“definite and substantial” reliance.
D.
The Effects of Noncompliance
·
Noncompliance w/ the SOF generally renders a
contract unenforceable. This is NOT the same as void. Unenforceability refers to
the lack of a remedy.
·
Void means that the contract does not exist.
Unenforceable contracts may become enforceable at a later time.
·
The SOF is an affirmative defense. It must be
pleaded or it will be considered waived. The party seeking to overcome the SOF
will have the burden of showing that the SOF has been satisfied.
Southwest
Engineering Company v. Martin Tractor Company
·
During a meeting
between the representatives of the two companies, where Martin produced a
memorandum that listed certain products, w/ prices, and quantity, for sale to
Southwest. The writing listed the name and title of Martin’s representative.
·
The defendant argued
that this memorandum does not constitute a writing that is a contract for the
sale of goods. This writing is only part of the negotiations and was only an
offer. Therefore, the SOF applies, so no contract is enforceable. They are
arguing for a very literal reading of
UCC 2-201(1).
But Prof. Lawrence states that UCC 2-201
should not be read that tightly and should be read liberally to allow more
contracts to be enforced.
·
The Kansas Supreme
Court ruled that under
UCC 2-201,
there was an agreement reached during the meeting and that the memorandum was a
contract for the sale of goods. Used a relaxed reading of UCC 2-201. There are
only three requirements:
1) the writing must
evidence a contract for the sale of goods (should state the goods and that the
transaction is a sale);
2) it must be
‘signed’, a word which includes any
authentication which identifies the party to be charged; AND
3) it must specify
quantity.
·
Prof. Lawrence
states that the Court got this wrong b/c satisfaction of the SOF does not
indicate that a contract has been made. This is a separate question. The only
question for the SOF is whether the writing satisfies the SOF. If the plaintiff
can satisfy the SOF, then can determine whether there was a contract or not. The
SOF is narrow in its scope.
Harry Rubin & Sons
v. Consolidated Pipe Co.
·
Plaintiff sues for
enforcement of three separate oral agreements. Plaintiff sent purchase orders as
confirmation memorandum for the oral contracts, to the defendant.
·
The issue is whether
the confirmation memos satisfy the SOF under
UCC 2-201(2).
·
The Court rules that
both of the memos satisfies the SOF so that both oral contracts are removed from
the SOF.
I. Terms
Supplied by the Express Agreement
·
This is the most obvious.
·
“Freedom of contract” is the general rule.
·
UCC
§ 1-302(a) – except as otherwise provided in subsection (b) or elsewhere
in the UCC, the effect of provisions of the UCC may be varied by
agreement.
o
UCC
§ 1-201(3),
“Agreement” – the bargain of the parties in fact, as found in their
language or inferred from other circumstances, including course of performance,
course of dealing, or usage of trade.
§
“Contract” is different from “Agreement” in that
it encompasses an agreement. Contract is not only an agreement, but a contract
also creates legal rights in the parties.
II. The Parol
Evidence Rule
·
The extent to which
oral evidence of additional express
terms to a contract will be excluded. The evidence may or may not exclude
certain types of evidence.
·
The SOF is a procedural hurdle. It does not
govern contract terms. The PER is a rule concerning admissibility of extrinsic
evidence for the purpose of establishing an express term of the contract other
than those listed in the contract.
·
The writing is
potential evidence of a contract.
Just b/c there is a writing doesn’t necessarily mean that there is a contract.
·
The main thing is a determination of the actual
intent of the parties.
UCC
§ 2-202(1),
Final Written Expression: Parol or Extrinsic Evidence
You cannot contradict an “integrated” (final terms)
agreement with evidence of any prior agreement or of a contemporaneous oral
agreement, but it may be explained or supplemented:
(a) by course
of performance, course of dealing, or usage of trade(§1-303);
and
(b) by evidence
of consistent additional terms unless the court finds the writing to have been
intended also as a complete and exclusive statement of the terms of the
agreement.
·
Must determine
whether it is partially (the terms
are final, but the writing is not an exclusive statement of all of the terms)
integrated or completely (the terms
are final and the writing is an exclusive statement of all of the terms)
integrated.
·
If either
partially or completely integrated,
can NOT introduce evidence of
contradictory terms.
·
If partially
integrated, can introduce evidence of additional terms.
·
If completely
integrated, can NOT introduce
evidence of additional terms.
·
The problem w/ the
above rule is that if we have ample evidence of the intent of the parties, then
the rule works easily. But if we don’t have evidence of the intent of the
parties, then it is hard to determine whether the parties intended a partial or
complete integration, or whether it was intended to be integrated at all.
·
The UCC approach
deviates somewhat from the Common Law approach. The main difference is in the
guidelines for construing intent.
o
Comment 3
– “If the additional terms are such that, if agreed upon, they would
certainly have been included in the
document in the view of the court, then evidence of their alleged making must be
kept from the trier of fact.”
o
Contrast this w/ the
Natural Inclusion Test of the common
law. “Courts should keep the evidence out if the evidence is for a term that
would have been naturally included
in the contract.”
A. The Common Law
·
When parties to a contract have reduced their
agreement to a writing which they intend to be a final expression of at least
some of their understandings, they may not introduce evidence of prior oral or
written terms, or contemporaneous oral terms, that contradict the writing. They
may, however, attempt to supplement the writing by introducing evidence of
consistent additional terms. If they intend that the writing be both final and
complete, even evidence of consistent additional terms will be excluded.
·
Steps in determining whether to invoke the
Parol Evidence Rule:
1) Ascertain whether the parties have adopted a particular
writing as a final expression of at
least part of their agreement.
·
A writing is
final when the parties have gone
beyond the negotiating stage and have agreed that the language represents at
least some of their understandings w/ respect to a contract.
2) Determine whether the writing is
complete.
·
A writing is
complete when the parties intend for
it to represent all of their understandings w/ respect to the contract.
·
a) The judge would first look at the writing to see whether
it appeared complete;
b) If the judge concluded that it did, the next step was to
presume that it was complete. Neither party could convince the court that what
they actually intended was a partial integration.
·
However, a party was still free to show that the
agreement represented by the writing was not the only contract between the
parties.
·
Collateral Contract – evidence of a
collateral agreement, not supported by separate consideration, might be
admissible to supplement the terms of the apparently complete writing, if the
term was one that a reasonable person “would not ordinarily be expected to
embody in the writing.”
III. Usage of
Trade, Course of Dealing & Course of Performance
·
All of these can provide a source of terms to the
contract which are just as much a part of the contract as the express terms.
·
UCC
§ 1-103 – (a)The UCC must
be liberally construed and applied to promote its underlying purposes and
policies, which are:
(a)(2) to
permit the continued expansion of commercial practices through custom, usage,
and agreement of the parties;
UCC
§ 1-303, Course of Performance,
Course of Dealing, and Usage of Trade
(a)
Course of Performance – a
sequence of conduct between the
parties to a particular transactions (installment contract) that exists if:
1) the agreement of the parties w/ respect to the
transaction involves repeated occasions for performance by a party; AND
2) the other party, w/ knowledge of the nature of the
performance and opportunity for objection to it, accepts the performance or
acquiesces in it w/o objection.
(b)
Course of Dealing
– a sequence of conduct concerning previous transactions (prior
contracts) 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.
·
This is essentially
the evolution of a private usage of trade between the parties.
·
“fairly” – the
transactions must be as comparable as possible. A transaction for 1000 units
cannot be expected to be performed in the same manner as a transaction for 10
units.
(c) Usage
of Trade – 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 w/ respect to the transaction in question.
·
“place” is an
interesting issue b/c there are regional differences in terms of custom.
(d) COP, COD,
of UT can be used for interpretation or establishing terms of a contract.
(e) The express
terms of an agreement and any applicable COP, COD, or UT
must be construed whenever
reasonable as consistent w/ each other. If such a construction is unreasonable,
then the hierarchy, from most controlling to least:
1) Express Terms 2) COP 3) COD 4) UT
Hypo Problem
·
Seller & buyer have a contract requiring “prompt
shipment”. Seller delivers the goods after 52 days. Buyer sues for breach.
·
“prompt
shipment”
o
What type of UT would help make a case for the
seller?
§
If the business backdrop of UT is that “prompt”
means shipment w/in 60 days, then shipment after 52 days may not necessarily
breach the contract.
o
What type of COD would help make a case for the
seller?
§
If this is their first contract together, then
there is no COD.
§
If there was prior contracts between the parties,
which of the contracts is relevant to this contract? How did the parties act in
the previous contracts in regards to “prompt shipment”?
o
What type of COP would help make a case for the
seller?
§
There must be some sort of installment or ongoing
contract between the two parties. Must have a
sequence of performance between the
parties under the existing contract.
·
However, what constitutes a “sequence” is not
defined. Probably two prior installments is the minimum. There must be enough of
a sequence to create a legitimate expectation between the parties.
§
Must also show that several of those prior
shipments were made around the 52 day mark and the buyer never objected.
Relationship between
UCC
§ 2-202(a) and
UCC
§ 1-303(e)
·
Some courts use to automatically hold that under
UCC § 2-202, if
COP, COD, or UT contradict the terms of the contract, then they are
inadmissible.
·
However, under
UCC § 1-303(e),
the express terms, COD, COP, and UT should be construed as consistent w/ each
other, if it is reasonable to do so.
·
Prof. Lawrence & the Comments to
UCC § 2-202
argues that courts should rule that if there are contradictory terms, it is a
question of fact to be resolved by a jury. The jury must determine what the
parties intended. The court ought to be willing to listen to any evidence that
the parties offer to show what their intent was.
o
The only time that COP, COD, and TU should be
excluded when dealing w/ contradictory terms under
UCC §
2-202(a), is when the express
term was intended to be a complete and exclusive statement of the term (the
contract specifically excludes COD, COP, and UT).
·
Notice that under
UCC § 2-202,
even if the express terms are intended to be completely integrated, then can
still present evidence of UT, COD, and COP, although evidence of consistent
additional terms is excluded under
UCC § 2-202(b).
·
However, this hierarchy cannot be construed
literally. Express terms and Trade Usage are actually both equally legitimate
sources of contract terms.
IV.
Implied in Law Terms
(Gap-Fillers)
·
These gap-fillers are available to help prevent
the contract from failing for indefiniteness.
·
We will also focus on the seller’s delivery
obligations as well as the gap-filling provisions.
A. Open and
Deferred Price Terms
o
A contract does not fail for indefiniteness for
lack of specified price (unless the goods are so unusual that a price cannot be
measured). The Code will supply a price in the contract.
o
§ 2-305, Open Price Terms
(1)
The parties, if they so intend can conclude a
contract for sale even though the price is not settled. In such a case, the
price is a reasonable price (usually
the market price) at the time of delivery if:
a) nothing is said as to price; or
b) the price is left to be agreed by the parties and they
fail to agree;
c) price is to be fixed in terms of some agreed market or
other standard as set or recorded by 3rd party
(2)
A price to be fixed by the seller or by the buyer
means a price for him to fix in good
faith.
(3)
If a price left to be fixed otherwise than by
agreement of the parties fails to be fixed through fault of one party, the other
may at his option treat the K as cancelled or himself fix a reasonable price.
(4)
When, however, the parties intend not to be bound
unless the price be fixed or agreed and it is not fixed or agreed there is no K.
B. Delivery and Payment Terms
Generally
o
§ 2-301, General Obligations of
Parties – The obligation of
the seller is to transfer and deliver and that of the buyer is to accept and pay
in accordance w/ the contract.
1) Place of Delivery
§
§ 2-308, Absence of
a) the place for delivery of goods is the seller’s place
of business or if he has none, his residence; but
b) in a contract for the sale of identified goods which to
the knowledge of the parties at the time of contracting are in some other place,
that place is the place for their delivery;
·
Hypo:
assume that the good is located in
·
Comment 1:
where delivery by carrier is “required or authorized by the agreement (preamble
to 2-504”, the seller’s duties as to delivery of the goods are governed not by
this section but by section UCC 2-504.
o
Most courts hold
that if there is significant distance between the parties, it is implicit that
the seller is authorized to send the
goods by carrier. T
·
This Code section is
in the context of an absence of an express place of delivery term. “No F.O.B.
provision”. This is a gap-filler
provision.
2) Time for Performance
§
§ 2-309, Absence of Specific Time
Provisions
(1)
The time for shipment or delivery or any other
action under a contract if not provided in this Article or agreed upon shall be
a reasonable time.
·
§ 1-205 – “Reasonableness Time”
Definition
1.
whether a time for taking action required (the UCC) is
reasonable depends on the nature, purpose, and circumstances of the action.
·
Agreement as to a
definite time however may be found in a term implied from contractual
circumstances, usage of trade, or course of dealing or performance as well as in
an express term.
a.
Such cases fall
outside the subsection since in them the time for action is ”agreed” by usage.
(2)
If the K provides for successive performances but is
indefinite in duration it is valid for a reasonable time unless otherwise
agreed may be terminated at any time by either party.
i.
The applicable
principles make it clear that surprise is to be avoided good faith judgment is
to be protected and notice or
negotiation to reduce the uncertainty to certainty is to be favored.
ii.
The reasonable time
of duration appropriate to a given arrangement is limited by the circumstances.
1.
When the arrangement
has been carried on by the parties over years and years, the “reasonable time”
can continue indefinetly and the K will not terminate until notice.
(3)
Termination of a K by one party except on the
happening of an agreed event requires that reasonable notification be
received by the other party and an agreement dispensing with notification is
invalid if its operation would be unconscionable.
i.
This subsection
recognizes that application of principles of good faith and sound commercial
practice normally call for such notification of termination of a going K
relationship as will give the other party a reasonable time to seek a substitute
agreement.
1.
This is valid under
this subsection unless the results in putting it into operation would be lead to
an unconscionable state of affairs.
·
Hypo
– Let’s assume the parties enter a contract and don’t specify anything about the
time of delivery and there is no UT, COP, or COD. Thus, we must use the
gap-filler.
o
B/f there is a
breach of the contract due to passage of time, there must be a notification to
the other party. The requirement of “good faith” requires reasonable
notification b/f a contract may be treated as breached b/c a reasonable time for
delivery or demand has expired.
o
A failure to reply
to such a notification, indicates acquiescence and that the proposed time by the
notifying party becomes a reasonable time.
o
If either party
insists on a time for delivery, and the response indicates that this time cannot
be met, then this is a “flat breach.”
o
UCC 2-609 – “can
always make a demand for adequate assurance of performances.” A failure to
provide adequate assurances will allow the case to move into repudiation.
3) Shipment and Destination Contracts
§ 2-319, F.O.B. (Free on Board)
and F.A.S. (Free Alongside) Terms
(1)
F.O.B.
is an
express delivery term (this is
NOT a gap-filler provision). If there
is no express F.O.B. provision, then 2-319 is irrelevant.
Ex: F.O.B.
·
Ex: F.O.B.
·
2-319(1)(a) is not
the exclusive mechanism for creating a shipment contract. Can create a shipment
contract through trade usage, course of dealing, or course of performance.
b.
(1) unless otherwise
agreed the term FOB at a named place, even though used in only connection with
the stated price is a delivery term
i.
totally irrelevant
unless have an expressed delivery agreement
ii.
eg
1.
FOB SD $15,000:
shipment K
2.
FOB NY $15,000:
destination K
(a)
when the term is FOB the place of shipment,
the seller must at that place ship the goods in the manner provided in this
article § 2-504 and bear the expense and risk of putting them into
the possession of the carrier.
o
Determines risk of loss: seller bears the risk of
putting them into the carrier: after that, risk of loss goes to buyer.
o
Therefore, buyer needs to insure his risk once
carrier obtains goods.
o
2-319 is not exclusive mechanism for
shipment K
§
could have one through other express terms: trade
usage, COD, COP.
(b)
when the term F.O.B the place of destination
the seller must at his own expense and risk transport the goods to that place
and there tender delivery of them in the manner provided in this Article
(§2-503);
(c)
When under either (a) or (b) the term is also
F.O.B vessel car or other vehicle the seller must in addition at his own expense
and risk load the goods on board.
a.
The term is F.O.B vessel the buyer must name the vessel
and in an appropriate case the seller must comply with the provisions of this
Article on the for of bill of lading.
§
§ 2-503, Manner of Seller’s
Tender of Delivery
(1) Tender of
delivery requires that the seller put and hold conforming goods at the buyer’s
disposition and give the buyer any notification reasonably necessary to enable
him to take delivery. The manner, time and place for tender are determined by
the agreement and this Article, and in particular:
(a) tender must be at a reasonable hour, and if it is of
goods they must be kept available for the period reasonably necessary to enable
the buyer to take possession; BUT
(b) unless otherwise agreed the buyer must furnish
facilities reasonably suited to the receipt of the goods.
(2) Where there
is a “shipment contract”, tender requires that the seller comply w/ the
provisions of UCC § 2-504.
§
§ 2-504, Shipment by Seller (Shipment Contracts) –
where the seller is required or
authorized to send the goods to the buyer and the contract does NOT require him
to deliver them at a particular destination (note the difference between “send”
and “deliver”), then unless otherwise agreed he must:
(a)
put the goods in the possession of such a
carrier and make such a contract for their transportation as may be reasonable
having regard to the nature of the goods and other circumstances of the case;
AND
(b)
obtain and promptly deliver or tender in due
form any document necessary to enable the buyer to obtain possession of the
goods or otherwise required by the agreement or by usage of trade; AND
(c)
promptly notify the buyer of the shipment.
§
Shipment Contract (see
above, UCC
§
2-504, replacing UCC
§
2-319(1)(a)) – one in which
the seller is required or authorized to
send the goods to the buyer but the contract does not require him to deliver
them at a particular destination. Ex: “F.O.B. seller’s city.” The seller’s
responsibilities are:
1) put the goods in the possession of such a carrier, bear
the expense and risk of putting then into the possession of the carrier
(however, the buyer pays for the actual cost of transportation) and make such a
contract for their transportation as may be reasonable having regard to the
nature of the goods and other circumstances of the case;
2) obtain and promptly deliver or tender in due form any
document necessary to enable the buyer to obtain possession of the goods or
otherwise required by the agreement or by usage of trade; AND
3) promptly notify the buyer of the shipment.
§
Classification of shipment or destination
contract is important b/c if shipment, seller only has to satisfy the above
three requirements. After doing so, the risk of loss shifts to the buyer and
shipment is proper. Any damage during transit will be the buyer’s
responsibility to pursue recovery against the carrier.
§
Destination Contract – where the
seller is required to deliver the
goods at a particular location. Ex: “F.O.B. buyer’s city”
·
UCC
§ 2-319(1)(b) – when the term is F.O.B. the place of destination
(destination contract), the seller must at his own expense and risk
transport the goods to that place and there tender delivery of them in the
manner provided in this Article.
·
UCC
§ 2-503(3) – Where the seller is required to deliver at a particular
destination (destination contract), tender requires that he comply w/ subsection
(1) and also in any appropriate case tender documents as described in
subsections (4) and (5) of this section.
·
UCC
§ 2-503(1) - The seller’s responsibilities under a destination contract
do not end until the seller is able to “put and hold conforming goods at the
buyer’s disposition and give the buyer any notification reasonably necessary to
enable him to take delivery.”
·
(a)
reasonable hour, and for a length of time reasonably necessary for B
to take possession
·
(b)
unless otherwise agreed, B must furnish facilities reasonably suited
to the receipt of the goods.
·
The risk of loss does not shift until the goods
are tendered to the buyer at the designated destination as satisfying
UCC
§ 2-503(1).
·
UCC
§
2-504 does not apply here, b/c that is for shipment contracts.
§
HYPO:
If there is no F.O.B. provision, no express terms in regards to delivery and no
Trade Usage, no COP, no COD, how are the goods to be delivered?
·
UCC §
2-503, Comment 5 states that the gap-filler is the “shipment contract”.
A “destination contract” must be specifically bargained for. Otherwise, we
assume that there is a shipment contract.
4) Payment
Terms
§
UCC
§ 2-310, Open Time for Payment or Running Credit – Unless
otherwise agreed:
(a) payment is
due at the time and place at which the buyer is to receive the goods even though
the place of shipment is the place of delivery;
·
If the seller wants
earlier payment, it must be bargained for. UCC 2-310 is the default rule in the
absence of an agreement that states otherwise. Must get it through agreement
with the buyer either through express terms relevant TU CD CP.
·
“even though the
place of shipment is the place of delivery” means that if there is a shipment
contract, delivery occurs when the goods are turned over to the carrier. Thus,
the buyer does not have to pay at that point. Payment is only due after the
Buyer has received the goods, so the buyer can inspect the goods before
accepting them. However, must still the
consider the risk of loss shift to the buyer (???)
§
UCC
§ 2-511
– Tender of payment
§
UCC
§ 2-513 – Buyer’s right to
inspect
C. Open Quantity Terms (Output and Requirements Contracts)
§
Requirements Contract – where the buyer
agrees to purchase all of his or her requirements for particular goods from the
seller.
§
Output Contract – where the buyer agrees
to purchase all of the seller’s output of particular goods.
§
UCC
§ 2-306, Output, Requirements and
Exclusive Dealings
(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)
a lawful agreement by either the S or the B for
exclusive dealing in the kind of goods concerned imposes unless otherwise agreed
an obligation by the S to use best
efforts to supply the goods and by the buyer to use
best efforts to promote their sale.
V. Supereminent
Contract Terms
·
UCC
§ 1-302, Variation by Agreement
(a) Except as
otherwise provided in subsection (b), or elsewhere in the UCC, the effect of
provisions of the UCC may be varied by agreement.
(b)
The obligation of good faith,
diligence, reasonableness, and care prescribed by the UCC may NOT be disclaimed
by agreement.
A. Unconscionability
·
UCC
§ 2-302, Unconscionable Contract
or Clause
(1)
If the court as a matter of law (exclusive
determination by the judge) finds the contract or any clause of the contract to
have been unconscionable at the time it was made the court may:
i) refuse to enforce the contract; OR
ii) enforce the remainder of the contract w/o the
unconscionable clause; OR
iii) so limit the application of any unconscionable clause
as to avoid any unconscionable result.
§
Comment 1:
This section is intended to allow the court to pass directly on the
unconscionability of the K or a particular term of the K and to make a
conclusion of law as to its unconscionability.
Courts are particularly vigilant against boilerplate language.
§
Comment 1 (also):
“The basic test is whether in the light of the general commercial background and
the commercial needs of the particular trade or case, the clauses are so
one-sided as to be unconscionable under the circumstances existing at the time
of the making of the contract.”
§
The main concern of
the drafters was to prevent oppression and unfair surprise.
§
Designed to help the
poor, uneducated, and disadvantaged b/c they are the most frequent victims of
sketchy practices.
§
Courts have not been
very receptive to claims of unconscionability brought forth by
merchants. Courts for the most part
allow a free market economy. Courts are not going to retroactively save business
people’s bad judgment.
§
In order to make a
successful unconscionability claim, you must show
BOTH:
a) Procedural
Unconscionability – bad bargaining process.
·
Ex: a person doesn’t
speak English. Lack of education makes it difficult to understand clauses. Fine
print on back of contract forms. Fraud. High pressure sales tactics.
b) Substantive
Unconscionability – overly harsh contract terms.
·
Ex: excessive price,
undue restrictions on the debtor’s rights, or undue expansion of creditor’s
remedies. Unreasonable liquidated damages provisions.
§
Procedural and
substantive are weighed together on a sliding scale. The more of one that we
find, the less of the other that we have to find in order to determine that
there is unconscionability.
(3)
When it is claimed or appears to the court that the
contract or any clause thereof may be unconscionable the parties shall be
afforded a reasonable opportunity to present evidence as to its
commercial setting, purpose, and effect to aid the court in making the
determination [of unconscionability].
b. Good faith
o
Can be viewed as an implied law: promise that
cannot be excluded by parties: exception of rule of freedom of K
§
Limitations:
·
Implies only to performance and enforcement of a
K
o
§1-304
Restatement: excluded negotiating good faith agreements
§
whenever we enter into a K, the duty arises. Duty
arises out of the K itself.
§
Cumbersome to police these methods
§
Any K for sale of goods gives rise to a non
excludible obligation to act in good faith
o
§1-201(20):
defines good faith
§
Good faith in the case of a merchant means:
“Honesty in fact”: extremely narrow range of applicability; AND the observance
of reasonable commercial standards of fair dealing and trade.
·
Overall reasonable standard of fair dealing
(unlike article 2, which is only from the particular trade).
·
Not just limited to merchants or merchants trade
just like article 2.
o
e.g.: dishonesty: cheating
o
doesn’t apply to negligence or open abuse of
power, acting capriciously
o
§2-103(1)(j): in case of merchant good faith means honesty in fact
and observance of fair dealing in the trade
§
Reserved in our book; no longer needed there if
the jurisdiction has adopted §1-303
§
Correction in article 1: correct one of biggest
drafting errors
·
before good faith defined as : honesty in fact
(purely subjective standard)
o
Article 1 definition is superior:
not limited to merchants
·
Definition: good faith in the case of a merchant
means honesty in fact and reasonable standards of fair dealing in the
trade.
o
§1-303 Obligation of Good Faith – Every K or duty w/in the UCC imposes
an obligation of good faith in its performance and enforcement.
§ 2-509
Risk of Loss in the Absence of a Breach
(1)
If the K requires or authorizes the seller to
ship the goods by carrier
(a)
if it does not require him to deliver them at
a particular destination, the risk of loss passes to the buyer when the goods
are duly delivered to the carrier even though the shipment is under reservation
(shipment K)
(b)
if it does require him to deliver them
at a particular destination and the goods are there duly tendered while in the
possession of the carrier, the risk of loss passes to the buyer when the goods
are there duly so tendered as to enable the buyer to take delivery.
(destination K)
o
2-509(1) – only
applicable when using third party common carrier, not when using seller’s own
trucks
o
2-509(1)(a) shipment
o
2-509(1)(b)
destination K
(2)
Where the goods are held by a bailee to be
delivered without being moved, the risk of loss passes to the buyer
(a)
on his receipt of a negotiable document of
title covering the goods; OR
o
Once the buyer
purchases the goods by purchasing a negotiable document to the goods, the title
and risk of loss passes to the buyer and the seller no longer has any control
over the goods.
§
The bailee is under
strict liability to deliver (w/o moving the goods) the goods to the buyer.
o
The negotiable
document serves three purposes:
1) serves as a
receipt that the goods have been placed in the possession of the bailee;
2) serves as a
storage contract; and
3) can pass title to
the goods and shifts the risk of loss to the buyer
(b)
On acknowledgement by the bailee of the
buyer’s right to possession of the goods, OR
§
This subsection
covers the case when the bailee does not
issue any document at all.
§
The risk of loss
does not pass until the bailee acknowledges the buyer’s right to possession.
§
Since the bailee is
responsible for the goods, he’s just not going to give them over to anyone.
(c)
After his receipt of a non negotiable
document of title or other written direction to deliver, as provided by
subsection (4)(b) of §2-503.
§
This deals w/ a
non-negotiable document. It serves the same first two purposes as a negotiable
document (#1 & #2, above). However, title is not connected to the non-negotiable
document. The document is only a receipt.
§
Title and risk of
loss does not pass until the buyer takes the non-negotiable document to the
bailee and asks for the goods. If the bailee complies, then title and risk of
loss is passed.
(3)
in any case not within subsection (1) or (2),
the risk of loss passes to the buyer on his receipt of goods if the seller is a
merchant; otherwise the risk passes to the buyer on tender of delivery.
o
“Receipt” is a term
of art that means “actual physical possession.” UCC § 2-103(1)(c).
o
When the seller is a
merchant, the merchant is the party to most likely have insurance. So the
merchant should bear the risk of loss until actual physical possession of the
buyer.
(4)
The provisions of this section are subject to
contrary agreement of the parties and to the provisions of this article on sale
on approval (§2-327) and Effect of Breach on Risk of Loss (§2-510).
·
Facts:
o
Plaintiff, seller,
brought action to recover for the price of goods sold and delivered to
defendant, buyer, pursuant to a distributorship agreement. Defendant
counterclaimed.
o
The trial court
awarded $6,315.82 to the defendant on his counterclaim, $559.03 of which was a
credit for goods lost in transit. The Circuit court affirmed.
o
The plaintiff argued
that the court erred in giving the $559.03 credit b/c the risk of loss had
passed to the defendant (buyer) when the goods were put on board the carrier.
Argues that they had a “shipment contract”.
o
The defendant argued
that they had a “destination contract” b/c the contract stated the words “ship
to.”
·
Holding
o
The Court held that
the contract contained no express term allocating the risk of loss. Thus, under
UCC 2-503, Comment 5, if the contract does not have an express term regarding
the risk of loss, then it is presumed as a “shipment contract.”
o
The fact that the
contract contained the words “ship to” does not matter b/c the words “ship to”
is included in all contracts where a carriage is contemplated.
·
Since the
presumption of a shipment contract controls in this case, the trial court erred
in awarding the $559.03 credit for the lost shipment.
Consolidated
Bottling
·
Consolidated entered
into a contract where they would sell to Jaco, a used can filling machine. The
contract contained the term F.O.B. purchaser’s truck.
·
Consolidated
informed Jaco that if the Jaco could not take delivery of the machine w/in two
weeks (around mid to late June), then Consolidated would prefer that delivery
take place after July 4th. Jaco accepted.
·
On June 9, vandals
broke into the warehouse and damaged the machine.
·
Plaintiff (seller),
Consolidated, brought suit against defendant (buyer) Jaco, to recovery from Jaco
the purchase price of $11,500 for certain used can filling equipment which was
damaged b/f delivery was made.
·
Consolidated argues
that the “risk of loss” had passed to Jaco and that it was holding the goods for
Jaco, under UCC 2-503(1).
·
Jaco argued that
since the contract provided no definite date of delivery, that a reasonable time
had not passed (2-309), and therefore, the risk of loss remained w/ the seller,
Consolidated.
·
The trial judge
awarded judgment in favor of Jaco.
·
The Court of Appeals
affirmed, holding that even if Consolidated had complied w/ UCC 2-503(1), it
does not matter b/c the parties had provided their own express term regarding
risk of loss, “F.O.B. purchaser’s truck.”
o
The risk of loss
does not pass until the goods have been delivered to the buyer or have reached
the place agreed upon.
o
Under
UCC 2-319(1)(c), a term such as
“F.O.B. purchaser’s truck” requires that the seller bear the expense and risk of
loading the goods on board.
o
Even if the court
stated that UCC 2-503(1) applied, which it does not b/c Consolidated is a
merchant under UCC 2-509(3), then Consolidated would still lose b/c they still
did not properly tender delivery.
Caudle v. Sherrard
Motor Co.
·
Plaintiff (seller),
Sherrard, entered into a contract w/ defendant (buyer), Caudle, where Caudle was
to purchase a house trailer from Sherrard.
·
However, the trailer
was not ready, and since Caudle had to go out of town and could not take
possession of the trailer, Caudle told Sherrard that he would return later to
get it.
·
B/f Caudle returned,
the house trailer was stolen and Caudle stopped payment on the house trailer.
·
Sherrard brought
suit against Caudle for sale price of the house trailer. The trial court found
in favor of Sherrard, awarding him $6,285.70. Caudle appeals.
·
The issue is whether
the risk of loss of a house trailer had passed from the seller, Sherrard, to the
buyer, Caudle, b/f the house trailer was stolen from the seller’s premises.
·
Plaintiff argues
that he was acting as a bailee of the trailer, and that by executing the
contract, had acknowledged the D’s right to possession of the trailer. Under UCC
2-509(2), the risk of loss shifted to the buyer.
o
Plaintiff also
argues that if he is not a bailee, then the risk of loss passed to the buyer
under 2-509(4), where the parties had entered into a contract that is contrary
to the rest of 2-509. A clause in the contract stated that “…no loss or damage
or destruction of said motor vehicle shall release the buyer from his obligation
hereunder.”
·
The Texas Court of
Civil Appeals reversed, holding that the contract failed for want of
consideration since the trailer was stolen b/f the risk of loss had passed to
Caudle. Caudle had not taken actual physical possession of the goods and thus,
the risk of loss did not shift.
o
The plaintiff is not
a bailee. Under the Code, a bailee must be one that is “in the business of
storing goods for hire – a commercial bailee.” In this case, the plaintiff is
not in such a business, and thus, is not a bailee under 2-509(2).
·
The only time UCC
2-509(2) can apply is if there is an independent third-party bailee.
o
Further, the
plaintiff’s argument about the contract clause (“no loss or damage…”) does not
constitute a contrary agreement between the parties pursuant to UCC 2-509(4) b/c
it should be interpreted as only protecting the seller after the buyer had taken
possession of the trailer.
·
To interpret it
otherwise, would be to impose on the buyer a difficult responsibility of
insuring the trailer when they don’t even have possession of it.
Martin v. Melland’s,
Inc.
·
Buyer purchases a
new truck and haystack mover while trading in his old equipment. While the
seller was preparing the new truck and mover, the buyer held onto the old units,
but title to the old units had already passed to the seller. The old units were
destroyed while in the buyer’s possession b/f getting the new units.
·
There was no
agreement concerning risk of loss. The seller refused to give the buyer the new
units and the buyer brought suit.
·
The buyer argued
that the correct standard is UCC §
2-509(2), where the buyer is a bailee. The seller had the right to take
possession at any time, and thus, the risk of loss had passed to the seller.
o
The court struck
down this argument b/c the buyer was not a bailee since he is not independent (3rd
party) and there was no contract for bailment.
·
The ND Supreme Court
holds that the proper standard is under
UCC § 2-509(3), in that risk of loss will not pass until tender of delivery.
Since the new unit was not to be delivered until it was ready, then delivery
could not be tendered until the new unit was ready. Since the buyer is using the
old units, he also has not tendered delivery of the old units to the seller.
Thus, the risk of loss remained w/ the buyer and thus must bear the loss.
VII. The Effect
of Breach on Risk of Loss
§ 2-510, Effect of Breach on Risk
of Loss
(1)
Where a tender or delivery of goods so
fails to conform to the contract as
to give a right of rejection, the risk of their loss remains on the seller until
cure or acceptance.
·
“Acceptance” means
receipt and payment of the goods. As opposed to “reject”.
·
“Cure” - sellers
makes changes to goods already tendered, such as repair, partial substitution,
etc. Comment 2.
o
Risk of loss does
not pass until “cure” is complete. See
Comment 2.
·
Perfect Tender Rule
– the buyer has the right of rejection if goods do not conform in any way.
·
This section changes
the rules of loss allocation that would otherwise apply in UCC §
2-509, to leave the risk of loss on the seller, when the buyer has the right
of rejecting the goods (they are non-conforming).
·
Under this
subsection, we are not concerned whether the buyer actually rejects or not. Only
that the buyer has the right of rejection. If the goods are
not conforming, the risk of loss
does NOT shift to the buyer (as it would under UCC 2-509), but stays w/ the
seller.
·
Whether the goods
were conforming when shipped is a question of fact for the jury.
·
Under a shipment
contract, if the seller ships conforming goods, then risk of loss passes to the
buyer (2-509). If the seller ships non-conforming goods, then risk of loss stays
w/ the seller (2-510).
(2)
Where the buyer rightfully revokes acceptance he may
to the extent of any deficiency in his
effective insurance coverage treat the risk of loss as having rested on the
seller from the beginning.
·
The only time when
this subsection applies is when the risk of loss has already passed to the buyer
through “acceptance” under subsection (1). If the buyer then revokes his
acceptance, subsection (2) applies.
·
Ex: The buyer
accepts the goods, then discovers the extent of the defect, has the right to
revoke, and properly does so. In the meantime, the goods are destroyed and the
buyer has no insurance coverage (total deficiency in insurance coverage). The
total risk of loss has passed b/c the deficiency is total.
o
If the buyer had
100% insurance coverage, then no risk of loss passes b/c the buyer’s insurance
company covers the loss. The Code wants to pass the cost to the insurance
company.
o
If the insurance
covers only 1/3 of the loss, then the insurance company will pay 1/3 of the loss
and the risk of loss is passed back to the seller w/ respect to the uninsured
2/3 of the loss.
o
Anti-subrogation
provision.
(3)
Where the buyer as to conforming goods already
identified to the contract for sale repudiates or is otherwise in breach b/f
risk of their loss has passed to him, the seller may to the extent of any
deficiency in his effective insurance coverage treat the risk of loss as resting
on the buyer for a commercially
reasonable time.
·
This subsection
deals w/ when the buyer breaches and how it effects the risk of loss.
·
This is also an
anti-subrogation clause. Operates the same as subsection (2), except that
subsection (2) is for the seller’s breach while subsection (3) is for the
buyer’s breach.
·
There are several
requirements that must be satisfied by the seller in order to pass the risk of
loss:
1) Goods that the
seller is producing must be conforming;
2) Goods are already
identified to the contract b/f the buyer breaches; AND
3) Repudiation or
breach by the buyer b/f risk of loss has already passed to the buyer.
4) Risk of loss
rested on the buyer for a commercially reasonable time.
Multiplastics, Inc.
v. Arch Industries, Inc.
·
Contract for the
special manufacture of 40,000 lbs. plastic pellets which were to be delivered
1000 lbs. per day until all 40,000 lbs are delivered.
·
The seller made the
goods and tried to contact the buyer to deliver them but the buyer kept ignoring
the seller’s request. Finally, the buyer said that he would take delivery, but
then continued to fail to issue a release.
·
While the seller was
holding the goods, the seller’s plant burned down and the goods were destroyed.
·
The seller sued the
buyer for the contract price.
·
B/c this case deals
w/ a breach by the buyer, it is a UCC §
2-510(3) case.
o
The buyer breached
b/c he had an obligation to accept the goods and to pay for them after the
seller has properly tendered. The buyer did neither.
o
There is no question
that the first three requirements of UCC § 2-510(3) are satisfied.
1) The goods were
conforming
2) the goods were
identified
3) the buyer
breached b/f the risk of loss had passed.
·
The seller was a
total deficiency in insurance coverage.
·
The main issue in
this case is whether the “commercially
reasonable time” standard has been satisfied b/c the time between the breach
and the destruction of the goods is 1 month.
·
The Court holds that
even though there is a 1 month time, this was still a “commercially reasonable
time” b/c the buyer continually made statements that they would issue a release.
Since the seller relied on the buyer’s statements, the seller had no reason to
get insurance.
VIII. Express
Warranties
·
There are three ways that express warranties are
created by the seller:
(1)
§2-313(2)(a) Any affirmation of fact
or promise
made by the seller to the buyer
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.
·
Whether an express
warranty is created is ascertained by the objective manifestation as received by
the buyer. Will NOT depend on the subjective intent of the seller.
·
Distinguish between
statements of fact and mere sales talk (or puffing).
o
In one sense, every
statement that a seller makes to a buyer is an opinion. So at what point does
the salesperson cross the line into a promise and is no longer an opinion?
See subsection (2) below.
·
The promise or
affirmation of fact must be made by the seller to the buyer.
(2)
§2-313(2)(b) Any description
of the goods which is made part of the basis of the bargain creates an express
warranty that the goods shall conform to the description.
·
The description does
NOT have to be made by the seller. If the seller makes the description,
then there is an overlap between (1)(a) and (1)(b).
(3)
§2-313(2)(c) Any sample or model which is made part of the basis of the
bargain creates an express warranty that the whole of the goods shall conform to
the sample or model.
·
Distinguish between
a sample and a model. A model creates less of a presumption that it is a literal
description of the goods. A sample, taken from the bulk of the goods, is a
literal description of the goods.
Comment 6.
·
Prof. Lawrence
thinks that it is a waste of time to distinguish between a sample and a model.
Ultimately, the main question is “if you are shown something by the seller, it
will create express warranties, but as to what characteristics are the
warranties created?” “What are the reasonable expectations of an average buyer
in the same position as this particular buyer?”
·
§2-313(3) -
It is not necessary to the creation of an express warranty that the
seller use formal words such as “warrant” or “guarantee” or that he have a
specific intention to make a warranty, but an affirmation
merely of the value of the goods or
a statement purporting to be merely
the seller’s opinion or commendation of the goods does not create a warranty.
o
The use of the word
“merely” is important b/c when the seller does more than “merely” what is
described, the seller has crossed the line into promise.
o
The issue is one of
fact as to whether the line has been crossed.
o
The main question is
“What are the justifiable expectations
of the buyer w/ respect to that statement?”
Autzen v. John C.
Taylor Lumber Sales Inc.
·
The seller argued
that the Huhta survey did not create an express warranty by description under
UCC §
2-313(1)(b) b/c it was not made by
the seller.
o
The court rejects
this argument b/c the description does NOT have to be made by the seller. The
fact that the seller did not make the promise does however, negate
UCC § 2-313(1)(a).
·
The seller also
argues that the description (survey) was not part of the basis of the bargain
b/c the survey came after the contract for the sale of the boat was already
made.
o
The court rejects
this argument b/c the although the contract was formed as to the price of the
boat, the bargain was still ongoing in terms of time of payment and transfer of
possession. The survey also created a false sense of security in the buyer as to
inspection of the boat and lessened the buyer’s degree of vigilance in
inspecting the boat prior to acceptance.
·
The seller also
argues that the survey was not part of the basis of the bargain b/c when the
seller offered to have the survey done, the buyer indicated that it would not be
necessary. Since buyer didn’t care about the survey, it can’t be a part of the
basis of the bargain.
o
The court rejects
this argument b/c the description does not have to bargained for. Instead, the
description must go to the essence of the
contract.
IX. Implied
Warranties
·
The difference between implied and express
warranties is one of degree, not kind. Breach of express warranty doesn’t
necessarily mean you have a better case w/ a better recovery.
·
Breach of express warranties will be measured
against the words or statements. The breach of implied warranties are measured
against the general standards.
·
Why distinguish between express and implied
warranties? Why not just have a general warranties category?
o
The Code recognizes the concept of freedom of
contract, and allows the parties to disclaim implied warranties.
o
It is extremely difficult to disclaim an express
warranty.
A.
Implied Warranty of Merchantability
UCC
§ 2-314, Implied Warranty:
Merchantability
(1)
Unless excluded or modified (Section 2-316), a
warranty that the goods shall be merchantable is
implied in a
contract for their sale if the seller
is a merchant w/ respect to goods of
that kind. Under this section the serving for value of food or drink to be
consumed either on the premises or elsewhere is a sale.
(2)
Goods to be merchantable must be at least such as
(must satisfy all):
(a)
pass w/o objection in the trade under the
contract description; and
(b)
in the case of
fungible (can be intermixed) goods,
are of fair average quality w/in the description; and
(c)
are fit for the ordinary purposes for which
such goods are used; and
(d)
run, w/in the variations permitted by the
agreement, of even kind, quality and quantity w/in each unit and among all units
involved; and
(e)
are adequately contained, packaged, and
labeled as the agreement may require, and
i.
Sellers argue that there must be a specific agreement w/
respect to containers, packaging, and labeling b/f the implied warranty of
merchantability can be breached.
ii.
However, most courts will not use the above restrictive
interpretation. Comment 10.
(f)
conform to the promise or affirmations of
fact made on the container or label if any.
Robert H. Carr &
Sons, Inc. v. Yearsley
·
Defendant argues
that the “ordinary purpose” of a log chain is not to use it as towing cable.
Only to drag logs out of the woods.
·
The court held that
it is possible that “log chains” are used for towing trucks, and therefore,
denied the defendants demurrer motion. The trial will go on.
·
If the buyer is
going to succeed under UCC § 2-314(c), what does the buyer have to prove?
o
The buyer has to
prove that other buyers have used the log chains for towing purposes. More
industries use the log chain for towing purposes. Testimony by other buyers
would be very helpful.
§
The buyer could also
use an expert witness who can establish the pattern that the common usage of the
log chain is for towing.
o
Suing the seller b/c
the log chain failed to “tow a mack truck up a hill” would be a particular
purpose which falls under 2-315, not
2-314.
o
The major defense of
the sellers is that the product failure was due to owner abuse, and not the
defect in the product. That the buyer put more stress on the chain than it was
designed to withstand.
Webster v. Blue Ship
Tea Room, Inc.
·
UCC 2-314(1)
applies to this case, as stated by the last sentence of this subsection, “the
serving for value of food or drink…”
o
It used to be that
service of food and drink was a service and not a sale. However, the Code
changes this.
o
However, in order
for this subsection to apply, it must be a merchant and the food must be served
for value.
·
Plaintiff ordered a
bowl of fish chowder, where she then choked on a bone. She sued the restaurant
for damages.
·
The court held that
there are two basic approaches that some courts take:
1) the issue is
whether or not the item that caused the injury was
foreign or natural to the particular food served.
·
If the P found a
chicken bone in the fish chowder, then it would be foreign, and would thus have
a cause of action.
·
Prof. Lawrence
doesn’t like this test.
2) whether the
presence of the object should have been anticipated to have been in the food.
·
The court follows
the second approach and holds that since fish chowder involves chunks of fresh
fish, then it should be anticipated that a bone might appear. Therefore, the P
does not have a cause of action.
Misc. Notes
·
Along w/ the two
approaches above, other courts take a third approach:
o
The test should be
what might be
reasonably expected by the consumer
rather than what might be naturally found in the dish.
o
Prof. Lawrence
thinks this is the best approach.
o
Ex: the P bites into
an olive and cracks his tooth on the pit. Under the natural/foreign test, the P
would NOT have a cause of action. But under the reasonable expectations test, if
the P looked at the olive and noticed a hole (indicating that it is probably
pitted), then the P does have a COA b/c he reasonably expected that there be no
pit.
Testo v. Russ
Dunmire Oldsmobile, Inc.
·
·
The D (salesman)
argued that the implied warranty of merchantability does not apply in the sale
of secondhand articles.
o
The court rejects
this argument and holds that the implied warranty applies to used goods b/c
UCC 2-314 does not distinguish between new and used.
§
In the comments, the
Code only mentions that used goods should be held to a standard that considers
that the goods are used. Less can be expected of used goods than if they were
new. But there is still an implied warranty of merchantability.
·
The D argues that
the used car satisfied the term “merchantable”.
The court focuses on UCC 2-314(2)(a) &
(c).
·
The court holds that
under (c), the car was not fit for ordinary purposes b/c the car would
overheat and wouldn’t start after only driving it for 138 miles. The racing
modifications made the car not fit for “ordinary purposes”. It made the car good
for only “racing purposes.”
·
The court holds that
under (a), the car could not pass w/o objection in the trade b/c the car was a
“race car”, not a “used car”, as described in the contract.
UCC
§2-315, Implied Warranty: Fitness
for a Particular Purpose
·
§2-315 - 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.
o
The hard part to
satisfy is the “particular purpose” requirement b/c most of the time, we
purchase products for “ordinary purposes.”
o
Also, most of the
time, we don’t rely on the seller’s skill to purchase suitable goods.
o
“Particular purpose”
has to be one that is distinct from the ordinary purpose OR at least, more
specific.
o
It is possible to
have an overlap w/ other implied warranties and w/ express warranties.
o
Under
UCC 2-315, you can have goods that
are not defective (so there is no 2-314 claim), but there is still a 2-315 claim
b/c it didn’t satisfy his particular purpose.
C. The Warranties
of Title and Against Infringement
UCC
§2-312, Warranty of Title and Against
Infringement; Buyer’s Obligation Against Infringement
(1)
Subject to subsection (2) there is in a contract for
sale a warranty by the seller that:
(a)
the title conveyed shall be good, and its
transfer rightful; and
(b)
the goods shall be delivered free from any
security interest or other lien or encumbrance of which the buyer at the time of
contracting has no knowledge. “Clean Title”
(2)
A warranty under subsection (1) will be excluded or
modified only by specific language or by circumstances which give the buyer
reason to know that the person selling does not claim title in himself or that
he is purporting to sell only such right or title as he or a third person may
have
(3)
Unless otherwise agreed a seller who is a merchant
regularly dealing in goods of the kind warrants that the goods shall be
delivered free of the rightful claim of any third person by way of infringement
or the like but a buyer who furnishes specifications to the seller must hold the
seller harmless against any such claim which arises out of compliance w/ the
specifications.
X. PRIVITY
A. Horizontal
Privity
·
Who is the injured party? Perhaps it wasn’t the
buyer that was injured. A family of the buyer is the one who wants to bring
suit. Historically, none of the family members has a cause of action against the
seller b/c there is no vertical privity.
·
A way to allow the family members to bring suit
w/o having vertical privity is through horizontal privity between the buyer and
the family member.
The privity requirement was first eliminated w/ respect
to negligence suits. Courts allowed negligence causes of action even w/o privity
w/ the seller or manufacturer.
·
There is an evolutionary chain of the removal of
the privity requirement to allow more causes of action.
1) Food. Mazzetti.
2) Drugs
3) Products that are not ingested but do have close
physical contact w/ the body. Ex: cosmetics, clothing, hair products.
·
In 1960, the bombshell hit, Bloomfield Motors,
which removed the privity requirement for a product (automobile) that has not in
close contact w/ the human body nor was it ingested. This case involved HP, b/c
the husband purchased the car, but the wife was driving it when she was injured.
·
The UCC doesn’t discuss VP.
·
The UCC deals w/ HP by
§ 2-318
Alternative A
– A seller’s warranty whether express or implied extends to any
natural person who is in the family or household of his 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. A seller may not exclude or limit the operation of this
section.
·
This is the most
restrictive of the three. Has the most requirements.
o
Natural person.
Covers only living persons. A corporation is an unnatural person.
o
In the family,
household, or guest in the buyer’s home.
§
Some courts held
that getting hurt in a car is not a “home”, so no recovery. Some courts allow
recovery from injuries in a car.
o
The person involved
must have been “reasonably expected to use, consume, or be affected by the
goods.”
§
Courts are lenient
on this requirement in favor of the plaintiff.
o
Injury to their
person.
Alternative B
– A seller’s warranty whether express or implied extends 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. A seller may not exclude or limit the operation of this
section.
·
This is the middle
alternative.
o
Natural person.
See above
o
No family,
household, or guest requirement.
o
The person involved
must have been “reasonably expected to use, consume, or be affected by the
goods.” See above
o
Injury to their
person. See above
Alternative C
– A seller’s warranty whether express or implied extends to any
person (not only natural, extends to companies) who may be reasonably
expected to use, consume or be affected by the goods and
who is injured (not only personal injury) by breach of the warranty. A
seller may not exclude or limit the operation of this section w/ respect to
injury to the person of an individual to whom the warranty extends.
·
This is the least
restrictive alternative.
o
Any person, not only
natural. Covers corporate entities.
o
The person involved
must have been “reasonably expected to use, consume, or be affected by the
goods.” See above
o
Injury, not only
personal injury.
B. Vertical Privity
·
If the buyer brings suit, who is a legitimate
defendant? Historically, it was only the retailer, b/c the buyer didn’t have
privity w/ the manufacturer, wholesaler, and distributor.
·
The main motivation is when the financial
worthiness of the immediate seller is in doubt (bankruptcy), then the remote
buyer won’t really have a remedy. Thus, he must look to recovery against a
distant seller, which historically, VP has denied. But the courts are doing away
w/ the VP requirement.
·
Is the theory of recovery:
1) Strict tort liability;
2) Express warranty; OR
3) Implied warranty?
·
Is the injury:
1) Personal Injury;
2) Direct Economic Loss; OR
3) Consequential Economic Loss?
Revised Article 2
·
Basically the same as the regular Article 2, in
regards to 2-313, 2-314, 2-315, & 2-318, but adds a few things:
1) Remedial Promise – this is when a seller makes a promise
that he will do something if a certain condition occurs.
2) Adds two new sections.
3)
UCC
§2-313A – covers new goods leased/sold to immediate buyer, and then
re-sold or re-leased. Covers any
express warranties or remedial promises reasonably expected to be furnished to
the buyer upon purchase/lease. It
eliminates the basis of the bargain requirements.
Remedies of 2-313A claims leaves the seller vulnerable to direct and
consequential claims but NOT for lost profits claims.
4)
UCC
2-313B – it’s comparable to A in that it also only applies to new goods
and covers obligations of the seller to the remote buyer.
It’s intended to cover communications (ads/representations) made by the
manufacturer, but the remote buyer must have knowledge of that communication and
a reasonable expectation that the seller will comply w/ the express warranty.
Economic Loss Doctrine Analysis
·
How much overlap is there between tort and
contract? Why might a plaintiff want to make a tort claim, rather than a
warranty claim? First of all, torts allows negligence and strict-liability.
But there are several other reasons:
1) There might be no express warranty protection
2) There was an express warranty, but the terms of the
warranty have expired
3) Implied warranties were disclaimed
4) The type or extent of relief under breach of warranty
might have been expressly limited by the seller in the agreement
5) Privity problems
6) Breach of warranty claim was lost b/c failed to provide
the proper notice.
7) Statute of Limitation has run out. Generally, breach of
warranty is 4 years and tort is 2 years. However, SOL for warranty runs when the
sale is made, SOL for tort doesn’t run until the injury is discovered. So for
cases when the injury is discovered 5 years after the sale, then SOL has run out
for breach of warranty, so must use tort claim.
Economic Loss
Doctrine – in the 1960’s, defenses arose to warranty claims, forcing
buyers to seek relief in torts.
·
There are three approaches used by the courts:
1) Sealy v White Motor Co - Tort liability cannot be
applied when the loss is purely monetary. Economic loss recovery only when there
is injury to person or other property
2) Allow economic loss recovery when the defect in the
product rendered it unreasonably dangerous, even though it didn’t result in
physical injury or loss of other property.
3) Allow economic loss recovery when the injury is a
sudden, calamitous event, caused by the defect in the product. Rejected by most
courts.
XI. Disclaimers
of Warranty
UCC
§ 2-316, Exclusion or
Modification of Warranties
(1)
Words or conduct relevant to the creation of an
express warranty and words or conduct tending to negate or limit
warranty shall be construed wherever reasonable as consistent w/ each other; but
subject to the provisions of this Article on parol or extrinsic evidence
(Section 2-202) negation or limitation is inoperative to the extent that such
construction is unreasonable.
§
A disclaimer of an
express warranty seems dishonest at the outset.
§
This subsection
serves two functions:
1) Instruct the
courts to try to construe the warranty and the disclaimer as consistent w/ each
other.
2) However, if the
court tries hard to reconcile the two terms so that they are not inconsistent,
but cannot do so, the disclaimer is ineffectual.
§
The basic idea is that you cannot disclaim express warranties, b/c it would
encourage dishonesty.
(2)
Subject to subsection (3), to exclude or modify the
implied warranty of merchantability or any part of it the language
must mention merchantability and in case of a writing
must be conspicuous, and to exclude or modify any implied warranty of
fitness the exclusion must be by a writing and conspicuous. Language to exclude
all implied warranties of fitness is sufficient if it states, for example, that
“There are no warranties which extend beyond the description on the face
hereof.”
§
Subsection 2 is the
predominant method of disclaimer.
§
A disclaimer of the
Implied Warranty of Merchantability does NOT have to be in writing. However, if
it is in writing, it must be conspicuous.
§
Regardless of
whether it is oral or written, the disclaimer must include the word
“merchantability.”
·
Prof. Lawrence
thinks the inclusion of the word “merchantability” doesn’t really help buyers
b/c they won’t really know what it means.
§
A disclaimer of the
Implied Warranty of Fitness for a Particular Purpose must be in writing,
but does NOT have to mention any specific writing. Must also be conspicuous.
§
The main question
for disclaimer of both of these implied warranties is whether it is
conspicuous. Definition of
“conspicuous” is in UCC § 1-201(10):
·
Conspicuous means
“so written, displayed, or presented that a
reasonable person against which it is to operate ought to have noticed
it.” Whether a term is conspicuous or not is a decision for the court.
Conspicuous terms include the following:
(A) a heading in
capitals equal to or greater in size than the surrounding text, or in
contrasting type, font, or color to the surrounding text of the same or lesser
size, and
(B) language in the
body of a record or display in larger type than the surrounding text, or in
contrasting type, font, or color to the surrounding text of the same size, or
set off from surrounding text of the same size by symbols or other marks that
call attention to the language.
·
The standard is an
objective standard, where
it doesn’t matter whether the buyer actually took notice of the disclaimer, but
whether a reasonable person ought to have noticed it.
(3)
Notwithstanding subsection (2)
(a)
unless the circumstances indicate otherwise,
all implied warranties are excluded by expressions like “as is”, “with all
faults” or other language which in common understanding calls the buyer’s
attention to the exclusion of warranties and makes plain that there is no
implied warranty;
·
There is also a
presumption of the conspicuousness requirement for terms like “as is” although
it is not expressly stated in the Code, b/c it would be too unfair for the
buyer.
AND
(b)
when the buyer before entering into the
contract has examined the goods or the sample or model as fully as he desired or
has refused to examine the goods there is no implied warranty w/ regard to
defects which an examination ought in the circumstances to have revealed to him;
AND
·
If the buyer is
aware of the defect, but has not made an examination of the product, and the
buyer goes through w/ the transaction, then the buyer doesn’t have a cause of
action, b/c he should have said something about the defect.
(c)
an implied warranty can also be excluded or
modified by course of dealing or course of performance or usage of trade.
(4)
Remedies for breach of warranty can be limited in
accordance w/ the provisions of this Article on liquidation or limitation of
damages and on contractual modification of remedy (Sections 2-718 and 2-719).
Dorman v.
International Harvester Co.
·
Dorman purchased a
tractor and backhoe from Harvester. The tractor had problems from the day of
delivery and broke down.
·
Dorman brought suit
for breach of express and implied warranties of merchantability and fitness for
particular purpose, seeking damages for $7,729.98, which includes the contract
price and loss of earnings.
·
The court considered
the issue of whether the contract for sale contained a valid disclaimer of
implied warranties.
o
Dorman testified
that he read but did not sign the contract on Oct 31, but later signed but
didn’t read the contract on Nov 3, b/c he was told that it was an identical
contract. Dorman also didn’t receive a copy of the warranty even though in the
contract it stated that he acknowledged receipt of the warranty.
o
In the contract,
there is a disclaimer of the warranties of merchantability and fitness for a
particular purpose, stating that the manufacturer’s standard printed warranty
(which appeared only in the purchase order, not the contract) only applied.
o
The trial court held
that the provision was conspicuous
and that Dorman should be charged w/ notice of the disclaimer.
§
The disclaimers were
in writing, and the one for Merchantability included the word “merchantabilty”.
§
The main issue was
whether the disclaimers were conspicuous.
·
The court of appeals
reversed, holding that the disclaimer provision was not sufficiently conspicuous
to have negated the implied warranties. The lettering in the contract was only
slightly larger and contrasted to the other paragraph of the contract.
o
“In order to have a
valid disclaimer provision, it must be in clear and position as to compel
notice.”
o
The contract also
did not have a proper heading, such as “DISCLAIMER OF WARRANTIES”.
o
Furthermore, the
disclaimer provision is ambiguous and possibly misleading. The words
“merchantability” and “fitness for a particular purpose” are italicized, thus
possibly causing the reader into thinking that he has such warranties.
o
Also, the
manufacturer’s standard warranty was not included in the contract, but was on
the reverse side of the purchase order, and a copy was never given to Dorman.
§
“A disclaimer of
warranties must be specifically bargained for so that a disclaimer in a warranty
given to the buyer after he signs the contract is not binding.”
The best possible
argument for seller in Dorman, that the disclaimer is conspicuous is that:
1) The disclaimer was close to where the buyer signed his name.
2) Italicized
lettering
3) The font is
slightly larger
4) The font is
slightly different
5) Buyer should have
read it and in fact, did read it, although he didn’t read the Manufacturer’s
standard printed warranty.
6) The disclaimer is
set off (lines separating it from the rest of the contract).
The arguments
against the seller, made by the court, that the disclaimer is not conspicuous:
1)
The slight difference in size and style of font is not enough to be conspicuous
2) There is no heading in bold lettering.
3) The italicized
words are misleading to the buyer. Only a part of the disclaimer is italicized.
XII.
Modification of Remedy
·
A disclaimer controls the seller’s liability.
·
The modification of remedy does not affect
liability, but affects the remedies that the buyer has after liability has been
established. Ex: limit on consequential damages.
UCC
§ 2-719, Contractual Modification
or Limitation of Remedy
(1)
Subject to the provisions of subsections (2) and (3)
of this section and of the preceding section on liquidation and limitation of
damages,
(a)
the agreement may provide for remedies in
addition to or in substitution for those provided in this Article and may limit
or alter the measure of damages recoverable under this Article, as by limiting
the buyer’s remedies to return of the goods and repayment of the price or to
repair and replacement of non-conforming goods or parts; AND
·
The most common
approach is to limit the remedy to only return of the purchase price or to limit
the remedy to “repair or replace”.
·
However, there must
still be a minimum adequate remedy and the agreement must be reasonable.
Comment 1
(b)
Resort to a remedy as provided is optional
unless the remedy is expressly agreed to be exclusive, in which case it is the
sole remedy.
·
If the seller does
not state that it is the exclusive remedy, otherwise, all of the other remedies
will still be available along w/ the one that is stated, for example, “repair or
replace.” Comment 2
·
This is one way for
the buyer to attack the limitation of remedies clause.
(2)
Where circumstances cause an exclusive or limited
remedy to fail of its essential purpose,
remedy may be had as provided in this Act.
·
This is another way
for the buyer to attack the limitation of remedies clause.
·
The phrase “its
essential purpose” requires a showing that the remedy itself failed, not just
that the buyer was not properly compensated.
o
Ex: the
consequential damages might be huge, but the “repair and replace” remedy still
serves its purpose, so the limitation of remedy is OK.
·
If there is a proper
showing that the “remedy fails its essential purpose”, then the limitation
provision drops out, and the full range of Article 2 remedies are available.
(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.
§
The burden of proof
on an unconscionability claim is always on the buyer unless the buyer purchases
consumer goods and the consumer goods causes injury to the person.
§
The consequential
damages is usually where the largest dollar amounts are involved.
XIV. Acceptance
·
The different responses that a buyer can make
after seller tenders the goods:
1) Acceptance
2) Rejection –
always pre-acceptance behavior.
§
The buyer refuses to take goods b/c they are
defective or have arrived too late.
3) Acceptance of the goods followed by
Revocation by the buyer. Revocation
is always post-acceptance behavior.
§
Acceptance is the pivotal concept b/c it affects
whether the buyer can use Rejection or Revocation.
§
The buyer changes his mind about his acceptance
and revokes the acceptance b/c the goods are defective.
§
Rejection and Revocation are contrary to what
UCC 2-301 states.
§
Rejection and Revocation are referred to as
Self-Help remedies.
§
The difference between Rejection and Revocation
is going to be in whether the buyer has a “right to do it” or not. Rejection is
easy and Revocation is tough.
UCC
§ 2-301, General Obligations of
Parties – The obligation of the seller is to transfer and deliver and
that of the buyer is to accept and pay in accordance w/ the contract.
·
This section is assuming that there is a valid
contract for the sale of goods.
·
To determine whether the buyer has accepted, see
UCC
§ 2-606. If the buyer does not accept, he has a right to reject, and does
not have to fulfill the obligation to pay.
UCC
§ 2-606, What Constitutes
Acceptance of Goods
(1)
Acceptance of goods occurs when the buyer:
(a)
after a reasonable opportunity to inspect the goods signifies to the
seller that the goods are conforming or that he will take or retain them in
spite of their non-conformity; OR
·
However, see
UCC § 2-513, where if the contract
is C.O.D., the buyer must pay even before he has inspected them. The buyer still
has the right to reject after inspection, but the problem is that the seller has
the buyer’s money.
o
However, payment of
the contract price is NOT conclusive as evidence of acceptance.
·
This is
active acceptance.
(b)
fails to make an effective rejection
(subsection (1) of Section 2-602), but such acceptance does not occur until the
buyer has had a reasonable opportunity to
inspect them; OR
·
This is a form of
passive acceptance.
(c)
does any act inconsistent w/ the seller’s
ownership; but if such act is wrongful as against the seller it is an acceptance
only if ratified by the seller.
·
This section is
difficult b/c technically, any use of the goods by the buyer would be
inconsistent w/ the seller’s ownership. However, certainly not all use by the
buyer should be sufficient to indicate an acceptance by the buyer.
o
Some use, for
example, can be necessary for the buyer to inspect the goods effectively.
o
Also, some use of
the goods after rejection is necessary to mitigate consequential damages, which
the buyer has a duty to do.
§
Ex: if the buyer
turns around and sells the goods, this is an act that is inconsistent.
(2)
Acceptance of a part of any commercial
unit is acceptance of that entire unit.
UCC
§ 2-607, Effect of Acceptance; Notice of
Breach; Burden of Establishing Breach After Acceptance; Notice of Claim or
Litigation to Person Answerable Over
(1)
The buyer must pay at the contract rate for any
goods accepted.
·
However, the buyer
still has a remedy under UCC
§ 2-714, since the seller has still
breached the contract. The buyer can sue for the difference in value of what was
promised and what was actually delivered.
(2)
Acceptance of goods by the buyer
precludes rejection of the goods
accepted and if made w/ knowledge of a non-conformity cannot be revoked b/c of
it unless the acceptance was on the reasonable assumption that the
non-conformity would be seasonably cured but acceptance does not of itself
impair any other remedy provided by this Article for non-conformity.
(3)
Where a tender has been accepted
(a)
the buyer must w/in a reasonable time after
he discovers or should have discovered
any breach notify the seller of breach or be barred from
any remedy; AND
·
The notice does NOT
have to be elaborate. The buyer only has to notify the seller that the
transaction is still troublesome and must be watched.
Comment 4. The seller might have a right to cure the defect, so the
buyer must notify him that the transaction is problematic.
·
When the buyer is a
merchant:
o
Commercial standards
determine what is a reasonable time for notification by the buyer
who qualifies as a merchant.
·
When the buyer is a
consumer buyer:
o
Many courts hold
that a “reasonable time” is more liberal and the time is extended for
consumers. Courts are more lenient w/ consumers.
(b)
if the claim is one for infringement or the
like (subsection (3) of Section 2-312) and the buyer is sued as a result of such
a breach he must so notify the seller w/in a reasonable time after he receives
notice of the litigation or be barred from any remedy over for liability
established by the litigation.
(4)
The burden is on the buyer to establish any breach
w/ respect to the goods accepted.
(a)
Preponderance of the
evidence standard.
(5)
Where the buyer is sued for breach of warranty or
other obligation for which his seller is answerable over
(a)
he may give his seller written notice of the
litigation. If the notice states that the seller may come in and defend and that
if the seller does not do so he will be bound in any action against him by the
his buyer by any determination of fact common to the two litigations, then
unless the seller after seasonable receipt of the notice does come in and defend
he is so bound.
(b)
if the claim is one for infringement or the like
(subsection (3) of Section 2-312) the original seller may demand in writing that
his buyer turn over to him control of the litigation including settlement or
else be barred from any remedy over and if he also agrees to bear all expense
and to satisfy any adverse judgment, then unless the buyer after seasonable
receipt of the demand does turn over control the buyer is so barred.
(6)
The provisions of subsections (3), (4) and (5) apply
to any obligation of a buyer to hold the seller harmless against infringement or
the like (subsection (3) of Section 3-312).
Zabriskie Chevrolet,
Inc. v. Smith
– Part I
·
·
The buyer refused to
accept the car even after the transmission was replaced. The seller refused to
give the buyer a replacement car.
·
Seller argues that
the buyer had accepted the goods, so is entitled to the contract price under
UCC
§ 2-607(1).
·
If the buyer is
found to have had accepted the car, then he can no longer reject the car, and
must only turn to revocation if possible.
·
If the buyer is
found to have NOT accepted the car, then the buyer can simply walk away from the
agreement by rejection, which is what he wants to do.
·
The court held that
when the buyer discovered the defect and rejected the car, the buyer was still
exercising the “reasonable opportunity to inspect” under
UCC
§ 2-606(1)(a) & (1)(b) and driving
only 7/10 of a mile definitely falls w/in the ambit of a “reasonable opportunity
to inspect.” Thus, the buyer had never accepted the goods b/c his reasonable
opportunity to inspect had not expired yet.
o
What if the buyer
had signed a receipt at the time of delivery that the buyer had found the car to
be perfect, but never actually inspected it?
§
It probably wouldn’t
change the courts ruling b/c it still doesn’t get around the problem of the
buyer having a “reasonable opportunity to inspect.”
§
The court is
realistic in that most consumers can’t really inspect cars well until they have
driven it for awhile. Thus, even though a buyer signed the receipt, this still
doesn’t mean that the buyer had a reasonable opportunity to inspect.
§
The question is not
whether the buyer actually inspected the goods, it is whether the buyer
had a reasonable opportunity to
inspect.
·
Acceptance does not
require an actual inspection. Only the opportunity to do so.
o
What if the buyer
had actually inspected the car and signed such a receipt?
§
The issue is whether
the seller has a legitimate case of the buyer waiving his right to further
inspection.
§
It would be very
tough for the seller to make this case though, b/c the receipt is probably based
on boiler-plate language.
o
What if the buyer
had gotten the car home fine and drove the car for a few months, w/ 10,000 mile
on the odometer, b/f the defect showed itself (the defect was latent and not
caused by the buyer’s use)?
§
This case is up in
the air, b/c must determine where to draw the line as to what constitutes a
“reasonable opportunity to inspect.”
§
UCC § 2-606
does not require that the buyer actually discover the defect. Only that they had
the opportunity to do so. Should we expect each consumer to take apart their car
and inspect each part, which is really the only way this defect could have been
detected b/f the breakdown?
·
On the flipside, is
it too long of a time for the buyer to inspect and expect to get their money
back?
·
Most courts would
hold that 10,000 miles is too long to fall under a “reasonable opportunity.”
Can-Key Industries,
Inc. v. Industrial Leasing Corp.
·
The buyer purchased
goods from the seller, and then turned around and leased them to a lessee. The
buyer purchased the goods on the condition that they were accepted by the
lessee.
·
The goods were
shipped directly from the seller to the lessee, and the lessee’s receipt of the
goods does not constitute acceptance b/c the lessee had to have a “reasonable
opportunity to inspect.”
·
The fact that the
buyer leased the goods to the lessee doesn’t constitute acceptance by the buyer
(even though it is an act inconsistent w/ the sellers) b/c the seller knew about
the buyer’s arrangement w/ the lessee beforehand.
o
Ordinarily, this
would constitute acceptance, b/c the buyer is performing an act that is
inconsistent w/ the seller. However, the buyer in this case protected himself
very well and conditioned his acceptance upon the lessee’s acceptance of the
leased goods.
·
UCC § 2-606(1)(a)
clearly
does not apply in this case, b/c the lessee never signified that the goods were
conforming or that they would retain them in spite of their non-conformity.
·
UCC § 2-606(1)(b)
does not
apply b/c the lessee made an effective rejection.
·
The issue is whether
the lessee had accepted under UCC §
2-606(1)(c).
o
There are two
competing policies:
1) If the buyer
rejected the goods, they should not be able to continue to use them after his
rejection.
2) However, the
buyer also has a duty of mitigation of consequential damages and should use them
for the sake of avoiding economic waste.
·
The court held that
the buyer’s use of the goods was NOT an act inconsistent w/ the seller’s
ownership b/c the buyer was cooperating w/ the seller to fix the problems, and
the use of the goods were tests of whether the problems were fixed.
o
Furthermore, the
buyer’s modification and alteration of the equipment is NOT inconsistent w/ the
seller’s ownership b/c to hold otherwise would be to penalize the lessee for
their good faith effort to fix the defect and to mitigate damages.
o
Prof. Lawrence says
that most courts would not be as forgiving when the buyer significantly alters
the goods.
XV. Rejection
·
UCC
2-601 deals w/ whether the buyer has a right to reject or not.
·
UCC
2-602 outlines the procedure that the buyer must follow when rejecting.
UCC
§ 2-601, Buyer’s Rights on
Improper Delivery – Subject to the provisions of this Article on
shipment by seller (§2-504) or breach in installment contracts (Section 2-612)
and unless otherwise agreed under the sections on contractual limitations of
remedy (Sections 2-718 and 2-719), if the goods or the tender of delivery fail
in any respect to conform to the contract, the buyer may
(a) reject the whole; or
(b) accept the whole; or
(c)
accept any commercial units and reject the
remainder.
o
This section of the
code essentially creates a Perfect
Tender Rule.
§
The perfect tender
standard applies not only to the goods, but also to the manner of delivery.
§
To safeguard against
buyer’s abusing this standard, their remedy will be very small if the goods were
not perfect only b/c of a technicality.
o
Limitations on UCC 2-601, Perfect Tender Rule
1)
Course of Dealing
& Trade Usage – These determine what constitutes perfect tender. Thus, they
aren’t really limitations but standards.
2)
Cure under
UCC 2-508
(see below) – If the seller has a right to cure the defect, then must still
comply w/ perfect tender standard under
2-601.
3)
UCC 2-612
– permits rejection in an installment
contract only when the non-conformity substantially impairs the value of the
goods to the buyer.
4)
UCC 2-504
– in shipment contracts, only allows
rejection of delivery only if material delay or loss ensues. However, this only
deals w/ delay situations, but does not deal w/ situations where there are other
problems w/ delivery, such as failure to notify the buyer or make a proper
contract for transportation of the goods.
5)
UCC 1-203
– the cure right must be exercised in good faith.
i.
Prof. Lawrence doesn’t think these limitations and
exceptions eat up the Perfect Tender Rule.
o
Material
Breach standard – This is the common law rule as opposed to the Code’s
Perfect Tender Rule. Material Breach encompasses the substantial performance
standard. They are the antithesis of each other. If there is a material breach,
then there can’t be substantial performance, and vice versa.
§
This is a more lenient standard than the Perfect
Tender Rule. Can’t cancel the contract unless there is a material breach.
(1)
Rejection of goods must be w/in a reasonable time
after their delivery or tender. It is ineffective unless the buyer
seasonably notifies the
seller.
§
Failure to do this
legally waives the buyer’s right to reject. So they have accepted the goods.
(2)
Subject to the provisions of the two following
sections on rejected goods (Sections
2-603 and
2-604),
(a)
after rejection any exercise of ownership by
the buyer w/ respect to any commercial unit is wrongful as against the seller;
AND
(b)
if the buyer has before rejection taken
physical possession of goods in which he does not have a security interest under
the provisions of this article (subsection (3) of Section
2-711), he is
under a duty after rejection to hold them w/ reasonable care at the seller’s
disposition for a time sufficient to permit the seller to remove them; BUT
(c)
the buyer has no further obligations w/
regard to goods rightfully rejected.
(3)
The seller’s rights w/ respect to goods wrongfully
rejected are governed by the provisions of this Article on Seller’s remedies in
general (Section 2-703)
Zabriskie Chevrolet,
Inc. v. Smith
- Part II
Miron v. Yonkers
Raceway, Inc.
·
SEE THE SUPPLEMENT
FOR THE FACTS.
·
The auctioneer is an
agent of the seller, and expressly warranted that the horse was sound.
·
Acceptance is the
pivotal concept here.
·
UCC
2-606(1)(b)
is the applicable acceptance provision here. The question is whether the buyer
had failed to make a rejection and whether the buyer had a reasonable
opportunity to inspect..
(1)
The buyer had a
right to reject under
UCC 2-601 b/c
the horse was non-conforming in that it couldn’t race, which is what the buyer
got it for and the seller said that it was good for.
(2)
The rejection by the
buyer happened almost immediately (w/in 12 hours) after he discovered that the
horse had a broken leg. However, the court held that this was not necessarily
timely b/c the horse can get injured while in transit.
(3)
The court held that
the buyer did have a reasonable opportunity to inspect b/c other buyers, b/f the
auction, brought their vets to inspect the horse (which is customary), while the
buyer did not in this case. Thus, under Trade Usage, the buyer did in fact have
a reasonable opportunity to inspect. It doesn’t matter that the buyer hadn’t
inspected the horse prior to taking possession of the horse. In fact, the buyer
should have inspected under Trade Usage, b/c other buyers did w/ their vets.
(4)
Therefore, the court
held that the buyer accepted the goods and does not have a right of rejection.
The court also held that the buyer also does not have a right to revoke either.
The buyer’s only remedy is that he can attempt to recover the damages under
UCC 2-714,
where he will get the difference in value of the horse as warranted and as
delivered.
§
However, the court
rejects this remedy, b/c the buyer has the burden of proof (under UCC 2-607) to
show that the horse was injured at the time he bought it and was not injured
after he took possession.
§
Since the buyer was
unable to satisfy this burden, he cannot get damages either.
UCC
§ 2-603, Merchant Buyer’s Duties
as to Rightfully Rejected Goods.
(1)
Subject to any security interest in the buyer
(subsection (3) of Section 2-711), when the seller has no agent or place of
business at the market of rejection a merchant buyer is under a duty after
rejection of goods in his possession or control to follow any reasonable
instructions received from the seller w/ respect to the goods and in the absence
of such instructions to make reasonable efforts to sell them for the seller’s
account if they are perishable or threaten to decline in value speedily.
Instructions are not reasonable if on demand indemnity for expenses is not
forthcoming.
(2)
When the buyer sells goods under subsection (1), he
is entitled to reimbursement from the seller or out of the proceeds for
reasonable expenses of caring for and selling them, and if the expenses include
no selling commission then to such commission as is usual in the trade or if
there is none to a reasonable sum not exceeding ten per cent on the gross
proceeds.
(3)
In complying w/ this section the buyer is held only
to good faith and good faith conduct hereunder is neither acceptance nor
conversion nor the basis of an action for damages.
UCC
§ 2-604, Buyer’s Options as to
Salvage of Rightfully Rejected Goods
·
§2-604 - Subject to the provisions of the immediately preceding section
on perishables if the seller gives no instructions w/in a reasonable time after
notification of rejection the buyer may store the rejected goods for the
seller’s account or reship them to him or resell them for the seller’s account
w/ reimbursement as provided in the preceding section. Such action is not
acceptance or conversion.
(1)
The buyer’s failure to state in connection w/
rejection a particular defect which is ascertainable by reasonable inspection
precludes him from relying on the unstated defect to justify rejection or to
establish breach
(a)
where the seller could have cured it if
stated seasonably; Or
(b)
between merchants when the seller has after
rejection made a request in writing for a full and final written statement of
all defects on which the buyer proposes to rely.
o
Policy:
of permitting the B
to give a quick and informal notice of defects in a tender without penalizing
him for omissions in his statement, while at the same time protecting the S who
is reasonably misled by the B’s failure to state curable defects.
o
Defect that could
have been cured by S:
a B who merely rejcts the
delivery without stating his objections to it is probably acting in bad faith
and seeking to get out of the deal which has become unprofitable.
o
When the time to
cure has past:
(1)(b) makes it plain that a S is entitled upon request to a final statement of
objections upon which he can rely.
§
What is needed is
that he make clear to the B exactly what is being sought.
§
A formal demand
under paragraph (b) will be sufficient in the case of a merchant- buyer.
(2)
Payment against documents made w/o reservation of
rights precludes recovery of the payment for defects apparent on the face of the
documents.
·
Subsection (2)
applies to the particular case of documents the same principle which the section
on effects of acceptance applies to the case of goods.
o
The only defects
concerned in the present subsection are defects in the documents which are
apparent on their face.
o
Where payment is
required against the documents they must be inspected before payment and the
payment then constitutes acceptance of the documents.
·
Such acceptance of
the documents does not constitute an acceptance of the goods or impair
any options or remedies of the buyer for their improper delivery.
UCC
§ 2-508, Cure by Seller of
Improper Tender or Delivery; Replacement
(1)
Where any tender or delivery by the seller is
rejected b/c non-conforming and the
time for performance has not yet expired, the seller may seasonably notify the
buyer of his intention to cure and may then w/in the contract time make a
conforming delivery.
·
This subsection only
applies when the seller performs early so that additional time for performance
remains.
·
“Seasonably Notify”
in this subsection and in (2) means prompt notification, w/ however, giving the
seller enough time to vigilantly
claim the right to cure and ascertain the extent of the defect.
·
The standard for
“cure” is still perfect tender. The biggest issue regarding the adequacy of
“cure” is whether the seller must replace the nonconforming goods or is entitled
to repair them.
o
Repair should be
allowed, provided that it will result in goods that conform to the contract.
o
On the other hand,
the buyer should not be required to “accept patchwork goods or
substantially repaired articles in lieu of flawless merchandise.”
§
If the parties do
not specify a time for the seller’s performance, the gap filler provision of
section 2-309
must be used.
·
This provides that
in absence of agreement, the time for delivery is to be a reasonable time.
·
When the time for
delivery is reasonable, either party must notify the other party of an
actual proposed performance date being able to establish a breach based on
delay.
o
In absence of any
prior notification of a proposed delivery date, the buyer cannot reject on the
ground that more than a reasonable time for delivery has passed b/c the delivery
date is construed as being too indefinite.
o
Even if the parties
establish a fixed date for the S’s delivery, they may subsequently modify that
date.
§
E.g. after a
rightful rejection and the receipt of intention to cure the non conforming
tender, the waived the time set in the modification by agreeing to accept
additional trees at a later date. Thus, the tender of delivery of the cure was
held within the time for the seller’s performance.
(2)
Where the buyer
rejects a non-conforming tender which
the seller had reasonable ground to
believe would be acceptable w/ or w/o money allowance the seller may if he
seasonably notifies the buyer have a further reasonable time to substitute a
conforming tender.
·
This section allows
the seller a further reasonable time beyond the K period for performance to cure
a nonconforming tender.
o
This time is not
indefinie, but rather a “further reasonable time.”
§
Courts should
consider “time to be of the essense.”
·
Allowing time to
cure is based on balancing the interest of both parties to the K.
o
The B’s right to
perfect tender suffers only a marginal inference b/c an effective cure must
conform to the K in all respects except the time of the S’s performance.
o
A S; additional time
should be viewed as granting a S a second chance, while providing an aggrieved B
with performance that is at least close to perfect tender.
·
A breaching S who is
granted further reasonable time to substitute a conforming tender must act
expeditiously and should apply the necessary attention and effort to correct the
deficiency promptly.
o
Delay in
investigating and correcting the problem should cause the cure effort to fail .
o
Repeated
unsuccessful cure efforts should terminate further cure rights: “opportunity to
cure should be contingent on the sellers ability to accomplish it.”
§
Reasonable grounds to believe
·
A seller cant
qualify for this statutory cure right in the absence of adequate grounds to
believe that the tender is perfect or that commercially legitimate reasons
justify the belief that the tender neverltheless will not cause the buyer to
complain.
o
When sellers known
or should have know that a rejection will follow an imperfect tender, they are
not entitled to claim surprise at the buyers response or to assert cure rights
under §2-508(2).
o
A seller can satisfy
this limitation when a tender made without knowledge of non conformity is made
in good faith and is consistent with commercially reasonable standards.
§
Eg.
·
But if new start up
company: then argument probably would not fly.
o
Also, stated
assumption not so well founded if seller had received a recall order on the
delivered set OR if similar sets had resulted in a significant # of subsequent
complaints/ defect.
o
Upgrades: if they
give you the better, new improved model:
§
Eg. Model of hearing
aid: caused buzzing in ear: had a good basis to reject b/c not what he ordered,
so company is going to have to cure and deliver the model that fits what was
bargained for.
·
A seller tendering
with knowledge of a deficiency in the tender can still qualify if it a
commercially reasonable basis to assume the tender will be acceptable to the B.
o
Joc oil
§
Had been certified
with content of .52% in Italian refinery
§
S believed it would
have been acceptable due to prior knowledge of Con Ed purchase and use
practices.
o
Zabriskie:
S did not qualify under the reasonable grounds requirement
b/c the sellers mechanics, inspection was supposed to be done on the
transmission (in 70 point inspection test), so mechanics either knew or should
have known about substantial defects in the cars sold. (Need to prove that known
or should have known).
§
·
Could be a lot of
internal latent defects that could not show up in the 70 point inspection.
·
Money Allowance
o
Buyer is entitled to
what he bargained for
§
Even for time for
performance has passed, have time to make conforming tender
·
Money allowance
instead is not conforming tender
o
If the S had
reasonable grounds to believe that the B would agree to a price allowance for
the nonconforming aspect of the sellers tender a rejection made by the buyer
would legitimately surprise the seller.
§
The seller thus
could qualify for an opportunity to cure the tender by providing seasonable
notification of an intent to cure.
§
See Joc Oil
(210-211).
·
S also made argument
that even if they knew at time that sulfer was .92% it would still tender that
shipment to Con Edison b/c reason to believe that would take oil with money
allowance b/c con
o
So had reason to
believe and nevertheless would be acceptable to Con Ed with money allowances
§
Since con ed said
“no” under this section has reasonable right to cure; extended time.
·
Conforming Tender
o
Conforming: “if
they are in accordance with obligations under the K”
2-601.
§
Must be in perfect
tender in all aspects of the K specifications; except that an additional
reasonable time is allowed when the cure is made pursuant to section
2-508(2).
·
Further reasonable
time:
o
Only way to get into
2-508 is
rejection
o
3 options here
§
(1) Seller will not
go forward with the cure within the further reasonable time allowed
·
Here further action
will not be necessary for an effective rejection
§
(2) S will provide a
conforming tender within a further reasonable time.
·
a new conforming
tender will cure the original nonconformity and terminate the B’s right to
reject.
§
(3) S will provide a
non conforming tender.
·
Initial rejection
covers the 1st tender: the B must respond to the subsequent tender or
ineffective cure and failure to do so after a reasonable time to inspect the
newly tendered goods will result in their acceptance by the buyer.
·
Repair
o
Should be allowed
provided that it will result in goods that conform to the K. If quality
of the product is not degraded and it is acceptable as a product that never
had the deficiency, cure in form of repair is adequate.
§
The repaired product
must comply with all the applicable warranties for the repair to satisfy the
perfect tender rule and to constitute and adequate cure.
§
Zabriskie:
dealer replaced the defective transmission with one that was removed from
another vehicle on the dealer’s showroom floor.
·
Dealer replaced
transmission from unknown lineage:
·
Π wanted a new
model.
o
Shaken faith
doctrine:
considers the effect that knowledge of the original defect has on a disappointed
buyer.
§
When knowledge of
the circumstances of repair would leave a reasonable buyer sufficiently
apprehensive about the reliability or quality of the purchased product, the B
does not receive what was bargained for and the repair is not an adequate cure.
.
§
Acceptability of the
repair as a cure should thus be determined from the perspective of a reasonable
buyer.
§
Problem with the
shaken faith doctrine in this case.
However can argue that: S completely replaced transmission and that the
defect was not anything more than an isolated instance and that the replacement
would able the car to performs represented.
§
No internal impact
to other parts and components as in Bayne v. Nall Motors, inc.
(bottom of page
213),
problem of axle going 85 mph could have caused damage to the whole car that
replacing the axle could very well possibly fix the rest of the car: shaken
faith doctrine applies here.
§
·
They are required to
substitute it for a conforming tender.
·
If you use repair:
can’t pass of patchwork goods.
·
In this case, the S
was not given an adequate determination if the cause was a minor or a
substantial defect, B just wanted a brand new TV and didn’t even accept a cure.
·
Since S was denied
reasonable opportunity to repair; B interfered with right and tried to dictate
method of conforming tender. B has a duty of good faith to cooperate with S to
make a reasonable inspection of goods to determine if need new set or simply
replace a minor defect to make the good conforming.
·
Not allowing to make
determination = B losing effectiveness to rejection.
·
Consensual Care
o
Can arise any time
following the S’s initial tender.
o
Parties who reach
their cure agreement can shape their cure arrangement as they please on terms
concerning the nature of the corrective action or the length of time that will
be allowed to cure.
o
Niether party can
then revert unilaterally to the original terms of the K.
§
Modification
agreement redefines the sellers required performance under the K.
1) Effective rightful rejection by the buyer
2) Notice of intent to cure by the seller if seller has a
right to cure, under
§2-508(1) or (2) or some other code provision.
3) One of three things happens:
a) If the seller never gets around to curing w/in a
reasonable time, then the buyer’s rejection stands.
b) If the seller does cure, and the buyer still rejects,
then the buyer is in breach of contract.
c) If the seller does cure, but the cure does not satisfy
2-601, then the buyer must again reject
the second tender, b/c if he does not, then he has accepted b/c he didn’t make
an effective rejection.
o
However, Prof.
Lawrence states that “factory sealed cartons” should not be conclusive in
determining whether the seller had reasonable grounds to believe.
o
Ex: If the seller
received a TV in a factory sealed carton but was informed by the manufacturer
that this model of TV has had problems, then the seller doesn’t have reasonable
grounds to believe that the goods would be OK.
·
“There is no mandate
to require the buyer to accept patchwork goods.” However, this does NOT rule out
repair of goods as the method of cure. The seller only has to provide a perfect
tender. If the seller can provide a perfect tender through repair, then the
seller’s cure can be repair.
·
The court holds that
b/c the seller was never given a chance to determine the extent of the defect
and whether the defect required repair or replacement, the buyer interfered w/
the seller’s right to cure after the seller gave notice of the intent to cure.
Therefore, the contract is not rescinded and the buyer does NOT get the return
of the purchase price since the buyer lost the effectiveness of her rejection.
Zabriskie Chevrolet,
Inc. v. Smith
– Part III
o
Prof. Lawrence
thinks that the court’s reasoning in this case is wrong. He doubts that the
seller knew about the defect and doubts that the seller should have known about
it b/c certain latent defects in the transmission are hard to discover, even by
thorough inspection.
·
The court also holds
that the seller, even if they did have a right to cure, didn’t satisfy the
standard under 2-601
b/c the substitute transmission was taken from another car, which might not have
been a new transmission.
o
Prof. Lawrence
thinks that this is wrong b/c the seller took a brand new transmission from
another car, which should satisfy the perfect standard rule.
·
The Smiths demanded
a different type of cure. Rather than repair, the Smiths wanted replacement of
the car.
o
The court held that
the Smiths were entitled to demand replacement and reject repair of the cars b/c
of the “Shaken Faith Doctrine”,
where when dealing w/ a new car, a buyer needs to have faith in the car’s
dependability and safety. By repairing the car, the buyer would still have
shaken faith, and thus, the repair would not satisfy.
§
Prof. Lawrence
thinks the doctrine is OK, but courts have incorrectly applied the doctrine.
§
The Smiths are
trying to dictate the method of cure, and the Smiths don’t have that option. The
seller’s only obligation under cure is to provide perfect tender and the seller
was trying to do that.
§
If the seller has a
legitimate right to cure (which the court held that they didn’t), then the
seller only has to provide perfect tender through their cure. The question is
whether repair can be perfect tender. The court held that under the “shaken
faith doctrine”, repair cannot be perfect tender when dealing w/ a brand new
car.
XVI. Revocation
UCC
§ 2-608, Revocation of Acceptance
in Whole or in Part
(1)
The buyer may revoke his acceptance of a lot or
commercial unit whose non-conformity
substantially impairs its value to
him if he has accepted it:
·
Unlike the right to
reject (perfect tender), revocation’s “substantial impair” standard is like the
common law “material breach” standard.
·
Whether the value is
substantially impaired is determined by each buyer’s personal circumstances.
Subjective standard. The same defect could affect two different buyers very
differently.
(a)
on the reasonable assumption that its
non-conformity would be cured and it has not been seasonably cured; OR
(b)
Subsection (1)(a)
deals w/ situations where the buyer accepts after having already
discovered the defect.
(b)
w/o discovery of such non-conformity if his
acceptance was reasonably induced either by the difficulty of discovery b/f
acceptance or by the seller’s assurances.
(c)
Subsection (1)(b)
deals w/ situations where the buyer accepts w/o having discovered the
nonconformity.
(2)
Revocation of acceptance must occur w/in a
reasonable time after the buyer discovers or should have discovered the ground
for it AND before any substantial change in condition of the goods which is not
caused by their own defects. It is not effective until the buyer notifies the
seller of it.
·
Ex: the buyer
purchases a barrel of apples, but there is one rotten apple at the bottom, which
causes the surrounding apples to also rot. B/c there has been a substantial
change in the condition of goods which is caused by the defect, the buyer does
not have to revoke acceptance w/in a reasonable time.
·
The “reasonable
time” standard is usually pretty long for buyers b/c revocation usually only
occurs after attempts at adjustment have failed.
(3)
A buyer who so revokes has the same rights and
duties w/ regard to the goods involved as if he had rejected them.
·
Unlike after a
rejection, the seller does NOT have a right to cure under a revocation.
Miron v.
·
The court held that
the buyer does not have a right to revoke b/c he can’t comply w/
UCC 2-608(1)(a)
nor
(b).
o
(a) There was no
reasonable assumption that the seller would cure the defect since a broken leg
for a horse is not fixable.
o
(b) The buyer’s
acceptance was not reasonably induced by the difficulty of discovery b/c the
buyer only needed to have a veterinarian examine the horse b/f accepting.
§
Furthermore, the
even though the seller’s agent (auctioneer) did make assurances, it certainly is
not strong enough to overcome the trade usage of buyers having their vets
examine horses b/f purchase.
Zabriskie Chevrolet,
Inc. v. Smith
·
If the buyer
discovers the defect b/f acceptance, then he must comply w/
2-608(1)(a). The
buyer must have reasonable assumption that the defect would be cured.
·
If the buyer
discovers the defect after acceptance, then he must comply w/
2-608(2). The
buyer must have been reasonably induced either by the difficulty of discovery
b/f acceptance or by the seller’s assurances.
·
If the buyer
wrongfully revokes an acceptance, the cases are split as to what the
consequences. Most courts hold that wrongful revocations are not legally
effective.
XVII.
Breach and Impaired Expectations
A. Anticipatory
Breach
·
The common law is that when making an agreement,
the parties have certain obligations and expectations and each party will
perform their obligations. Also, each party is entitled to expect that the other
party will not impair your expectations.
o
The most serious impairment of expectations comes
from anticipatory repudiation. In any contract, there is an implied promise that
neither party will repudiate.
·
The UCC takes the same approach as the common
law w/ respect to Anticipatory Breach. The main difference between the UCC
and the common law is where a party’s actions don’t quite amount to an
Anticipatory Breach, but only amounts to
Prospective Inability to Perform.
·
Under PIP, there is not yet a breach. But under
the common law, there is an implied condition that at all times from the making
of the contract to the time for performance, both parties must be ready at all
times to perform their obligations.
o
However, each of their obligations are
constructively conditioned on each other’s ability to perform. Thus, X does not
have to be ready to pay unless Y is ready to work.
o
If there is a statement of doubt by X, that is
pretty serious about his inability to perform, then Y’s obligation to pay is
excused, b/c the obligations are constructively conditioned on one another.
§
If the aggrieved party invokes the PIP doctrine,
the aggrieved party in this instance, cannot bring a lawsuit b/c there was no
breach. Y was excused from his obligation to pay.
·
PIP is NOT relevant to UCC Article 2, only the
common law. UCC 2-609
deviates from PIP.
UCC
§ 2-610, Anticipatory Breach
When either party repudiates the contract w/ respect to a
performance not yet due the loss of which will
substantially impair (this is
similar to material breach, not perfect tender) the value of the contract to the
other, the aggrieved party may…
(a)
for a commercially reasonable time await
performance by the repudiating party; OR
§
Hold off suing for
damages.
(b)
resort to any remedy for breach (Section
2-703 or Section 2-711), even though he has notified the repudiating
party that he would await the latter’s performance and has urged retraction; AND
§
Suing for damages.
§
2-703 and 2-711
indicates the right to cancel the contract.
(c)
in either case suspend his own performance or
proceed in accordance w/ the provisions of this Article on the seller’s right to
identify goods to the contract notwithstanding breach or to salvage unfinished
goods (Section 2-704).
(1)
A contract for sale imposes an obligation on each
party that the other’s expectation of receiving due performance will not be
impaired. When reasonable grounds for insecurity arise w/ respect to the
performance of either party the other may
in writing demand adequate assurance
of due performance and until he receives such assurance may, if commercially
reasonable, suspend any performance for which he has not already received the
agreed return.
(2)
Between the merchants the reasonableness of grounds
for insecurity and the adequacy of any assurance offered shall be determined
according to commercial standards.
(3)
Acceptance of any improper delivery or payment does
not prejudice the aggrieved party’s right to demand adequate assurance of future
performance.
(4)
After receipt of a justified demand, failure to
provide w/in a reasonable time not exceeding thirty days such assurance of due
performance as is adequate under the circumstances of the particular case is a
repudiation of the contract.
Graulich Caterer,
Inc. v. Hans Holterbosch, Inc.
·
There was breach b/c
food delivered was bad, and did not come close to matching the samples, and did
not satisfy the Warranty of Fitness for a Particular Purpose.
·
The perfect tender
rule of 2-601 is
not applicable to installment contracts, which are governed
by 2-612.
·
The buyer’s
rejection of the first installment is governed by
UCC 2-612(2), and
the rejection of the second installment (the cure) is governed by
UCC 2-612(3).
·
The food in this
case was non-conforming and could not be
cured, so rejection was proper under
2-612(2). The
second installment was the seller’s cure attempt, which also failed.
·
Rejection under
2-612(3) of the remaining installments was proper b/c non-conformity of the
first two installments “substantially impaired the value of the whole contract.”
Time was critical. The buyer had an immediate need for quality food and the
seller was unable to cure. Thus, the buyer rightfully rejected b/c there was no
reason for the buyer to think that the seller would cure the defect in time for
the buyer to serve food soon after.
UCC
§ 2-611, Retraction of
Anticipatory Repudiation
(1)
Until the repudiating party’s next performance is
due he can retract his repudiation unless the aggrieved party has since the
repudiation cancelled or materially changed his position or otherwise indicated
that he considers the repudiation final.
(2)
Retraction may be by any method which clearly
indicates to the aggrieved party that the repudiating party intends to perform,
but must include any assurance justifiably demanded under the provisions of this
Article (Section 2-609)
(3)
Retraction reinstates the repudiating party’s rights
under the contract w/ due excuse and allowance to the aggrieved party for any
delay occasioned by the repudiation.
(1)
An “installment contract” is one which requires or
authorizes the delivery of goods in separate lots to be separately accepted,
even though the contract contains a clause “each delivery is a separate
contract” or its equivalent.
(2)
The buyer may reject any installment which is
non-conforming if the non-conformity substantially impairs the value of that
installment and cannot be cured or if the non-conformity is a defect in the
required documents; but if the non-conformity does not fall w/in subsection (3)
and the seller gives adequate assurance of its cure the buyer must accept that
installment.
(3)
Whenever non-conformity or default w/ respect to one
or more installments substantially impairs the value of the whole contract there
is a breach of the whole. But the aggrieved party reinstates the contract if he
accepts a non-conforming installment w/o seasonably notifying of cancellation or
if he brings an action w/ respect only to past installments or demands
performance as to future installments.
UCC
§ 2-703, Seller’s Remedies in
General
(1)
Where the buyer
wrongfully rejects, revokes, fails
to make a payment due on or before delivery, fails to perform a K obligation or
repudiates, it is a breach.
(2)
If the buyer is in breach to the seller, the seller
may
(a)
withhold delivery of such goods;
(b)
stop delivery of the goods
(§ 2-705);
(c)
proceed under the next section respecting
goods still unidentified to the contract;
(d)
reclaim the goods
§2-507(2)
or 2-702(2)
(e)
Require payment directly from the buyer
§2-325(c)
(f)
cancel
(g)
resell and recover damages as hereafter
provided (§
2-706);
(h)
recover damages for non-acceptance or
repudiation (§ 2-708)
(i)
recover lost profits under
§2-708(2)
(j)
recover the price under
§2-709
(k)
obtain specific performance under
§2-716
(l)
recover liquidated damages under
§2-718
(m)
in other cases, recover damages in any manner
that is reasonable under the circumstances
UCC
§ 2-711, Buyer’s Remedies in General;
Buyer’s Security Interest in Rejected Goods
(1)
A breach of K by the S includes the Seller’s
wrongful failure to deliver or to perform a contractual obligation, making of a
non-conforming tender of delivery or performance, and repudiation.
(2)
If the seller is in breach of contract under (1),
the buyer, to the extent provided for by this Act or other law, may:
(a)
in the case of rightful cancellation,
rightful rejection, or justifiable revocation of acceptance, recover so much of
the price as has been paid
(b)
deduct damages from any part of the price
still due under
§2-717
(c)
cancel
(d)
“cover” and have damages under
§2-712 as to
all goods affected whether or not they have been id’d to the K
(e)
recover damages for nondelivery or
repudiation under
§2-713
(f)
recover damages for breach w/regard to
accepted goods or breach w/regard to a remedial promise under
§2-714
(g)
recover identified goods under
§2-502.
(h)
obtain specific performance or obtain the
goods by replevin or similar remedy under
§2-716
(i)
recover liquidated damages under
§2-718
(j)
in other cases, recover damages in any manner
that is reasonable under the circumstances
(3)
On rightful rejection or justifiable revocation of
acceptance a buyer has a security interest in goods in his possession or control
for any payments made on their price and any expenses reasonably incurred in
their inspection, receipt, transportation, care and custody and may hold such
goods and resell them in like manner as an aggrieved seller (Seller 2-706).
XVIII. Remedies
of Buyers
·
Compare the availability of the buyer’s remedies:
a) Either
UCC
§2-712 (Cover) or
UCC
§2-713 (Market
Price);
§
These remedies are used in the case of
non-delivery, anticipatory repudiation, buyer rightfully rejects or rightfully
revokes.
§
If the buyer covers, then can’t use 2-713.
§
The Code prefers the Cover remedy over the Market
Price remedy b/c the Cover remedy is more of an accurate remedy in putting the
buyer in the same position as if the contract had been performed.
§
Must also consider
UCC
§2-715 (Incidental & Consequential damages)
OR
b)
UCC
§2-714
(Remedy when Accepting Goods)
§
Only can be used when the buyer has accepted the
goods. If buyer accepts, can’t use 2-712 nor 2-713.
§
Must also consider
UCC
§2-715 (Incidental & Consequential damages)
UCC
§ 2-712, “Cover”; Buyer’s
Procurement of Substitute Goods
(1)
After a breach w/in the preceding section the buyer
may “cover” by making in good faith and w/o unreasonable delay any reasonable
purchase of or contract to purchase goods in substitution for those due from the
seller.
o
The goods purchased
during cover do not have to be identical, only that they are “commercially
usable as reasonable substitutes under the circumstances of the particular
case.” Comment 2
o
The test of proper
cover is whether at the time and place the buyer acted in
good faith (“honesty in fact and
w/in the boundaries of reasonable commercial standards”) and in a
reasonable manner, and it is
immaterial that hindsight may later prove that the method of cover was not the
cheapest or most effective. Comment 2
o
See Problem #2
o
If the buyer does
not make a qualifying cover (if any one of these requirements is not met) then
must go to 2-713
(market price/contract price differential). It would be the same as if the buyer
had not covered at all.
(2)
The buyer may recover from the seller as damages the
difference between the cost of cover and the contract price together w/ any
incidental or consequential damages as hereinafter defined (Section
2-715), but less expenses saved in consequence of the seller’s breach.
(3)
Failure of the buyer to effect cover w/in this
section does not bar him from any other remedy.
B. Market
Price/Contract Price Differential
UCC
§ 2-713, Buyer’s Damages for
Non-Delivery or Repudiation
(1)
Subject to the provisions of this Article w/ respect
to proof of market price (Section
2-723), if the seller wrongfully fails to deliver or repudiates or the
buyer rightfully rejects or justifiably revokes acceptance:
(a)
the measure of damages for wrongful failure
to deliver by the seller or rightful rejection or justifiable revocation of
acceptance by the buyer is the difference between the market price at the
time for tender and the contract price together w/ any incidental and
consequential damages provided in this Article (Section
2-715), but less expenses saved in consequence of the seller’s breach;
and
(b)
the
measure of damages for repudiation by the seller is the difference between the
market price at the expiration of a commercially reasonable time after the buyer
learned of the repudiation, but no later than the time stated in (a), and the K
price together w/any incidental or consequential damages provided in
§2-715, less
expenses saved in consequence of the seller’s breach.
·
This remedy reflects
the common law approach.
·
If the buyer has NOT
accepted the goods and the buyer has not covered, this is the appropriate
remedy. The buyer does not have to cover and can decide to use the market price
remedy (2-713).
·
Must establish the
“where” and “what time” of the market.
o
The time of the
market price is “at the time when the buyer learned of the breach.”
§
This raises problems
w/ proving of when the buyer learned of the breach.
§
The main problem is
when dealing w/ anticipatory repudiation. However, Prof. Lawrence doesn’t want
us to go over this b/c it is taken care of in the amendments.
·
For market price
remedy calculations, Prof. Lawrence doesn’t want us to spend too much time of
finding “incidental & consequential damages” and “less expenses saved.”
(2)
Market price is to be determined as of the place of
tender or, in cases of rejection after arrival or revocation of acceptance, as
of the place of arrival.
·
See Problem below.
o
First, determine
whether the goods were not delivered at all, or whether they were delivered and
then rejected (subsection (2)
of 2-713 then
applies).
o
Second, determine
whether the contract is a shipment or destination contract.
UCC
§ 2-714,
Buyer’s Damages for Breach in Regard to Accepted Goods
(1)
Where the buyer has accepted goods and given
notification (subsection (3) of
Section 2-607) he
may recover as damages for any non-conformity of tender the loss resulting in
the ordinary course of events from the seller’s breach as determined in any
manner which is reasonable.
o
If the acceptance is
revoked b/f the cause of action, then 2-714 does not apply, b/c the
acceptance disappeared.
o
There must be an
acceptance that is still effective (not revoked) at the time of the cause of
action in order to use the 2-714 remedy.
o
Ex: late delivery,
tender of non-conforming documents.
(2)
The measure of damages for breach of warranty is the
difference at the time and place of
acceptance between the value of the goods accepted and the value they would
have had if they had been as warranted, unless special circumstances show
proximate damages of a different amount.
o
The value of the
goods as warranted is often determined by the contract price, but it is not
conclusive. If the buyer can prove that the value of the goods exceeds the
contract price, then the buyer should get the benefit of the bargain. Or if the
value of the goods is less than the contract price, then the buyer should be
stuck w/ the foolishness of the bargain.
o
Cost to repair is
often the measure of the difference.
(3)
In a proper case any incidental and consequential
damages under the next section may also be recovered.
D.
Incidental and
Consequential Damages
UCC
§ 2-715, Buyer’s Incidental and
Consequential Damages
(1)
Incidental damages resulting from
the seller’s breach include expenses reasonably incurred in inspection, receipt,
transportation and care and custody of goods rightfully rejected, any
commercially reasonable charges, expenses or commissions in connection
w/effecting cover and any other reasonable expense incident to the delay or
other breach.
§
Incidental damage is
designed to cover two types of costs:
1) Expenses incurred
while the aggrieved buyer is fulfilling their obligations under the contract,
where the buyer is “following the reasonable instructions of the seller while
holding the goods for the seller.”
2) Expenses incurred
while exercising the buyer’s own rights under the contract. Ex: inspection of
defective goods or transactional costs for cover.
(2)
Consequential damages resulting
from the seller’s breach include
(a)
any loss resulting from general or particular
requirements and needs of which the seller at the time of contracting had reason
to know and which could not reasonably be prevented by cover or otherwise; AND
§
But-For Test
– “But for the seller’s breach, I would not have suffered this damage.”
·
However, there is a
foreseeability requirement. “The
seller must have either known about it or had reason to know about it
at the time of contracting.”
Hadley v. Baxendale.
§
Although not stated
in the Code, the buyer must be able to prove consequential damages w/
reasonable certainty. It doesn’t
have to be exact, but speculation is not good enough.
·
However, the “established
business rule”, where only established businesses can receive damages for
lost profits, has been generally rejected by the courts.
§
Mitigation Principle
– “could not reasonably be prevented by cover or otherwise.” The buyer is under
a duty to mitigate by covering or other methods. If the buyer could have
mitigated any of the loss, but did not, the buyer cannot recover the losses for
which the buyer could have mitigated.
(b)
Injury to person or property proximately
resulting from any breach of warranty.
§
This is the
proximate cause requirement. The
torts standard BUT NO FORSEEABILITY REQUIREMENT.
·
Even though there
may be actual cause, it doesn’t necessarily mean that there is proximate cause.
§
Note that the
foreseeability principle (Hadley v. Baxendale) is not present in
this subsection.
§
Lewis v. Mobile Oil
Corporation
– The buyer purchased a lubricant for their machinery from the local oil dealer.
He asked the seller which type the buyer needed, and the seller made a
recommendation. Ultimately, the lubricant used was the wrong kind and the
machines were badly damaged. Buyer brought a COA for breach of warranty.
·
Breach of Implied
Warranty of Fitness for a Particular Purpose.
·
As consequential
damages, the buyer received the cost of repair and replacement of the parts that
were damaged as well as lost profits during the repair time of the machine.
E. Specific
Performance
UCC
§ 2-716, Buyer’s Right to
Specific Performance or Replevin
(1)
Specific performance
may be decreed where the goods are
unique or in other proper circumstances.
§
“Unique” does not
mean only “one of a kind.” Goods can be unique even if there is more than one
(ex: limited edition corvette).
§
One example of
“other proper circumstances” is when the buyer is unable to cover. This is the
only example given in the comments.
(2)
The decree for specific performance may include such
terms and conditions as to payment of the price, damages, or other relief as the
court may deem just.
(3)
The buyer has a right of replevin for
goods identified to the contract if
after reasonable effort he is unable to
cover for such goods or the circumstances reasonably indicate that such
effort will be unavailing or if the goods have been shipped under reservation
and satisfaction of the security interest in them has been made or tendered.
(4)
The buyer’s right under (3) vests upon acquisition
of a special property, even if the seller had not then repudiated or failed to
deliver.
·
If there is an
inability to cover and the goods are identified, the courts
must award a right to replevin.
Unlike specific performance, where the court’s decision is discretionary
(“may”), the courts decision in right to replevin, if the goods are identified
and the buyer is unable to cover, then the court is compelled to grant a right
to replevin.
XIX.
Remedies of Sellers
A. Resale
(analogous to Buyer’s Cover)
UCC
§ 2-706, Seller’s Resale
Including Contract for Resale
(1)
Under the conditions stated in
Section 2-703 on
seller’s remedies, the seller may resell the goods concerned or the undelivered
balance thereof. Where the resale is made in good faith and in a
commercially reasonable manner the seller may recover the difference between
the resale price and the contract price together w/ any incidental damages
allowed under the provisions of this Article (Section
2-710), but less expenses saved in consequence of the buyer’s breach.
(2)
Except as otherwise provided in subsection (3) or
unless otherwise agreed resale may be made at public or private sale including
sale by way of one or more contracts to sell or of identification to an existing
contract of the seller. Sale may be as a unit or in parcels and at any time and
place on any terms but every aspect of the sale including the method, manner,
time, place and terms must be commercially reasonable. The resale must be
reasonably identified as referring to the broken contract, but it is not
necessary that the goods be in existence or that any or all of them have been
identified to the contract b/f the breach.
(3)
Where the resale is at private sale the seller: must
give the buyer reasonable notification of his intention to resell.
(4)
Where the resale is at public sale
(a)
Only identified goods can be sold except
where there is a recognized market for a public sale of futures in goods of the
kind; AND
(b)
it must be made at a usual place or market
for public sale if one is reasonably available and except in the case of goods
which are perishable or threaten to decline in value speedily the seller must
give the buyer reasonable notice of the time and place of the resale; AND
(c)
if the goods are not to be w/in the view of
those attending the sale the notification of sale must state the place where the
goods are located and provide for their reasonable inspection by prospective
bidders; AND
(d)
the seller may buy.
(5)
A purchaser who buys in good faith at a resale takes
the goods free of any rights of the original buyer even though the seller fails
to comply w/ one or more of the requirements of this section.
(6)
The seller is not accountable to the buyer for any
profit made on any resale. A person in the position of a seller (Section
2-707) or a buyer who has rightfully rejected or justifiably revoked
acceptance must account for any excess over the amount of his security interest,
as hereinafter defined (subsection (3) of
Section 2-711).
(7)
Failure of a seller to resell under this section
does not bar the seller from any other remedy.
B. Contract
Price/Market Price Differential (analogous to Buyer’s remedy of same name)
UCC
§ 2-708, Seller’s Damages for
Non-Acceptance or Repudiation
(1)
Subject to subsection (2) and to the provisions of
this Article w/ respect to proof of market price (Section
2-723):
(a)
the measure of damages for non-acceptance by
the buyer is the difference between the market price at the time and place for
tender and the unpaid contract price together w/ any incidental damages provided
in this Article (Section
2-710), but less expenses saved in consequence of the buyer’s breach.
(b)
the measure of damages for repudiation by the
buyer is the difference btw the K price and the market price at the place for
tender at the expiration of a commercially reasonable time after the seller
learned of the repudation, but no later than the time stated in (a), together
w/any incidental or consequential damages provided in
§2-710, less
expenses saved in consequence of the buyer’s breach.
C. Lost Profits
UCC
§ 2-708, Seller’s Damages for
Non-Acceptance or Repudiation
(2)
If the measure of damages provided in subsection (1)
is inadequate to put the seller in as good a position as performance would have
done then the measure of damages is the profit (including reasonable
overhead) which the seller would have made from full performance by the buyer,
together w/ any incidental damages provided in this Article (Section
2-710), due allowance for costs reasonably incurred and due credit for
payments or proceeds for resale.
(1)
Lost Volume Seller
– Under the 7th Circuit, there are three requirements for a
seller to qualify as a lost volume seller:
1) the seller must
possess the capacity to make an additional sale;
2) the additional
sale would have been profitable for the seller; AND
3) the seller
probably would have made the additional sale even if the breach had not
occurred.
D. Action for Price
(this is sort of like Buyer’s remedy of Specific Performance)
·
This remedy is a court judgment that orders the
buyer to pay the contract price.
·
If the buyer refuses to pay, then the court
executes their order and gets the sheriff to seize the buyer’s property (lien)
to pay off the seller and pay the sheriff’s expenses.
·
This is not the preferred remedy. The preferred
remedy is UCC 2-706,
Resale.
UCC
§ 2-709, Action for the Price
(1)
If the buyer fails to pay the price as it becomes
due the seller may recover, together w/ any incidental damages under the §2-710,
the price
(a)
of goods accepted or conforming goods lost or
damaged w/in a commercially reasonable time after risk of their loss has passed
to the buyer; AND
§
Generally, seller
can not get action for the price if the buyer has not accepted the goods. Even
if the buyer wrongfully rejects, the wrongful rejection still precludes any
acceptance, and the seller will have difficulty getting action for the price.
·
The policy behind
this is that seller’s who have control of the goods are in a better position to
resell them.
§
However, an
exception to the buyer’s acceptance requirement is when the goods are lost or
damaged after the risk of loss has passed to the buyer.
·
When goods are lost
or damaged, then the policy behind the buyer’s acceptance requirement no longer
applies.
·
Must consider who
has the risk of loss. Shipment or destination contract.
(b)
of goods identified to the contract if the
seller is unable after reasonable effort to resell them at a reasonable price or
the circumstances reasonably indicate that such effort will be unavailing.
·
This is another
exception to the buyer’s acceptance requirement. This subsection undercuts the
policy behind the buyer’s acceptance requirement.
·
Seller’s should
document their efforts to resell.
·
A situation where
“such efforts will be unavailing” is when technology makes the goods obsolete or
totally unwanted. If the goods are identified to the contract, then can get
action for the price.
(2)
If the seller sues for the price he must hold for
the buyer any goods which have been identified to the contract and are still in
his control except that if resale becomes possible he may resell them at any
time prior to the collection of the judgment. The net proceeds of any such
resale must be credited to the buyer
and payment of the judgment entitles him to any goods not resold.
(3)
After the buyer has wrongfully rejected or revoked
acceptance of the goods or has failed to make a payment due or has repudiated (Section
2-610), a seller who is held not entitled to the price under this section
shall nevertheless be awarded damages for non-acceptance under
§2-708.
E. Incidental
Damages and Consequential Damages
·
Generally, there are no consequential damages for
the seller b/c they do not incur them when buyer breaches.
UCC
§ 2-710, Seller’s Incidental
Damages and Consequential damages
(1)
Incidental damages to an aggrieved seller include
any commercially reasonable charges or commissions incurred in stopping
delivery, in the transportation, care, and custody of goods after the buyer’s
breach, in connection w/ return or resale of the goods or otherwise resulting
from the breach.
(2)
Consequential damages resulting from the buyer’s
breach include any loss resulting from general or particular requirements and
needs of which the buyer at the time of contracting had reason to know and which
could not reasonably be prevented by resale or otherwise.
(3)
In a consumer K, seller may not recover
consequential damages from a consumer.
TRANSFER OF GOODS
XX. Assignment and
Delegation
UCC
§ 2-210, Delegation of
Performance; Assignment of Rights
(1)
If the seller or buyer assigns rights under a K, the
following rules apply:
(a)
Either party may assign all their rights
unless it would materially change the duty of the other party, increase
materially the burden or risk imposed on that party by the K, or impair
materially that party’s chance of obtaining return performance.
A right to damages for breach of the whole K or a right arising out of
the assignor’s due performance of its entire obligation may be assigned despite
agreement otherwise.
·
Ex: a singer cannot
delegate his duty to sing to another singer b/c the duty to sing is personal,
and the hiring party has a substantial interest in having his original singer
perform.
·
The assignor is
still liable for breach and must still make sure that his assignee fulfills his
duty.
(b)
the creation, attachment, perfection, or
enforcement of a security interest in the seller’s interest under a K is not an
assignment that materially changes the duty of…see statute
(2)
If the buyer or seller delegates performance of its
duties under a K, the following rules apply:
(a)
see statute
(b)
see statute
(c)
see statute
(d)
see statute
(3)
see statute
(4)
see statute
·
Voidable Title – a situation where a GF
purchaser (Bona Fide purchaser, BFP) may
purchaser greater title than the seller had. A GF purchaser (BFP) can
prevail over the original owner if the GFP purchases the goods from someone who
has voidable title.
(1)
A purchaser
of goods acquires all title which his transferor had or had power to
transfer except that a purchaser of a limited interest acquires rights only to
the extent of the interest purchased (derivative
title rule). A person w/ voidable
title has power to transfer a good title to a good faith purchaser for
value. When goods have been delivered under a transaction of purchase the
purchaser has such power even though
(a)
The transferor was deceived as to the
identity of the purchaser, OR
(b)
Delivery was in exchange for a check which is
later dishonored, OR
(c)
It was agreed that the transaction was to be
a “cash sale”, OR
(d)
The delivery was procured through fraud
punishable as larcenous under the criminal law.
·
The above four
subsections are ways to create voidable title.
·
Ex: If a thief
steals a painting from someone’s home, and goes out and tries to sell it, then
the buyer who purchases it from the thief will not prevail over the original
seller b/c there is no way that the thief can get voidable title. Also,
obviously, if the purchaser knew that the painting was stolen, then he wouldn’t
be a BFP, so can’t prevail over original owner.
·
Ex: However, if the
thief uses a more sophisticated scam, by telling the owner that he is an art
dealer and convinces the owner that he has a prospective buyer of the painting,
but the prospective buyer wants to inspect the painting first. The owner lets
the thief leave w/ the painting. The thief then sells the painting to a BFP, who
has no idea that the painting was stolen.
·
Since the owner
entrusted the painting to the thief,
then it can create voidable title and the BFP can prevailover the original
owner. The original owner’s remedy will be to go after the thief. This is an
exception to the derivative title rule.
·
However, the thief,
if he couldn’t sell the painting, obviously could not prevail over the original
owner.
(2)
Any entrusting of possession of goods to a merchant
who deals in goods of that kind gives him power to transfer all rights of the
entruster to a buyer in ordinary course of business.
(3)
“Entrusting” includes any delivery and any
acquiescence in retention of possession regardless of any condition expressed
between the parties…see the statute
·
Unless they are a
merchant, they cannot be selling the goods in the ordinary course of business.
·
When you
entrust the goods to a merchant that
qualifies under subsection (2), you are giving him
apparent authority.
1) Market Overt – this has never been recognized in
the
2) BIOC (Buyer in the ordinary course of business) –
must be bona fide, must purchase from a merchant that sells goods of that kind,
and the sale must be made in the ordinary course of business.
3) BFP (Bona Fide purchaser)
3) Buyer (just a regular buyer)