JRC/Fall 2010/Sales

SALESFall 2010/Prof. Hardin/Joshua R. Collums

Sales (5th Ed.) by Benfield & Greenfield

I. INTRODUCTION

A. Organization of the Book and Goals of the Course**B. Background and History of the UCC

1. Sponsors: The National Conference of Commissioners on Uniform State Lawsa. NCCUSL is a government-supported organization. Each state appoints

Commissioners to the Conference.b. ALI is a private, non-profit, self-perpetuating body composed of lawyers, judges,

and law professors from all over the country.2. The Initial Drafting History

a. A final text of the proposed Code was completed in September 1951 and at thattime was approved by the two Sponsoring Organizations and was also approvedby the House of Delegates of the American Bar Association.

b. In October of 1952, an official edition of the Code with explanatory commentswere published as the 1952 Official Text and Comments Editions.

c. Pennsylvania adopted the Code in 1953 and by 1967 the District of Columbiaand all the states except Louisiana had adopted the Code.

3. The Scope of the Codea. Article 1. General Provisions; Article 2. Sales; Article 2A. Personal Property Leases;

Article 3. Commercial Paper; Article 4. Bank Deposits and Collections; Article 4A. Funds Transfers; Article 5. Letters of Credit; Article 6. Bulk Transfers; Article 7. Documents of Title; Article 8. Investment Securities; Article 9. Secured Transactions.

4. Permanent Editorial Boarda. In 1962, ALI and NCCUSL organized the Permanent Editorial Board for the

Uniform Commercial Code, and each appointed five members to serve on it.b. The Board’s first function was to secure uniform adoption of the Code. As the

Code became widely adopted, the Editorial Board was able to turn its attentionto needed improvements in the Code.

c. Today, the Board is comprised of six members each from the two sponsoringorganizations.

C. The Code as “Code”1. Basic Issue. Whether the Code is just another statute, bigger than most, but basically like

all other statutes in a common-law jurisdiction, or whether, on the other hand, it is a codein the Continental sense of the word.a. Hawkland, Uniform Commercial Code Methodology.

(1) A “code” is a preemptive, systematic, and comprehensive enactment of awhole field of law. It is preemptive in that it displaces all other law in itssubject area save only that which the code excepts. It is systematic inthat all of its parts, arranged in an orderly fashion and stated with aconsistent terminology, form an interlocking, integrated body, revealingits own plan and containing its own methodology. It is comprehensivein that it is sufficiently inclusive and independent to enable it to beadministered in accordance with its own basic policies.

(2) A mere statute, on the other hand, is neither preemptive, systematic, norcomprehensive, and, therefore, its methodology is different from that ofa code.

(3) The UCC meets the requirements of a code. Its provision, followingthe organizational plan of most European codes, are logically dividedinto interlocking “articles,” each handling one major subdivision of theentire subject.

-1-

JRC/Fall 2010/Sales

b. Kripke, Principles Underlying the Drafting of the Uniform Commercial Code(1) It is fair to say that the draftsmen of the Code had an anticodification or

antistatute predilection. They did not want to codify the law, in thecontinental sense of codification.

(2) The drafters did not intend that the solution to problems within theambit of the Code must be found in the confines of the statute.

D. Scope of Article 21. The Sales-Service Hybrid

a. Anthony Pools v. Sheehan, (Md. 1983)(1) § 2-105(1). “Goods” means all things (including specially manufacturer

goods) which are moveable at the time of identification to the contract for saleother than the money in which the price is to be paid, investment securities(Article 8) and things in action. “Goods” also includes the unborn young ofanimals and growing crops and identified things attached to realty as described inthe section on goods to be severed from realty (Section 2-107).

(2) Hybrid Transaction. In part a contract for the rendering of services and inpart a contract for the sale of goods.

(3) Predominant Factor Test. Whether the predominant factor, the thrust, thepurpose, reasonably stated, is a transaction of sale with labor incidentallyinvolved or vice versa.(a) If the service aspect predominated, no warranties of quality

were imposed in the transactions, not even if the defect orcomplaint related to the goods that were involved rather thanto the services.

(b) However, a number of commentators have advocated a morepolicy oriented approach to determining whether warranties ofquality and fitness are implied with respect to goods sold as partof a hybrid transaction in which service predominates.

(4) Policy Approach. A number of commentators have advocated a morepolicy oriented approach to determining whether warranties of qualityand fitness are implied with respect to goods sold as part of a hybridtransactions in which service predominates.

(5) Gravamen Test. Focus instead on whether the gravamen of the actioninvolves goods or services.

b. Distinguishing Sales from Service(1) Insul-Mark Midwest, Inc. v. Modern Materials, Inc. (Ind. 1993)

(a) Determination of whether the predominant thrust of a mixedcontract is to provide services or goods:i) Contract Language. Look first to the language of the

contract, in light of the situation of the parties and thesurrounding circumstances. Specifically, one looks tothe terms describing the parties, and the words used todescribe the relationship between the parties.

ii) Parties’ Circumstances. One looks to the circumstancesof the parties, and the primary reason they enteredinto the contract. One also considers the final productthe purchaser bargained to receive, and whether itmay be described as a good or a service.

iii) Costs of Goods v. Services. Finally, one examines thecosts involved for the goods and services and whetherthe purchaser was charged only for a good, or a pricebased on both goods and services.

(2) Hirschfield Sons Co. v. Colt Industries (Mich. 1981)(a) Plaintiff bought a large scale for $16,525 and the contract called

-2-

JRC/Fall 2010/Sales

for the Defendant to install it for an additional price of $12,242. The Plaintiff complained that the installation was defective. The court held that Article 2 was not applicable.

(3) Dispensation of Food in Restaurants and Blood in Hospitals(a) § 2-314(1). Under this section the serving for value of food or drink

to be consumed either on the premises or elsewhere is a sale.i) Reverses the position that some courts held under the

Uniform Sales Act.1

(b) Blood Transfusionsi) Article 2 does not address this matter specifically.

Under the Uniform Sales Act, some courts held that ablood transfusion was not a sale by a hospital or doctorto a patient, but rather a service, and hence nowarranty protection was available under the statute.

2. Computer Softwarea. License. When a customer pays for software on a disk for installation on the

customer’s computer, that transaction usually is a license that gives the customerthe right to use the software under the terms of the license.(1) Questions arise as to whether the methods of calling the user’s attention

to the license document is sufficient to make the terms of the documentbinding under Article 2. More fundamental, of course, is whether Article2 applies at all.

b. Advent Systems Ltd. v. Unisys Corp. (3d Cir. 1991).(1) Issue. Whether a contract for software was a contract for the sale of

goods, so that the Article 2 statute of frauds applied.(2) The Code “applies to all transactions in goods.” Goods are defined as

“all things (including specifically manufactured goods) which aremoveable at the time of the identification for sale.” Pennsylvania courtshave recognized that “goods” has a very extensive meaning under theUCC.

(3) Computer programs are the product of an intellectual process, but onceimplanted in a medium are widely distributed to computer owners. Ananalogy can be drawn to a compact disc recording of an orchestralrendition. The music is produced by the artistry of musicians and initself is not a “good,” but when transferred to a laser-readable discbecome a readily merchantable commodity. Similarly, when a professordelivers a lecture, it is not a good, but, when transcribed as a book, itbecomes a good.

(4) The topic has stimulated academic commentary with the majorityespousing the view that software fits within the definition of a “good” inthe UCC.(a) Benefits of Applying UCC. Applying the UCC to computer

software transactions offers substantive benefits to litigants andthe courts. The Code offers a uniform body of law on a widerange of questions likely to arise in computer software disputes:implied warranties, consequential damages, disclaimers ofliability, the statute of limitations, to name a few.

(5) Court applies the predominance test to determine the applicability of theUCC.(a) “Although determining the applicability of the UCC to a

Some courts held that the dispensation of food in restaurants was not a “sale of goods” but an “utterance”1

or a service. Since there was no sale, these courts concluded that no warranty could be implied.

-3-

JRC/Fall 2010/Sales

contract by examining the predominance of goods or serviceshas been criticized, we see no reason to depart from thatpractice here.”

c. Architectronics Inc. v. Control Systems, Inc. (S.D.N.Y. 1996).(1) Under the UCC as adopted in New York, a “transaction” need not

involve a sale; the use of the term “transaction” rather than sale in UCC2-102 makes it clear that Article 2 is not to be confined merely to thosetransactions in which there is a transfer of title.(a) The applicability of Article 2 to a transaction is not defeated by

the use of a license in lieu of a sale if the license provides fortransfer of some of the incidents of goods ownership.

(2) Generally, software is considered a “good,” even though a finishedsoftware product may reflect a substantial investment of programmingservices. However, copyrights, patents, and trademarks are classified as“general intangibles” under the UCC and are distinguished from goods.

(3) Because the predominant feature of the SLDA was a transfer ofintellectual property rights, the agreement is not subject to Article 2 ofthe UCC.

d. Uniform Computer Information Transaction Act (UCITA).(1) The Uniform Computer Information Transaction Act (UCITA) was

promulgated by NCCUSL in 1999.(a) Criticized for its complexity. Software developers have

generally been strong supporters of UCITA; many purchasersof software have opposed it.

(b) Has only been adopted in two states . Some states have2

adopted “UCITA-shield” statutes which provide that choiceof law provisions applying UCITA to residents of those statesare not effective.

(2) UCITA applies to computer information transactions.(a) Section 102(a)(11) defines “computer information transaction”

as “as agreement or the performance of it to create, modify,transfer, or license computer information or informationalrights in computer information.”i) “Computer information” is defined as “information in

electronic form which is obtained from or through theuse of a computer or which is in a form capable ofbeing processed by a computer. The term includes acopy of the information and any documentation orpackaging associated with the copy.”a) Therefore, UCITA covers the purchase of a

computer program on a disk including thelicensing agreement and liability disclaimersthat go along with the disk.

(b) Rev. § 2-103(1)(k). The terms [goods] does not includeinformation.i) The intent is to exclude from Article 2 transactions in

which computer programs or other information isdownloaded from an internet site.

e. Distributorship and Franchise Agreements(1) Franchise Relationship. In a franchise relationship the franchisee acquires

goods and intellectual property from the franchisor and sells goods or

In 2003, NCCUSL announced that it would not seek additional adoptions of UCITA.2

-4-

JRC/Fall 2010/Sales

services under the franchisor’s trademark.(2) Zapatha v. Dairy Mart, Inc. (Mass. 1980).

(a) “About 70% of the goods the plaintiffs sold were not purchasedfrom Dairy Mart. Dairy Mart’s profit was intended to comefrom the franchise fee and not from the sale of items to itsfranchisees. Thus, the sale of goods by Dairy Mart to theZapathas was, in a commercial sense, a minor aspect of theentire relationship.”

(b) “We view the legislative statements of policy concerning goodfaith and unconscionability as fairly applicable to all aspects ofthe franchise agreement, not by subjecting the franchiserelationship to the provisions of the sales article but rather byapplying the stated principles by analogy. This basic commonlaw approach, applied to statutory statements of policy, permitsa selective application of those principles expressed in a statutethat reasonably should govern situations to which the statutedoes not apply explicitly.”

f. Contracts Involving the Sale of Both Goods and Real Estate(1) § 2-207. Goods to Be Severed from Realty; Recording.

(1) A contract for the sale of minerals or the like (including oil and gas) or astructure or its materials to be removed from realty is a contract for the sale ofgoods within this chapter if they are to be severed by the seller but until severancea purported present sale thereof which is not effective as a transfer of an interest inland is effective only as a contract to sell.(2) A contract for the sale apart from the land of growing crops or other thingsattached to realty and capable of severance without material harm thereto but notdescribed in subsection (1) or of timber to be cut is a contract for the sale of goodswithin this chapter whether the subject matter is to be severed by the buyer or bythe seller even though it forms part of the realty at the time of contracting, and theparties can by identification effect a present sale before severance.(3) The provisions of this section are subject to any third party rights provided bythe law relating to realty records, and the contract for sale may be executed andrecorded as a document transferring an interest in land, and shall then constitutenotice to third parties of the buyer's rights under the contract for sale.

g. Leases: The Scope of Article 2A(1) Article 2A applies to “any transactions, regardless of form, that creates a

lease. § 2A-102.(2) Major scope issue is whether the transaction is a lease or instead is a sale

in which the seller retains a security interest.(a) Incentives for the supplier to structure the transaction as a lease

rather than a sale with a security interest: (1) no public filing isnecessary to preserve the rights of the lessor as against creditorsof, or buyers from, the lessee; and (2) on default by the lessee,the lessor can just take the goods back, without any obligationto go through the foreclosure proceedings that Article 9 of theUCC requires for a sale with a security interest.

3. Application of Article 2 Rules in Non-Goods Transactionsa. Hoffman v. Horton (Va. 1972).

(1) Issue. Whether an auctioneer at a foreclosure sale may reopen thebidding when an overbid is made immediately prior to orsimultaneously with the falling of the hammer in acceptance of a lowerbid.

(2) Va. Code § 8.2-328(2) read “A sale by auction is complete when theauctioneer so announces by the fall of the hammer or in other customary

-5-

JRC/Fall 2010/Sales

manner. Where a bid is made while the hammer is falling in acceptanceof a prior bid the auctioneer may in his discretion reopen the bidding ordeclare the goods sold under the bid on which the hammer was falling.” (a) We disagree with the trial court that the transaction in this case,

involving the sale of land, is controlled by § 8.2-328(2) of theUniform Commercial Code. Title 8.2 of the CommercialCode applies only to transactions relating to “goods.” Code §8.2-105, § 107.

(b) However, while the UCC is not controlling here, we think itappropriate to borrow from it to establish the rule applicable tothe transaction at hand. To vest the auctioneer crying a sale ofland with the same discretion to reopen bidding that he has inthe sale of goods is to achieve uniformity and, or moreimportance, to recognize a rule which is both necessary andfair.

b. Extension of Article 2 to Cases Clearly Beyond Its Scope(1) Some courts have extended Article 2 to cover cases clearly beyond its

scope because Article 2 has a rule or rules not readily available atcommon law or under other statutes. See Wille v. Southwestern Bell Tel.Co. (Kan. 1976) (applying 2-302's doctrine of unconscionability to acase involving a contract claim against a telephone company by a YellowPages advertiser).(a) Appeal of Reeves Soundcraft Corp. (ASB-CA 1964). Federal

government argued that the matter should be controlled byfederal common law. The Board agreed, but then held that thefederal common law should be deemed to include relevantportions of the UCC, because there is little, if any, federal caselaw on the point involved, and, anyway, the UCC reflects “thebest in modern decisions and discussion.”

4. Effect of Article 2 on Other Statutes Applicable to Sale of Goodsa. Pet Dealers Ass’n of N.J., Inc. v. Division of Consumer Affairs, Dept. Of Law and

Public Safety, State of N.J. (N.J. 1977)(1) Issue. Pet Dealers challenged the validity of regulations regarding the

sale of pet cats and dogs issued by the New Jersey Attorney Generalpursuant to New Jersey’s Consumer Fraud Act.

(2) In Jeselsohn v. Atlantic City (N.J. 1976), the Supreme Court of NewJersey rejected an argument that a local ordinance dealing with auctionswas invalid because it conflicted with Article 2's provisions dealing withauction practices.(a) “The provisions of the Code dealing with sales, rescission and

revocation of acceptance ‘are intended to give certainty andstability to the law of commercial transactions. In this sense,they do not purport to limit the proper exercise of policepower in the public interest.’”

(b) The fact that the regulations are part of a statewide plan tocombat consumer fraud rather than a local ordinance does notalter their legitimacy as a valid exercise of police power. In anyevent, the Code expressly provides that it does not “impair orrepeal any statute regulating sales to consumers.”

b. Statutes Regulating Sales to Consumers, Farmers, or Other Specified Classes ofBuyers(1) Transactions involving automobiles, home improvement products (or

the installation thereof), and agricultural products (e.g., pesticides, seed,livestock, etc.) should be scrutinized carefully in terms of special

-6-

JRC/Fall 2010/Sales

legislation, since the bulk of special legislation involves consumers andfarmers.

(2) Statutes prohibiting deceptive practices in consumer sales transactions. Federal legislation including the Magnuson-Moss Warranty Act.

5. Territorial and Temporal Limitations and Choice of Lawa. Choice of Law

(1) § 1-301. Territorial Application of the Subtitle; Parties’ Powerto Choose Applicable Law.3

(1) Except as provided in this section, when a transaction bears a reasonablerelation to this state and also to another state or nation, the parties may agreethat the law either of this state or of such other state or nation shall govern theirrights and duties. Failing such agreement this subtitle applies to transactionsbearing an appropriate relation to this state.(2) Where one of the following provisions of this subtitle specifies the applicablelaw, that provision governs and a contrary agreement is effective only to theextent permitted by the law (including the conflict of laws rules) so specified:

Rights of creditors against sold goods Section 2-402; Applicability ofthe Article on Leases Sections 2A-105 and 2A-106; Applicability ofthe Article on Bank Deposits and Collection Section 4-102;Governing law in the Article on Funds Transfers Section 4A-507;Letters of Credit Section 5-116; Bulk Sales Subject to the Article onBulk Sales Section 6-103.

(2) Forum. The court in which litigation is brought, called the forum, doesnot, and constitutionally cannot, apply its own substantive law to everymatter that is brought before it.(a) Conflict-of-law rules seek to prevent forum shopping.

(3) 1-105 mandates the application of the law of a particular state for ahandful of transactions and gives the parties the competence to choosetheir own law for all others.(a) Not absolute. The law chosen must bear a “reasonable” relation

to the transaction. (b) No law chosen. If the parties fail to specify the law of a state that

bears a reasonable relation to the transaction, or if they makeno choice of law at all, then the law of the forum applies if itbears an “appropriate” relation to the transaction.

(4) Revised Article 1. With exceptions for consumer transactions, indomestic transactions (i.e., those that do not bear a reasonablerelationship to a foreign country) the parties can choose the law of anystate, whether or not the state chose has a reasonable relationship to thetransaction.(a) International Transactions. The parties can choose the law of any

state or country whether or not the state or country has areasonable relationship with the transaction. i) Limitation. “An agreement otherwise effective . . . is

not effective to the extent that application of the lawof the State or country designated would be contraryto a fundamental policy of the State or country whoselaw would govern in the absence of agreement.”

Original UCC § 1-105 appears as Ark. Rev. Article 1-301. The new choice-of-law provision has been3

the subject of substantial attack and it is not certain that it will be widely adopted. As of 2006, none of the states,including Arkansas, adopting revised Article 1 has adopted the revised version. Instead, they have retained original 1-105.

-7-

JRC/Fall 2010/Sales

(b) Consumer Transactions. In consumer transactions, the state orcounty whose law is chose must bear a reasonable relationshipto the transaction, and the law chosen cannot deprive theconsumer of the protection of any rule of law applicable in thestate or country in which the consumer “principally” resides,or, if the consumer both makes a contract for the purchase ofgoods and takes delivery of the goods in a state or county otherthan that in which the consumer resides, then the consumerprotection laws of that jurisdiction.

(5) Evans v. Harry Robinson Pontiac-Buick, Inc., 336 Ark. 155 (1999).(a) Usury occurs when a lender charges more than the legally

permissible maximum rate of interest, defined by Article 19,section 13 of the Arkansas Constitution, as amended byAmendment 60.i) For an agreement to be usurious, it must be so at the

time it was entered into. The party asserting usury hasthe burden of proof, and the proof must be sustainedby clear and convincing evidence. The intention tocharge a usurious rate of interest will never bepresumed, imputed, or inferred where the oppositeresult can be fairly and reasonably reached.

(b) Ark. Code Ann. § 4-1-105(1), a provision of the UniformCommercial Code, allows parties to choose a foreign state’s lawto govern a transaction:i) Except as provided hereafter in this section, when a

transaction bears a reasonable relation to this state andalso to another state or nation the parties may agreethat the law either of this state or of such other state ornation shall govern their rights and duties. Failingsuch agreement, this subtitle applies to transactionsbearing an appropriate relation to this state.

(c) Arkansas Appliance Distributing sets out certain inquiries that areimportant in determining whether a reasonable relationshipexists between Texas and the retail installment contract at issue:i) A court should look at where the transaction

originated, where payments under the transactionwere sent, and where the parties to the contract werelocated.

II. FORMATION OF THE SALES CONTRACT

A. Introduction1. Prior to the enactment of the UCC, the formation of a sales contract with few exceptions

was governed by the same rules as the formations of any other contract.2. § 2-204. Formation in General.

(1) A contract for sale of goods may be made in any manner sufficient to show agreement, includingconduct by both parties which recognizes the existence of such a contract.(2) An agreement sufficient to constitute a contract for sale may be found even though the moment ofits making is undetermined.(3) Even though one (1) or more terms are left open a contract for sale does not fail for indefiniteness ifthe parties have intended to make a contract and there is a reasonably certain basis for giving anappropriate remedy.

B. Offer and Acceptance1. Unique Designs, Inc. v. Pittard Machinery Company (Ga. App. 1991).

a. Unique relied on OCGA § 13-3-1 and § 13-3-2 to show that the oral contractwas unenforceable because there had been no meeting of the minds.

-8-

JRC/Fall 2010/Sales

(1) § 13-3-1. “To constitute a valid contract, there must be parties able tocontract, a consideration moving to the contract, the assent of the partiesto the terms of the contract, and a subject matter on which the contractcan operate.”

(2) § 13-3-2. “The consent of the parties being essential to a contract, untileach has assented to all the terms, there is no binding contract; untilassented to, each party may withdraw his bid or proposition.”

b. OCGA § 11-2-204. “Even though one or more terms are left open a contractfor sale does not fail for indefiniteness if the parties have intended to make acontract and there is a reasonably certain basis for giving an appropriate remedy.”(1) The confusion over the purchase price and the open terms in the

agreement were not sufficient to negate the clear intent of the parties toenter into an enforceable agreement.

c. OCGA § 11-1-205(1). “A course of dealing is a sequence of previous conductbetween the parties to a particular transaction which is fairly to be regarded asestablishing a common basis of understanding for interpreting their expressionsand other conduct.”(1) We can only conclude under the plain and unambiguous language of

this statute that a sale of a single lathe from Pittard to Unique, whichoccurred more than two years prior to the transaction at issue in thisaction, cannot be deemed to be a “sequence of previous conduct under§ 11-1-205(1).

2. Common-Law Technicalities. § 2-204 seeks to make an agreement between the partiesbinding and eschew the technical difficulties developed under the common law in somestates (e.g., indefiniteness, lack of mutuality vagueness as to the moment the agreement wasstruck, etc.) that prevented formation of a contract.a. UCC Reverses Common Law. § 2-204 reverses this case law, and thus liberalizes

some basic aspects of the law of contract formation.3. Question of Fact. The “intent to contract” is a question of fact for the trier of fact. The

trial judge’s finding of fact cannot be disturbed on appeal if supported by competentevidence in the record.

4. Bacou Dalloz USA, Inc. v. Continental Polymers, Inc. (1st Cir. 2003).a. When the promises of the parties depend on the occurrence of some future event

within the unilateral control of the promisors, the promises are illusory and theagreement is nonbinding.(1) We believe that the district court read Centerville Builders too broadly in

ruling that all agreements to agree are unenforceable in Rhode Island. The Rhode Island Supreme Court’s comment that the Offer to Purchasewas nothing more than agreement to agree and as such wasunenforceable must be viewed in the context in which it was made. The court’s main concern was that the parties made illusory promisesresulting in a lack of mutuality of obligation.(a) The January 12 letter contains no such infirmities. The letterth

does not condition the parties’ obligations on the illusorypromise that the future supply agreement be “satisfactory” toeither party. The letter set forth reciprocal promises in theform of the supply agreement’s material terms. Such promisesare sufficient to establish mutuality of obligation.

b. The actual supply agreement could and likely would contain payment terms,delivery terms, and other similar provisions not contained in the letter. But thefact that the parties were to negotiate these details at a future date does not renderillusory the obligation incurred under the January 12 letter. The parties clearlyth

agreed to enter into a supply agreement consistent with the terms outlined in theJanuary 12 letter. Those terms were not so indefinite as to precludeth

-9-

JRC/Fall 2010/Sales

enforcement of the letter:(1) Price Term. The letter describes the price term as the price then available

from third-party suppliers. The price term thus is readily discernable byobtaining quotes from other vendors or other evidence of the prevailingmarket price.(a) A term specifying market price or the currently available price

provides a sufficiently definite basis to provide a remedy.(2) Quality Term. Under Rhode Island law, “virtually every contract

contains an implied covenant of good faith and fair dealing between theparties.”

5. Restatement (Second) of Contracts § 33. Certainty.(1) Even though a manifestation of intention is intended to be understood as an offer, it cannot beaccepted so as to form a contract unless the terms of the contract are reasonably certain.(2) The terms of a contract are reasonably certain if they provide a basis for determining the existenceof a breach and for giving an appropriate remedy.(3) The fact that one or more terms of a proposed bargain are left open or uncertain may show that amanifestation of intention is not intended to be understood as an offer or as an acceptance.

6. § 2-305. Open Price Term.(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 at the time for 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; or(c) the price is to be fixed in terms of some agreed market or other standard as set orrecorded by a third person or agency and it is not so set or recorded.

(2) A price to be fixed by the seller or by the buyer means a price for him to fix in good faith.(3) When a price left to be fixed otherwise than by agreement of the parties fails to be fixed throughfault of one party the other may at his option treat the contract as cancelled of himself fix a reasonableprice.(4) Where, however, the parties intend not to be bound unless the price be fixed or agreed and it isnot fixed or agreed there is no contract. In such a case the buyer must return any goods alreadyreceived or it unable to do so must pay their reasonable value at the time of delivery and the sellermust return any portion of the price paid on account.

7. Offer & Acceptancea. Common Law View. The common law adhered to the view that the offeror was

“the master of the offer” and as such it was for the offeror to determine the natureand extent of the resultant power of acceptance, including the mode or form thatthe acceptance take. Therefore, it was often held that an attempted acceptancemade in a manner other than that prescribed by the offer is ineffective to form acontract.

b. § 2-206. Offer and Acceptance in Formation of Contract.(1) Unless otherwise unambiguously indicated by the language or circumstances

(a) an offer to make a contract shall be construed as inviting acceptance in anymanner and by any medium reasonable in the circumstances;(b) an order or other offer to buy goods for prompt or current shipment shall beconstrued as inviting acceptance either by a prompt promise to ship or by theprompt and current shipment of conforming or non-conforming goods, but such ashipment of non-conforming goods does not constitute an acceptance if the sellerseasonably notifies the buyer that the shipment is offered only as anaccommodation to the buyer.

C. Statute of Frauds1. Early Statute of Frauds. Parliament enacted the Statute of Frauds in 1677 to avoid unfair

results that seemed to flow from allowing courts to hear cases based on allegations of oralcontracts.a. Writing Required. The Statute of Frauds required a written agreement or other

-10-

JRC/Fall 2010/Sales

writing proving the existence of the contract and its essential terms.b. Rigid enforcement of the Statute of Frauds by some courts provided a shield for a

bad-faith party by allowing that party to avoid a fairly made contract because of afailure to satisfy the formal requisites of the Statute.

c. Parliament repealed the Statute of Frauds for sales cases in 1954.(1) The UCC, accepting arguments from both sides, adopted 2-201.

2. § 2-201. Formal Requirements; Statute of Frauds.(1) Except as otherwise provided in this section a contract for the sale of goods for the price of $500 ormore is not enforceable by way of action or defense unless there is some writing sufficient to indicatethat a contract for sale has been made between the parties and signed by the party against whomenforcement is sought or by his authorized agent or broker. A writing is not insufficient because itomits or incorrectly states a term agreed upon but the contract is not enforceable under this paragraphbeyond the quantity of goods shown in such writing.(2) Between merchants if within a reasonable time a writing in confirmation of the contract andsufficient against the sender is received and the party receiving it has reason to know its contents, itsatisfies the requirements of subsection (1) against such party unless written notice of objection to itscontents is given within 10 days after it is received.(3) A contract which does not satisfy the requirements of subsection (1) but which is valid in otherrespects is enforceable

(a) if the goods are to be specially manufactured for the buyer and are not suitable for sale toothers in the ordinary course of the seller's business and the seller, before notice ofrepudiation is received and under circumstances which reasonably indicate that the goods arefor the buyer, has made either a substantial beginning of their manufacture or commitmentsfor their procurement; or(b) if the party against whom enforcement is sought admits in his pleading, testimony orotherwise in court that a contract for sale was made, but the contract is not enforceable underthis provision beyond the quantity of goods admitted; or(c) with respect to goods for which payment has been made and accepted or which have beenreceived and accepted (Sec. 2-606).

3. Southwest Engineering Co., Inc. v. Martin Tractor Co., Inc. (Kan. 1970).a. Southwest took the position that the memorandum prepared by Hurt at

Springfield supplies the essential elements of a contract required by the foregoingstatute, i.e., that it is (1) a writing signed by the parties to be charged, (2) that it isfor the sale of goods and (3) that quantity is shown.

b. In the Kansas Comment to 84-2-201, which closely parallels the Official UCCComment, the following explanation is given:

“Subsection (1) relaxes the interpretations of many courts in providingthat the required writing need not contain all the material terms and thatthey need not be stated precisely. All that is required is that the writingafford a basis for believing that the offered oral evidence rests on a realtransaction. Only three definite and invariable requirements as to thewriting are made by this subsection. First, it must evidence a contractfor the sale of goods; second, it must be ‘signed,’ a word which includesany authentication which identifies the party to be charged; and third, itmust specify quantity. Terms relating to price, time, and place ofpayment or delivery, the general quality of goods, or any particularwarranties may all be omitted.”

c. K.S.A. § 84-1-201(39) provides as follows: “‘Signed’ includes any symbolexecuted or adopted by a party with present intention to authenticate a writing.”(1) The Official UCC Comment states in part:

“The inclusion of authentication in the definition of ‘signed’ isto make clear that as the term is used in this Act a completesignature is not necessary. Authentication may be printed,stamped or written. It may be on any part of the document

-11-

JRC/Fall 2010/Sales

and in appropriate cases may be found in a billhead orletterhead. The question always is whether the symbol wasexecuted or adopted by the party with present intention toauthenticate the writing.”

d. K.S.A.§ 84-2-204(3) reads: “Even though one or more of the terms are left opena contract for sale does not fail for indefiniteness if the parties have intended tomake a contract and there is a reasonably certain basis for giving an appropriateremedy.”(1) K.S.A. § 84-2-310 supplies the omitted term:

Unless otherwise agreed(a) payment is due at the time and place at which the buyer is to receive thegoods even though the place of shipment is the place of delivery.

4. Howard Construction Co. v. Jeff-Cole Quarries, Inc. (Mo. App. 1983).a. Rejected and criticized the reasoning of Southwest Engineering.4

(1) “The court’s finding that the writing evidence a contract has beenseverely criticized. See 84 Harv. L. Rev. 1737 (1971). That criticismstems from the fact that ‘the memorandum before the court–on its facenothing more than a price list–was not proof of agreement, but, at most,only of negotiations.’ Id. at 1738. Finding such a writing sufficientplants the seeds for allowing the statute of frauds to be satisfied by anyevidence of mere negotiations.”

5. Decatur Cooperative Ass’n v. Urban (Kan. 1976).a. Issue: Whether the alleged seller, a farmer, was a “merchant” within the meaning

of the uniform commercial code so as to remove the oral contract from operationof the statute of frauds.(1) Secondary Issue: Whether the seller was equitably estopped from relying

on the statute of frauds as a defense to an action on the oral contract.b. Under K.S.A. § 84-2-201(2) a “merchant” is deprived of the defense of the

statute of frauds as against an oral contract with another merchant if he fails toobject to the terms of a written confirmation within ten days of its receipt.(1) K.S.A. § 84-2-104:

(1) ‘Merchant’ means a person who deals in goods of the kind or otherwise by hisoccupation holds himself as having knowledge or skill peculiar to the practices orgoods involved in the transaction or to whom such knowledge of skill may beattributed to his employment of an agent or broker or other such intermediary whoby his occupation holds himself out as having such knowledge or skill.(2) ‘Between merchants’ means in any transactions with respect to which bothparties are chargeable with the knowledge or skill of merchants.

c. It appears there are three separate criteria for determining merchant status. Amerchant is:(1) a dealer who deals in the goods of the kind involved, or(2) one who by his occupation holds himself out as having knowledge or

skill peculiar to the practices or goods involved, or(3) a principal who employs an agent, broker or other intermediary who by

his occupation holds himself out as having knowledge or skill peculiar tothe practices or goods involved in the transaction.

Professionalism, special knowledge, and commercial experience are to be used indetermining whether a person in a particular situation is to be held to thestandards of a merchant.

d. The writers of the official UCC comment virtually equate professionals with

But see Veik v. Tilden Bank (Neb. 1978) which held that a written offer satisfied the statute because “all that4

is required is that the writing afford a basis for believing that the offered oral evidence rests on a real transaction.”

-12-

JRC/Fall 2010/Sales

merchants–the casual or inexperienced buyer or seller is not to be held to thestandard set for the professional in the business. The defined term “betweenmerchants,” used in the exception proviso to the statute of frauds, contemplatesthe knowledge and skill of professionals on each side of the transaction.(1) Appellee as a farmer undoubtedly had special knowledge or skill in

raising wheat but we do not think this factor, coupled with annual salesof a wheat crop and purchases of seed wheat, qualified him as amerchant in that field.

e. K.S.A. § 84-1-103 provides that certain principles of law and equity, includingestoppel, unless displaced by the particular provisions of the uniform code, shallsupplement its provisions.(1) Equitable estoppel v. Promissory estoppel:

(a) “A promise which the promisor should reasonably expect toinduce action or forbearance of a definite and substantialcharacter on the part of the promisee and which does inducesuch action or forbearance is binding if injustice can be avoidedonly by enforcement of the promise. This is called the doctrineof promissory estoppel.”

(b) “Promissory estoppel differs from ordinary ‘equitable’ estoppelin that the representation is promissory rather than to anexisting fact.”

(2) A substantial number of courts hold that the doctrine of promissoryestoppel may render enforceable any promise upon which the promisorintended, or should have known, that the promisee would act to hisdetriment, and which is indeed acted upon in such a manner by thepromisee, where application of the statute of frauds to that promisewould thus work a fraud or a gross injustice upon the promisee.(a) Before the doctrine of promissory estoppel can be invoked in a

case involving the statute of frauds the promisee must first showby competent evidence that a valid and otherwise enforceablecontract was entered into by the parties.i) The conduct of the promisor must be something more

than a mere refusal to perform the oral contract, sinceany party to an oral contract unenforceable under thestatute of frauds has that right, and the exercise of theright of nonperformance is no more a fraud than abreach of any other contract.

ii) And the promisee must show the facts of the case andthe conduct of the promisor justifying application ofthe doctrine.

f. The vital principle of estoppel rendering the statute of frauds inoperative is thathe who by his language or conduct leads another to do, upon the faith or an oralagreement, what he would not otherwise have done, and changes his position tohis prejudice, will not be allowed to subject such person to loss or injury, or toavail himself of that change to the prejudice of such other party.

g. It is clear that appellant was entitled to invoke the doctrine of promissory estoppelso as to bar application of the statute of frauds and to have an evidentiary hearingupon disputed matters in connection with that issue.

6. Lige Dickson Co. v. Union Oil Co. of California (Wash. 1981).a. Certified Question: Under the law of the State of Washington, may an oral promise

otherwise within the statute of frauds, § 62.A.2-101, nevertheless be enforceableon the basis of promissory estoppel?

b. The Kentucky Court of Appeals reached the conclusion that UCC § 2-201cannot be overcome through the application of the doctrine of promissory

-13-

JRC/Fall 2010/Sales

estoppel. It reasoned that the statutory avoidance of § 2-201 found in § 2-201(3)was as far as the legislature was willing to go and “any attempt by the courts tojudicially amend this statute which is plain on its face would contravene theseparation of powers mandated by the Constitution.”

c. The UCC was adopted to regulate commercial dealing. Uniformity amongdifferent jurisdictions in decisions concerning commerce was a major motivationbehind development of the UCC. By so doing, it was hoped that this area of lawwould become clearer and disputes would be more readily resolved. (1) If we were to adopt § 139 as applicable in the context of the sale of5

goods, we would allow the parties to circumvent the UCC. Forexample, to prove justifiable reliance (an element of promissoryestoppel), the promisee may offer evidence of course of dealing betweenthe parties, as plaintiff did in this case.(a) The Official Comments to 62A.1-205(4) state that the statute

of frauds: “restricts the action of the parties, and . . . cannot beabrogated by agreement, or by a usage of trade . . .”

7. Partial Performance. § 2-201(3)(c) provides that performance may make an oral agreementenforceable even if there is no writing.

8. Admissions. If a party to an agreement admits in the context of judicial proceedings that acontract was made, 2-201(3)(b) makes that agreement enforceable even if there is nowriting.a. Lewis v. Hughes (Md. 1975). “We come then to the basic issue in this case, which

is whether the Statute of Frauds is satisfied pursuant to § 2-201(3)(b) when theparty denying the existence of the contract and relying on the statute takes thestand and, without admitting explicitly that a contract was made, testifies to factswhich as a matter of law establish that a contract was formed.”(1) “While we have found no case specifically deciding this question,

numerous cases dealing with § 2-201(3)(b) seem to say that in such asituation the requirements of the statute have been fulfilled. We holdthat the Statute of Frauds does not bar enforcement of the contractinvolved in this case.”

9. Specially Manufactured Goods. In Impossible Electronic Techniques, Inc. v. Wackenhut ProtectiveSystems, Inc. (5th Cir. 1982), the court stated:a. “The crucial inquiry is whether the manufacturer could sell the goods in the

ordinary course of his business to someone other than the original buyer. If withslight alterations the goods could be sold, then they are not speciallymanufactured; if, however, essential changes are necessary to render the goodsmarketable by the seller to others, then the exception does apply.”

10. Noncompliance. Section 2-201 declares that contracts that fail to comply with its provisions

Restatement (Second) of Contracts § 139. Enforcement by Virtue of Action in Reliance.5

(1) A promise which the promisor should reasonably expect to induce action or forbearance on the part of the promisee or athird person and which does induce the action or forbearance is enforceable notwithstanding the Statute of Frauds ifinjustice can be avoided only by enforcement of the promise. The remedy granted for breach is to be limited as justicerequires.(2) In determining whether injustice can be avoided only by enforcement of the promise, the following circumstances aresignificant:

(a) the availability and adequacy of other remedies, particularly cancellation and restitution;(b) the definite and substantial character of the action or forbearance in relation to the remedy sought;(c) the extent to which the action or forbearance corroborates evidence of the making and terms of the promise, orthe making and terms are otherwise established by clear and convincing evidence;(d) the reasonableness of the action or forbearance;(e) the extent to which the action or forbearance was foreseeable by the promisor.

-14-

JRC/Fall 2010/Sales

are “unenforceable.”a. Void/Voidable. Voidable not void. Failure to meet the requirements of 2-201

does not nullify a contract, but gives one of the parties an option to avoid it.D. The Battle of the Forms

1. § 2-207. Additional Terms in Acceptance or Confirmation.(1) A definite and seasonable expression of acceptance or a written confirmation which is sent within areasonable time operates as an acceptance even though it states terms additional to or different fromthose offered or agreed upon, unless acceptance is expressly made conditional on assent to theadditional or different terms.(2) The additional terms are to be construed as proposals for addition to the contract. Betweenmerchants such terms become part of the contract unless:

(a) the offer expressly limits acceptance to the terms of the offer.(b) they materially alter it; or(c) notification of objection to them has already been given or is given within a reasonabletime after notice of them is received.

(3) Conduct by both parties which recognizes the existence of a contract is sufficient to establish acontract for sale although the writings of the parties do not otherwise establish a contract. In such casethe terms of the particular contract consist of those terms on which the writings of the parties agree,together with any supplementary terms incorporated under any other provisions of this act.

2. C. Itoh & Co. (America), Inc. v. Jordan International Co. (7th Cir. 1977)a. The only effect of a failure to object to a written confirmation of an oral offer or

agreement under § 2-201 is to take away from the receiving merchant the defenseof the Statute of Frauds. Section 2-201 obviously cannot be relied on to make aparticular term, such as a provision for arbitration, binding on a party if thatsection does not even serve to establish the existence of an agreement

b. Hence, once the existence and terms of an alleged oral agreement have beenestablished, it is necessary to refer to § 2-207, Additional Terms in Acceptance orConfirmation, not § 2-201, to ascertain whether a term included in a writtenconfirmation but not in the parties’ oral agreement is binding on the recipient ofthe written confirmation.

c. Under § 2-207 it is necessary to first determine whether a contract has beenformed under § 2-207(1) as a result of the exchange of forms.(1) Common-Law Mirror Image Rule. At common law, an acceptance which

contained terms additional to those of the offer constituted a rejection ofthe offer and thus became a counter-offer.

(2) § 2-207 was intended to alter this inflexible common law approach tooffer and acceptance.(a) It is now well-settled that the mere presence of an additional

term, such as a provision for arbitration, in one of the parties’forms will not prevent the formation of a contract under § 2-207(1).

(3) However, while this constitutes a sharp departure from the common law“mirror image” rule, there remains situations where the inclusion of anadditional term in one of the form exchanged by the parties will preventthe consummation of a contract under that section.(a) If acceptance is expressly made conditional on assent to the

additional terms.i) The consequence of a clause containing acceptance on

assent to the additional or different terms is that as ofthe exchange writings, there is no contract. Either partymay at this point in their dealings walk away from thetransaction.

(4) At common law, the terms of the counter-offer were said to have beenaccepted by the original offeror when he proceeded to perform under

-15-

JRC/Fall 2010/Sales

the contract without objecting to the counter-offer.(a) § 2-207(3) of the Code first provides that “conduct by both

parties which recognizes the existence of a contract is sufficientto establish a contract for sale although the writings of theparties do not otherwise establish a contract.”i) Where a contract has been consummated by the

conduct of the parties, “the terms of the particularcontract consist of those terms on which the writingsof the parties agree, together with any supplementaryterms incorporated under any other provisions of thisAct.”

ii) We are persuaded that the disputed additional terms(i.e., those terms on which the writings of the partiesdo not agree) which are necessarily excluded from aSubsection (3) contract by the language, “terms onwhich the writings of the parties agree,” cannot bebrought back into the contract under the guise of“supplementary terms.”a) Accordingly, we find that the

“supplementary terms” contemplated by § 2-207(3) are limited to those supplied by thestandardized “gap-filler” provisions of ArticleTwo.

3. Northrop Corp. v. Litronic Industries (7th Cir.)a. § 2-207 provides that if additional terms in the acceptance are not materially

different from those in the offer, then, subject to certain other qualifications, theybecome part of the contract, § 2-207(2), while if the additional terms arematerially different they operate as proposals and so have no effect unless theofferor agrees to them, UCC § 2-207, comment 3; if the offeror does not agreeto them, there, the terms of the contract are those in the offer.

b. The Code does not explain, however, what happens if the offeree’s responsecontains different terms (rather than additional ones) within the meaning of § 2-207(1). There is no consensus on that question.(1) One view is that the discrepant terms in both nonidentical offer and the

acceptance drop out, and default terms found elsewhere in the Code fillthe resulting gap. (Majority view).

(2) Another view is that the offeree’s discrepant terms drop out and theofferor’s become part of the contract.

(3) A third view, possibly the most sensible, equates “different” with“additional” and makes the outcome turn on whether the new terms inthe acceptance are materially different from the terms in the offer–inwhich they operate as proposals, so that the offeror’s terms prevail unlesshe agrees to the variant terms in the acceptance–or not materiallydifferent from the terms in the offer, in which event they become part ofthe contract.

4. Article 2A. Article 2A contains no provision like § 2-207 because leases usually are notformed by an exchange of purchase order and acknowledgment forms.

5. Hill v. Gateway 2000, Inc. (7th Cir. 1997).a. ProCD holds that terms inside a box of software bind consumers who use the

software after an opportunity to read the terms and to reject them by returningthe product.

b. Practical considerations support allowing vendors to enclose the full legal termswith their products. Cashiers cannot be expected to read legal documents tocustomers before ringing up sales. If the staff at the other end of the phone for

-16-

JRC/Fall 2010/Sales

direct-sales operations such as Gateway’s had to read the four-page statement ofterms before taking the buyer’s credit card number, the droning voice wouldanesthetize rather than enlighten many potential buyers.

c. Section 2-207(2) of the UCC, the infamous battle-of-the-forms section, statesthat “additional terms [following acceptance of an offer] are to be construed asproposals for addition to a contract. Between merchants such terms become partof the contract unless . . .”(1) However, where there is only one form, Section 2-207 is irrelevant.

d. ProCD answers “yes,” to merchants and consumers alike, to the question ofwhether a vendor may propose a contract of sale be formed, not in the store (orover the phone) with the payment of money or a general “send me he product,”but after the customer has had a chance to inspect both the item and the terms.

e. Shoppers have three principal ways to discover terms:(1) They can ask the vendor to send a copy before deciding. In fact, the

Magnuson-Moss Warranty Act requires firms to distribute their warrantyterms upon request.

(2) They can consult public sources (computer magazines, the Web sites ofvendors) that may contain this information.

(3) They may inspect the documents after the product’s delivery.6. Klocek v. Gateway, Inc. (D. Kan. 2000).

a. Split Authority. State courts in Kansas and Missouri apparently have not decidedwhether terms received with a product become part of the parties’ agreement. Authority from other courts is split.

b. When Was Contract Formed? It appears that at least in part, the cases turn onwhether the court finds that the parties formed their contract before or after thevendor communicated its terms to the purchaser.

c. In ProCD , the Seventh Circuit noted that the exchange of money frequentlyprecedes the communication of detailed terms in a commercial transaction. Citing UCC § 2-204, the court reasoned that by including the license with thesoftware, the vendor proposed a contract that the buyer could accept by using thesoftware after having an opportunity to read the license.(1) The Hill court followed the ProCD analysis, noting that “practical

considerations support allowing vendors to enclose the full legal termswith their products.”

d. This court is not persuaded that Kansas or Missouri courts would follow theSeventh Circuit reasoning in Hill and ProCD .(1) In each case, the Seventh Circuit concluded without support that UCC

§ 2-207 was irrelevant because the cases involved only one written form. This conclusion is not supported by the statute or by Kansas or Missourilaw.

(2) Disputes under § 2-207 often arises in the context of a “battle of theforms,” but nothing in its language precludes application in a case whichinvolves only one form. By its terms, § 2-207 applies to an acceptanceor written confirmation. It states nothing which requires another formbefore the provision becomes effective.(a) In fact, the official comment to the section specifically provides

that §§ 2-207(1) and (2) apply “where an agreement has beenreached orally ... and if followed by one or both parties sendingformal memoranda embodying the terms so far agreed andadding terms not discussed.”

(3) In addition, the Seventh Circuit has provided no explanation for itsconclusion that the “vendor is the master of the offer.” In typicalconsumer transactions, the purchaser is the offeror, and the vendor is theofferee.

-17-

JRC/Fall 2010/Sales

E. Articles 2 and 2A and Electronic Commerce1. UETA & E-Sign. In 1999, NCCUSL promulgated the Uniform Electronic Transactions

Act (UETA), and in 2000, Congress adopted the Electronic Signatures in Global andNational Commerce Act, 15 U.S.C. 7000ff (popularly known as “E-Sign.”).a. UETA and E-Sign cover the same issues in very similar language, and E-Sign

provides that it does not apply in states that have adopted UETA.(1) State Adoption and Exemption. More than 40 states have adopted UETA

and thus are exempted from the federal law.F. Contract Modification

1. § 2-209. Modification, Rescission, and Waiver.(1) An agreement modifying a contract within this chapter needs no consideration to be binding.(2) A signed agreement which excludes modification or rescission except by a signed writing cannot beotherwise modified or rescinded, but except as between merchants such a requirement on a formsupplied by the merchant must be separately signed by the other party.6

(3) The requirements of the statute of frauds section of this chapter (§ 4-2-201) must be satisfied ifthe contract as modified is within its provisions.(4) Although an attempt at modification or rescission does not satisfy the requirements of subsection(2) or (3) it can operate as a waiver.(5) A party who has made a waiver affecting an executory portion of the contract may retract thewaiver by reasonable notification received by the other party that strict performance will be required ofany term waived, unless the retraction would be unjust in view of a material change of position inreliance on the waiver.

2. Wisconsin Knife Works v. National Metal Crafters (7th Cir. 1986).a. Section 2-209 of the UCC provides that “a signed agreement which excludes

modification or rescission except by a signed writing cannot be otherwisemodified or rescinded, but except as between merchants such a requirement on aform supplied by the merchant must be separately signed by the other party.”(1) We conclude that the clause forbidding modifications other than in

writing was valid and applicable and that the jury should not have beenallowed to consider whether the contract had been modified in someother way. This may, however, have been a harmless error. (a) Section 2-209(4) of the UCC provides that “an attempt at

modification” which does not satisfy a contractual requirementthat modifications be in writing nevertheless “can operate as awaiver.”

b. Common Law. The common law refused to enforce modifications unsupportedby fresh consideration. Under the pre-existing duty rule, an enforceableagreement to modify a contract required consideration.

c. UCC Approach. The drafters of the UCC took a fresh approach by makingmodifications enforceable even if not supported by consideration (See § 2-209(1))and looking to the doctrines of duress and bad faith for the main protectionagainst exploitive or opportunistic attempts at modification.(1) Exclusion of Oral Modifications. But they did another thing as well. In §

2-209(2) they allowed the parties to exclude oral modifications. (a) Common Law Didn’t Allow. The common law did not enforce

agreements such as § 2-20(2) authorizes. The “reasoning” wasthat the parties were always free to agree orally to cancel theircontract and the clause forbidding modifications not in writingwould disappear with the rest of the contract when it was

This subsection is clumsily drafted. Under the UCC, if the contract is between a merchant and a6

nonmerchant, a term on the merchant’s form requiring that modification or rescission be in a signed record must beseparately signed by the nonmerchant, otherwise the clause is ineffective. Calamari, § 5.14.

-18-

JRC/Fall 2010/Sales

cancelled.d. Attempted Modification as Waiver. If § 2-209(4), which as we said provides that an

attempted modification which does not comply with subsection (2) cannevertheless operate as a “waiver,” is interpreted so broadly that any oralmodification is effective as a waiver notwithstanding § 2-209(2), both provisionsbecome superfluous and we are back in the common law–only with not even arequirement of consideration to reduce the likelihood of fabricated or unintendedoral consequences.(1) Reliance Necessary. If an attempted modification is effective as a waiver

only if there is reliance, then both sections 2-209(2) and 2-209(4) can begiven effect.(a) Reliance, if reasonably induced and reasonable in extent, is a

common substitute for consideration in making a promiselegally enforceable, in part because it adds something in theway of credibility to the mere say-so of one party.

(b) The main purpose of forbidding oral modifications is toprevent the promisor from fabricating a modification that willlet him escape his obligations under the contract and the dangerof successful fabrication is less if the promisor has actuallyincurred a cost, has relied.

(c) There is of course a danger of bootstrapping–of incurring a costin order to make the case of a modification. But it is a riskycourse and is therefore less likely to be attempted than merelytestifying to a conversation; it makes one put one’s moneywhere one’s mouth is.

e. Our approach is not inconsistent with § 2-209(5), which allows a waiver to bewithdrawn while the contract is executory, provided there is no “material changeof position in reliance on the waiver.”

3. BMC Industries, Inc. v. Barth Industries, Inc. (11th Cir. 1998).a. Although the UCC does not specifically layout the elements of waiver, we have

stated that waiver requires (1) the existence at the time of the waiver a right,privilege, advantage, or benefit which may be waived; (2) the actual constructiveknowledge thereof; and (3) an intention to relinquish such a right, privilege,advantage, or benefit.

b. Detrimental Reliance Not Required for Waiver. We conclude that the UCC does notrequire consideration or detrimental reliance for waiver of a contract term.(1) Our conclusion follows from the plain language of subsection (4) and

(5). While subsection (4) states than an attempted modification that failsmay still constitute a waiver, subsection (5) provides that the waiver maybe retracted unless the non-waiving party relies on the waiver.(a) Consequently, the statute recognizes that waivers may exist in

the absence of detrimental reliance–these are the retractablewaivers referred to in subsection (5). Only this interpretationrenders meaning to subsection (5), because reading subsection(4) to require detrimental reliance for all waivers means thatwaivers would never be retractable.

(b) Judge Posner, in Wisconsin Knife Words v. National MetalCrafters, ignores a fundamental difference betweenmodifications and waivers: while a party that has agreed to acontract modification cannot cancel the modification withoutgiving consideration for the cancellation, a party mayunilaterally retract its waiver of a contract term provided itgives reasonable notice.

4. Section 2-209 and the Statute of Frauds

-19-

JRC/Fall 2010/Sales

a. Under 2-201 itself, only specified forms of reliance take oral contracts out of thestatute, viz., delivery and acceptance, payment, or commencing manufacturing ofspecially manufactured goods. But cases like Decatur Cooperative Association v.Urban hold that detrimental reliance takes the case out of the statute.

b. It is possible to read § 2-209(3) as requiring a writing for any modification of acontract for more than $500, but this reading creates an anomaly.(1) Under 2-201 itself not all the terms of a contract have to be evidenced

by a writing: the only essential term is a quantity term. Oral evidencecan be offered showing all the other terms.

(2) Therefore, perhaps §2-209(3) only states the obvious: that contract formore than $500 must meet the requirements of 2-201. This wouldmean that any increase in the quantity term must be evidenced by awriting, since a contract is not enforceable beyond the quantity shownin the writing. And it would mean that price increases from less than$500 to more than $500 must be evidenced by a writing that satisfies §2-201(1).

G. Options Without Considerations (Firm Offers)1. § 2-205. Firm Offers.

An offer by a merchant to buy or sell goods in a signed record that by its terms gives assurances that itwill be held open is not revocable, for lack of consideration, during the time stated or if no time isstated for a reasonable time, but in no event may the period of irrevocability exceed three months. Any such term of assurance in a form supplied by the offeree must be separately signed by the offeror.

2. Requirements of § 2-205. (1) Merchant – defined in § 2-104 to mean a person dealingprofessionally in the kind of goods in question; (2) Signed writing; and (3) Explicitassurances

3. Time Limits of § 2-205a. Reasonable Time Period. If the UCC firm offer does not state for how long a time

the offer will be held open, it is irrevocable “for a reasonable time.”(1) § 1-205(a). Reasonable Time. Whether a time for taking an action

required by the Uniform Commercial Code is reasonable depends on the nature,purpose, and circumstances of the action.

b. Stated Time. If the offer state a time period during which it is irrevocable, thattime period controls.

c. Three Month Limit. Whether or not a time period is stated, an offer under § 2-205 cannot be made irrevocable for a period longer than three months. (1) If the offeree gives consideration for the irrevocability, the offer will be

irrevocable for whatever period is stated. § 2-205 deals only with firmoffers for which no consideration is given.7

4. Form Supplied by the Offeree. If the firm offer is contained on a form drafted by the offeree,the offer is irrevocable only if that particular “firm offer” clause is separately signed by theofferor.8

5. Friedman v. Sommer (N.Y. App. 1984).a. A contract for the sale of a cooperative apartment, in reality a sale of securities in

a cooperative corporation, is governed by the UCC. The applicable section of

“If supported by consideration it may continue for as long as the parties specify. This section deals only7

with the offer which is not supported by consideration.” Comment 3, § 2-205.

“Protection is afforded against the inadvertent signing of a firm offer when contained in a form prepared8

by the offeree by requiring that such a clause be separately authenticated. If the offer clause is called to the offeror’sattention and he separately authenticates it, he will be bound; Section 2-302 may operate, however, to prevent anunconscionable result which otherwise would flow from other terms appearing in the form.” Comment 4, § 2-205.

-20-

JRC/Fall 2010/Sales

the Code is § 2-205 which provides in pertinent part:(1) “An offer . . . in a signed writing which by its terms gives assurance that

it will be held open is not revocable, for lack of consideration, duringthe time stated.”(a) The offer here gave no such assurance. Quite the contrary, it

expressly provided that it was “non-exclusive.” Thus, thesponsor explicitly reserved the right to sell the tenant’sapartment to others at any time during the 30-dayperiod–precisely the opposite of an assurance that the tenantwould have the right at any time during that period to purchasethe apartment for herself.

6. Section 2-205 and Promissory Estoppela. E.A. Coronis Associates v. M. Gordon Construction Co. (N.J. App. Div. 1966)

(1) To successfully establish a cause of action based on promissory estoppelGordon must prove that (1) it received a clear and definite offer fromCoronis; (2) Coronis could expect reliance of a substantial nature; (3)actual reasonable reliance on Gordon’s part, and (4) detriment.

III. TERMS OF THE SALE CONTRACT

» § 1-201(11). “Contract”, as distinguished from “agreement”, means the total legal obligation that results from theparties’ agreement as determined by the Uniform Commercial Code as supplemented by any other applicable law. A. Terms of the Agreement

1. The Concept of Agreementa. § 1-201(3). “Agreement”, as distinguished from “contract”, means the bargain of the

parties in fact, as found in their language or inferred from other circumstances, includingcourse of performance, course of dealing, or usage of trade as provided in Section 1-303.

b. The definition makes it clear that not all agreements are effective and that theagreement itself consists of the express and implied terms constituting the actualbargain of the parties.

2. Express Terms and the Limitations of Thema. Article 2 adopts the general principle of freedom of contract, which means,

among other things, that written terms in a sales contract are generally to be takenat face value and understood according to the normal techniques of legalinterpretation. But there are limits on freedom of contract: (1) § 1-302. Variation by Agreement.

(a) Except as otherwise provided in subsection (b) or elsewhere in [the UniformCommercial Code], the effect of provisions of [the Uniform Commercial Code]may be varied by agreement.(b) The obligations of good faith, diligence, reasonableness, and care prescribed by[the Uniform Commercial Code] may not be disclaimed by agreement. Theparties, by agreement, may determine the standards by which the performance ofthose obligations is to be measured if those standards are not manifestlyunreasonable. Whenever [the Uniform Commercial Code] requires an action tobe taken within a reasonable time, a time that is not manifestly unreasonablemay be fixed by agreement.(c) The presence in certain provisions of [the Uniform Commercial Code] of thephrase “unless otherwise agreed”, or words of similar import, does not imply thatthe effect of other provisions may not be varied by agreement under this section.

(2) § 2-302. Unconscionable Contract or Clause(1) If the court as a matter of law finds the contract or any clause of the contract tohave been unconscionable at the time it was made the court may refuse to enforcethe contract, or it may enforce the remainder of the contract without theunconscionable clause, or it may so limit the application of any unconscionableclause to avoid any unconscionable result.(2) When it is claimed or appears to the court that the contract or any clause

-21-

JRC/Fall 2010/Sales

thereof may be unconscionable the parties shall be afforded a reasonableopportunity to present evidence as to its commercial setting, purpose and effect toaid the court in making the determination.

b. Campbell Soup Co. v. Wentz (3d Cir. 1948). [UNCONSCIONABILITY](1) Paragraph 2 provides for the manner of delivery. Carrots are to have

their stalks cut off and be in clean sanitary bags or other containersapproved by Campbell. This paragraph concludes with a statement thatCampbell’s determination of conformance with specifications shall beconclusive. The defendants attack this provision as unconscionable.(a) We do not think that it is, standing by itself. We think that the

provision is comparable to the promise to perform to thesatisfaction of another and that Campbell would be held liableif it refused carrots which did in fact conform to thespecifications.

(2) We are not suggesting that the contract is illegal. Nor are we suggestingany excuse for the grower in this case who has deliberately broken anagreement entered into with Campbell. We do think however, that aparty who has offered and succeeded in getting an agreement as tough asthis on is should not come to a chancellor and ask court help in the enforcementof its terms. That equity does not enforce unconscionable bargains is toowell established to require elaborate citation.

c. History of Unconscionability and Equity. Courts of equity long have refused toenforce agreements that are so extreme in nature as to appear unconscionable inthe light of business practices and mores.(1) The idea that a contract may be unenforceable because it is shockingly

unfair dates back hundreds of years.(2) Restatement (Second) of Contracts § 208 allows a court to decline to

enforce all or party of an unconscionable contract. The provision isalmost word-for-word the same as § 2-302(1).

(3) The Code itself does define the word “unconscionable.” However,Comment 1 to § 2-303 attempts to do so:(a) “The basic test is whether, in light of the general commercial

background and the commercial needs of the particular trade orcase, the clauses involved are so one-sided as to beunconscionable under the circumstances existing at the time ofthe making of the contract.”

(b) “The principle is one of the prevention of oppression andunfair surprise and not of disturbance of allocation of risksbecause of superior bargaining power.”

d. Viewed at Time of Signing. The contract must be judged as of the facts exiting atthe time of signing it. The fact that one of the parties acted in bad faith after thecontract was signed has no effect on whether the contract itself wasunconscionable.

e. A&M Produce Co. v. FMC Corp. (Cal. App. 1982).(1) Unconscionability is a flexible doctrine designed to allow courts to

directly consider numerous factors which may adulterate the contractualprocess. Uniform Commercial Code § 2-302 specifies that “any clauseof the contract” may be unconscionable.

(2) Unconscionability has been generally recognized to include an absenceof meaningful choice on the part of one o the parties together withcontract terms which are unreasonably favorable to the other party.(a) Phrased another way, unconscionability has both a

“procedural” and a “substantive” element.i) Procedural:

-22-

JRC/Fall 2010/Sales

a) Oppression. Inequality of bargaining powerwhich results in no real negotiation and anabsence of meaningful choice.

b) Surprise. The extent to which the supposedlyagreed-upon terms of the bargain are hiddenin a prolix printed form drafted by the partyseeking to enforce the disputed terms.

ii) Substantive:a) No precise definition of substantive

unconscionability can be proffered. Caseshave talked in terms of “overly-harsh” or“one-sided” results.

b) Substantive unconscionability must beevaluated as of the time the contract wasmade.

(b) While unconscionability is ultimately a question of law,numerous factual inquiries bear upon that question:i) The business conditions under which the contract was

formed directly affect the parties’ relative bargainingpower, reasonable expectations, and the commercialreasonableness of the risk allocation as provided in thewritten agreement.

ii) A businessman usually has a more difficult timeestablishing procedural unconscionability in the senseof either “unfair surprise” or “unequal bargainingpower.”a) Courts view businessmen as possessed of a

greater degree of commercial understandingand substantially more economic muscle thatthe ordinary consumer.

b) However, with increasing frequency, courtshave begun to recognize that experience butlegally unsophisticated businessmen may beunfairly surprised by unconscionable contractterms and that even large business entitiesmay have relatively little bargaining power,depending on the identity of the othercontracting party and the commercialcircumstances surrounding the agreement.

(3) Procedural Unconscionability with Form Contracts. The burden should be onthe party submitting a standard contract in printed form to show that theother party had knowledge of any unusual or unconscionable termscontained therein. The principle should be the same as that applicableto implied warranties, namely that a package of goods sold to apurchaser is fit for the purposes intended and contains no harmfulmaterials other than that represented.

(4) Disclaimer of Warranties as Substantive Unconscionability. Since a product’sperformance forms the fundamental basis for a sales contract, it ispatently unreasonable to assume that a buyer would purchase astandardized mass-produced product from an industry seller without anyenforceable performance standards. From a social perspective, risk ofloss is most appropriately borne by the party best able to prevent itsoccurrence. Rarely would the buyer be in a better position than themanufacturer-seller to evaluate the performance characteristics of a

-23-

JRC/Fall 2010/Sales

machine.(5) Exclusion of Consequential Damages. Consequential damages are a

commercially recognized type of damage actually suffered by A&M dueto FMC’s breach. A party should be able to rely on their existence inthe absence of being informed to the contrary.

f. Varieties of Unconscionability(1) Procedural – refers to the fact that one party was induced to enter the

contract without having any meaningful choice. Thus oppressive clausestucked away in the boilerplate, high-pressure salespeople misleadingilliterate consumers, oligopolistic industries which all sellers offer thesame unfair “adhesion contracts” so that no bargaining is possible, are allindications of a lack of real assent.

(2) Substantive – unduly fair and one-sided (ex. excessive price or unfairmodification of either the seller’s or the buyer’s remedies).

g. Unconscionability in Commercial Transactions(1) A few other courts have held contracts between two business entities to

be unconscionable, but in most commercial cases the courts haverejected claims of unconscionability.

h. Unconscionability in Consumer Transactions(1) Consumers More Successful? Buyers in consumer transactions have had

somewhat more success in arguing unconscionability. For the most part,however, the courts have applied the two-part test explained in A & MProduce.

(2) Arbitration Clauses. In recent years the most frequently raised issues ofunconscionability have concerned arbitration clauses like the one in Hillv. Gateway 2000, Inc.. In considering unconscionability in the contextof arbitration clauses, courts have focuses on the extent to which theagreement:(a) imposes costs on the consumer that are higher than the costs to litigate(b) specifies a situs of arbitration that forecloses participation by the

consumer(c) removes common-law or statutory remedies, including the right to

attorney’s fees, that would be available in litigation(d) shortens the period for asserting a claim(e) specifies an arbitration mechanism that is biased in favor of the

merchant who has selected it(f) obligates the consumer to arbitrate but leaves the merchant free to

litigate(g) precludes the consumer from proceeding by way of class action

i. Unconscionability in Lease Transactions(1) §2A-108(1) tracks § 2-302.

(a) Induced by Unconscionable Conduct. However, Subsection (2)provides that, in a consumer lease, the court can grantappropriate relief if a lease contract or any provision of it hasbeen induced by unconscionable conduct. In addition, itprovides that relief can be granted for unconscionable conductin the collection of a claim arising under a lease contract.

(b) Attorney’s Fees for Consumers. Subsection (4) permits and awardof attorney’s fees to a consumer who successfully asserts anunconscionability claim under § 2A-108.9

Presumably, there is no reason of principle for a different rule as to consumer leases than consumer sales,9

but the 2003 revisions preserve this difference between Article 2 and 2A.

-24-

JRC/Fall 2010/Sales

j. Mandatory Code Rules That Cannot Be Varied by Agreement(1) Good Faith, Diligence, Reasonableness & Care. § 1-302(b) is clear in its

provision that the parties are not competent to disclaim their“obligations of good faith, diligence, reasonableness and care as providedby the act.”

(2) Standards Manifestly Unreasonable? On the other hand, the sectionempower the parties to determine the standards by which theperformance of these obligations is to be measured if those standards arenot manifestly unreasonable The provisions of the UCC can be variedby agreement unless the section or rules that the parties seek to varyprovides otherwise.10

3. The Hierarchy of the Various Components of Agreement» § 2-202. Final Written Expression: Parol or Extrinsic Evidence.

Terms with respect to which the confirmatory memoranda of the parties agree or which areotherwise set forth in a writing intended by the parties as a final expression of theiragreement with respect to such terms as are included therein may not be contradicted byevidence of any prior agreement or of a contemporaneous oral agreement but may beexplained or supplemented.

(a) by course of performance, course of dealing, or usage of trade (Section 1-303),and(b) by evidence of consistent additional terms unless the court finds the writing tohave been intended also as a complete and exclusive statement of the terms of theagreement.

» § 1-303. Course of Performance, Course of Dealing, and Usage ofTrade.(a) A “course of performance” is a sequence of conduct between the parties to a particulartransaction that exists if:

(1) the agreement of the parties with respect to the transaction involves repeatedoccasions for performance by a party; and(2) the other party, with knowledge of the nature of the performance andopportunity for objection to it, accepts the performance or acquiesces in it withoutobjection.

(b) A “course of dealing” is a sequence of conduct concerning previous transactions betweenthe parties to a particular transaction that is fairly to be regarded as establishing a commonbasis of understanding for interpreting their expressions and other conduct.(c) A “usage of trade” is any practice or method of dealing having such regularity ofobservance in a place, vocation, or trade as to justify an expectation that it will be observedwith respect to the transaction in question. The existence and scope of such a usage must beproved as facts. If it is established that such a usage is embodied in a trade code or similarrecord, the interpretation of the record is a question of law.(d) A course of performance or course of dealing between the parties or usage of trade in thevocation or trade in which they are engaged or of which they are or should be aware isrelevant in ascertaining the meaning of the parties' agreement, may give particular meaningto specific terms of the agreement, and may supplement or qualify the terms of theagreement. A usage of trade applicable in the place in which part of the performance underthe agreement is to occur may be so utilized as to that part of the performance.(e) Except as otherwise provided in subsection (f), the express terms of an agreement andany applicable course of performance, course of dealing, and usage of trade must be construedwhenever reasonable as consistent with each other. If such a construction is unreasonable:

(1) express terms prevail over course of performance, course of dealing, and usage

§ 1-302(a) provides: “Except as otherwise provided in subsection (b) or elsewhere in [the Uniform10

Commercial Code], the effect of provisions of [the Uniform Commercial Code] may be varied by agreement.”

-25-

JRC/Fall 2010/Sales

of trade;(2) course of performance prevails over course of dealing and usage of trade; and(3) course of dealing prevails over usage of trade.

(f) Subject to § 2-209, a course of performance is relevant to show a waiver or modificationof any term inconsistent with the course of performance.(g) Evidence of a relevant usage of trade offered by one party is not admissible unless thatparty has given the other party notice that the court finds sufficient to prevent unfair surpriseto the other party.

a. The Parole Evidence Rule11

(1) Clause (b). States the tradition rule that a total integration cannot becontradicted or supplemented. It creates a presumption that the writingis only a partial integration that can be overcome if the parties actuallyintend the writing to be a total integration or, as stated in Comment 3, ifit is certain that parties similarly situated would have included theoffered term in the writing.

(2) Clause (a). Course of dealing, usage of trade, or a course of performancemay be used to supply a consistent additional term even though thewriting is deemed to be a total integration under the rule stated in clause(b). Thus, under this rule, even a total integration is treated as if it werea partial integration in relation to this triad of evidence, and the onlyquestion to be decided is whether the evidence contradicts the writing.

(3) Thus, the UCC limits the use of parole evidence to three situations:(a) Evidence Explaining Contractual Terms (§ 2-202(a)). Normally

parole evidence may be used to interpret or explain terms of acontract (§2-202(a) ex: usage of a term in the trade, the courseof the parties’ dealings, or the course of the parties’performance).

(b) Evidence of Consistent Additional Terms (§ 2-202(b)). Consistentor additional terms may be admitted if (§2-202 officialcomment 3):i) The parties did not intend their writing to be the

complete and exclusive statement of the terms of theiragreement (§2-202(b)).

ii) The additional/consistent terms are not materialenough that they would have definitely been includedin the writing. (ex: A term specifying that sugarshould be shipped in 5 pound bags may be consideredan additional or consistent term since it is possible thatthe parties may have “forgotten” to include such aterm, but a term saying that the sugar will be sold at$1.00 a pound instead of the regular price of $1.50would certainly have been included in any writing theparties would have made.

(c) Evidence of Fraud, Misrepresentation, Duress, or Mistake. Paroleevidence may be used to prove the existence of fraud,misrepresentation, or mistake.

(4) ARB, Inc. v. E-Systems, Inc. (D.C. Cir. 1980).(a) We believe that the written contract was “intended as a

complete and exclusive statement of the terms of theagreement.” Two factors support this conclusion:

“Parole evidence” refers to information or circumstances not reflected in a contract, which may affect the11

terms of the contract.

-26-

JRC/Fall 2010/Sales

i) Integration Clause. First and most important is that thewritten contract contain an integration clause, andintegration clauses are generally to be given effectunder § 2-202.a) Non-UCC Maryland law holds that

integration clauses, although not absolutelyconclusive, are indicative of the intention ofthe parties to finalize their completeunderstanding in the written contract thatthere was no other prior orcontemporaneous agreement not included inthe written contract.

b) Maryland law further requires, however, thatthe circumstances surrounding the making ofthe contract be considered to discoverwhether the integration clause in questiondoes, in fact, express the genuine intention ofthe parties to make the written contract thecomplete and exclusive statement of theiragreement.

ii) Not a Consistent Additional Term. Even if the writtencontract had not been intended as a complete andexclusive statement of the terms of the agreement,however, we believe that § 2-202 would bar evidenceof the deletion of the reprocurement provision on thegrounds that this evidence is not a “consistentadditional term” within the meaning of § 2-202(b).a) Test for Consistency. We reject the narrow

view of inconsistency that to be inconsistentthe “additional terms” must negate orcontradict terms of the agreement. Thisinterpretation of “inconsistent” is itselfinconsistent with a reading of the whole of §2-202. Direct contradiction of express termsis forbidden in the initial paragraph of § 2-202. The narrow interpretation renders thatpassage a nullity, a result which is to beavoided. Rather, we believe “inconsistency”as used in § 2-202(b) means the absence ofreasonable harmony in terms of the languageand respective obligations of the parties.”

(5) Noble v. Logan-Dees Chevrolet-Buick, Inc. (Miss. 1974).(a) We hold that under the facts as disclosed by the record, Logan-

Dees was not entitled to offer parole testimony undersubsection (a) because the evidence does not disclose a courseof dealing and usage of trade as defined in the UCC neitherdoes it disclose a course of performance as defined in the UCC.

(b) Not Consistent Term. We hold that Logan-Dees was notentitled to introduce parol testimony under subsection (b)because the evidence offered was not of consistent additionalterms, but the evidence offered would show a differentconsideration from that expressed in the writing.i) We also hold that parol evidence was not admissible

under subsection (b) because the contract, by its own

-27-

JRC/Fall 2010/Sales

terms, was a complete and exclusive statement of theterms of the agreement of the parties.

(c) Where parties, without any fraud or mistake, have deliberatelyput their contract in writing, the writing is not only the best,but the only, evidence of their agreement.

b. Trade Usage, Course of Dealing, Good Faith(1) Nanakuli Paving & Rock Co. v. Shell Oil Co., Inc.

(a) Scope of Trade Usagei) The Code defines usage of trade as “any practice or

method of dealing having such regularity ofobservance in a place, vocation or trade as to justify anexpectation that it will be observed with respect to thetransaction in question.”12

ii) The extent of a usage is ultimately a jury question. The Code provide, “The existence and scope of suchusage are to be proved as facts.”

iii) The practice must have “such regularity of observanceas to justify an expectation that it will be observed.”

(b) Waiver or Course of Performancei) Course of performance under the Code is the action

of the parties in carrying out the contract at issue,whereas course of dealing consists of relations betweenthe parties prior to signing that contract.

ii) Although the Comment rules out one instanceconstituting a course of performance, it does notfurther delineate how many acts are needed to form acourse of performance.

iii) Comment 3 expresses a preference for aninterpretation of waiver. The preference for waiveronly applies, however, where acts are ambiguous.

(c) Express Terms as Reasonably Consistent with Usage and Course ofPerformancei) Under the UCC, an agreement goes beyond the

written words on a piece of paper. a) “‘Agreement’ means the bargain of the

parties in fact as found in their language orby implication from other circumstancesincluding course of dealing or usage of tradeor course of performance as provided in thischapter”

b) Express terms, then, do not constitute theentire agreement, which must be sought alsoin evidence of usages, dealings, andperformance of the contract itself.

c) Performance, usages, and prior dealing areimportant enough to be admitted always,even for a final and complete agreement;only if they cannot be reasonably reconciled

We understand the used of the word “or” to mean that parties can be bound by a usage common to the12

place they are in business, even if it is not the usage of their particular vocation or trade. The inference is that a usageneed not necessarily be one practiced by members of the party’s own trade or vocation to be binding if it is socommonly practiced in a locality that a party should be aware of it.

-28-

JRC/Fall 2010/Sales

with the express terms of an agreement arethey not binding on the parties.

d) Columbia Nitrogen Corp. v. Royster Co. (4thCir. 1971).1) Ambiguity was not necessary for the

admission of evidence of usage andprior dealings. Even though thelengthy contract was the result oflong and careful negotiations andapparently covered everycontingency, the appellate courtrules that “the test of admissibility isnot whether the contract appears onits face to be complete in everydetail, but whether the profferedevidence of course of dealing andtrade usage reasonably can beconstrued as consistent with theexpress terms of the agreement.

(d) Good Faith in Setting Pricei) The Code provides, “A price to be fixed by the seller

or by the buyer means a price for him to fix in goodfaith.” § 2-305(2).a) For a merchant good faith means “the

observance of reasonable commercialstandard of fair dealing in the trade.” § 2-103(1)(b).

b) The comment to § 2-305 explains, “[I]nnormal cases a ‘posted price’ satisfies thegood faith requirement.” However, theword “in the normal case” means that,although a posted price will usually besatisfactory, it will not be so under allcircumstances.

B. Terms Outside the Agreement: The “Statutory Terms”» By setting forth statutory terms, the Code supplies a commonly accepted term on the

mater and perhaps prevents the contract from failing for lack of a reasonable basis forenforcement.

» Priority of Statutory Terms. In cases of conflict, it is clear that statutory terms aresubordinated in rank to course of performance, course of dealing, and usage of trade. Thisis sound because course of performance, course of dealing, and usage of trade are methodsto find implied terms of the contract.

» Most statutory terms are signaled by the phrase, “Unless otherwise agreed....” Thislanguage makes it clear that the provision that follows is to be used only in those caseswhere the parties have not expressly or impliedly agreed on the matter at hand.13

“The presence in certain provisions of [the Uniform Commercial Code] of the phrase ‘unless otherwise13

agreed”, or words of similar import, does not imply that the effect of other provisions may not be varied byagreement under this section.” § 1-302(c). Therefore, no negative inference is to be drawn from the fact that someterms are prefaced with unless-otherwise-agreed language and others are not. Indeed, the parties have thecompetence to displace most provisions of Article 2. Only mandatory provisions like good faith, diligence,reasonableness, care, unconscionability, and others that are specifically made generally or partially binding irrespectiveof the expressed will of the parties cannot be disclaimed by agreement. This implicates that all non-mandatory

-29-

JRC/Fall 2010/Sales

» Open Term. Parties fully aware of the importance of a term may omit it with the intentionof adding it at a later time.

1. Price§ 2-305. Open Price Term(1) The parties if they so intend can conclude a contract for sale even though the price is not settled. Insuch a case the price is a reasonable price at the time for 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; or(c) the price is to be fixed in terms of some agreed market or other standard as set orrecorded by a third person or agency and it is not so set or recorded.

(2) A price to be fixed by the seller or by the buyer means a price for him to fix in good faith.(3) When a price left to be fixed otherwise than by agreement of the parties fails to be fixed throughfault of one party the other may at his option treat the contract as cancelled or himself fix a reasonableprice.(4) Where, however, the parties intend not to be bound unless the price be fixed or agreed and it isnot fixed or agreed there is no contract. In such a case the buyer must return any goods alreadyreceived or if unable so to do must pay their reasonable value at the time of delivery and the sellermust return any portion of the price paid on account.a. Background

(1) Common Law. At common law the use of open-price terms frequentlyresulted in the avoidance of an otherwise valid contract on grounds ofindefiniteness, illusory promise, or lack of mutuality of obligation.

(2) UCC . Article 2, however, acknowledges the usefulness of open-pricecontracts.(a) “This section applies when the price term is left open on the

making of an agreement which is nevertheless intended by theparties to be a binding agreement. This Article rejects in theseinstances the formula that ‘an agreement to agree isunenforceable’ if the case falls within subsection (1) of thissection, and rejects also defeating such agreements on theground of ‘indefiniteness.’” Comment 1, § 2-305.

b. Variable Price Terms(1) Variable Prices – prices that depend on the happening or non-happening

of stated contingencies are sometimes described by courts as “open-price” terms, but they are open only in the sense that the parties do notknow at the time the contract is executed what the ultimate price willbe.(a) Ex. Agreements to sell at the market price or at the price

charged by a particular seller on the day in question. Theseterms become “open” in the true sense only if the externalprice standard becomes non-existent or otherwise fails tooperate in the anticipated manner.

(2) “Sale” Disguised as Wager. When the price is made to vary on thehappening of a contingency that bears little or no relationship to thesubject matter of the contract, a wager usually is involved, and it will notbe enforced because of public policy.

c. Drafting Open-Price Terms(1) § 2-305 rejects, for the most part, the common-law objections to a

contract with an indeterminate price. But problems may remain, ifthere is doubt concerning the factual questions posed by subsections (1)

provisions are, basically, gap fillers to be used only when the parties have not come to a different express or impliedagreement regarding a particular term.

-30-

JRC/Fall 2010/Sales

and (4):(a) Did the parties intend for there to be a contract even though

they have not agreed on the price and even though theyultimately do not agree on a price?i) Parties, therefore, should make it clear whether they

consider themselves bound in the event that the priceis not fixed in accordance with their agreement.

ii) Furthermore, parties should state factors that should beused in determining a “reasonable price” in the eventthat a court is called on to make this determination.

iii) Likewise, there may be minimum and maximumamounts beyond which the parties do not contemplatethe price should be set.

d. Mutuality of Obligation(1) § 2-305(2) permits the parties to agree that the price may be fixed in

good faith by one party alone.(a) Mutual Commitment. The concept of bilateral contracts includes

the idea of mutual commitment, and this means that if oneparty has not really made any commitment, then there is nocontract.

(b) Courts’ Hostility. Many courts were hostile to agreements theythought left one of the parties free to perform or withdrawfrom the transaction at his own unfettered discretion, and theiradverse decisions on these matters threatened the right of theparties to agree that one of them alone could determine suchthings as satisfaction, details of performance, price, cancellation,and good cause.

(2) Good Faith Limits Discretion of Parties. § 2-305 does not allow the partiesto agree effectively that the price may be set through the unfettereddiscretion of either. Discretion to set the price is limited by good faith.

e. James Mathis v. Exxon Corp. (5th Cir. 2002).(1) Texas law, which tracks the Uniform Commercial Code, implied a

good faith component in any contract with an open price term. § 2-305.

(2) The pivotal provision is Comment 3 to § 2-305 :14

(a) In the absence of Comment 3, there is no doubt Exxon wouldbe subject to both the subjective “honesty in fact” good faith of§ 1-201(19) and the objective “commercial reasonableness”good faith of § 2-103. The difficult question is whethercomment 3 creates an exception to the normal principles ofgood faith governing the sale of goods.

(3) General Article 1 Standard. Section 1-201(19) states the generallyapplicable “subjective” (“white heart and empty head”) standard whichconcentrates on the actual state of mind of the party rather than on theother state of mind a reasonable man would have had under the samecircumstances.

“Subsection (2), dealing with the situation where the price is to be fixed by one party rejects the14

uncommercial idea that an agreement that the seller may fix the price means that he may fix any price he may wish bythe express qualification that the price so fixed must be fixed in good faith. Good faith include observance ofreasonable commercial standards of fair dealing in the trade if the party is a merchant (Section 2-103). But in thenormal case a “posted price” or a future seller’s or buyer’s “given price,” “price in effect,” “market price,” or the likesatisfies the good faith requirement.”

-31-

JRC/Fall 2010/Sales

(4) Article 2 Standard. In the case of merchants, however, or at least thosemerchants governed by Article 2 on Sales, an objective element is addedto their good faith duties. Section 2-103(1)(b) provides that “[g]oodfaith in the case of a merchant means honesty in fact and the observanceof reasonable commercial standards of fair dealing in the trade.” Thisdefinition imposes a duty on merchants to meet good faith requirementsthat are measure both subjectively and objectively.

(5) We conclude that the “normal case” of Comment 3 is coextensive witha merchant’s residual “honesty in fact” duty embodied in §§ 1-201(19)and 2-103. Thus the comment embraces both the objective(commercial reasonableness) and subjective (honesty in fact) senses ofgood faith; objective good faith is satisfied by a “price in effect” as longas there is honesty in fact (a “normal case”).(a) The caselaw supports this interpretation of comment 3. Courts

that have addressed the normalcy question have consistentlyheld that a lack of subjective good faith takes a challengeoutside the bounds of what is normal.

f. Revised Article 1(1) All Persons Subject to Reasonable Commercial Standards. Revised § 1-

201(20) and § 2-103(j) extend the Article 2 definition to all persons, sothat all parties, not just merchants, have an obligation to observereasonable commercial standards of fair dealing.

2. Quantitya. Riegel Fiber Corp. v. Anderson Gin Co. (5th Cir. 1975).

(1) Comment 1, §2-201 notes: “Only three definite and invariablerequirements as to the memorandum are made by this subsection. First,it must evidence a contract for the sale of goods; second, it must be“signed,” a word which includes any authentication which identifies theparty to be charged; and third, it must specify a quantity.”

(2) Appellees contend that because the quantity terms included in thewritten forms are allegedly too indefinite to support enforcement of theunderlying agreement, the writings in legal effect have no quantity termat all. Accordingly, appellees contend, the district judge correctly heldthat § 2-201 barred enforcement of the contracts.(a) The lower court erred in relying on § 2-201. The statute of

frauds is only one of many potential barriers to the enforcementof agreements.

(b) For the limited purpose of meeting the technical statute offrauds requirement embodied in § 2-201, the accuracy of thequantity term is immaterial.15

(c) § 2-204(3) states the general rule regarding standard ofdefiniteness required by the Code for enforceability:i) “Even though one or more terms are left open a

contract for sale does not fail for indefiniteness if theparties have intended to make a contract and there is areasonably certain basis for giving an appropriateremedy.”

ii) The Official Comment to this section adds that“commercial standards on the point of ‘indefiniteness’are intended to be applied.”

“The only term which must appear is the quantity term which need not be accurately states but recovery15

is limited to the amount stated.” § 2-201, Comment 1.

-32-

JRC/Fall 2010/Sales

b. Output and Requirements Contracts(1) Common Law v. UCC . Some common law courts struck down sales

contracts as illusory if the contained terms measuring the quantity ofgoods by the seller’s output or the buyer’s requirements. Section 2-306rejects the common law position.

(2) § 2-306. Output Requirements and Exclusive Dealings.(1) A term which measures the quantity by the output of the seller or therequirements of the buyer means such actual output or requirements as may occurin good faith, except that no quantity unreasonably disproportionate to any statedestimate or in the absence of a stated estimate to any normal or otherwisecomparable prior output or requirements may be tendered or demanded.(2) A lawful agreement by either the seller or the buyer for exclusive dealing inthe kind of goods concerned imposes unless otherwise agreed an obligation by theseller to use best efforts to supply the goods and by the buyer to use best efforts topromote their sale.

(3) The good faith limitation of § 2-306 prevents the parties from arbitrarilyincreasing or decreasing their output or requirements for ulteriorreasons.

c. Exclusive-Dealing Contracts(1) Variant of requirements contracts, in which the buyer is given the

exclusive right to sell the product produced by the seller in a giventerritory and the seller promises to supply the buyer’s requirements ofthat product.(a) § 2-306(2) makes such agreements enforceable.

3. Paymenta. Payment v. Price. The payment term should not be confused with the price term.

The price term deals with “how much” must be paid. The payment term dealswith “where, when, and how” that payment is to be made.

b. The payment term is often omitted and differences of opinion may result as towhen the buyer is obliged to pay, where the payment is to be made, and in whatmanner (e.g., cash, check, certified check, etc.). These gaps, of course, can befilled in some cases by resort to course of performance, course of dealing, or usageof trade. In other cases, statutory terms provide answers.

c. § 2-310. Open Time for Payment or Running of Credit; Authority toShip Under Reservation.Unless otherwise agreed:(a) payment is due at the time and place at which the buyer is to receive the goods eventhough the place of shipment is the place of delivery; and(b) if the seller is authorized to send the goods he may ship them under reservation, andmay tender the documents of title, but the buyer may inspect the goods after their arrivalbefore payment is due unless such inspection is inconsistent with the terms of the contract (§4-2-513); and(c) if delivery is authorized and made by way of documents of title otherwise than bysubsection (b) then payment is due regardless of where the goods are to be received (i) at thetime and place at which the buyer is to receive delivery of the tangible documents or (ii) atthe time the buyer is to receive delivery of the electronic documents and at the seller's place ofbusiness or if none, the seller's residence; and(d) where the seller is required or authorized to ship the goods on credit the credit periodruns from the time of shipment but post-dating the invoice or delaying its dispatch willcorrespondingly delay the starting of the credit period.

-33-

JRC/Fall 2010/Sales

d. § 2-507. Effect of Seller’s Tender; Delivery on Condition.16

(1) Tender of delivery is a condition to the buyer's duty to accept the goods and, unlessotherwise agreed, to his duty to pay for them. Tender entitles the seller to acceptance of thegoods and to payment according to the contract.(2) Where payment is due and demanded on the delivery to the buyer of goods ordocuments of title, his right as against the seller to retain or dispose of them is conditionalupon his making the payment due.

e. § 2-511. Tender of Payment by Buyer; Payment by Check.(1) Unless otherwise agreed tender of payment is a condition to the seller's duty to tenderand complete any delivery.(2) Tender of payment is sufficient when made by any means or in any manner current inthe ordinary course of business unless the seller demands payment in legal tender and givesany extension of time reasonably necessary to procure it.(3) Subject to the provisions of this subtitle on the effect of an instrument on an obligation(§ 3-310), payment by check is conditional and is defeated as between the parties bydishonor of the check on due presentment.

4. Deliverya. Common Law. Common law courts did not regard the delivery term as so

material that its inclusion was deemed necessary to make the agreementenforceable.(1) Common law courts looked to course of dealing, course of performance,

and usage of trade to ascertain any implied understanding relating todelivery. If that produced no satisfactory answer, they used a set ofrules, said to be based on common practices, to fill the gap.

b. UCC . Article 2 employs the same approach, with few exceptions.c. § 2-307. Delivery in Single Lot or Several Lots.

Unless otherwise agreed all goods called for by a contract for sale must be tendered in asingle delivery and payment is due only on such tender but where the circumstances giveeither party the right to make or demand delivery in lots the price if it can be apportionedmay be demanded for each lot.

d. § 2-308. Absence of Specified Place for Delivery.Unless otherwise agreed:(a) the place for delivery of goods is the seller's place of business or if he has none hisresidence; but(b) in a contract for sale of identified goods which to the knowledge of the parties at the timeof contracting are in some other place, that place is the place for their delivery; and(c) documents of title may be delivered through customary banking channels.

e. § 2-309. Absence of Specific Time Provisions; Notice of Termination.(1) The time for shipment or delivery or any other action under a contract if not provided inthis chapter or agreed upon shall be a reasonable time.(2) Where the contract provides for successive performances but is indefinite in duration it isvalid for a reasonable time but unless otherwise agreed may be terminated at any time byeither party.(3) Termination of a contract by one (1) party except on the happening of an agreed eventrequires that reasonable notification be received by the other party and an agreementdispensing with notification is invalid if its operation would be unconscionable.

f. Luedtke Engineering Co., Inc. v. Indiana Limestone Co., Inc. (7 Cir. 1984).th

(1) Under § 2-207, an additional term in an acceptance to a contractbetween merchants becomes part of the contract unless the offer

Section 2-507(1) and 2-511(1) embrace the common-law doctrine of constructive conditions. The16

obligation of the seller to deliver the goods and the obligation of the buyer to pay for them are concurrentlyconditional.

-34-

JRC/Fall 2010/Sales

expressly limits acceptance to the offer’s specific terms, the offerorobjects to the additional term, or the additional term materially alters thecontract.(a) Comment 4 to § 2-207 defines “material alteration” as a term

that would “result in surprise or hardship if incorporatedwithout express awareness by the other party.”

(2) § 2-307 provides in part that “unless otherwise agreed all goods calledfor by a contract for sale must be tendered in a single delivery.” (a) Yet, § 2-307 contains an exception to the single delivery

requirement, “where the circumstances give either party theright to make or demand delivery in lots,” and Comment 4 to§ 2-307 state that the phrase “unless otherwise agreed” includessurrounding circumstances, usage of trade, course of dealing,and course of performance.

(3) The absence of a specific delivery term in the contract required IndianaLimestone to deliver the stone within a reasonable time. § 2-309.

5. Risk of Lossa. Common Law. The common law and the Uniform Sales Act said that the owner

should have the risk of loss when goods are lost, damages, or destroyed. Lossesand gains in the value of the goods were though to be normal aspects ofownership.(1) Risk of loss passed from one to the other at the precise moment that title

was transferred from seller to the buyer, unless the contract otherwiseprovided.(a) Pre-Code law made the “intention of the parties” preeminent

in determining when title passed, but since that intention wasseldom expressed, a number of presumptive rules weredeveloped to determine it.17

i) If the goods were specific and nothing remained to bedone to put them into a deliverable state, the titlepassed when the bargain was struck.

ii) If the goods were unascertained (i.e., not yet identifiedas the goods constituting the subject matter of thecontract), or if something remained to be done tothem to make them deliverable, the passage of titlewas postponed until the goods were “appropriated” tothe contract and made deliverable.

b. UCC. Article 2 scrapped the passage-of-title, or property, approach to risk ofloss and replaced it with what its drafters called a contractual approach.(1) § 2-509. Risk of Loss in the Absence of Breach.

(1) Where the contract requires or authorizes the seller to ship the goods bycarrier:

(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 tothe carrier even though the shipment is under reservation (§ 4-2-505);but(b) if it does require him to deliver them at a particular destination andthe 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

Common law cases raised policy concerns that the title of passage concept did not take into account. For17

example, the seller was often in a better position to prevent the loss of goods than the buyer, and the seller was morelikely to have insurance on the goods.

-35-

JRC/Fall 2010/Sales

tendered as to enable the buyer to take delivery.(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 possession or control of a negotiable document oftitle covering the goods; or(b) on acknowledgment by the bailee of the buyer's right to possessionof the goods; or(c) after his receipt of possession or control of a nonnegotiable documentof title or other directions to deliver in a record, as provided in §2-503(4)(b).

(3) In any case not within subsection (1) or (2), the risk of loss passes to thebuyer on his receipt of the goods if the seller is a merchant; otherwise the riskpasses to the buyer on tender of delivery.(4) The provisions of this section are subject to contrary agreement of the partiesand to the provisions of this chapter on sale on approval (§ 2-327) and on effectof breach on risk of loss (§ 2-510).

(2) Under § 2-509 the risk of loss depends in the first instance on whetherthe seller is required or authorized to ship the goods by carrier. If theseller is so required or authorized, then the risk of loss depends on wherethe seller is to deliver the goods.(a) Often, the place of delivery is expressed by use of a mercantile

term, such a “f.o.b.,” “c.i.f.,” “ex ship,” etc. The mostimportant mercantile terms are elaborately defined in §§ 2-319–2-325.

(b) When parties use one of these terms they are making an expresscontract.

(3) § 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 togive a right of rejection the risk of their loss remains on the seller until cure oracceptance.(2) Where the buyer rightfully revokes acceptance he may to the extent of anydeficiency in his effective insurance coverage treat the risk of loss as having restedon the seller from the beginning.(3) Where the buyer as to conforming goods already identified to the contract forsale repudiates or is otherwise in breach before risk of their loss has passed to him,the seller may to the extent of any deficiency in his effective insurance coveragetreat the risk of loss as resting on the buyer for a commercially reasonable time.

c. A.M. Knitwear Corp. v. All America Export-Import Corp. (N.Y. App. 1976).(1) FOB is a Delivery Term. The Uniform Commercial Code provides that,

unless otherwise agreed, the term F.O.B. at a named place “even thoughuses only connection with the stated price, is a delivery term.”

(2) Where the term F.O.B. the place of shipment is used, as in this casewith the term F.O.B. plant, the code provides that the seller must shipthe goods in the manner provided in § 2-504 of the UniformCommercial Code and “bear the expense and risk of putting them intothe possession of the carrier.”

(3) With respect to shipment by the seller, the code provides that where theseller is “required or authorized” to send the goods, but not required todeliver them to a particular destination, then “unless otherwise agreed”the seller must “put the goods into the possession of a carrier.” § 2-504(a).

(4) Further, with respect to risk of loss, the code provide that where thecontract requires or authorizes the seller to ship the goods by carrier “ifit does not require him to deliver them at a particular destination, the

-36-

JRC/Fall 2010/Sales

risk of loss passes to the buyer when the goods are duly delivered to thecarrier.” § 2-509(4).(a) The risk of loss provision is, however, “subject to contrary

agreement of the parties.”(5) Since the term “FOB PLANT” was a delivery term, the risk of loss was

on the seller until the goods were put into the possession of thecarrier–unless the parties “otherwise agreed” or there was a “contraryagreement” with respect to the risk of loss.

d. § 2-504. Shipment by Seller.Where the seller is required or authorized to send the goods to the buyer and the contractdoes not require him to deliver them at a particular destination, then unless otherwise agreedhe must

(a) put the goods in the possession of such a carrier and make such a contract fortheir transportation as may be reasonable having regard to the nature of the goodsand other circumstances of the case; and(b) obtain and promptly deliver or tender in due form any document necessary toenable the buyer to obtain possession of the goods or otherwise required by theagreement or by usage of trade; and(c) promptly notify the buyer of the shipment.

Failure to notify the buyer under paragraph (c) or to make a proper contract under paragraph(a) is a ground for rejection only if material delay or loss ensues.

e. C.I.F. and C& F Terms and Risk of Loss(1) C.I.F. and C & F terms are frequently employed in marine shipments.

In almost all cases the place named by the term is the destination point.(2) § 2-320(1) states that C.I.F. “means that the price includes in a lump

sum the cost of the goods and the insurance and freight o the nameddestination. The term C & F or C.F. means that the price so includescost and freight to the named destination.

(3) Under the common law and under the Uniform Sales Act, the buyerwas said to have the risk of loss during the transit period (i.e., after thegoods had been loaded on board) even though the contract requireddelivery and for the seller to pay freight.(a) The conclusion was derived from the insurance term since, it

was argued, the seller was obliged to take out insurance in favorof the buyer and that the parties must have agreed that thebuyer had the risk of loss.

(b) For mere C.F. contracts, which resembled F.O.B. contracts,courts accordingly put the risk of loss for the transit period onthe seller.

f. Mercantile Terms Under Revised Article 2(1) Revised Article 2 deletes §§ 2-319 – 2-324 out of a concern that they

do not accurately reflect the current understanding as to the meaning ofthose terms.

g. Silver v. Wycombe, Meyer & Co., Inc. (N.Y.C. 1984).(1) In the absence of contrary agreement by the parties, risk of loss under

the UCC is determined by he manner in which delivery is to be made. § 2-509.(a) It is clear that the provisions of UCC § 2-509(1) govern the

issue of when risk of loss passes to the buyer “where thecontract requires or authorizes the seller to ship the goods bycarrier.”

(b) Where the contract requires the seller to deliver themerchandise at a particular location, risk of loss passes upontender of the goods at that location. § 2-509(1)(b). Where the

-37-

JRC/Fall 2010/Sales

contract does not require the seller to deliver the goods to aparticular destination, it passes upon their delivery to thecarrier. § 2-509((1)(a). Where the contract provides fordelivery at the seller’s place of business or at the situs of thegoods, risk of loss passes upon actual receipt by the buyer, ifseller is a merchant, and otherwise upon tender of delivery. §2-509(3).

(c) Comment 3 to § 2-509 makes it clear that “a merchant sellercannot transfer risk of loss and it remains upon him until actualreceipt by the buyer, even though full payment has been madeand the buyer has been notified that the goods are at hisdisposal.”

(d) The provisions of § 2-509(2) contemplate a situation in whichgoods are in the physical possession of a third party who willcontinue to hold them after consummation of the sale. Therefore, this is not a provision appropriately applied to thecircumstance at bar which anticipate the passing of title andphysical possession more or less simultaneously. i) Furthermore, bailment requires delivery of the goods to

the bailee. Having concluded that defendant failed toestablish delivery of the furniture to plaintiff, by nostretch of the imagination may plaintiff be said to haveredelivered it to defendants for safe-keeping.

(2) The agreement between buyer and seller clearly contemplates delivery atthe buyer’s home an, under the UCC, risk of loss remains upon amerchant seller until he completes his performance with reference to thephysical delivery of the goods. § 2-401(2); § 2-509(3); and Comment 3to § 2-509.

h. Receipt-Tender Rules Under § 2-509(3).(1) Consumer from Merchant. Under § 2-509(3), if a consumer purchases

goods from a merchant, risk of loss does not pass to the buyer until thebuyer receives the goods.

(2) Consumer from Consumer. On the other hand, if a consumer purchasesfrom another consumer, risk of loss passes upon tender of deliver.(a) Often tender occurs an instant before the buyer receives the

goods. But sometimes the buyer may not receive the goodsuntil some time after the seller tenders delivery.i) Ex. The buyer may leave the goods with the seller

for a time, as when a car dealer calls a buyer to set upa time for the buyer to pick up her newly arrived car,or when a buyer of furniture at a garage sale promisesto return the next day with a truck.

i. Jakowski v. Carole Chevrolet, Inc. (N.J. 1981).(1) Seller argues that the risk of loss passed to the buyer upon his receipt of

the auto. This is consistent with UCC § 2-509(3) pursuant to which therisk of loss passes to the buyer upon his receipt of the goods. (a) Section 2-509(4), however, expressly provides that the general

rules of § 2-509 are subject to the more specific provisions of §2-510 which deals with the effect of breach upon risk of loss.

(2) Buyer relied on § 2-510 which provides: Where a tender of delivery ofgoods so fails to conform to the contract as to give a right of rejectionthe risk of their loss remains on the seller until cure or acceptance.(a) § 2-106 is clear in its intent to preserve the rule of strict

compliance, that is, the “perfect tender” rule.

-38-

JRC/Fall 2010/Sales

i) “Goods ... are conforming or conform to the contractwhen they are in accordance with the obligationsunder the contract.”

(b) The language of § 2-510(1), “so fails to conform,” is misleadingin this respect: no particular quantum of nonconformity isrequired where a single delivery is contemplated. The allusionis to § 2-612 which substitutes a rule of substantial compliancewhere, and only where, an installment deal is contemplated.

(3) In Zabriskie it was held that the mere taking of possession by thepurchaser is not equivalent to acceptance. Before he can be held to haveaccepted, a buyer must be afforded a “reasonable opportunity to inspect”the goods. § 2-606.(a) The seller’s communication that the goods did not conform to

the contract and that the seller was exercising its right to curesaid nonconformity, obviated the need for a formal rejection onbuyer’s part. Put another way, it precluded the buyer fromrejecting the car.

(4) Given the undisputed facts, the operation of § 2-510(1) is inescapable. The goods failed to conform, the buyer never accepted them and thedefect was never cured. Accordingly, risk of loss remained on the seller.

j. Ultimate Risk of Loss(1) The concept of “risk of loss” does not refer to ultimate loss. Rather, it is

used to determine which party takes the initial loss. Often the initial losscan be shifted to the other party to the sales contract or to a carrier,warehouseman, or insurance company.

6. Choice of Lawa. Wright-Moore Corporation v. Ricoh Corporation (7th Cir. 1990).

(1) Indiana has long adhered to the “most intimate contacts” test for choiceof law. (a) Under this approach, the court will consider all acts of the

parties touching to the transaction in relation to the severalstates involved and will apply as the law governing thetransaction the law of that state with which the facts are in mostintimate contact.

(b) This approach also recognizes that parties may expressly choosethe applicable law through a contract. The law of the statechosen by parties to govern their contractual rights and dutieswill be applied if the particular issue is one which the partiescould have resolved by an explicit provision in their agreementdirected to that issue.i) Typical issues that cannot be determined by explicit

agreement include capacity, formalities, substantialvalidity, and illegality, but the set issues which cannotbe contractually chosen is determined by local law.

ii) If the issue is one which could not have beenexplicitly resolved by the contract, the choice of lawprovisions of the contract will still apply unless thechosen state has no substantial interest in the litigationor application of the law of the chosen state would becontrary to a fundamental policy of a state which has amaterially greater interest that the chosen state in thedetermination of the particular issue and which, underthe rule of § 188, would be the state of applicable lawin the absence of an effective choice of law by the

-39-

JRC/Fall 2010/Sales

parties.b. The court’s discussion of choice of law in Wright-Moore is apropos of the rule of

the UCC, found in § 1-105.c. Revised Article 1. § 1-301 greatly relaxes the rules regarding the effectiveness of

contractual choice of law clauses. § 1-301(b) authorizes commercial parties to adomestic transaction to choose the law of any state to govern their transaction,whether or not the state whose law is chose bears a reasonable relationship to thetransaction.

7. Special Arrangementsa. Sale or Return; Sale on Approval.

(1) Buyers of goods for their own use will frequently want a trial periodbefore deciding whether to purchase.

(2) § 2-326. Sale on Approval and Sale or Return–Rights ofCreditors.(1) Unless otherwise agreed, if delivered goods may be returned by the buyer eventhough they conform to the contract, the transaction is

(a) a “sale on approval” if the goods are delivered primarily for use,and(b) a “sale or return” if the goods are delivered primarily for resale.

(2) Goods held on approval are not subject to the claims of the buyer's creditorsuntil acceptance; goods held on sale or return are subject to such claims while inthe buyer's possession.(3) Any “or return” term of a contract for sale is to be treated as a separatecontract for sale within the statute of frauds section of this Chapter (§ 4-2-201)and as contradicting the sale aspect of the contract within the provisions of thisChapter on parol or extrinsic evidence (§ 4-2-202).

(3) § 2-327. Special Incidents of Sale on Approval and Sale orReturn.(1) Under a sale on approval unless otherwise agreed:

(a) although the goods are identified to the contract the risk of loss andthe title do not pass to the buyer until acceptance; and(b) use of the goods consistent with the purpose of trial is not acceptancebut failure seasonably to notify the seller of election to return the goodsis acceptance, and if the goods conform to the contract acceptance of anypart is acceptance of the whole; and(c) after due notification of election to return, the return is at the seller'srisk and expense but a merchant buyer must follow any reasonableinstructions.

(2) Under a sale or return unless otherwise agreed(a) the option to return extends to the whole or any commercial unit ofthe goods while in substantially their original condition, but must beexercised seasonably; and(b) the return is at the buyer's risk and expense.

b. Auctions(1) § 2-328. Sale by Auction.

(1) In a sale by auction if goods are put up in lots each lot is the subject of aseparate sale.(2) A sale by auction is complete when the auctioneer so announces by the fall ofthe hammer or in other customary manner. Where a bid is made while thehammer is falling in acceptance of a prior bid the auctioneer may in his discretionreopen the bidding or declare the goods sold under the bid on which the hammerwas falling.(3) Such a sale is with reserve unless the goods are in explicit terms put upwithout reserve. In an auction with reserve the auctioneer may withdraw the

-40-

JRC/Fall 2010/Sales

goods at any time until he announces completion of the sale. In an auctionwithout reserve, after the auctioneer calls for bids on an article or lot, that article orlot cannot be withdrawn unless no bid is made within a reasonable time. In eithercase a bidder may retract his bid until the auctioneer's announcement ofcompletion of the sale, but a bidder's retraction does not revive any previous bid.(4) If the auctioneer knowingly receives a bid on the seller's behalf or the sellermakes or procures such a bid, and notice has not been given that liberty for suchbidding is reserved, the buyer may at his option avoid the sale or take the goodsat the price of the last good faith bid prior to the completion of the sale. Thissubsection shall not apply to any bid at a forced sale.

(2) Drew v. John Deere Co. of Syracuse, Inc. (N.Y. 1963).(a) Auction Without Reserve. At such an auction, the owner of the

property has no right to withdraw the property after biddinghas commenced. It is also necessarily implicit in an auctionwithout reserve, that the owner of the property may nothimself bid in the property, as this would be equivalent towithdrawing it from sale. (Restatement of Contracts § 27).i) The owner, by making such an announcement, enters

into a collateral contract with all person bidding at theauction that he will not withdraw the property fromsale. Therefore, the highest bona fide bidder at anauction without reserve may insist that the propertybe sold to him or that the owner answer to him indamages.

(b) On the other hand, in an auction sale not expressly announcedto be without reserve, the owner may withdraw the property atany time before it is actually “knocked” down to a bidder bythe auctioneer.i) There is no contract until the offer made by the

bidder is accepted by the auctioneer’s “knockingdown” the property to him.

ii) An auction ‘with reserve’ is the normal procedure. Comment 2, § 2-328.

(c) There was no express statement that the auction would bewithout reserve. The statement that the sale would be made tothe highest bidder is not the equivalent of an announcementthat the auction would be without reserve. § 2-328(3).i) An announcement that a person will sell his property

at public auction the highest bidder is a meredeclaration of intention to hold an auction at whichbids will be received.

(d) The auctioneer at an auction sale in asking for bids, does notmake an operative offer. This is true even though the seller orhis representative has issued advertisements or made otherstatements that the article will be sold to the highest bidder, oris offered for sale to the highest bidder. Such statements aremerely preliminary negotiation, not intended and notreasonably understood to be intended to affect legal relations.

(3) Shill Bidding or Puffing(a) Secret bidding at auctions by the seller or one acting on his

behalf is known as “shill bidding” or “puffing,” a practice thatis considered fraudulent because it creates a misleadingimpression that there is greater competition for the goods thanactually exists.

-41-

JRC/Fall 2010/Sales

(b) Enables the seller to convert an auction “without reserve” intoone “with reserve,” by purporting to sell the goods to the shilland by that subterfuge in effect withdraw them from the sale.

IV. EXPRESS AND IMPLIED WARRANTIES

A. Introduction1. Warranty of Merchantability. Under Article 2, a merchant seller who deals in goods of the

kind has an obligation that, unless the parties otherwise agree, the goods be of a certainquality. This obligation, a “warranty of merchantability,” arises independently of anyovert representations by the seller concerning the goods. Thus, it is referred to as animplied warranty.a. § 2-314. Implied Warranty–Merchantability–Usage of Trade.

(1) Unless excluded or modified (§ 4-2-316), a warranty that the goods shall bemerchantable is implied in a contract for their sale if the seller is a merchant with respect togoods of that kind. Under this section the serving for value of food or drink to be consumedeither on the premises or elsewhere is a sale.(2) Goods to be merchantable must be at least such as:

(a) pass without objection in the trade under the contract description; and(b) in the case of fungible goods, are of fair average quality within the description;and(c) are fit for the ordinary purposes for which such goods are used; and(d) run, within the variations permitted by the agreement, of even kind, qualityand quantity within each unit and among all units involved; and(e) are adequately contained, packaged, and labeled as the agreement mayrequire; and(f) conform to the promises or affirmations of fact made on the container or label ifany.

(3) Unless excluded or modified (§ 4-2-316), other implied warranties may arise fromcourse of dealing or usage of trade.

2. Warranty for Fitness for Particular Purpose. Article 2 also provides for another impliedwarranty, the “warranty of fitness for particular purpose,” which arise if the seller hasreason to know that the buyer is relying on the seller to select for the buyer goods that aresuitable for the buyer’s purposes.a. § 2-315. Implied Warrant–Fitness for Particular Purpose.

Where the seller at the time of contracting has reason to know any particular purpose forwhich the goods are required and that the buyer is relying on the seller's skill or judgment toselect or furnish suitable goods, there is unless excluded or modified under the next sectionan implied warranty that the goods shall be fit for such purpose.

3. Express Warranty. Another warranty is the “express warranty,” which arises if the sellermakes promises or representations as to the goods in such a manner as to become part ofthe “basis of the bargain.”a. § 2-313. Express Warranties by Affirmation, Promise, Description,

Sample.(1) Express warranties by the seller are created as follows:

(a) Any affirmation of fact or promise made by the seller to the buyer whichrelates to the goods and becomes part of the basis of the bargain creates an expresswarranty that the goods shall conform to the affirmation or promise.(b) Any description of the goods which is made part of the basis of the bargaincreates an express warranty that the goods shall conform to the description.(c) Any sample or model which is made part of the basis of the bargain creates anexpress warranty that the whole of the goods shall conform to the sample ormodel.

(2) It is not necessary to the creation of an express warranty that the seller use formal wordssuch 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

-42-

JRC/Fall 2010/Sales

the seller's opinion or commendation of the goods does not create a warranty.4. Warranty of Title. Protects a buyer’s expectation that third parties may not disturb the

buyer’s possession of the goods.a. § 2-312. Warranty of Title and Against Infringements–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 orencumbrance of which the buyer at the time of contracting has no knowledge.

(2) A warranty under subsection (1) will be excluded or modified only by specific languageor by circumstances which give the buyer reason to know that the person selling does notclaim title in himself or that he is purporting to sell only such right or title as he or a thirdperson may have.(3) Unless otherwise agreed a seller who is a merchant regularly dealing in goods of the kindwarrants that the goods shall be delivered free of the rightful claim of any third person byway of infringement or the like but a buyer who furnishes specifications to the seller musthold the seller harmless against any such claim which arises out of compliance with thespecifications.

5. Warranty is an area of the law where tort and contract overlap. The same facts mayrequire analysis under both bodies of law.a. Ex. A false representation may give rise to an express warranty but it may also be

actionable as deceit, negligent misrepresentation, or innocent misrepresentation. b. Ex. If goods are defective and cause personal injuries, the seller may be subject to

strict liability in tort as well as liability in contract for breach of the impliedwarranty.

B. Express Warranties1. Doug Connor, Inc. v. Proto-Grind, Inc. (Fla. App. 2000).

a. Proto-Grind argued that the oral affirmation made by the Proto-Grind agentsmerely constituted puffing, sales talk, or otherwise nonactionable opinion and thatin order to satisfy the threshold of an affirmation of fact, the statement must bedetailed and specific.(1) An express warranty need not be by words, but can be by conduct as

well, such as, the showing of a blueprint or other description of thegoods sold to the buyer. Moreover, fraud is not an essential ingredient. It is sufficient that the warranty was made which formed part of the basisof the bargain.(a) The statements made by Proto-Grind could amount to more

than puffing or sales talk.b. Proto-Grind also argues that because Doug knew that a competitor was, at time,

quite dissatisfied with his Proto-Grind 1200, Connor was on equal footing withProto-Grind with respect to knowledge of the machine’s capability.(1) Even if Doug was more savvy than he acknowledged, the manufacturer

of an expensive product should be well aware of the product’s attributesand deficiencies before it offers it to the public. We conclude that therelative knowledge of the parties is a matter for the jury to consider, nota complete bar to recovery by Connor.

2. Royal Business Machines, Inc. v. Lorraine Corp. (7th Cir. 1980).a. The decisive test for whether a given representation is a warranty or merely an

expression of the seller’s opinion is whether the seller asserts a fact of which thebuyer is ignorant or merely states an opinion or judgment on a matter of whichthe seller has no special knowledge and on which the buyer may be expected alsoto have an opinion and to exercise his judgment.(1) General statements to the effect that the goods are “the best,” or are “of

good quality,” or will “last a lifetime” and be “in perfect condition,” are

-43-

JRC/Fall 2010/Sales

generally regarded as expression of the seller’s opinion or “the puffing ofhis wares” and do no create an express warranty.

(2) Statements which are assertions of fact but which do not relate to thegoods sold are not express warranties to which the goods were toconform.

(3) An expression of future capacity or performance can constitute anexpress warranty.

b. Affirmation must become part of the basis of the bargain.(1) An affirmation of fact which the buyer from his experience knows to be

untrue cannot form a part of the basis of the bargain.(2) The requirement that a statement be part of the basis of the bargain in

order to constitute an express warranty is essentially a reliancerequirement and is inextricably intertwined with the initialdetermination as to whether given language may constitute an expresswarranty since affirmations, promises and descriptions tend to become apart of the basis of the bargain. It was the intention of the drafters of theUCC not to require a strong showing of reliance. In fact, theyenvisioned that all statements of the seller become part of the basis of thebargain unless clear affirmative proof is shown to the contrary,.

c. Breach occurs only if the goods are defective upon delivery and not if the goodslater become defective through abuse or neglect.

3. The court states, “General statements to the effect that goods are ‘the best,’ or are ‘of goodquality,’ or will ‘last a lifetime’ and ‘be in perfect condition’ are generally regarded asexpressions of the seller’ opinion and do not create an express warranty.”a. Do not overlook the word generally in this sentence. In Valley Datsun v.

Martinez (Tex. Civ. App. 1979), the court held that a salesman’s statement to theplaintiff that a camper was in “excellent condition” created an express oralwarranty.(1) “Under the circumstances existing, this statement was more than mere

‘dealer’s talks’ because knowledge of the seller, in conjunction with thebuyer’s relative ignorance, operates to make the slightest divergencefrom mere praise into representations of fact, which become effective asa warranty.”

4. Reliance v. Basis of the Bargain. Under the Uniform Sales Act, the reliance on the seller’sstatement was an essential element of express warranty. The drafters of Article 2specifically departed from expressing this requirement in terms of reliance. Instead, theycreated the phrase, “basis of the bargain.”a. Footnote 7 of Royal Business Machines (above) addresses this issue: “The

requirement that a statement be part of the basis of the bargain in order toconstitute an express warranty “is essentially a reliance requirement and isinextricably intertwined with the initial determination as to whether givenlanguage may constitute an express warranty since affirmations, promises anddescriptions tend to become part of the basis of the bargain. It was the intentionof the drafters of the UCC not to require a strong showing of reliance. In fact, theyenvisioned that all statements of the seller become part of the basis of the bargainunless clear affirmative proof is shown to the contrary.

5. Leases. Except for stylistic improvements, 2A-210 is identical to Article 2's provision onexpress warranties.

C. The Implied Warranties of Merchantability and Fitness1. Historical Background

a. Wright v. Hart (N.Y. 1837).(1) “To imply a warranty of anything whatever except title in the vendor,

much more to imply a warranty that the article is merchantable; or if thepurchaser happens to signify the purpose for which he wishes the article,

-44-

JRC/Fall 2010/Sales

to imply a warranty that it is fit for that particular purpose, is necessarilyto subvert the common law principle, that the risk of the sale is with thepurchaser, and to substitute for it the loose and litigious principle of thecivil law, that the quality of the article must correspond with the pricegiven for it.”

b. Uniform Sales Act provided: “Where goods are bough by description from aseller who deals in goods of that description (whether he be the grower ormanufacturer or not), there is an implied warranty that the goods shall be of amerchantable quality.”

2. The Standardsa. UCC dropped the sale-by-description limitation on the warranty of

merchantability: now the warranty arises under 2-314 against any merchant whodeals in goods of the kind in any sales transaction unless there is an effectivedisclaimer.

b. In addition, the Code provides in 2-315 for an implied warranty of fitness for aparticular purpose.

c. Ambassador Steel Co. v. Ewald Steel Co. (Mich. 1971).(1) Issue. Plaintiff contends on appeal that because defendant did not inform

plaintiff of the purposes for which the steel was to be used, defendantcannot claim that it was not fit for the purpose for which it was used. Defendant, however, appears to be relying on a different implied warranty, thatof merchantability, and not that of particular purpose.

(2) § 2-315(1) states: “Unless excluded or modified ... , a warranty that thegoods shall be merchantable is implied in a contract for their sale if theseller is a merchant with respect to goods for that kind.”(a) Subsection (2) states that for goods to be merchantable they

mut at least:i) pass without objection in the trade under the contract

description; and . . .ii) are fit for the ordinary purposes for which such goods

are used; and . . .iii) run, within the variations permitted by the agreement,

of even kind, quality and quantity within each unitand among all units involved; . . .

(3) Comment 2 explains:(a) The question when the warranty is imposed turns basically on

the meaning of the terms of the agreement as recognized in thetrade. Goods delivered under an agreement made by amerchant in a given line of trade must be of a qualitycomparable to that generally acceptable in that line of tradeunder the description or other designation of the goods used inthe agreement.

(4) Thus, unless there is an exclusion or modification, when, as here, amerchant sells such goods, an implied warranty arises that the goodswould pass without objection in the trade under the contractdescription; also, that they are fit for the ordinary purposes for which thegoods are used.(a) Usage of trade is defined as “any practice or method of dealing

having such regularity of observance in a place, vocation ortrade as to justify an expectation that it will be observed withrespect to the transaction in question.”

(b) A course of dealing between parties and any usage of trade inthe vocation in which they are engaged or of which they are orshould be aware give particular meaning to an supplement or

-45-

JRC/Fall 2010/Sales

qualify terms of an agreement.(5) Merchantability v. Particular Purpose. Comment 2 to § 2-315:

(a) A ‘particular purpose’ differs from the ordinary purpose forwhich the goods are used in that it envisages a specific use bythe buyer which is peculiar to the nature of his businesswhereas the ordinary purposes for which goods are used arethose envisaged in the concept of merchantability and go touses which are customarily made of the goods in question. Forexample, shoes are generally used for the purpose of walkingupon ordinary ground, but a seller may know that a particularpair was selected to be used for climbing mountains.

(6) It appears, then, that the warranty of merchantability warrants that thegoods sold are of average quality within the industry, whereas a warrantyof fitness for a particular purpose warrants that the goods sold are fit forthe purposes for which they are intended.(a) The latter is also further qualified by the requirement that the

seller must know, at the time of sale, the particular purpose forwhich the goods are required and also that the buyer is relyingon the seller to select or furnish suitable goods.

(7) Applies to Sale or Resale of Goods. Comment 1 states that the warranty ofmerchantability applies to goods sold for resale as well as those for sale.

(8) Need not Prove Contract Breach but Warranty Breach. Defendant did notneed to sustain the burden of proving that plaintiff breached thecontract. What defendant needed to do, and what the record shows hedid do, was prove that plaintiff had breached its implied warranty ofmerchantability.

d. Non-Uniform Amendments Regarding Livestock(1) States in the Midwest, South, and West have limited the existence or

scope of implied warranties in the sale of livestock, either by amending2-316 or by enacting a separate statute for that purpose.

e. Bethlehem Steel Corp. v. Chicago Eastern Corp. (7th Cir. 1988).(1) Issue. Chicago Eastern argues that the steel was not merchantable

because the steel was subjected to a renitrogenization process–a processnot traditionally used with steel fo this designation.(a) In other words, Chicago Eastern admits that the steel it

received from Bethlehem did indeed possess the propertiesnecessary to comply with the ASTM designation it ordered,but argues that the steel also possessed additional properties as aresult of the renitrogenization process that made the steelunmerchantable.

(2) Under Illinois law, if the seller of goods is a merchant of goods of thekind being sold, a warranty that the goods are “merchantable” is impliedinto a contract for their sale as a matter of law, unless otherwise expresslyexcluded or modified. §§ 2-314; 2-316.(a) The minimum criteria for determining merchantability are set

forth in paragraph 2-314(a)-(f).(3) All the evidence introduced by Chicago Eastern, including Levinson’s

testimony was directed towards showing that the steel acquired in thefirst purchase was unfit for use as wall sheets in grain storage bins.(a) Merchantability, however, does not look only at the particular

use the buyer puts the goods. Rather, Comment 7 states thatparagraph 2-314(2)(a) and (b) are to be read together and refer“to the standards of that line of the trade which fits thetransaction and the seller’s business.”

-46-

JRC/Fall 2010/Sales

f. Level of Quality Required by “Merchantability”(1) Fargo Machine & Tool Co. v. Kearney & Trecker Corp. (E.D. Mich. 1977).

(a) At the outset then, it is necessary to distinguish and segregatethose defects which merely required that work be performedand those legally significant defects which either remaineduncured after reasonable opportunity to correct them or whichare otherwise related to plaintiff’s damage claims.

(b) Routine Repairs Not a Breach. Case law recognizes that suchmechanical failures in new and complex machines are expected,and to the extent that deficiencies and corrective serviceperformed were routine for so sophisticated a machine, nobreach occurs.

(2) Taterka v. Ford Motor Co. (Wis. 1978).(a) Where automobiles are concerned the term “unmerchantable

has only been applied where a single defect poses a substantialsafety hazard or numerous defects classify the car as a “lemon.” The ordinary purpose for which a car is intended is to providetransportation. Where a car can provide safe, reliabletransportation it is generally considered merchantable.i) The only inference that can reasonable be drawn from

the undisputed facts is that the rust problem describedin this case did not render the car unfit for the purposeof driving and therefore unmerchantable.

g. Establishing a Quality Standard(1) Use of expert witnesses is one way, but it is not the only way. A buyer

may be able to establish by circumstantial evidence that goods are not fitfor their ordinary purposes.(a) Nelson v. Wilkins Dodge, Inc. (Minn. 1977).

i) Although liability for breach of warranty attaches onlywhen a defect existing in the goods causes abreakdown in quality, generally no specific defectneed be alleged, and a defective condition can beproved by circumstantial evidence.

(2) Defect Not Yet Manifested(a) Everett v. TK-Taito, L.L.C. (Tex. App 2005).

i) The Texas Supreme Court has not yet addressedwhich claims, if any, a plaintiff possesses standing toassert based on an unmanifested product defect thatcauses only economic damage. Our sister courts, aswell as out-of-state courts, have reached differentconclusions concerning which, if any, theories ofrecovery are available to a plaintiff seeking economicbenefit-of-the-bargain or cost-of-replacementdamages on an unmanifested product defect.a) Defect for Ordinary Purposes v. Defect for Strict

Liability. In the context of an impliedwarranty of merchantability case, the word“defect” means a condition of the goods thatrenders them unfit for the ordinary purposesfor which they are used because of a lack ofsomething necessary for adequacy. In thearea of strict products liability, however, theword “defect” means a condition of theproduct that renders it unreasonably

-47-

JRC/Fall 2010/Sales

dangerous.1) A product that performs its ordinary

function adequately is not defectivein the implied warranty ofmerchantability context simplybecause it does not function as wellas the buyer would like, or even aswell as it could.

2) That is, for a defect to causeredressable damages in a breach ofthe implied warranty ofmerchantability action, it must causethe product not to functionadequately in the performance of itsordinary function for the plaintiff.

3. Warranty and Strict Liabilitya. Products Liability or Strict Liability in Tort. If the goods meet industry standards can

they still be unmerchantable? In most states the answer is “yes.” If the goodscause personal injury or property damage, they may be found to be notmerchantable even though they meet industry standards.(1) Restatement (Second) of Torts § 402A imposes liability on sellers for

personal injuries caused by defects in the products they sell regardless ofthe absence of negligence.(a) The test for whether a product was defective was whether the

product failed to meet the reasonable expectations of theconsumer. Court applied this test without regard to the kindof defect, whether it was an alleged defect in manufacturing oran alleged defect in design.i) Over the years, however, some courts became

dissatisfied with this test as applied to design defects,because it places liability on manufacturers for injuriesthat they could not have foreseen and could not haveavoided or prevented. In 1998, the ALI promulgatedthe Restatement (Third) of Torts–Products Liability.

ii) The provisions in the Restatement (Third) distinguishbetween production defects and design defects. a) For products defects, one still looks to the

reasonable expectations of the buyer but thetest for design defects turns on the availabilityof a reasonable alternative design that wouldhave made the product reasonably safe.

b. Denny v. Ford Motor Co. (N.Y. 1995).(1) Issues. Are the elements of New York’s causes of action for strict

products liability and breach of implied warranty always coextensive? Ifnot, can the latter be broader than the former?(a) Holding. The causes of action are not identical and, under the

circumstances presented her, it is possible to be liable for breachof implied warranty even though a claim of strict productsliability has not been satisfactorily established.

(2) Early History. Courts first relied upon contractual warranty theories asthe only existing means of facilitating economic recovery for personalinjuries from the use of defective goods. Eventually, the contractuallybased implied warranty theory came to be perceived as inadequate in aneconomic universe that was dominated by mass-produced products and

-48-

JRC/Fall 2010/Sales

an impersonal marketplace. It primary weakness was, of course, its rigidrequirement of a relationship of privity between the seller and theinjured consumer. Therefore, courts shifted their focus to thedevelopment of a new, more flexible tort cause of action: the doctrine ofstrict products liability.

(3) Tort Cause of Action Has Not Subsumed Warranty Action. The continuedvitality of the warranty approach is evidenced by its retention andexpansion in New York’s version of the UCC. The existence of thisstatutory authority belies any argument that the breach of impliedwarranty remedy is a dead letter.18

(4) Core Element of “Defect” is Subtly Different in 2 Causes of Action. (a) A design defect may be actionable under a strict products

liability theory if the product is not reasonable safe. The NewYork standard for determining the existence of a design defecthas required an assessment of whether “if the design defectwere known at the time of manufacturer, a reasonable personwould conclude that the utility of the product did no outweighthe risk inherent in marketing a product designed in thatmanner.”19

i) The analysis is rooted in a recognition that there areboth risks and benefits associated with many productsand that there are instances in which a product’sinherent dangers cannot be eliminated withoutsimultaneously compromising or completely nullifyingits benefits.

(b) It is this negligence-like risk/benefit component of the defectelement that differentiates strict products liability claims fromUCC-based breach of implied warranty claims in casesinvolving design defects.i) The UCC’s concept of a “defective” product requires

an inquiry only into whether the product in questionwas “fit for the ordinary purposes for which suchgoods are used.” § 2-314(2)(c).a) The cause of action is one involving true

“strict” liability, since recovery may be hadupon a showing that the product was notminimally safe for its expectedpurpose–without regard to the feasibility ofalternative designs or the manufacturer’s“reasonableness” in marketing it in thatunsafe condition.

c. Restatement, Comment n:(1) “The Restatement contemplates that a well coordinated body of law

Indeed, § 2-715(2)(b) includes as an element of “consequential damages” injury to person. This makes it18

illogical to conclude that the breach of implied warranty theory should be confined to recovery for economic loss.

In a design defect case, the alleged product flaw arises from an intentional decision by the manufacturer to19

configure the product in a particular way. In contrast, in strict products liability cases involving manufacturingdefects, the harm arises from the product’s failure to perform in the intended manner due to some flaw in thefabrication process. In the latter class of cases, the flaw alone is a sufficient basis to hold the manufacturer liablewithout regard to fault.

-49-

JRC/Fall 2010/Sales

governing liability for harms to persons or property arising out of thesale of defective products requires a consistent definition of defect, andthat the definition properly should come from tort law, whether theclaim carries a tort label or one of implied warranty of merchantability.”

(2) The comment goes on to say that since the factual predicate for a breachof the warranty of merchantability and strict-tort liability are the same inboth manufacturing and design-defect cases, claims on both theoriesshould not be submitted to a jury.

d. Express warranties and the warranty of fitness for particular purpose depend onspecific representations by the seller and, therefore, a claim for breach of thosewarranties is not duplicative of strict-tort liability and can be asserted along with aclaim for strict-tort liability.(1) Injury to Property. Restatement takes the position that the strict-liability

tort rules adopted by the Restatement apply to personal injury and toinjury to property other than the thing being sold.(a) Defects that injure only the property being sold are left to the

law of contract, including warranty law. See East RiverSteamship Corp. v. Transamerica Delaval, Inc., 476 U.S. 858(1986).

e. Tyson v. Ciba-Geigy Corp. (N.C. 1986).(1) Express Warranty/Puffing. A salesman’s expression of his opinion in “the

puffing of his wares” does not create an express warranty. Thus,statements such as “supposed to last a lifetime” and “in perfectcondition” do not create an express warranty. (a) Similarly, the statement made by the salesman in the present

case that the Dual 8E would “do a good job” is a mereexpression of opinion and did not create an express warranty.

(2) Implied Warranty of Fitness for Particular Purpose. The evidence in therecord is sufficient for a jury to find that Farm Chemical made animplied warranty relating to the fitness of the Dual 8E for plaintiff’spurpose and that this warranty was breached.

f. A.S. Leavitt v. Monaco Coach Corporation (Mich. App. 2000).(1) To establish a valid warranty of fitness for a particular purpose, “the

seller must know, at the time of sale, the particular purpose for whichthe goods are required and also that the buyer is relying on the seller toselect or furnish suitable goods.”(a) The evidence that plaintiff communication his wish to traverse

mountain roads while keeping up with commercial buses wassufficiently specific to support a finding that plaintiff articulatedto defendant his particular need for engine power. Likewise,plaintiff’s testimony about having communicated his problemswith brakes in the past while seeking defendant’s advice in thematter, along with having described the mountainous areas inwhich he wished to drive the coach, was sufficient to support afinding that defendant articulated to defendant his particularbraking needs.

g. Wilson v. Massey-Ferguson, Inc. (Ill App. 1974).20

(1) Facts. Plaintiff purchased a tractor that he claimed could not handleheavy duty plowing and that the engine failed earlier than it shouldhave. He sued for breach of warranty of merchantability and thewarranty for fitness for particular purpose.

Compare with Tennessee-Carolina Transportation v. Strick Corp. (N.C. 1973) (below).20

-50-

JRC/Fall 2010/Sales

(2) Illinois Code Comment to § 2-315 indicates that: “Thus, where thegoods are to be put to ordinary use, the concept of merchantability andnot particular purpose is involved.”

(3) The Comment 2 to § 2-315 similarly indicates that:(a) “A ‘particular purpose’ differs from the ordinary purpose for

which the goods are used in that it envisages a specific use bythe buyer which is peculiar to the nature of his businesswhereas the ordinary purposes for which the goods are use arethose envisaged in he concept of merchantability and goes touses which are customarily made of the goods in question. Forexample, shoes are generally used for the purpose of walkingon ordinary round, but a seller may know that a particular pairwas selected to be used for climbing mountains.”

(4) In this case, the tractor was sold and used for ordinary farm work, whichincludes, without question, heavy duty plowing. Thus, § 2-315 is notrelevant in this case, and the implied warranty of merchantability (§2-314), is the only relevant concept here.

h. Tennessee-Carolina Corporation, Inc. v. Strick (N.C. 1973).(1) “Although the primary purpose of §2-315 is indeed to protect a buyer

who purchases goods with the intention of using them in a “particular”manner, meaning a manner in which they would not normally beexpected to be used, we do not think that section is limited exclusivelyto purchases of such a nature. That warranty also protects a buyer whenhis particular purpose is the general or ordinary purpose.”21

(2) Despite the lack of authority expressly adopting this interpretation of“particular purpose,” several cases have done so impliedly, withoutdiscussion of the issue. Therefore, we think it beyond dispute that inPennsylvania the warranty of fitness does protect a buyer whoseparticular purpose is the general or ordinary one.

4. Leasesa. Article 2A recognizes two kinds of leases:

(1) True Leases. In one, the lessor typically maintains an inventory of thegoods, retains the title to the goods, and gets them back at a time whenthey still have meaningful value. (a) Before the promulgation of Article 2A in 1989, when called

upon to decide whether there were warranties in this kind oflease transaction, the courts held that Article 2 warranties applyto leases. §§2A-210-213 confirm this result.

(2) Finance Lease. The other kind of lease is more a mechanism forfinancing a transaction than it is a mechanism for putting goods into thepossession of the user.(a) A finance lessor has no inventory of goods, knows nothing

about the goods it leases, and provides no repair or otherservices with respect to those goods. Rather, it is purely asource of money for the user of the goods.

(b) § 2A-103(g). "Finance lease" means a lease with respect to which:(i) the lessor does not select, manufacture, or supply the goods;(ii) the lessor acquires the goods or the right to possession and use of thegoods in connection with the lease; and

“If the buyer’s use of the goods is ordinary use of those goods, the buyer’s particular purpose coincides21

with the ordinary use of those goods, and either section 2-314 or section 2-315 will give the buyer the protection heneeds.” Nordstrom Sales § 78 (1970) (emphasis added).

-51-

JRC/Fall 2010/Sales

(iii) one of the following occurs:(A) the lessee receives a copy of the contract by which thelessor acquired the goods or the right to possession and use ofthe goods before signing the lease contract;(B) the lessee's approval of the contract by which the lessoracquired the goods or the right to possession and use of thegoods is a condition to effectiveness of the lease contract;(C) the lessee, before signing the lease contract, receives anaccurate and complete statement designating the promises andwarranties, and any disclaimers of warranties, limitations ormodifications of remedies, or liquidated damages, includingthose of a third party, such as the manufacturer of the goods,provided to the lessor by the person supplying the goods inconnection with or as part of the contract by which the lessoracquired the goods or the right to possession and use of thegoods; or(D) if the lease is not a consumer lease, the lessor, before thelessee signs the lease contract, informs the lessee in writing (a)of the identity of the person supplying the goods to the lessor,unless the lessee has selected that person and directed thelessor to acquire the goods or the right to possession and useof the goods from that person, (b) that the lessee is entitledunder this Article to the promises and warranties, includingthose of any third party, provided to the lessor by the personsupplying the goods in connection with or as part of thecontract by which the lessor acquired the goods or the right topossession and use of the goods, and (c) that the lessee maycommunicate with the person supplying the goods to thelessor and receive an accurate and complete statement of thosepromises and warranties, including any disclaimers andlimitations of them or of remedies.

b. All-States Leasing Co. v. Bass (Idaho 1975).22

(1) Implied Warranty for Particular Purpose. By analogy in a lease transaction,in order for such an implied warranty of fitness to arise it must be showthat: (1) the lessor was made aware of the lessee’s need, (2) that the lessorrecommended a product, and (3) that the lessee leased the product asrecommended.

(2) Implied Warranty of Merchantability. In a lease transaction, in order forsuch an implied warranty of merchantability to exist it must be shownthat the lessor is a “merchant” with respect to the goods which he leases.(a) The official comment following § 2-104 notes:

i) “On the other hand, in Section 2-314 on thewarranty of merchantability, such warranty is impliedonly ‘if the seller is a merchant with respect to goodsof that kind.’ Obviously this qualification restricts theimplied warranty to a much smaller group thaneveryone who is engaged in business and requires aprofessional status as to a particular kinds of goods.”

(b) The record discloses that appellant does not build, manufacture,or sell any equipment or machines of any kind, but rather is in

This case arose before the enactment of Article 2A and concerns the applicability of the implied warranty22

of merchantability to a finance lease.

-52-

JRC/Fall 2010/Sales

the business of purchasing or financing the purchase ofequipment specifically selected and specified by an approvedlessee.i) In light of our conclusion that appellant was a finance

lessor and not a merchant for purposes of §2-314, it isunnecessary to pass upon the validity of the disclaimerclause, as it has no bearing on the merits of this appeal.

c. § 2A-210. Express Warranties.(1) Express warranties by the lessor are created as follows:

(a) Any affirmation of fact or promise made by the lessor to the lessee whichrelates to the goods and becomes part of the basis of the bargain creates an expresswarranty that the goods will conform to the affirmation or promise.(b) Any description of the goods which is made part of the basis of the bargaincreates an express warranty that the goods will conform to the description.(c) Any sample or model that is made part of the basis of the bargain creates anexpress warranty that the whole of the goods will conform to the sample or model.

(2) It is not necessary to the creation of an express warranty that the lessor use formalwords, such as "warrant" or "guarantee," or that the lessor have a specific intention to makea warranty, but an affirmation merely of the value of the goods or a statement purporting tobe merely the lessor's opinion or commendation of the goods does not create a warranty.

d. § 2A-212. Implied Warranty of Merchantability.(1) Except in a finance lease, a warranty that the goods will be merchantable is implied ina lease contract if the lessor is a merchant with respect to goods of that kind.(2) Goods to be merchantable must be at least such as

(a) pass without objection in the trade under the description in the leaseagreement;(b) in the case of fungible goods, are of fair average quality within the description;(c) are fit for the ordinary purposes for which goods of that type are used;(d) run, within the variation permitted by the lease agreement, of even kind,quality, and quantity within each unit and among all units involved;(e) are adequately contained, packaged, and labeled as the lease agreement mayrequire; and(f) conform to any promises or affirmations of fact made on the container or label.

(3) Other implied warranties may arise from course of dealing or usage of trade.e. § 2A-213. Implied Warranty of Fitness for Particular Purpose.

Except in a finance lease, if the lessor at the time the lease contract is made has reason toknow of any particular purpose for which the goods are required and that the lessee is relyingon the lessor's skill or judgment to select or furnish suitable goods, there is in the leasecontract an implied warranty that the goods will be fit for that purpose.

f. “Except in a finance lease...”(1) The introductory words to § 2A-212 mean that with respect to the

implied warranty of merchantability, Article 2A puts a finance lessor inthe same category as a lender: there is no implied warranty.

(2) Even if a lessor is not a finance lessor under Article 2A, it can still avoidwarranty liability by an effective disclaimer. See § 2A-214.

g. Hell or High Water Clauses. Finance leases frequently include so-called “hell orhigh water” clauses under which the lessee promises to pay the lessor even thoughthe leased goods are defective. Section 2A-407 is a statutory “hell or high water”provision that is effective even thought the contract itself does not contain a “hellor high water” provision.(1) § 2A-407. Irrevocable Promises; Finance Leases.

(1) In the case of a finance lease that is not a consumer lease the lessee's promisesunder the lease contract become irrevocable and independent upon the lessee'sacceptance of the goods.

-53-

JRC/Fall 2010/Sales

(2) A promise that has become irrevocable and independent under subsection (1):(a) is effective and enforceable between the parties, and by or againstthird parties including assignees of the parties ; and(b) is not subject to cancellation, termination, modification,repudiation, excuse, or substitution without the consent of the party towhom the promise runs.

(3) This section does not affect the validity under any other law of a covenant inany lease contract making the lessee's promises irrevocable and independent uponthe lessee's acceptance of the goods.

D. Warranty of Title1. The Obligation to Provide Good Title

a. § 2-312. Warranty of Title and Against Infringement; Buyer’sObligation Against Infringement.23

(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 orencumbrance of which the buyer at the time of contracting has no knowledge.

(2) A warranty under subsection (1) will be excluded or modified only by specific languageor by circumstances which give the buyer reason to know that the person selling does notclaim title in himself or that he is purporting to sell only such right or title as he or a thirdperson may have.(3) Unless otherwise agreed a seller who is a merchant regularly dealing in goods of the kindwarrants that the goods shall be delivered free of the rightful claim of any third person byway of infringement or the like but a buyer who furnishes specifications to the seller musthold the seller harmless against any such claim which arises out of compliance with thespecifications.

b. Any non-spurious claim, asserted against the buyer by a third party as to the titleto the goods will constitute a breach of the warranty of title, entitling the buyer tocancel the sale or to recover from the seller costs of defending the title.(1) Merely because the buyer can defeat the third party in a lawsuit does not

necessarily mean that the buyer has a “good” title claim. The fact thathis title is unreasonably exposed to the claim of the third person is whatconstitutes the breach of the seller’s warranty of good title, and thatbreach is not cured by the buyer’s ability to defeat the third party.(a) Jefferson v. Jones, (Md. 1979).

i) “We ... conclude that the General Assembly intendedthat section 2-312's protection, unless waived by thepurchaser, applies to third party claims of title nomatter whether eventually determined to be inferioror superior to the buyer’s ownership.”

ii) “There is some point at which a third party’s claimagainst the goods becomes so attenuated that weshould not regard it as an interference against whichthe seller has warranted. All that a purchaser shouldexpect from a seller of property is that he be protectedfrom colorable claims against his title and not from allclaims.”a) “The claim must be colorable, nonspurious

and of such a nature as to produce areasonable doubt as to the title’s validity.”

Subsection (1)(a) requires that the seller warrant “good title.” Good title is not defined by the Code, but23

Official Comment 1 states that a good titles is one that is not exposed to a lawsuit.

-54-

JRC/Fall 2010/Sales

c. Subsection 2-312(1)(b) requires that the goods be free from any security interest,lien, or encumbrance of which the buyers has no actual knowledge.(1) The knowledge limitation reflects the fact that a person buying the

goods with actual knowledge of a possible outstanding interest in themwill pay less for them, in return for which it is fair for that person toassume the title risks.

2. Disclaimer of the Warrantya. Subsection (2) of 2-312 sets out the requirement for disclaiming the warranty of

title:(1) A disclaimer of title can be only by specific language. The word “only”

in subsection (2) means that the warranty of title cannot be disclaimedby using broad similar language (which is authorized by 2-316(2) and (3)to disclaim the implied warranties of merchantability and for particularpurpose).(a) Rather, the seller must use specific language calling the buyer’s

attention to the fact that the warranty of title is beingdisclaimed.

b. Subsection (2) also provides that no warranty of title exists when thecircumstances of the sale give the buyer reason to know that the seller does notclaim to have titled or purports to be selling only whatever ownership the sellermay have.

c. Subsection (3) provides that a merchant dealing in goods of the kind that arebeing sold warrants that the goods will be free from infringement claims by thirdpersons which may arise out of violations of patents, trademarks, and the like.(1) If, however, the buyer furnishes specifications for the goods that the

seller is to deliver, the buyer does not get this infringement protection,but, on the contrary, must hold the seller harmless against any suchclaims that arise out of compliance with the specification.

3. Leasesa. The warranty in § 2A-211 reflects the fact that in lease transactions the title does

not pass to the lessee. Therefore, § 2A-211 imposes a warranty of quietpossession: that no person holds a claim or interest arising from an act oromission of the lessor which will interfere with the lessee’s quiet enjoyment of theleasehold interest.

b. Further, except in a finance lease, the warranty also protects against claims ofinfringement.

c. As with the warranty of title in sales transactions, this warranty may be excludedor modified.

V. DISCLAIMERS AND OTHER LIMITATIONS ON WARRANTIES

A. Disclaimers1. Default Provisions. The warranty provisions of the UCC (§§ 2-314 and 2-315) are simply

default provisions. The parties are free to agree otherwise, that there will be no impliedwarranties in their particular transaction.

2. § 2-316. Exclusion or Modification of Warranties.(1) Words or conduct relevant to the creation of an express warranty and words or conduct tending tonegate or limit warranty shall be construed wherever reasonable as consistent with each other; butsubject to the provisions of this chapter on parol or extrinsic evidence (§ 4-2-202) negation orlimitation is inoperative to the extent that such construction is unreasonable.(2) Subject to subsection (3), to exclude or modify the implied warranty of merchantability or any partof it the language must mention merchantability and in case of writing must be conspicuous, and toexclude 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 “Thereare no warranties which extend beyond the description on the face hereof.”(3) Notwithstanding subsection (2):

-55-

JRC/Fall 2010/Sales

(a) unless the circumstances indicate otherwise, all implied warranties are excluded byexpressions like “as is”, “with all faults” or other language which in commonunderstanding calls the buyer's attention to the exclusion of warranties and makes plain thatthere is no implied warranty; and(b) when the buyer before entering into the contract has examined the goods or the sampleor model as fully as he desired or has refused to examine the goods there is no impliedwarranty with regard to defects which an examination ought in the circumstances to haverevealed to him; and(c) an implied warranty can also be excluded or modified by course of dealing or course ofperformance or usage of trade.(d)(i) The implied warranties of merchantability and fitness shall not be applicable to acontract for the sale of human blood, blood plasma, or other human tissue or organs from ablood bank or reservoir of such other tissues or organs. Such blood, blood plasma, or tissueor organs shall not, for the purpose of this article, be considered commodities subject to saleor barter but shall be considered as medical services.(ii) With respect to the sale of bovine, porcine, ovine, and equine animals, or poultry, thereshall be no implied warranty that the animals are free from disease or sickness. Thisexemption shall not apply when the seller knowingly sells animals which are diseased orsick.

(4) Remedies for breach of warranty can be limited in accordance with the provisions of this chapter onliquidation or limitation of damages and on contractual modification of remedy (§§ 4-2-718,4-2-719).

3. Sierra Diesel Injection Service, Inc. v. Burroughs Corporation (9th Cir. 1989).a. Warranty exclusions are permitted under the UCC § 2-316 to allow parties to

bargain to allocate the risk of loss. However, exclusions of warranties aregenerally disfavored, and standardized take it or leave it form contracts such as theone in this case are construed against the drafter.

b. Subject to Good Faith/Unconscionability. They are subject to the general obligationof good faith and of not imposing unconscionable terms upon a party.

c. Purpose of Warranty Waivers. According to Official Comment 1, the purpose ofthe warranty waiver section is to “protect a buyer from unexpected andunbargained language of disclaimer by denying effect to such language wheninconsistent with language of express warranty and permitting the exclusion ofimplied warranties only by conspicuous language or other circumstances whichprotect the buyer from surprise.”(1) Conspicuous. Conspicuousness is defined as: “A term of clause is

conspicuous when it is so written that a reasonable person against whomit is to operate ought to have noticed it.... Language in the body of aform is ‘conspicuous’ if it is in larger or other contrasting type or color.”(a) The Official Comment notes that “the test is whether attention

can reasonably be expected to be called to it.”(b) Factors in Determining Conspicuousness. Whether a disclaimer is

conspicuous is not simply a matter of measuring the type size orlooking at the placement of the disclaimer within the contract. A reviewing court must ascertain that a reasonable person inthe buyer’s position would not have been surprised to find thewarranty disclaimer in the contract.i) Sophistication. One factor to consider is the

sophistication of the parties.ii) Surrounding Circumstances. Also relevant as to whether

a reasonable person would have notice a warrantydisclaimer are the circumstances of the negotiation andsigning.

4. Must Mention Merchantability. To be effective under 2-316(2), a disclaimer of the implied

-56-

JRC/Fall 2010/Sales

warranty of merchantability must mention “merchantability.” In addition, under 2-316(2), a disclaimer of the implied warranty of merchantability must be conspicuous,which is defined in 1-201(10).a. Hamilton v. O’Connor Chevrolet, Inc. (N.D. Ill. 2005).24

(1) “The bold faced writing is not obscured; in fact, it is free-standing andset forth in its own paragraph out from the remainder of the text. Inaddition, below the disclaimer, the Retail Contract provides a definitionof the implied warranty of merchantability.”

(2) “The fact that the disclaimer is on the back side of the Retail Contractdoes not, in this case at least, alter the result of the analysis aboutwhether a reasonable person would be expected to notice it. Inaddition, in at least three other places, the front side of the RetailContract directs the reader to the back side of the agreement.”

5. Gindy Manufacturing Corp. v. Cardinale Trucking Corp. (N.J. 1970).a. The express terms of an agreement should be construed where reasonable as

consistent with the custom of the trade or a course of dealing evidenced byprevious conduct of the parties. § 1-205. Moreover, a course of performance isrelevant to the interpretation of an agreement. § 2-208. The express terms of anagreement and a course of performance, course of dealing and usage of trade“shall be construed whenever reasonable as consistent with each other.” § 2-208(2).

b. To disclaim an implied warranty of merchantability, § 2-316(2) of the Coderequires the use of the word “merchantability,” and requires, in a writtencontract, that such exclusion must be in “conspicuous” language.(1) “Conspicuous” is defined to include such writing “that a reasonable

person against whom it is to operate ought to have noticed it.” Thedefinition provides that “a printed heading in capitals is conspicuous,”and that “conspicuous” writing includes larger print or other contrastingtype or color. This section also provides that conspicuousness is to bedetermined by the court.

(2) In the case at hand an implied warranty of merchantability has not beenexcluded in a manner that conforms to § 2-316(2). The word“merchantability” is not used and the exclusion is not conspicuous.

c. Subsection (3) of § 2-16 does not use the term “conspicuous.” Subsection (2),which requires the use of conspicuous language in written agreements to excludeor modify implied warranties of merchantability or fitness, is expressly madesubject to subsection (3). The introductory language of subsection (3) alsosuggests the supremacy of its provisions over subsection (2). Thus, reading thetwo subsections literally would eliminate the requirement of “conspicuous”language as a condition for the exclusion of all implied warranties whereexpression like “as is” are used.(1) On the other hand, the intent may have been simply to provide in

subsection (3) a qualification of subsection (2) so as to permit the use ofcommonly understood term in substitution for the term“merchantability” or terms respecting fitness, without eliminating therequirement of conspicuous language where the agreement is in writing.(a) The metamorphosis of § 2-316 and the reason given in the

legislative history mentioned suggest that the use of expressions

The disclaimer in this case was set forth as follows: “Warranties Seller Disclaims. You understand24

that the Seller is not offering any warranties and that there are no implied warranties ofmerchantability, or fitness for a particular purpose, or any other warranties, express or implied by theSeller.”

-57-

JRC/Fall 2010/Sales

like “as is” was intended merely to give effect to commonterms in addition to those specified in subsection (2) as a meansfor disclaiming certain warranties. There is no evidence of alegislative purpose to require conspicuous language in one caseand not when expressions like “as is” are used.

(b) It appears desirable to read into § 2-316(3) the requirement ofconspicuousness when the attempted disclaimer is in writing.

(c) It does not make sense to require conspicuous language when awarranty is disclaimed by used of the words “merchantability”or “fitness” and not when a term like “as is” is used toaccomplish the same result.i) This interpretation would still leave intact the exclusion

of implied warranties arising from a course of dealing or usageof trade by expressions like “as is” whether conspicuous ornot.

B. Privity and Warranty1. § 2-318. Third Party Beneficiaries of Warranties Express or Implied.25

Alternative AA seller's warranty whether express or implied extends to any natural person who is in the family orhousehold of his buyer or who is a guest in his home if it is reasonable to expect that such person mayuse, consume or be affected by the goods and who is injured in person by breach of the warranty. Aseller may not exclude or limit the operation of this section.Alternative BA seller's warranty whether express or implied extends to any natural person who may reasonably beexpected to use, consume or be affected by the goods and who is injured in person by breach of thewarranty. A seller may not exclude or limit the operation of this section.Alternative CA seller's warranty whether express or implied extends to any person who may reasonably be expectedto use, consume or be affected by the goods and who is injured by breach of the warranty. A seller maynot exclude or limit the operation of this section with respect to injury to the person of an individual towhom the warranty extends.

2. Ark. Code Ann. § 4-86-101. Lack of Privity.The lack of privity between plaintiff and defendant shall be no defense in any action brought againstthe manufacturer or seller of goods to recover damages for breach of warranty, express or implied, or fornegligence, although the plaintiff did not purchase the goods from the defendant, if the plaintiff was aperson whom the manufacturer or seller might reasonably have expected to use, consume, or be affectedby the goods.

3. Ark. Code Ann. § 4-86-102. Liability of a Supplier.(a) A supplier of a product is subject to liability in damages for harm to a person or to property if:

(1) The supplier is engaged in the business of manufacturing, assembling, selling, leasing,or otherwise distributing the product;(2) The product was supplied by him or her in a defective condition that rendered itunreasonably dangerous; and(3) The defective condition was a proximate cause of the harm to a person or to property.

(b) The provisions of subsection (a) of this section apply although the claiming party has not obtainedthe product from or entered into any contractual relation with the supplier.(c)(1) Any licensee under § 17-42-103(10) who is only providing brokerage and sales services underhis or her license shall not be considered a supplier under this section.(2)(A) Except as provided in subdivisions (c)(2)(B) and (C) of this section, real estate andimprovements located on real estate shall not be considered a product under this section.(B) Any tangible object or good produced that is affixed to, installed on, or incorporated into real

Arkansas has adopted Alternative A to § 2-318.25

-58-

JRC/Fall 2010/Sales

estate or any improvement on real estate shall be considered a product under this section.(C) If environmental contaminants exist or have occurred in an improvement on real estate, theimprovement on real estate shall be considered a product under this section.

4. Randy Knitwear, Inc. v. American Cyanamid Co. (N.Y. 1962).26

a. Traditionally, an action for breach of implied warranty would not succeed, absentprivity between plaintiff and defendant. The same was applied to expresswarranties.

b. However, there has been a shift from the technical privity requirement. It wasrecognized that it should be dispensed with in a proper case in the interest ofjustice and reason. (1) More specifically, it was held that in cases involving foodstuffs and

household goods, the implied warranties of fitness and merchantabilityrun from the retailer to the members of the purchaser’s household,regardless of privity of contract.

c. In Baxter v. Ford Motor Co. (Wash.), the court breach the “citadel of privity”where express representations were made by a manufacturer to induce reliance byremote purchasers.(1) Since the Baxter decision, courts throughout the country have shown a

marked, and almost uniform, tendency to discard the privity limitation,and hold the manufacturer strictly accountable for the truthfulness ofrepresentations made to the public and relied upon by the plaintiff inmaking his purchase.(a) Today, the significant warranty, the one which effectively

induces the purchase, is frequently that given by themanufacturer through mass advertising and labeling to ultimatebusiness users or to consumers with whom he has no directcontractual relationship.

(b) It is highly unrealistic to limit a purchaser’s protection towarranties made directly to him by his immediate seller. Theprotection he really needs is against the manufacturer whosepublished representations caused him to make the purchase.

d. It is true that in many cases the manufacturer will ultimately be held accountablefor the falsity of his representations, but only after an unduly wasteful litigationprocess.

e. We perceive no warrant for holding–as the appellant urges–that strict liabilityshould not here be imposes because the defect involved, fabric shrinkage, is notlikely to cause personal harm or injury.(1) Most courts that have dispensed with the requirement of privity in this

sort of case have not limited their decisions in this manner.(a) Since the basis of liability turns not upon the character of the

product but upon the representation, there is no justificationfor a distinction on the basis of the type of injury suffered orthe type of article or goods involved.

5. Direct Loss/Consequential Lossa. The Randy Knitwear court made no distinction between the types of loss the

plaintiff may recover in denying summary judgment. Some courts, however,limit the plaintiff’s recover to direct loss.(1) In Beyond the Garden Gate, Inc. v. Northstar Freeze-Dry Manufacturing, Inc.

(Iowa 1995), the court held that a nonprivity plaintiff may at most

Decided under the Uniform Sales Act.26

-59-

JRC/Fall 2010/Sales

recover for direct loss.27

6. Minnesota Mining & Manufacturing Co. v. Nikisha, Ltd. (Minn. 1997).a. The Minnesota legislature had adopted a variant of Alternative C of § 2-318.b. “Those who purchase, use, or otherwise acquire warranted goods have standing

to sue for purely economic losses. Those who lack any such connection to theunwarranted goods must demonstrate physical injury or property damage beforeeconomic losses are recoverable. This line comports with legislative intent,provides a clear rule of law, and identifies a sensible limit to liability withoutdisrupting settled precedent.”

7. Tex Enterprises, Inc. v. Brockway Standard, Inc. (Wash. 2003).a. Issue. Can an implied warranty arise from a manufacturer’s direct representation

to a remote commercial purchaser, absent a contract between the parties orreliance as a third party beneficiary on the contract between the manufacturer andits immediate buyer?

b. There are two types of plaintiffs for whom lack of privity has been a concern:(1) A horizontal non-privity plaintiff is not a buyer of the product in question,

but is one who consumes or is affected by the goods.(a) By adopting Alternative A of § 2-318, the Washington

Legislature chose to eliminate the privity requirement forhorizontal non-privity under certain circumstances.

(2) A vertical non-privity plaintiff is a buyer who is in the distributive chain,but who did not buy the product directly from the defendant.(a) UCC Comment 3 to § 2-318, as adopted in Washington, notes

that this provision is silent with regard to vertical privity, butthe section “is not intended to enlarge or restrict thedeveloping case law on whether the seller’s warranties, given tohis buyer who resells, extend to other persons in thedistributive chain.”i) In Baughn v. Honda Motor Co. (1986), the court

adopted the traditional rule that a plaintiff may notbring an implied warranty action under the UCCwithout contractual privity.a) The court would have let an express

warranty claim proceed because “the privityrequirement is relaxed when a manufacturermakes express representations, in advertisingor otherwise, to a plaintiff.”

ii) In Touchet Valley Grain Growers, Inc. v. Opp & Siebold(1992), the court created an exception to the privityrequirement for implied warranties:a) Allowed a vertical nonprivity plaintiff to

recover where the plaintiff was the intendedthird party beneficiary of the impliedwarranty that the manufacturer gave to itsintermediate dealer.

b) Did not overturn Baughn but rather statedthat Baughn was not argued on third partybeneficiary grounds. Thus, Touchet carvedout a third party beneficiary exception to the

The court quoted extensively from White & Summers: “Remote buyers may use a seller’s goods for27

unknown purposes from which enormous losses might ensue. Since the remote seller cannot predict the purposes forwhich the goods will be used he faces unknown liability and may not be able to insure himself.”

-60-

JRC/Fall 2010/Sales

general rule.c. Allowing implied warranties to arise without reliance on an underlying contract is

inconsistent with both the plain language of §§ 2-314 and 315 and the court’sprior approach to implied warranties.(1) The language of §§ 2-314 and 315 can be contrasted with that of § 2-

313 (express warranties) in that the language does not refer to anunderlying “contract”. Thus, the plain meaning of this statutorylanguage forecloses application of implied warranties where there is nounderlying contract to which the purchaser is a party or an intendedthird party beneficiary.

(2) Allowing implied warranties to arise out of express representations couldleave a manufacturer unable to adequately predict when impliedwarranties will attach.

8. Morrow v. New Moon Homes, Inc. (Alaska 1976).a. Issue. The remedies which are available to a remote purchaser against the

manufacturer of defective goods for direct economic loss.(1) Under the UCC, the manufacturer is given the right to avail himself of

certain affirmative defenses which can minimize his liability for a purelyeconomic loss. Specifically, the manufacturer has the opportunity,pursuant to § 2-316, to disclaim liability and under § 2-719 to limit theconsumer’s remedies, although the Code further provides that suchdisclaimers and limitations cannot be so oppressive as to beunconscionable and thus violate § 2-302. In addition, the manufactureris entitled to reasonably prompt notice from the consumer of theclaimed breach of warranties, pursuant to § 2-607(3)(a).(a) In our view, recognition of a doctrine of strict liability in tort

for economic loss would seriously jeopardize the continuedviability of these rights Thus, we hold that the theory of strictliability in tort ... does not extend to the consumer who suffersonly economic loss because of defective goods.

b. Issue. Whether the Morrows, as remote purchasers, can invoke the warrantiesattributable to the manufacturer which arose when New Moon passed titled ofthe mobile home to the next party in the chain of distribution.(1) Horizontal v. Vertical Privity. The issue of horizontal privity raises the

question whether person other than the buyer of defective goods canrecover from the buyer’s immediate seller on a warranty theory. Thequestion of vertical privity is whether parties in the distributive chainprior to the immediate seller can be held liable to the ultimate purchaserfor loss caused by the defective product.(a) With regard to vertical privity, the Code is totally silent and

strictly neutral, as Comment 3 to § 2-318 makes eminentlyclear.

(2) There is nothing incompatible in affording parallel consumer remediessounding in tort and in contract, and several jurisdictions which haveadopted strict liability in tort also make available an implied warrantytheory without regard to privity of contract.

(3) The leading case is Henningsen v. Bloomfield Motors, Inc. (N.J. 1960)which held liable for personal injuries and property damage both themanufacturer of an automobile and the dealer who sold the vehicle.

(4) The widespread rationale for the widespread abolition of therequirement of privity stems from the structure and operation of the freemarket economy in contemporary society.

(5) The policy considerations which dictate the abolition of privity arelargely those which also warranted imposing strict tort liability on the

-61-

JRC/Fall 2010/Sales

manufacturer: the consumer’s inability to protect himself adequatelyfrom defectively manufactured goods, the implied assurance of themaker when he puts his goods on the market that they are safe, and thesuperior risk bearing ability of the manufacturer.

(6) Sub-Issue: Whether to extend abolition of privity to embrace not onlywarranty actions for personal injuries and property damage but also thosefor economic losses.(a) Court holds that there is no satisfactory justification for a

remedial scheme which extends the warranty action to aconsumer suffering personal injury or property damage butdenies similar relief to the consumer “fortunate” enough sufferonly direct economic loss.i) The fear that if the implied warranty action is

extended to direct economic loss, manufacturers willbe subjected to liability for damages of unknown andunlimited scope would seem unfounded. Themanufacturer may possibly delimit the scope of hispotential liability by use of a disclaimer in compliancewith § 2-316 or by resort to the limitations authorizedin § 2-719.

(b) We therefore hold that a manufacturer can be held liable fordirect economic loss attributable to a breach of his impliedwarranties, without regard to privity of contract between themanufacturer and the ultimate purchaser.28

9. Leases. For ordinary leases, Article 2A pretty much tracks Article 2. But for finance leases,2A-209 explicitly gives the lessee a direct cause of action against the supplier of the goods.a. The “supplier” is the person from whom the lessor buys the goods (2A-103(x)).

10. Patty Precision Products Co. v. Brown & Sharpe Manufacturing Co. (10th Cir. 1988).a. On of the prime goals of the Code was to do away with the requirement of

privity of contract consistent with 402A of the Restatement which abolishes theprivity requirement only in cases of property damage and personal injury.(1) An ultimate consumer in the distribution chain can bring a direct breach

of warranty action against a manufacturer, notwithstanding his lack ofprivity. Since there is an implied warranty of merchantability under §2-314 and fitness for particular purpose under § 2-315 unless excludedin accordance with § 2-316, we hold that General Electric’s disclaimerto Brown & Sharpe, undisclosed to Patty Precision, was irrelevant andthat the district court erred in admitting it into evidence and instructingon it.

11. Other courts have held that warranty disclaimers are effective against immediate buyers arealso effective against remote buyers.

C. Contributory Negligence and Assumption of Risk1. For a buyer to recover for breach of warranty, the buyer must prove: (a) that there is a

warranty with respect to the goods; (b) that the seller breached the warranty; (c) that thebuyer suffered a loss or injury (d) that the breach of warranty is the factual and legal causeof the injury; and (e) the amount of the loss.

2. It is not enough for the buyer to establish a warranty and a loss. The buyer must alsoestablish a breach of the warranty, and the mere fact of injury does not establish that the sellerbreached the warranty.

The court does not discuss the issue of consequential economic loss other than to note that § 2-71528

governs the recovery of such damages and requires, among other things, that said damages must have been foreseeableby the manufacturer.

-62-

JRC/Fall 2010/Sales

a. It is necessary that the breach has proximately caused the damages complained of bythe plaintiff. The burden is upon the buyer to establish the breach.

b. Proof of causation cannot be established through negative implication.c. Without an affirmative finding by the jury on causation, the conclusion that the

entire verdict is based upon speculation is well supported.d. The burden is not insuperable, even if the buyer cannot establish the cause of the

product’s failure to do what it is supposed to do.(1) “Generally, no specific defect need be alleged, and a defective condition

can be proved by circumstantial evidence.”(a) “Circumstantial evidence may be resorted to if there can be

drawn therefrom a rational inference that a defect in thedefendant’s product was the source of the trouble.”

(2) “We hold that the plaintiff need not show the specific technical cause ofa product’s malfunction in order to sustain its causation burden in abreach of warranty cause of action.”

3. Correia v. Firestone Tire & Rubber Co. (Mass. 1983).a. Issue. Does Massachusetts recognize contributory or comparative negligence of

fault as a full or partial defense to an action for personal injury or wrongful deathbased on breach of warranty?

b. We have recognized on a number of occasions that claims based on breach ofwarranty sound essentially in tort. Further, we have recognized that in thisCommonwealth the theory of implied warranty provided by §§ 2-314, 2-318, is“congruent in nearly all respects with the principles expressed in Restatement(Second) of Torts § 402(A),” which defines the strict liability of a seller forphysical harm to a user or consumer of the seller’s product.

c. Section 85 is applicable only to actions “by any person or legal representative torecover damages for negligence resulting in death or in injury to person orproperty.”(1) Strict liability actions are not actions in negligence. Restatement

(Second) of Torts § 402A, Comment n. The defendant may be liable“even though he has exercised all possible care in the preparation andsale of the product.”

(2) The court also declines to give effect to any underlying principles of thecomparative negligence statute by judicial adoption. “To do so wouldbe to meld improperly the theory of negligence with the theory ofwarranty as expressed in § 2-318, and thereby to undercut the policiessupporting these statutes.”

d. Strict liability is justified on a different basis than negligence. The seller, bymarketing his product for use and consumption, has undertaken and assumed aspecial responsibility toward any member of the consuming public who may beinjured by it.(1) Given this focus, the user’s negligence does not prevent recovery except

when he unreasonably uses a product that he knows to be defective anddangerous.

e. We conclude that the plaintiff in a warranty action under § 2-314 may notrecover if it is found that, after discovering the product’s defect and being madeaware of its danger, he nevertheless proceeded unreasonably to make use of theproduct and was injured by it.

4. Fiske v. MacGregory, Div. Of Brunswick (R.I. 1983).a. Issue. Whether or not Rhode Island’s comparative-negligence statute should be

applied to breach-of-implied warranty actions and to strict liability actions.b. After a prolonged consideration and reading of this statute, we can only come to

the conclusion that the language “all action hereafter brought for personalinjuries” includes actions brought on the theories of strict liability and breach of

-63-

JRC/Fall 2010/Sales

implied warranty as well as actions brought on a negligence theory.(1) The drafters deemed it necessary to use the language “in all actions,”

leaving no doubt in our minds that they intended to include actions instrict liability and implied warranty.

(2) If the comparative-negligence statute only applied to negligence actions,a defendant-manufacturer liable in strict liability or implied warrantycould not have the damages apportioned because of plaintiff’s culpableconduct. Ironically, defendant-manufacturers found liable in negligencewould have the damages apportioned, despite the fact that their conductwas clearly more culpable than the conduct of those defendants foundliable in strict liability or implied warranty.

5. Before adoption of comparative-negligence statutes, most courts had taken the position ofthe Restatement (Second) of Torts § 402A, comment n that in implied warranty and stricttort actions, only assumption of the risk–not ordinary negligence–is a defense to a stricttort (or warranty) action. Therefore, as to strict tort or warranty actions, use comparativefault principles reduces plaintiffs’ recoveries below to what they would have been underprior law.

D. Federal and State Statutes Applying Special Rules to Consumer Transactions1. The Magnuson-Moss Consumer Warranty Act

a. Introduction(1) Dissatisfaction with the operation of certain UCC rules in consumer

transactions led Congress in 1975 to enact the Magnuson-MossConsumer Warranty Act.

(2) The Act has three principal components: (1) disclosure; (2) a ban ondisclaimers; and (3) enhanced remedies.

(3) Written Warranty Not Required. The Act does not require a supplier togive a written warranty. That remains entirely within the discretion ofthe supplier. If, however, the supplier does give a written warranty, therequirements of the Magnuson-Moss Act apply.

(4) Full or Limited Warranty. Section 103 requires suppliers of consumergoods who give written warranties to label those warranties either “full”or “limited.”(a) Full Warranty. To be a full warranty, the warranty must meet

the standards specified in Section 104.i) Labeled “Full Warranty.” If a warranty does not meet

those standards, it may not properly be labeled a “fullwarranty.” If the supplier nevertheless labels it “fullwarranty,” then it is deemed to incorporate all thestandards specified for full warranties. § 104(e).

(b) Limited Warranty. If the written warranty does not meet thestandard set forth in § 104 then it is a “limited warranty.”

(5) Full and Conspicuous Disclosure. The Act requires “full and conspicuous”disclosure of the terms of the warranty. § 102(a).(a) The FTC is authorized to promulgate implementing

regulations, and it has done so. FTC, Disclosure of WrittenConsumer Product Warranty Terms and Conditions, 16 C.F.R. §§701.1-701.4.

(6) Disclaimers of Implied Warranties. Section 108 sweeps away disclaimers ofimplied warranties. If a supplier gives a written warranty, the suppliermay not disclaim implied warranties. This is true even if the writtenwarranty is a “limited warranty.” The supplier may, however, be ableto limit the duration of implied warranties.

(7) Federal Cause of Action. If the warrantor breaches a written warranty oran Article 2 implied warranty, the consumer has a federal cause of action

-64-

JRC/Fall 2010/Sales

and, if successful, may recover attorney’s fees. § 110(d).(a) Article 2, in contrast, contains no provision making attorney’s

fees available to a successful litigant.(8) Extends Beyond Consumer Transactions. A “consumer product” is any

goods that are normally used for personal, family, or householdpurposes. This means that an automobile or a television, for example, iswithin the definition even if the purchaser is a commercial entity.(a) “Consumer” includes a buyer who purchases for use rather

than resale. So when section 108 bans disclaimers on consumerproducts that are sold to consumers, it bans disclaimers ontelevisions that are sold to sports bards. And when section110(d) gives a right of action to consumers, it confers a right ofaction on a corporation that purchases a car for its sales rep.

b. Invalidation of Disclaimers(1) The Act invalidates disclaimers of implied warranties, but only if the

supplier makes a written warranty.(a) Supplier. “Supplier” includes the manufacturer of a consumer

product, intermediate distributors, and the retailer.c. Impact on the Requirement of Privity

(1) Courts are split on whether § 110(d) eliminates any requirement ofprivity of contract for implied warranty.(a) Szajna v. General Motors Corp. (Ill. 1986).

i) “In cases where no Magnuson-Moss written warrantyhas been given, Magnuson-Moss has no effect uponState-law privity requirements because, by virtue ofsection 101(7), which defines implied warranty,implied warranty arises only if it does so under Statelaw. However, if a Magnuson-Moss written warranty(either “full” or “limited”) is given, by reason of thepolicy against disclaimers of implied warrantyexpressed in Magnuson-Moss and the provisionsauthorizing a consumer to sue a warrantor, thenonprivity “consumer” should be permitted tomaintain an action on an implied warranty against the‘warrantor.’ A warrantor, by extending a writtenwarranty to the consumer, establishes privity betweenthe warrantor and the consumer which, thoughlimited in nature, is sufficient to support an impliedwarranty under sections 2-314 and 2-315 of theUCC. The implied warranty thus recognized, byvirtue of the definition in section 101

(b) Walsh v. Ford Motor Co. (D.D.C. 1984).i) “Here, Congress has specifically provided that implied

warranties “arise” under State law. Section 101(7). If, in this action, there are to be any implied warrantyclaims at all under Magnuson-Moss, they must“originate” from or “come into being” from state law. Therefore, if a State does not provide for a cause ofaction for breach of implied warranty where verticalprivity is lacking, there cannot be a Federal cause ofaction for such a breach.”

(2) In Szajna the Illinois Supreme Court believed that it is a question ofstate law whether the state’s requirement of privity survives enactment ofMagnuson-Moss. The federal courts disagree.

-65-

JRC/Fall 2010/Sales

d. Leases(1) In Voelker v. Porsche (7th Cir. 2003), the court stated, “No binding

authority governs the question of whether a lease can constitute a saleunder the Magnuson-Moss Act. Persuasive authorities, for their part,are divided.” (a) The court defined three categories of “consumers” under the

Act:i) Category 1. A buyer (other than for the purposes of

resale) of any consumer product.a) Here, the only sale alleged in relation to the

case was between the manufacturer, Porsche,and the lessor, and that sale occurred for thepurposes of resale.

ii) Category 2. Any person to whom such a product istransferred during the duration of an implied orwritten warranty (or service contract) applicable to theproduct.a) Voelker has failed to allege that the car was

“transferred [to him] during the duration” ofthe New Car Limited Warranty.

iii) Category 3. Any other person who is entitled by theterms of such warranty (or service contract) or underapplicable State law to enforce against the warrantor(or service contractor) the obligations of the warranty(or service contract). a) Under the state law of Illinois, as an assignee

of that warranty, a lessee like Voelker wasentitled to enforce the rights arising from thewarranty.

VI. BUYER’S REMEDIES FOR BREACH BY THE SELLER

A. Introduction1. § 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 inaccordance with the contract.

2. § 2-507. Effect of Seller’s Tender; Delivery on Condition.(1) Tender of delivery is a condition to the buyer's duty to accept the goods and, unless otherwiseagreed, to his duty to pay for them. Tender entitles the seller to acceptance of the goods and topayment according to the contract.(2) Where payment is due and demanded on the delivery to the buyer of goods or documents of title,his right as against the seller to retain or dispose of them is conditional upon his making the paymentdue.

3. § 2-511. Tender of Payment by Buyer; Payment by Check.(1) Unless otherwise agreed tender of payment is a condition to the seller's duty to tender andcomplete any delivery.(2) Tender of payment is sufficient when made by any means or in any manner current in theordinary course of business unless the seller demands payment in legal tender and gives any extensionof time reasonably necessary to procure it.(3) Subject to the provisions of this subtitle on the effect of an instrument on an obligation (§ 3-310),payment by check is conditional and is defeated as between the parties by dishonor of the check on duepresentment.

4. Putting these together, we see that Article 2 embraces the common-law rule that ordinarilythe parties must perform simultaneously.

B. Rejection, Cure, and Revocation of Acceptance1. Single-Delivery Contracts

-66-

JRC/Fall 2010/Sales

a. Common-Law. Under the common-law, unless the parties have agreed otherwise,the performance of each part is a condition of the other party’s obligation toperform. (1) This leads to the common-sense conclusion that if one party refuses to

perform, the other need not perform either.b. Substantial Performance Doctrine. Under this doctrine, if substantial

performance–albeit not complete or perfect–triggers the obligation of the other. The second party may refuse to perform only if the performance of the first fallsshort of substantial performance.(1) At one time, the rule applied to contracts for the sale of goods. But that

changed in 1877 with the English case of Bowes v. Shand.c. Perfect-Tender Rule. The rule of Bowes, Norrington, and Filley is known as the29

perfect-tender rule.(1) Early Law. The Uniform Sales Act adopted the perfect-tender rule, but

courts in states that adopted the Act sometimes failed to follow itsprovisions.

(2) UCC and the Perfect-Tender Rule. The UCC’s position is found in § 2-601, which continues the perfect-tender rule in single-delivery contracts,and 2-612, which adopts a version of the substantial performance rule ininstallment contract, except as to defects in documents, where it adheresto the perfect tender rule.(a) § 2-601. Buyer’s Rights on Improper Delivery.

Subject to the provisions of this chapter on breach in installmentcontracts (§ 2-612) and unless otherwise agreed under the sections oncontractual limitations of remedy (§§ 2-718 and 2-719), if the goodsor 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 unit or units and reject the rest.

(b) § 2-612. “Installment Contract”; Breach.(1) An “installment contract” is one which requires or authorizes thedelivery of goods in separate lots to be separately accepted, even thoughthe contract contains a clause “each delivery is a separate contract” or itsequivalent.(2) The buyer may reject any installment which is non-conforming ifthe non-conformity substantially impairs the value of that installmentand cannot be cured or if the non-conformity is a defect in the requireddocuments; but if the non-conformity does not fall within subsection (3)and the seller gives adequate assurance of its cure the buyer must acceptthat installment.(3) Whenever non-conformity or default with respect to one (1) or moreinstallments substantially impairs the value of the whole contract thereis a breach of the whole. But the aggrieved party reinstates the contractif he accepts a non-conforming installment without seasonably notifyingof cancellation or if he brings an action with respect only to pastinstallments or demands performance as to future installments.

d. D.P. Technology Corp. v. Sherwood Tool, Inc. (D. Conn. 1990).(1) While it is true that the doctrine of “perfect tender” has been criticized

by scholars principally because it allowed a dishonest buyer to avoid anunfavorable contract on the basis of an insubstantial defect in the seller’s

Norrington and Filley are U.S. Supreme Court cases.29

-67-

JRC/Fall 2010/Sales

tender, the basic tender provision of the UCC continued the perfecttender policy developed by the common law and embodied in theUniform Sales Act.

(2) Section 2-601 states that with certain exceptions , the buyer has the30

right to reject “if the goods or the tender of the delivery fail in any respectto conform to the contract.(a) Similarly, courts interpreting § 2-601 have strictly interpreted it

to mean any nonconformity, thus excluding the doctrine ofsubstantial performance.i) The generally disfavored “perfect-tender rule”

survives enactment of the UCC as respects a contractfor the sale of goods but does not control in the areaof service contracts which are governed by thestandard of substantial performance.

ii) These courts have thus found that the tender must beperfect in the context of the perfect tender rule in thesense that the proffered goods must conform to thecontract in every respect.

(3) Connecticut, however, appears in this regard to be the exception. In acase interpreting § 2-601, the appellate court stated that “the ‘perfecttender rule’ requires a substantial nonconformity to the contract before abuyer may rightfully reject the goods.”(a) Thus, the Connecticut Appellate Court has adopted “the

White and Summers construction of § 2-601 as in substance arule that does not allow rejection for insubstantial breach suchas short delay causing no damage.”

(b) Connecticut’s interpretation of § 2-601 so as to mitigate theharshness of the perfect tender rule reflects the consensus ofscholars that the rule is harsh and needs to be mitigated.

(c) Indeed, Summers and White state that the rule has been so“eroded” by the exceptions in the Code that “relatively little isleft of it; the law would be little changed if § 2-601 gave theright to reject only upon substantial nonconformity,” especiallysince the Code required a buyer or seller to act in good faith.

(4) A rejection of goods that have been specially manufactured for aninsubstantial delay where no damage is caused is arguably not in goodfaith.(a) This court finds that in cases where the nonconformity involves

a delay in the delivery of specially manufactured goods, the lawin Connecticut requires substantial nonconformity for a buyer’srejection under § 2-601, and precludes a dismissal for failure tostate a claim on the grounds that the perfect tender rule,codified at § 2-601, demands complete performance.

e. Good Faith Limitation on Buyer’s Right to Reject. Section 1-304 provides that“[e]very contract or duty within this Act imposes an obligation of good faith in itsperformance and enforcement.”

f. Cure. Section 2-508 permits a seller, after a buyer has rejected goods, to cure thenonconformity for which the buyer rejected. Hence, 2-508 mitigates theharshness of the perfect-tender rule. It does not eliminate the harshness because:(1) re-tender will cause at least some additional expense, and (2) it may not be

See, e.g., §§ 2-508 (seller’s limited right to cure defects in tender), 2-608 (buyer’s limited right to revoke30

acceptance) and 2-612 (buyer’s limited right to reject nonconforming tender under installment contract).

-68-

JRC/Fall 2010/Sales

possible for the seller to acquire the necessary information and take the necessarysteps to make an appropriate re-tender, as, for example, when tender is beingmade by a third party.

2. Installment Contractsa. Substantial Performance. Article 2 adopts essentially the substantial performance

rule for installment contracts.(1) Section 2-612(2) provides that the buyer may reject an installment only

if the installment has a nonconformity, the nonconformity substantiallyimpairs the value of the installment, and the nonconformity cannot becured.

(2) If the nonconformity substantially impairs the value of the wholecontract–as opposed to just the value of the installment–the buyer maycancel the contract and recover damages for total breach. 2-612(3).

(3) Substantial Impairment. Comment 4 states that “substantial impairment ofthe value of an installment can turn not only on the quality of the goodsbut also on such factors as time, quantity, assortment and the like.”

b. Midwest Mobile Diagnostic Imaging, L.L.C. v. Dynamics Corporation of America(W.D. Mich. 1997).(1) Under the UCC, the parties’ rights to reject, cure, and cancel under an

installment contract differ substantially from those defined under a singledelivery contract.

(2) Section 2-612(1) defines an “installment contract” as “one whichrequires or authorizes the delivery of goods in separate lots to beseparately accepted”(a) Comment 1 emphasizes that the “definition of an installment

contract is phrased more broadly in this Article [than in itsprevious incarnation as the Uniform Sales Act] so as to coverinstallment deliveries tacitly authorized by the circumstances orby the option of either party.”

(3) The terms ‘commercial unit’ and ‘lot’ are not mutually exclusive. (a) Lot. Section 2-105 defines ‘lot’ as a “parcel or single article

which is the subject matter of a separate sale or delivery,whether or not it is sufficient to perform the contract.”

(b) Commercial Unit. The same section defines ‘commercial unit’ as“such a unit of goods as by commercial usage is a single wholefor purposes of sale and division of which materially impairs itscharacter or value on the market or in use. A commercial unitmay be a single article (as a machine) or a set of articles (as asuit of furniture or an assortment of sizes) or a quantity (as abale, gross, or carload) or any other unit treated in use or in therelevant market as a single whole.”

(c) Lot Can Be Single Commercial Unit. Thus, a lot, which is themeasure of goods that the contract states will be deliveredtogether in one installment, can be a single commercial unit.

(d) Consequently, § 2-612 applies whenever a contract formultiple items authorizes the delivery of the items in separategroups at different times, whether or not the installmentconstitutes a commercial unit.

(4) Under § 2-612, the buyer’s right to reject is far more limited than thecorresponding right to reject under a single delivery contract definedunder § 2-601.(a) Under, § 2-601 exists the perfect tender rule which requires a

very high level of conformity. Under this rule, the buyer mayreject a seller’s tender for any trivial defect, whether it be in the

-69-

JRC/Fall 2010/Sales

quality of the goods, the timing of performance, or the mannerof delivery.

(b) Section 2-612 creates an exception to the perfect tender rule. Under subsection (2), a buyer may not reject nonconformingtender unless the nonconformity impairs the value of theinstallment.i) In addition, if the nonconformity is curable and the

seller gives adequate assurances of cure, the buyermust accept the installment.

ii) But even if rejection is proper under subsection (2),cancellation of the contract is not appropriate unlessthe defect substantially impairs the value of the wholecontract. § 2-612(3).

(c) Because this section significantly restricts the buyer’s right tocancel under an installment contract, there is not correspondingnecessity for reference to § 2-508; the seller’s right to cure isimplicitly defined by § 2-612.31

(5) To establish substantial impairment of the value of an installment thebuyer “must present objective evidence that with respect to its ownneeds, the value of the goods was substantially impaired.”(a) The existence of such nonconformity depends on the facts and

circumstances of each case, and can “turn not only on thequality of the goods but also on such factors as time..., and thelike. Comment 4, § 2-612.

(6) Substantial impairment, however, does not in itself justify rejection ofthe installment. The buyer must still accept tender if the defect can becured and the seller gives adequate assurances.

(7) Substantial Impairment of Contract as a Whole. Under § 2-612(3) the rightto cancel does not arise unless the nonconforming goods substantiallyimpair the value of the entire contract.(a) Whether a breach constitutes “substantial impairment” of the

entire contract is a question of fact. To make such adetermination, the Court should consider “the cumulativeeffect of the breaching party’s performance under the contract,based on the totality of the circumstances.

(b) Ultimately, “whether the nonconformity in any giveninstallment justifies cancellation as to the future depends, not onwhether such nonconformity indicates an intent or likelihoodthat future deliveries will also be defected, but whether thenonconformity substantially impairs the value of the wholecontract.” Comment 6, § 2-612.i) If the nonconformity only impairs the aggrieved

party’s security with regard to future installments, he“has the right to demand adequate assurances but notan immediate right to cancel the entire contract.”

ii) The right to cancel will be triggered only if “materialinconvenience or injustice will result if the aggrievedparty is forced to wait and received ultimate tenderminus the part or aspect repudiated.

3. Procedure for Effective Rejection and Duties After Rejection

Courts of other jurisdictions have reached differing conclusions with regard to the interaction between §§31

2-612 and 2-508.

-70-

JRC/Fall 2010/Sales

a. If the goods and the tender conform to the contract, the buyer must accept them. If either the goods or the tender of them does not conform to the contract, in asingle-delivery contract the buyer may reject them.

b. § 2-513. Buyer’s Right to Inspection of Goods.(1) Unless otherwise agreed and subject to subsection (3), where goods are tendered ordelivered or identified to the contract for sale, the buyer has a right before payment oracceptance to inspect them at any reasonable place and time and in any reasonable manner.When the seller is required or authorized to send the goods to the buyer, the inspection maybe after their arrival.(2) Expenses of inspection must be borne by the buyer but may be recovered from the sellerif the goods do not conform and are rejected.(3) Unless otherwise agreed and subject to the provisions of this chapter on C.I.F. contracts(§ 2-321(3)), the buyer is not entitled to inspect the goods before payment of the pricewhen the contract provides:

(a) for delivery “C.O.D.” or on other like terms; or(b) for payment against documents of title, except where such payment is dueonly after the goods are to become available for inspection.

(4) A place or method of inspection fixed by the parties is presumed to be exclusive butunless otherwise expressly agreed it does not postpone identification or shift the place fordelivery or for passing the risk of loss. If compliance becomes impossible, inspection shall beas provided in this section unless the place or method fixed was clearly intended as anindispensable condition failure of which avoids the contract.

c. § 2-602. Manner and Effect of Rightful Rejection.(1) Rejection of goods must be within a reasonable time after their delivery or tender. It isineffective unless the buyer seasonably notifies the seller.(2) Subject to the provisions of the two (2) following sections on rejected goods (§§ 2-603,2-604),

(a) after rejection any exercise of ownership by the buyer with respect to anycommercial unit is wrongful as against the seller; and(b) if the buyer has before rejection taken physical possession of goods in which hedoes not have a security interest under the provisions of this chapter (§2-711(3)), he is under a duty after rejection to hold them with reasonable care atthe seller's disposition for a time sufficient to permit the seller to remove them; but(c) the buyer has no further obligations with regard to goods rightfully rejected.

(3) The seller's rights with respect to goods wrongfully rejected are governed by theprovisions of this chapter on seller's remedies in general (§ 2-703)

d. § 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 thatthe goods are conforming or that he will take or retain them in spite of theirnon-conformity; or(b) fails to make an effective rejection (§ 2-602(1)), but such acceptance does notoccur until the buyer has had a reasonable opportunity to inspect them; or(c) does any act inconsistent with the seller's ownership; but if such act iswrongful as against the seller it is an acceptance only if ratified by him.

(2) Acceptance of a part of any commercial unit is acceptance of that entire unite. Miron v. Yonkers Raceway, Inc. (2d Cir. 1968)

(1) 2-607 provides: “The burden is on the buyer to establish any breachwith respect to the goods accepted.”

(2) 2-606(1) states: Acceptance of goods occurs when the buyer:(a) after a reasonable opportunity to inspect the goods signifiesto the seller that the goods are conforming or that he will takeor retain them in spite of their nonconformity; or(b) fails to make an effective rejection (subsection (1) of Section

-71-

JRC/Fall 2010/Sales

2-602), but such acceptance does no occur until the buyer hashad a reasonable opportunity to inspect them; or(c) does any act inconsistent with the seller’s ownership; but ifsuch act is wrongful as against the seller it is an acceptance onlyif ratified by him.

(3) 2-602(1) provides: “Rejection of goods must be within a reasonabletime after their delivery or tender. It is ineffective unless the buyerseasonably notifies the seller.”

(4) Finkelstein accepted the horse, then, if having had a reasonableopportunity to inspect it, he did not reject it within a reasonable time.What is reasonable depends upon an evaluation of all of thecircumstances.(a) As the trial judge rightly pointed out, “The fact that the subject

matter of the sale in this case was a live animal bears on what isa reasonable time to inspect and reject.”

(b) Finkelstein having had an opportunity to inspect Red Carpeton the day of the sale, we have no problem with the findingthat the attempted rejection on the next day did not comewithin a reasonable time.

(5) What is a reasonable time for rejection depends on the purpose ofrejection.(a) When goods are effectively rejected for breach of warranty, the

burden of proving that they conform presumably remains onthe seller, whereas upon acceptance the buyer has the burdento establish any breach.

(b) In short, since one of the consequences of acceptance is that thebuyer bears the burden of proving any breach, the fairness ofallocating the burden one way or the other is relevant indetermining whether acceptance has occurred–here, whetherrejection took place within a reasonable time.

(6) In any case, if there are defects which are not discoverable by theinspection which the district court found Finkelstein has a reasonableopportunity to make, the problem is taken care of by § 2-608(1) whichprovides in relevant part:The buyer may revoke his acceptance of a lot or commercial unit whosenonconformity substantially impairs its value to him if he has accepted it.(b) without discovery of such nonconformity if his acceptance was reasonablyinduced either by the difficulty of discovery before acceptance or by the seller’sassurances.

f. The concepts of reasonable time for rejection and for notification of rejection areelastic. The resolution of the issue is normally one for the jury.

g. When a seller delivers nonconforming goods and responds to the buyer’scomplaint with a promise to bring the goods up to contract specifications, courtsdiscount the time during which the seller attempts to remedy the defect in thegoods in computing a reasonable time for rejection.

h. Reasonable Time Modified By Agreement. The contract may specify the periodwithin which rejection must take place and that provision will be effective unlessit is “manifestly unreasonable” (1-204).(1) If the time limitation is so short that the contract time for rejection

would expire before the buyer has a reasonable chance to discover thedefect, the time set is manifestly unreasonable.

i. Rejection Communicated Not Only Recorded. Rejection must be communicated tothe seller. This is because upon rejection, the seller may have a right to cure thenonconformity but cannot do so unless informed of the problem.

-72-

JRC/Fall 2010/Sales

(1) Even if the seller has a right to cure, the policy of the code is to promotenegotiation with respect to troublesome transactions. See 2-607(3)(requiring the buyer to give the seller notice of a breach even if thebuyer already has accepted the goods and intends to keep them).

(2) In the typical case, notification of rejection is virtually contemporaneouswith rejection.

(3) DeJesus v. Cat Auto Tech Corp. (N.Y. City Civil Ct. 1994).(a) The court held that a stop payment order on a check was not

an effective rejection because it did not give the seller areasonable time and opportunity to cure.

j. Rejection/Revocation v. Rescission. Rejection is merely a refusal to take thetendered goods: it need not be accompanied by a decision not to sure on thecontract for breach. Rescission of the contract, on the other hand, is a choiceamong several available remedies for breach. A person who rescinds is seeking toescape from the contract and return to its pre-contract status, as opposed toenforcing the contract by seeking expectancy damages for the loss caused by theother person’s breach.(1) Rejection v. Revocation. Revocation of acceptance (authorized by 2-608)

is an “undoing” of acceptance and is available in only limitedcircumstances. Rejection is a refusal to accept and is much more readilyavailable.

k. Rejection/Revocation Not an Election of Remedy. The buyer might either ask forrescission or for damages for breach. Asking for return of any of the purchaseprice paid would not necessarily be a request for rescission, since on breach-of-contract principles, a seller is not entitled to retain the price of goods notaccepted.

l. Acceptance by Conduct Inconsistent with the Seller’s Ownership. Acceptance of goodsmay also occur even if the buyer purports to reject but then engages in conductinconsistent with the seller’s ownership. § 2-606(1)(c).

m. Acceptance by Using the Goods After Rejection. In Bowen v. Young (Tex. Civ. App.1974), the court held that the plaintiff rejected the mobile home he hadpurchased but that he subsequently accepted it when he moved into it and spentnearly $600.00 to repair the heating unit and change from an electric to a gasheater.

4. Curea. § 2-508. Cure by Seller of Improper Tender or

Delivery–Replacement.32

(1) Where any tender or delivery by the seller is rejected because non-conforming and thetime for performance has not yet expired, the seller may seasonably notify the buyer of hisintention to cure and may then within the contract time make a conforming delivery.(2) Where the buyer rejects a non-conforming tender which the seller had reasonablegrounds to believe would be acceptable with or without money allowance the seller may if heseasonably notifies the buyer have a further reasonable time to substitute a conformingtender.

b. Zabriskie Chevrolet, Inc. v. Smith (N.J. 1968).(1) It is clear that a buyer does not accept goods until he has had a

“reasonable opportunity to inspect.”(a) The plaintiffs argue that defendant had the opportunity to take

the car for a “spin around the block” before signing thepurchase agreement. The court counters that expecting the

Note that subsection (1) governs the seller’s right o cure when the buyer rejects the goods before the time32

for the seller’s performance has expired. Subsection (2) applies when the time for the seller’s performance has expired.

-73-

JRC/Fall 2010/Sales

layman to understand the intricacies of the modern automobileis impractical and that the first few miles of driving thusbecome more significant.i) How long the buyer may drive the new care under

the guise of inspection of new goods is not an issue inthis case as the car’s nonconformity was discoveredwithin 7/10 of a mile and minutes after leaving theshowroom floor.

(2) The plaintiff, in a different position from the layman, was aware (orshould have been) that the vehicle did not conform to the bargain theparties had made, and plaintiff had no reasonable right to expect that thevehicle in that condition would be accepted.

(3) Section 2-602 indicates that one can reject after taking possession. Possession, therefore, does not mean acceptance and the correspondingloss of the right of rejection; nor does the fact that buyer has a securityinterest along with possession eliminate the right to reject.

(4) 2-508 has been applauded as a rule aimed at ending “forced breaches.” Section 2-508 prevents the buyer from forcing the seller to breach bymaking a surprise rejection of the goods because of some minornonconformity at a time at which the seller cannot cure the deficiencywithin the time for performance.(a) It is clear that in the instant case there was no “forced breach”

on the part of the buyer, for he almost immediately began tonegotiate for another automobile.

(b) A “cure” which endeavors by substitution to tender a chattelnot within the agreement or contemplation of the parties isinvalid.i) For a majority of people, the purchase of a new car is

a major investment, rationalized by the peace of mindthat flows from its dependability and safety. Oncetheir faith is shaken, the vehicle loses not only is realvalue in their eyes, but becomes an instrument whoseintegrity is substantially impaired and whose operationis fraught with apprehension.

c. Shaken-Faith Doctrine. Some other courts have embraced it, but not all.(1) Sinco, Inc. v. Metro-North Commuter Railroad Co. (S.D.N.Y. 2001).

(a) Metro-North contracted with Sinco to provide a fall-restraintsystem for workers working on the Grand Central Terminalrenovation. When one of the harnesses fell apart in a worker’shand during a demonstration, Metro-North refused to use thesystem and also refused any cure.

(b) “It is well-settled under New York law that in order to justifytermination, ‘a breach must be ... so substantial andfundamental as to strongly tend to defeat the object of theparties in making the contract.’ Termination is anextraordinary remedy to be permitted only when the breachdoes to ‘the root of the agreement.’”

(c) The court rejected Metro-North’s “shaken-faith” theory,which relied, in part, on the Zabriskie case, stating, “ifobjectively, the cure was show to be reliably safe, Metro-Northwould have been obligated to accept the cure, despite, perhaps,any lingering subjective misgivings of its employees.”

(d) The court, however, ultimately found that Sinco had not curedand that Metro-North justifiably terminated the contract.

-74-

JRC/Fall 2010/Sales

i) “The injured party did not have to accept at facevalue the word of the breaching party regarding thereliability of replacement equipment. Metro-Northwas entitled to objective evidence of such reliability.”

d. Cure by Repair v. Cure by Substitution of New Goods.(1) Wilson v. Scampoli (D.C. App. 1967).

(a) “While [cases] provide no mandate to require the buyer toaccept patchwork goods or substantially repaired articles in lieuof flawless merchandise, they do indicate that minor repairs orreasonable adjustments are frequently the means by which animperfect tender may be cured.”

(b) “The seller, then, should be able to cure [the defect] undersubsection (2) in those cases in which he can do so withoutsubjecting the buyer to any great inconvenience, risk or loss.”

e. Subsection (1) v. Subsection (2)(1) Under 2-508(1), the seller’s right to cure within “time for performance”

or “contract time” is absolute. After the “contract time,” however, cureis available only if the seller had reasonable grounds to believe that theoriginal, nonconforming tender would be acceptable. If the seller doesnot have reasonable grounds to believe that, it is crucial to the seller’sright to cure that the time for performance not have expired when thebuyer rejects the goods.

(2) Time for Performance.(a) At least one court has held that “time for performance”

includes any period in which the seller promised to providesome support after delivery. See Peter Pan Seafoods, Inc. v.Olympic Foundry Co. (Wash. App. 1977).

5. Revocation of Acceptancea. Like rejection, revocation of acceptance has the effect of putting the goods back

into the hands of the seller. To that extent, it may seem that it does not matterwhether the buyers rejects or revokes acceptance, but it matter a lot.

b. Although rejection is permitted if the goods or tender fail in any respect toconform to the contract. Revocation is permitted only under the circumstancesspecified in § 2-608.

c. § 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-conformitysubstantially impairs its value to him if he has accepted it:

(a) on the reasonable assumption that its non-conformity would be cured and ithas not been seasonably cured; or(b) without discovery of such non-conformity if his acceptance was reasonablyinduced either by the difficulty of discovery before acceptance or by the seller'sassurances.

(2) Revocation of acceptance must occur within a reasonable time after the buyer discovers orshould have discovered the ground for it and before any substantial change in condition ofthe goods which is not caused by their own defects. It is not effective until the buyer notifiesthe seller of it.(3) A buyer who so revokes has the same rights and duties with regard to the goodsinvolved as if he had rejected them.

d. Jorgensen v. Pressnall (Or. 1976).(1) Whether plaintiffs proved nonconformities sufficiently serious to justify

revocation of acceptance is a two-step inquiry under the code.(a) Subjective. Since 2-608 provides that the buyer may revoke

acceptance of goods “whose nonconformity substantially impairits value to him,” the value of conforming goods to the plaintiff

-75-

JRC/Fall 2010/Sales

must first be determined.i) This is a subjective question in the sense that it calls

for a consideration of the needs and circumstances ofthe plaintiff who seeks to revoke; not the needs andcircumstances of an average buyer.

(b) Objective. Whether the nonconformity in fact substantiallyimpairs the value of the goods to the buyer, having in mind hisparticular needs. i) This is an objective question in the sense that it calls

for evidence of something more than plaintiff’sassertion that the nonconformity impaired the value tohim; it requires evidence from which it can beinferred that plaintiff’s needs were not met because ofthe nonconformity. In short, the nonconformity mustsubstantially impair the value of the goods to theplaintiff buyer. The existence of substantialimpairment depends on the facts and circumstances ineach case.

(2) Complete Impairment Unnecessary. Revocation of acceptance ispermissible not only where there is complete impairment but also wherethe impairment is substantial but not complete.

(3) Seller Must Cure Seasonably. A seller does not have an unlimited amountof time to cure the nonconformity. He must act seasonably.(a) Pressnall had ample opportunity to cure the defects before the

revocation of acceptance, therefore, his argument that anyfailure to cure the nonconformities was excused because theplaintiffs unreasonably refused to allow further attempts fails.

(4) The plaintiffs retained a security interest in the goods after therevocation of acceptance. This entitled them to continue in possessionto preserve their collateral.(a) Continued occupancy was the most feasible method of

protecting the mobile home from water damage. Thealternative was to find covered storage, which could have beenexpensive.

e. Continued Use After Revocation of Acceptance(1) The court in Jorgensen holds that the buyers’ continued occupancy did

not constitute an acceptance because it was a necessary move to preservethe collateral in light of the alternatives (e.g., covered storage). Othercases reach different results:(a) Bowen v. Young (Tex. Civ. App. 1974). The court held that

the buyer occupying the home and spending nearly $600.00 torepair the alleged defective heating unit constituted anacceptance under § 2-607(1)(c).

(b) Fablok Mills, Inc. V. Cocker Machine & Foundry Co. (N.J. 1973). The court held that attempts of the seller to repair may haveinduced the buyer reasonably to believe that the defects wouldbe cured. What is a reasonable time within which to revoke isa matter for the jury. Further, whether use after revocation isinconsistent with revocation is also a matter for the jury.i) The court stated that the overriding requirement of

reasonableness which permeates the Code counselsagainst any absolute rule against continued use afterrevocation of acceptance. Use may be the mostappropriate means of mitigating damages. The

-76-

JRC/Fall 2010/Sales

defendant did not show that it objected to thecontinued use, that the delay in stopping useprejudiced it, or that the buyer had any reasonablealternative.33

f. Revocation of Acceptance and Privity of Contract. The following cases reach differentconclusions regarding the ability of the buyer to sue someone other than the sellerunder revocation of acceptance.(1) Durfee v. Rod Baxter Imports, Inc. (Minn. 1977)

(a) “If plaintiff had sued Saab-Scania for breach of either expresswarranty or implied warranty, the absence of privity would notbar the suit despite the language of the pertinent Code sections. We see no reason why the result should differ merely becauseplaintiff has chosen to revoke his acceptance instead of suing forbreach of warranty. The remedies of the Code are to beliberally administered.”

(b) “The distributor of the automobile, who profits indirectly fromretail sales, must take responsibility for the solvency of itsdealers when its warranty is breached. A consumer cannot beexpected to foresee the demise of local dealerships; instead he isentitled to rely on the distributor who induced him to buy theautomobile.”

(2) Gasque v. Mooers Motor Car Co., Inc. (Va. 1984).(a) “The remedy of revocation of acceptance ... lies only against a

seller of goods, not against a remote manufacturer. This is sobecause the remedy, where successful, cancels a contract of sale,restores both title to and possession of the goods to the seller,restores the purchase price to the buyer, and as fairly aspossible, returns the contracting parties to the status quo ante. The remote manufacturer, having no part in the saletransaction, has no role to play in such a restoration of formerpositions.

g. Gappelberg v. Landrum (I)(1) We have examined the authorities from other states and found that the

greater weight of authority provides support for the conclusion that theright to cure by repair ends when the buyer justifiably exercises his rightto revoke acceptance of goods due to a substantial impairment in theirvalue.(a) The test that the courts have applied to rule on the propriety of

revocation requires a substantial impairment in the value of thegoods. This substantial impairment, in turn, has dependedupon such factors as the ease of correcting the defect and theseller’s diligence in attempting these repairs.

(b) Right to Cure by Replacement Survives Revocation for IneffectiveRepair. Because these factors relate to the repair of defects,revocation for ineffective repairs should not preclude anattempt to cure by replacement. Therefore, the seller’s right toreplace should survive a buyer’s revocation followingineffective repairs.

(2) A survey of the cases reveals three lines of cases: (1) The seller’s right tocure [by repair] ends where the buyer’s right to revoke begins; (2) Theseller has no right to cure [by repair] in a case of revocation of

Accord Toshiba Machine Co. v. SPM Flow Control, Inc. (Tex. App. 2005).33

-77-

JRC/Fall 2010/Sales

acceptance unless § 2-608(a)(1) applies (that is, when the buyer acceptswith knowledge of the defect and the seller agrees to repair); and (3) The seller’s right to cure by repair is cut off by the subverted confidenceof the buyer in the reliability of a major purchase such as a car or amobile home.(a) Landrum’s offer to replace does not fall into any of these three

categories, and, therefore, in the spirit of the Code, weconclude that following three weeks of diligent attemptedrepairs, Landrum was entitled to replace the television whenfaced with the unexpected demand of Gappelberg for thereturn of consideration when the television stopped operatingcompletely.

h. Gappelberg v. Landrum (II)(1) Issue. Under the UCC, does the seller have the right to cure a

substantial defect by making a replacement of the product after the buyerhave revoked acceptance?

(2) The concept of revocation is simple: the right of a buyer to revoke existsonly when the buyer has initially accepted the goods in question. Rejection, however, is an initial act of the buyer, meaning there wasnever an acceptance.

(3) The right of the seller to cure by repair or replacement clearly exists ininstances of rejection. UCC § 2-508.

(4) The only reference to cure in § 2-608 is in situations when the buyerknew of the defects at the time of acceptance of the goods. There is noreference to cure for our situation of where Gappelberg accepted thetelevision set without knowing of the defects.(a) The court of appeals concluded that “in the spirit of the

Code,” cure by replacement even in revocation situationsshould be authorized.

(5) Although a rejection case, Zabriskie held that once a buyer’s faith hasbeen shaken, the vehicle loses not only its real value in their eyes, butbecomes an instrument whose integrity is substantially impaired andwhose operation is fraught with apprehension.(a) By the same token, Gappelberg had seen one Advent television

perform, or fail to perform as the case may be, and therecertainly is justification for his not wanting to go throughexperiences with another Advent.

(b) We are cited no good policy reason why different rules shouldattain as to cure by replacement instead of cure by repair. Indeed we cannot envision any basis for a distinction. Thus,we state that once a buyer has properly revoked acceptance of aproduct, the seller has neither the right to cure by repair nor byreplacement.

C. Remedies When Buyer Does Not Have the Goods1. The Right to Get the Goods

a. § 2-711(2). Where the seller fails to deliver or repudiates the buyer may also(a) if the goods have been identified recover them as provided in this Article (§ 2-502); or(b) in a proper case obtain specific performance or replevy the goods as provided in thisArticle (§ 2-716).

b. Section 2-502 addresses some of the situations in which a buyer forms a contractwith a seller who encounters financial difficulty before delivering the goods.(1) § 2-502. Buyer’s Right to Goods on Seller’s Insolvency.

(1) Subject to subsections (2) and (3) and even though the goods have not beenshipped a buyer who has paid a part or all of the price of goods in which he has a

-78-

JRC/Fall 2010/Sales

special property under the provisions of § 4-2-501 may on making and keepinggood a tender of any unpaid portion of their price recover them from the seller if:

(a) in the case of goods bought for personal, family, or householdpurposes, the seller repudiates or fails to deliver as required by thecontract; or(b) in all cases, the seller becomes insolvent within ten days after receiptof the first installment on their price.

(2) The buyer's right to recover the goods under subsection (1) (a) vests uponacquisition of a special property, even if the seller had not then repudiated orfailed to deliver.(3) If the identification creating his special property has been made by the buyerhe acquires the right to recover the goods only if they conform to the contract forsale.

(2) The section permits the buyer to recover the goods from the seller, butonly if(a) the buyer tenders any balance of the price of the goods, and(b) the seller’s insolvency arose within ten days after the buyer’s

first payment.(3) If the seller is insolvent at the time the contract is formed, the buyer34

gains no right under the section, even if the buyer has no reason tosuspect the insolvency.

(4) Even if § 2-502 gives the buyer rights to the goods as against the seller,the seller’s creditors also may have rights to them.

(5) Section 2-716(1) states that the seller is entitled to specific performance“where the goods are unique or in other proper circumstances.”35

c. Sedmak v. Charlie’s Chevrolet, Inc. (Mo. 1981).(1) Under the Code, the court may decree specific performance as a buyer’s

remedy for breach of contract to sell goods “where the goods are uniqueor in other proper circumstances.” § 2-716(1).(a) The general term “in other proper circumstances” expresses the

drafters’ intent to “further a more liberal attitude than somecourts have shown in connection with the specific performanceof contracts of sale.” Comment 1, § 2-716.i) The Pace Car was not unique in the traditional legal

sense. It was not an heirloom or, arguable, not one ofa kind. However, its “mileage, condition, ownershipand appearance” did make it difficult, if notimpossible, to obtain its replication withoutconsiderable expense, delay and inconvenience.

§ 1-201(23). “Insolvent” means:34

(A) having generally ceased to pay debts in the ordinary course of business other than as a result ofbona fide dispute;(B) being unable to pay debts as they become due; or(C) being insolvent within the meaning of federal bankruptcy law.

“The test of uniqueness under this section must be made in terms of the total situation which characterizes35

the contract. Output and requirements contracts involving a particular or peculiarly available source or marketpresent today the typical commercial specific performance situation, as contrasted with contracts for the sale orheirlooms or priceless works of art which were usually involved in the older cases. However, uniqueness is not thesole basis of the remedy under this section for the relief may also be granted ‘in other proper circumstances’ andinability to cover is strong evidence of ‘other proper circumstances.’” Comment 2, § 2-716

-79-

JRC/Fall 2010/Sales

ii) The sticker price for the car was $14,284.21. YetCharlie’s received offers from individuals in Hawaiiand Florida to buy the Pace Car for $24,000 and$28,000 respectively. As sensibly inferred by the trialcourt, the location and size of these offersdemonstrated this limited edition was in short supplyand great demand.

d. Hilmor Sales Co. v. Helen Neushaefer Div. Of Supronics Corp. (N.Y. 1969).(1) Section 2-716(1) of the UCC provides with respect to a buyer’s right to

specific performance that it may be decreed “where the goods areunique or in other proper circumstances.”

(2) It appears to the court that plaintiff can be adequately compensated forany breach of contract herein by an award of money damages. In such asituation, “there should be no specific performance.”

e. Early Common Law Specific Performance. Early case law limited specificperformance of contract for the sale of chattels to unique or one-of-a-kind goods(heirlooms, etc.), but there are a fair number of pre-Code cases giving specificperformance of sales contracts in other situations.

f. Replevin. Section 2-716 also provides that buyer had a right of replevin for goodsidentified to the contract if he unable to procure substitute goods (“effect cover”)or if the “goods have been shipped under reservation and satisfaction of thesecurity interest in them has been made or tendered.” (1) Subsection (3) also gives a consumer buyer the right to replevy goods that

have been identified to the contract for sale under 2-501 “even if theseller has not repudiated or failed to deliver.” Therefore, there is norequirement that the goods be otherwise unique or that the consumerbuyer be able to cover.

2. The Right to Damagesa. § 2-711. Buyer’s Remedies in General; Buyer’s Security Interest in

Rejected Goods.(1) Where the seller fails to make delivery or repudiates or the buyer rightfully rejects orjustifiably revokes acceptance then with respect to any goods involved, and with respect tothe whole if the breach goes to the whole contract (§ 4-2-612), the buyer may cancel andwhether or not he has done so may in addition to recovering so much of the price as hasbeen paid

(a) “cover” and have damages under the next section as to all the goods affectedwhether or not they have been identified to the contract; or(b) recover damages for non-delivery as provided in this chapter (§ 4-2-713).

(2) Where the seller fails to deliver or repudiates the buyer may also(a) if the goods have been identified recover them as provided in this chapter (§4-2-502); or(b) in a proper case obtain specific performance or replevy the goods as provided inthis chapter (§ 4-2-716).

(3) On rightful rejection or justifiable revocation of acceptance a buyer has a security interestin goods in his possession or control for any payments made on their price and any expensesreasonably incurred in their inspection, receipt, transportation, care and custody and mayhold such goods and resell them in like manner as an aggrieved seller

b. Section 2-711 sets out a roadmap for damages when a seller breaches a salescontract. It is not a complete roadmap, however, because it does not address theremedies of a buyer who accepts and keeps nonconforming goods.

c. Valley Die Cast Corp. v. A.C.W. Inc. (Mich. 1970).(1) Acceptance of Rejection. The existence of acts tending to show an

acceptance or rejection of goods as well as the ultimate fact of acceptanceor rejection are, under the facts in this case, for the jury to determine.

-80-

JRC/Fall 2010/Sales

(2) Incidental or Consequential Damages. We are convinced that the recordcontained sufficient proofs to enable the jury to determine whetherrenovation costs should be included in the award of damages todefendant as a proximate result of the failure of plaintiff’s equipment tofunction properly. There was no substantial error committed by thecourt in submitting this question of fact to the jury.

(3) Loss of Profits. The difficulty in measuring damages by profits is that theyare common uncertain and speculative, and depend upon so manycontingencies that their loss cannot be traced with reasonable certaintyto the breach of contract. When that is the case they are said to be tooremote; and the damages must be estimate on a consideration of suchelements of injury as are most directly and certainly the result of thefailure in performance. But in some cases profit are the best possible measureof damage, for the very reason that the loss is indisputable, and the amount canbe estimate with almost absolute certainty.(a) Damages for loss of profits are more frequently allowed to be

recovered in cases of tort than contract; but when loss of profitsarising from a breach of contract can be proved with areasonable degree of certainty, and such loos is directlytraceable to the breach of the contract, there is no reason whysuch damages may not be recovered.

(4) Cover Damages. The trial court ruled defendant had not covered byinstalling a more expensive brush system, which operated upon aprinciple entirely different from the pressure system purchased fromplaintiff.(a) We rule that the question of admissibility of defendant’s offer of

evidence of “cover was one for the court, and that its rejectionwas not an abuse of discretion but was proper under the facts.

d. Allied Canners & Packers, Inc. v. Victor Packaging Co. (Cal. App. 1984).(1) Sections 2-712 and 2-713 of the UCC are sometimes referred to as

“cover and “hypothetical cover,” since the former involves and actualentry into the market by the buyer while the latter does not.(a) It has been recognized that the use of the market-price contract

price formula under § 2-713 does not, absent pure accident,result in a damage award reflecting the buyer’s actual loss.i) Courts are divided on the issue of whether market

damages, even though in excess of the plaintiff’s loss,are appropriate for a supplier’s breach of his deliveryobligations. a) “Strangely enough, each view has generally

tended to disregard the arguments, and eventhe existence, of the opposing view. Thesetwo rival bodies of law, imposing inappearance, have passed each other like silentships in the night.”

ii) White and Summers, after noting their belief that “theCode drafters did not by § 2-713 intend to put thebuyer in the same position as performance wouldhave, advance two possible explanations for thesection:a) Since cover was not a recognized remedy

under Pre-Code law, it made sense underthat law to say that the contract-marketformula put buyer in the same position as

-81-

JRC/Fall 2010/Sales

performance would have on the assumptionthat the buyer would purchase substitute goods. Ifthings worked right, the market price wouldapproximate the cost of the substitute goodsand buyer would be put ‘in the sameposition.”1) But under the Code, § 2-712 does

this job with greater precision.2) § 2-713 reigns only over those cases

in which the buyer does notpurchase a substitute. Perhaps thedrafters retains § 2-713 not out of abelief in its appropriateness, but outof fear that they would be dismissedas iconoclasts had they proposedthat the court in noncover casessimply award the buyer anyeconomic loss proximately causedby seller’s breach.

b) The better explanation for § 2-713 “is that itis a statutory liquidated damage clause, abreach inhibitor the payout of which needbear no close relation to plaintiff’s actualloss.” § 2-713 is consistent with a belief thatplaintiff recover too little and tooinfrequently for the law of contracts to beeffective.1) “Perhaps it is misleading to think of

the market-contract formula as adevice for the measurement ofdamages. An alternative way oflooking at market-contract is toview this differential as a statutoryliquidated damages clause, ratherthan as an effort to calculate actuallosses.”

(2) Viewing § 2-713 as, in effect, a statutory provision for liquidateddamages, it is necessary for us to determine whether a damage award to abuyer who has not covered is ever appropriately limited to the buyer’sactual economic loss which is below the damages produced by themarket-contract formula, and, if so, whether the present case presents asituation in which the damages should be so limited.(a) One view is that § 2-713 of the UCC, or a substantively

similar statutory provision, establishes the principle that abuyer’s resale contract and damage claims made thereunder areirrelevant to an award of damages , and that damages thereforecannot be limited to a plaintiff’s actual economic loss.

(b) Although we find no cases discussing the interaction of § 1-106 and § 2-713, we note that some pre-UCC cases held that36

“The remedies provided by this code shall be liberally administered to the end that the aggrieved party may be36

put in as good a position as if the other party had fully performed but neither consequential or special nor penal damages maybe had except as specifically provided in this code or by other rule of law.”

-82-

JRC/Fall 2010/Sales

a limitation to actual loss should be placed upon the marketprice-contract price measure of damages under general contractprinciples.i) One author on the subject has apparently concluded

that such a limitation is appropriate under the UCCwhen the plaintiff-buyer had a resale contract and theexistence of the resale contract is known to thedefendant-seller.

(3) We conclude that in the circumstances of this case–in which the sellerknew that the buyer had a resale contract, the buyer has not been able toshow that it will be liable in damages to the buyer on its forwardcontract, and there has been no finding of bad faith on the part of theseller–the policy of §1-106 [Rev. § 1-305], subdivision (1), that theaggrieved party to be put in as good a position as if the other party hadperformed requires that the award of damages to the buyer be limited toits actual loss, the amount it expected to make on the transaction.

e. TexPar Energy Inc. v. Murphy Oil USA, Inc. (7th Cir. 1995).(1) We cannot quarrel with Murphy that the general measure of damages in

contract cases is the expectancy of “benefit of the bargain” measure. The UCC itself embraces such a measure in § 1-106, providing that theUCC remedies “shall be liberally administered to that end that theaggrieved party may be put in as good a position as if the other partyhad fully performed.” § 1-106 [Rev. § 1-305].

(2) Nevertheless, we do not believe that the district court erred in awardingdamages based on a straightforward application of § 2-713. Thatprovision is found is found in the article on the sale of goods, andspecifies a remedy for the circumstances presented here–the seller’snondelivery of goods for which there is a market price at the time ofrepudiation.(a) Our problem with Murphy’s suggested measure of damages is

that limiting the buyer’s damages in case such as this one to thebuyer’s out of pocket losses could, depending on the market,create a windfall for the seller.

(b) Since § 2-713 addresses the circumstances of a seller’snondelivery of goods with a market price, we see no error inapplying this specific provision over the more general remediesprovision found at § 1-106.

(c) The § 2-713 remedy serves the purpose of discouraging sellersfrom repudiating their contract as the market rises, if the buyershould resell as did TexPar, or gambling that the buyer’sdamages will be small should the market drop. It also has theadvantage of promoting uniformity and predictability incommercial transactions, by fixing damages on the date of thebreach, rather than allowing the vicissitudes of the market inthe future to determine damages.

f. While cases exist that are in agreement with Allied Canners, see H-W-H Cattle Co.v. Schroeder (8th Cir. 1985), most courts agree with TexPar. (1) “We are not persuaded that the lost profits view under Allied should be

embraced. It is a minority rule that has received only nominal support. We believe the majority rule or the market damages remedy ascontained in § 2-713 is more reasoned and should be followed as thepreferred measure of damages. While application of the rule may notreflect the actual loss to a buyer, it encourages a more efficient marketand discourages the breach of contracts.” Tongish v. Thomas (Kan.

-83-

JRC/Fall 2010/Sales

1992).D. Remedies When the Buyer Gets and Keeps the Goods

1. The buyer who accepts and keeps goods is obligated to pay for them, and § 2-607(1)requires the buyer to pay the price even if the goods do no conform to the contract.

2. § 2-714. Buyer’s Damages for Breach in Regard to Accepted Goods.(1) Where the buyer has accepted goods and given notification (§ 2-607(3)) he may recover asdamages for any non-conformity of tender the loss resulting in the ordinary course of events from theseller's breach as determined in any manner which is reasonable.(2) The measure of damages for breach of warranty is the difference at the time and place of acceptancebetween the value of the goods accepted and the value they would have had if they had been aswarranted, unless special circumstances show proximate damages of a different amount.(3) In a proper case any incidental and consequential damages under the next section may also berecovered.

3. Section 2-607(3)(a) provides that a buyer who wants to keep the goods but assert a claimfor damages “must within a reasonable time after he discovers or should have discoveredthe breach notify the seller of the breach or be barred from any remedy.”a. This is reinforced by § 2-605(1), which applies when the buyer rejects the goods.

4. Jay V. Zimmerman Co. v. General Mills, Inc. (E.D. Mo. 1971).a. The rule followed by Missouri courts is that a purchaser who accepts late delivery

does not thereby, as a matter of law, waive his right to recover damages whichhave resulted from the delay.(1) Under the facts of this case, all that defendant waived by accepting the

dune buggies was the right to rescind the contract by reason of plaintiff’sbreach.

b. Notice. Section 2-607(3) provides in substance that where a tender has beenaccepted, the buyer must, within “a reasonable time” after the breach has beendiscovered or should have been discovered, notify the seller of the breach “or bebarred from any remedy.”(1) This statute refers to a breach which is discovered or discoverable only

after acceptance of tender of the goods.(a) In the present case, as in any case involving late delivery, both

the seller and the buyer are necessarily fully aware prior totender that the seller’s contract obligation to timely deliver hasnot been complied with. It would be an unreasonable, if notabsurd, construction of the statute to require a renewed noticeof breach after acceptance of the goods under the facts hereinvolved.

(b) The purpose of notice in the context of this section is to informthe seller of matters which would not normally come to thebuyer’s attention until after the goods came into his possession. i) The legislative intent was to make provision with

respect to the effect of acceptance of allegedlydefective or inferior quality goods or those allegedlynot meeting warranted standards of quality. In thatsituation it is reasonable to require the buyer toinform the seller of the existence of a possible factualdispute relating to matters of which the buyerpresumably was not aware prior to his acceptance of atender of the goods.

c. Damages. The expenses totaling $3,151.98 [air-freight cost for substitute andovertime labor costs] would not have been incurred but for plaintiff’s breach ofcontract, and we find that they constitute ‘incidental damages’ in connection witheffecting cover, incident to the breach, within the meaning of § 2-715.(1) We find that the cartons, however, were not actually time coded and

-84-

JRC/Fall 2010/Sales

that they could have been used for a Clackers dune buggy promotion atany time after the dune buggies were accepted had defendant desired todo so.(a) We are convinced, however, that the defendant’s decision not

to use the dune buggies to advertise its Clackers cereal was dueto its reasonable belief that these premiums could moreprofitably be used to promote another of its cereals in view ofthe rapidly declining sales of Clackers commencing long priorto the agreed dates of delivery. The Clackers cartons becameobsolescent and were ultimately destroyed because ofdefendant’s change in promotion plans and not because ofplaintiff’s default in making timely deliveries.

5. Eastern Air Lines, Inc. v. McDonnell Douglas Corp. (5th Cir. 1976).a. The trial court apparently was of the view that the sole function of § 2-607 is to

inform the seller of hidden defects in his performance. Under this approach, theonly purpose of notice is to provide the seller with an opportunity to remedy anotherwise unknown nonconforming tender.

b. Section 2-607's origins, however, reveal that is has a much broader function. The Code’s notice requirement was derived from decisional law in California andseveral other states which sought to ameliorate the harsh common law rule thatacceptance of goods by the buyer waived any an all of his remedies.(1) This approach reconciled the desire to give finality to transactions in

which goods were accepted with the need to accommodate a buyer,who, for business reasons, had to accept the tendered goods despiteunsatisfactory performance by the seller.

(2) Under § 49 of the Uniform Sales Act it was irrelevant whether a sellerhad actual knowledge of a nonconforming tender. Instead, the criticalquestion was whether the seller had been informed that the buyerconsidered him to be in breach. Pre-UCC decisions, therefore, appliedthe notice requirement in delivery delay cases.

c. As the drafters of Article 2 acknowledge, § 2-607 continues the basic policiesunderlying § 49 of the Uniform Sales Act.(1) As Comment 4 to § 2-607 indicates, the purpose of notice is not merely

to inform the seller that his tender is nonconforming, but to open theway for settlement through negotiation between the parties. In thewords of the California Supreme Court, “the sound commercial rule”codified in § 2-607 also requires that a seller be reasonably protectedagainst stale claims arising out of transactions which a buyer had led himto believe were closed.”

d. Given these undeniable purposes, it is not enough under § 2-607 that a seller hasknowledge of the facts constituting a nonconforming tender; he must also beinformed that the buyer considers him to be in breach of the contract. TheCode’s notice requirement, then, is applicable to delivery delays as well as otherbreaches. Accordingly, we decline to follow the Zimmerman decision, and wefind that the trial court erred in not applying § 2-607 to the delivery delays atissue in this case.

E. Contractual Limitations of Remedies1. Almost all of the provision in Part 7 of Article 2 are merely gap fillers, for §§ 2-718 and 2-

719 specifically authorize the parties to displace those provisions by agreement.a. § 2-719 is related to § 2-316, which authorizes warranty disclaimers, but

conceptually it is very different:(1) If a seller disclaims warranties, that means that there are no warranties

and the seller is not in breach just because the goods are defective. If, onthe other hand, a seller excludes damages, a defect in the goods may

-85-

JRC/Fall 2010/Sales

amount to a breach of the contract but the buyer has no claim todamages for loss caused by that breach.

2. § 2-718. Liquidation or Limitation of Damages–Deposits.(1) Damages for breach by either party may be liquidated in the agreement but only at an amountwhich is reasonable in the light of the anticipated or actual harm caused by the breach, the difficultiesof proof of loss, and the inconvenience or nonfeasibility of otherwise obtaining an adequate remedy. Aterm fixing unreasonably large liquidated damages is void as a penalty.(2) Where the seller justifiably withholds delivery of goods because of the buyer's breach, the buyer isentitled to restitution of any amount by which the sum of his payments exceeds

(a) The amount to which the seller is entitled by virtue of terms liquidating the seller'sdamages in accordance with subsection (1); or(b) In the absence of such terms, twenty percent (20%) of the value of the total performancefor which the buyer is obligated under the contract or five hundred dollars ($500), whicheveris smaller.

(3) The buyer's right to restitution under subsection (2) is subject to offset to the extent that the sellerestablishes

(a) A right to recover damages under the provisions of this chapter other than subsection (1);and(b) The amount or value of any benefits received by the buyer directly or indirectly byreason of the contract.

(4) Where a seller has received payment in goods their reasonable value or the proceeds of their resaleshall be treated as payments for the purpose of subsection (2); but if the seller has notice of the buyer'sbreach before reselling goods received in part performance, his resale is subject to the conditions laiddown in this chapter on resale by an aggrieved seller (§ 4-2-706).

3. § 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 onliquidation and limitation of damages,

(a) The agreement may provide for remedies in addition to or in substitution for thoseprovided in this chapter and may limit or alter the measure of damages recoverable underthis chapter, as by limiting the buyer's remedies to return of the goods and repayment of theprice or to repair and replacement of nonconforming goods or parts; and(b) Resort to a remedy as provided is optional unless the remedy is expressly agreed to beexclusive, in which case it is the sole remedy.

(2) Where circumstances cause an exclusive or limited remedy to fail of its essential purpose, remedymay be had as provided in this subtitle.(3) Consequential damages may be limited or excluded unless the limitation or exclusion isunconscionable. Limitation of consequential damages for injury to the person in the case of consumergoods is prima facie unconscionable but limitation of damages where the loss is commercial is not.

4. If an exclusive repair-or-replace remedy fails of its essential purpose, the Article 2 remediesare available.a. Assuming that the seller is willing to attempt repairs, the remedy fails of its

essential purpose if the seller’s attempts are unsuccessful. This may occur in twoways:(1) The defect repeatedly manifest itself, as when the seller simply cannot,

despite repeated repairs, solve the problem with a car’s transmission.(2) It may also occur, however, if notwithstanding the successful repair of a

defect, another defect becomes evident. At some point, a succession ofdefects, even if each (excepts perhaps the last one) is repaired, justifies aconclusion that the remedy has failed of its essential purpose.

b. “The limited remedy of repair or replacement of defective parts fails of itsessential purpose whenever, despite reasonable opportunity for repair, the goodsare not restored to a nondefective condition within a reasonable time, whether ornot the failure to do so if willful.” Murray v. Holiday Rambler, Inc. (Wis. 1978).

c. “To be effective the repair remedy must be provided within a reasonable time

-86-

JRC/Fall 2010/Sales

after discovery of the defect. It is not necessary to show negligence or bad faithon the party of the seller. The detriment to the buyer is the same whether theseller diligently but unsuccessfully attempts to honor his promise or actsnegligently or in bad faith.” Chatlos Systems, Inc. v. National Cash Register Corp.(3d. Cir. 1980).

d. §§ 2-712, 2-713, and 2-714 each provide that the buyer may recoverconsequential damages. But § 2-719(3) provides that, whether or not the partiesagree on any remedies not found in Article 2, they are free to agree that in theevent of seller’s breach, the seller is not liable for consequential damages.

5. Smith v. Navistar International Transportation Corp. (7th Cir. 1992).a. Smith’s signature on the Retail Order would ordinarily constitute an effective

waiver of any right to recover incidental and consequential damages arising fromthe loss of his single employment contract. However, the UCC provide that‘where circumstances cause an exclusive or limited remedy to fail of its essentialpurpose, remedy may be has as provided in this Act.” § 2-719(2).(1) In Adams v. J.I. Case Co. (Ill. App. 1970), the Illinois Appellate Court

adopted a categorical approach and held that the seller’s breach of alimited warranty to repair or replace defective tractor parts automaticallyexposes the seller to liability for the buyer’s consequential damagesdespite an otherwise enforceable disclaimer.(a) “The limitations of remedy and of liability are not separable

from the obligations of the warranty. Repudiation of theobligation of the warranty destroyed its benefits. It should beobvious that they cannot at once repudiate their obligationunder the warranty and asserts its provisions beneficial tothem.”

(2) In AES Technology Systems, Inc. v. Coherent Radiation (7th Cir. 1978), theSeventh Circuit rejected the categorical approach used in Adams andrefused to automatically sever a consequential damage disclaimer from acontract merely on the failure of a limited warranty to provide thebenefits that the parties bargained for.(a) “Some courts have awarded consequential damages, when a

remedy failed of its essential purpose, in the face of prohibitionsin the contract against consequential damages. However, wereject the contention that failure o the essential purpose of thelimited remedy automatically means that a damage award willinclude consequential damages. An analysis to determinewhether consequential damages are warranted must carefullyexamine the individual factual situation including the type ofgoods involved, the parties and the precise nature and purposeof the contract. The purpose of the courts in contractualdisputes is not to re-write contract by ignoring parties intent;rather, it is to interpret the existing contract as fairly as possiblewhen all events did not occur as planned.”

(b) Other courts have similarly adopted this case-by-case approach. See Chatlos Systems v. National Cash Register (3d. Cir. 1980) (“Itappears to use that the better reasoned approach is to treat theconsequential damage disclaimer as an independent provision,valid unless unconscionable.”); S.M. Wilson & Co. v. SmithInternational, Inc. (9th Cir. 1978) (“The seller ... did not ignorehis obligation to repair; he simply was unable to perform it. This is not enough to require that the seller absorb losses thebuyer plainly agreed to bear.”).

(3) We believe the district court’s reliance on AES rather than Adams was

-87-

JRC/Fall 2010/Sales

correct. The case-by-case approach adopted by AES and the otherdecisions allows some measure of certainty in that parties of relativelyequal bargaining power can allocate all of the risk that may accompany abreach of warranty, and prevents the courts from upsetting thatallocation upon a breach of contractual duties.(a) In those situations where the limited warranty fails to provide

the benefits that the buyer expected (i.e., to repair or replacedefective parts) and the parties are clearly on unequal termswith respect to relative bargaining power, the case-by-caseapproach enunciated in AES enables the courts to examine“the intent of the parties, as gleaned from the express provisionof the contract and the factual background” to determinewhether consequential damages are warranted, rather thanautomatically exposing the seller to liability for consequentialdamages despite an otherwise valid disclaimer.

b. We have failed to discover evidence in the record that the parties intended thatthe defendants bear the risk of consequential damages or that the parties’ relativebargaining power was so unequal that the disclaimer was unconscionable and werefuse to re-write the contract including the Retail Order ‘s clear exclusion ofconsequential damages.

6. Consequential Damages/Incidental Damagesa. § 2-714(3) states that the buyer may recover incidental and consequential

damages “in a proper case.”(1) Beal v General Motors Corp. (Del. 1973) (quoting Keystone Diesel Engine

Co. v. Irwin (Pa. 1963)).37

(a) “‘Special circumstances’ entitling the buyer to damages inexcess of the difference between the value as warranted and thevalue as accepted exist where the buyer has communicated tothe seller at the time of entering into the contract sufficient factsto make it apparent that the damages subsequently claimedwere within the reasonable contemplation of the parties.”

(b) Jones & McKnight Corp. v. Birdsboro Corp. (N.D. Ill 1970).i) “Under Pennsylvania interpretation of the general

Code provisions dealing with damages, therefore, theplaintiff, in order to collect damages in excess of thedifference between the value of the goods aswarranted and as accepted, must prove that the sellerwas on notice of the fact that the plaintiff would holdit responsible for any loss of profit or loss due to“down time” arising from the inability to use themachinery and equipment in question.”

(c) The ‘tacit agreement’ concept has elsewhere been rejected,however.i) “In their Official Comment upon UCC § 2-715(2) its

framers make it clear that the ‘tacit agreement’ test forthe recovery of consequential damages is rejected. The language of that section should not be sonarrowly construed as to require a prior understandingor agreement that the seller would be bound forconsequential damages in the event of his breach. The Official Comment further states that the older

Relying on Pre-Code common law principles.37

-88-

JRC/Fall 2010/Sales

Common Law rule which made the seller liable for allconsequential damages of which he had “reason toknow” in advance is followed, modified to requirereasonable prevention of loss by cover or otherwise.” Adams v. J.I. Case Co. (Ill. App. 1970).

(d) “[This court adopts] the test of the Adams case. Under thattest, the question then is whether the loss for which recovery issought is one that results from general or particularrequirements or needs of which the seller at the time ofcontracting had reason to know. If it is, then consequentialdamages are proper provided that those damages could nothave been reasonably prevented by action of the buyer.”

7. Lemon Lawsa. Every state has enacted a so-called lemon law to provide relief to purchasers of

defective motor vehicles. The impetus to these laws was a shortcoming of § 2-719. Granted, subsection (2) provides that if an exclusive remedy fails of itsessential purpose, the buyer may pursue all Article 2 remedies. But it does notprovide any standard for when an exclusive remedy fails of its essential purpose. (1) The historic attitude of the automobile manufacturers was to offer

repeated repairs, no matter how many prior attempts they had made andno matter how long a vehicle may have been out of service for repairs.

b. The lemon laws establish a bright-line test, typically an alternative test of eitherfour attempts to repair a single defect or the vehicle being out of service for morethan 30 days during the first year after its purchase. (1) See Ark. Code Ann. § 4-90-401 et seq.

VII. SELLER’S REMEDIES FOR BREACH BY THE BUYER

A. Introduction1. § 2-703. Seller’s Remedies in General.

Where the buyer wrongfully rejects or revokes acceptance of goods or fails to make a payment due onor before delivery or repudiates with respect to a part or the whole, then with respect to any goodsdirectly affected and, if the breach is of the whole contract (§ 4-2-612), then also with respect to thewhole undelivered balance, the aggrieved seller may:

(a) withhold delivery of such goods;(b) stop delivery by any bailee as hereafter provided (§ 4-2-705);(c) proceed under § 4-2-704 respecting goods still unidentified to the contract;(d) resell and recover damages as hereafter provided (§ 4-2-706);(e) recover damages for nonacceptance (§ 4-2-708) or in a proper case the price (§4-2-709);(f) cancel.

2. § 2-708. Seller’s Damages for Non-Acceptance or Repudiation.(1) Subject to subsection (2) and to the provisions of this chapter with respect to proof of market price(§ 4-2-723), the measure of damages for non-acceptance or repudiation by the buyer is the differencebetween the market price at the time and place for tender and the unpaid contract price together withany incidental damages provided in this chapter (§ 4-2-710), but less expenses saved in consequenceof the buyer's breach.(2) If the measure of damages provided in subsection (1) is inadequate to put the seller in as good aposition as performance would have done then the measure of damages is the profit (includingreasonable overhead) which the seller would have made from full performance by the buyer, togetherwith any incidental damages provided in this chapter (§ 4-2-710), due allowance for costs reasonablyincurred and due credit for payments or proceeds of resale.

3. § 2-709. Action for the Price.(1) When the buyer fails to pay the price as it becomes due the seller may recover, together with anyincidental damages under the next section the price

(a) of goods accepted or of conforming goods lost or damaged within a commercially

-89-

JRC/Fall 2010/Sales

reasonable time after risk of their loss has passed to the buyer; and(b) of goods identified to the contract if the seller is unable after reasonable effort to resellthem at a reasonable price or the circumstances reasonably indicate that such effort will beunavailing.

(2) Where the seller sues for the price he must hold for the buyer any goods which have been identifiedto the contract and are still in his control except that if resale becomes possible he may resell them atany time prior to the collection of the judgment. The net proceeds of any such resale must be creditedto 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 apayment due or has repudiated (§ 4-2-610), a seller who is held not entitled to the price under thissection shall nevertheless be awarded damages for non-acceptance under the preceding section.

B. Remedies on Wrongful Rejection or Repudiation1. Action for the Price

a. Industrial Molded Plastic Products, Inc. v. J. Gross & Son, Inc. (Pa. 1979).(1) It is true that in order to maintain an action for the contract price of

goods which are merely identified, the seller must mitigate damages orshow that such effort would be unavailable. § 2-709(1)(b).(a) However, a seller of goods is also entitled to recover the

contract price due for goods accepted by the buyer. § 2-709(1)(a).i) Under the Code, a buyer’s acceptance of goods

occurs, inter alia, when, after a reasonable opportunityto inspect the goods, the buyer fails to make aneffective rejection of them. § 2-606(1)(b).

ii) To preserve his rights, the seller is only obligated totender the goods in accordance with the terms of thecontract. § 2-507(1).

iii) The seller is under no obligation to resell acceptedgoods in order to maintain his action for price. § 2-709(1)(a).

(2) Gross had ample opportunity to inspect, but never rejected the goods. In fact, even as late as March 30, 1972, Gross still indicated that itintended to market the clips, but would need more time to do so. Assuch, Gross accepted the clips and breached its contract by failure to payfor them. Since the goods were accepted, Industrial is entitled to the fullunpaid balance of the contract price, notwithstanding its failure toattempt to resell the clips.

b. N. Bloom & Sons (Antiques) Ltd. v. Skelly (S.D.N.Y. 1987).(1) The measure of damages in a case of non-acceptance is the difference

between the contract price and the market price at the time and place oftender, or lost profits. § 2-708. In a case in which goods are acceptedbut not paid for, the seller may bring an action for the full contractprice. § 2-709(1)(a).

(2) § 2-507(1) provides: “Tender of delivery is a condition to the buyer’sduty to accept the goods and, unless otherwise agreed, to his duty to payfor them. Tender entitles the seller to acceptance of the goods and to paymentaccording to the contract. (emphasis added).(a) The requirements for an effective tender are set forth in § 2-

503(1).(3) Skelly, after being informed of Artworld’s attempts to deliver the

candelbras and centerpiece throughout September 1985, did not takeany active steps to reject them until October 1. Under thecircumstances, this was not within a “reasonable time” after tenderunder § 2-602(1). Skelly did have a “reasonable opportunity to inspect”

-90-

JRC/Fall 2010/Sales

the goods under § 2-606(1).(4) Section 2-513(1) provides a right of inspect “at any reasonable place and

time and in any reasonable manner.” This provision does not mean thatif a buyer chooses not to inspect the goods, she thereby acquires adefense of non-inspection. By refusing to respond to Artworld’srepeated attempts at delivery, Skelly gave up her right of inspection, andthus accepted the goods. Under § 2-709(1)(a), the amount Bloom mayrecover is therefore the full contract price of $45,000.

2. Action for Damagesa. The seller’s basic remedy for a buyer’s unjustified rejection of goods is recovery of

damages (as distinguished from recovery of the price), and in recovering damages,the seller typically has the choice of two measures:(1) the contract price less the market price at the time and place for tender,

under § 2-708(1), or(2) upon resale of the goods to another buyer, the contract price less the

resale price, under § 2-706.(a) § 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 balancethereof. Where the resale is made in good faith and in a commerciallyreasonable manner the seller may recover the difference between theresale price and the contract price together with any incidental damagesallowed under the provisions of this Article (Section 2-710), but lessexpenses saved in consequence of the buyer's breach.(2) Except as otherwise provided in subsection (3) or unless otherwiseagreed resale may be at public or private sale including sale by way ofone or more contracts to sell or of identification to an existing contract ofthe seller. Sale may be as a unit or in parcels and at any time andplace and on any terms but every aspect of the sale including themethod, manner, time, place and terms must be commerciallyreasonable. The resale must be reasonably identified as referring to thebroken contract, but it is not necessary that the goods be in existence orthat any or all of them have been identified to the contract before thebreach.(3) Where the resale is at private sale the seller must give the buyerreasonable 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 arecognized market for a public sale of futures in goods of thekind; and(b) it must be made at a usual place or market for public saleif one is reasonably available and except in the case of goodswhich are perishable or threaten to decline in value speedilythe seller must give the buyer reasonable notice of the timeand place of the resale; and(c) if the goods are not to be within the view of thoseattending the sale the notification of sale must state the placewhere the goods are located and provide for their reasonableinspection by prospective bidders; and(d) the seller may buy.

(5) A purchaser who buys in good faith at a resale takes the goods freeof any rights of the original buyer even though the seller fails to complywith one or more of the requirements of this section.(6) The seller is not accountable to the buyer for any profit made on

-91-

JRC/Fall 2010/Sales

any resale. A person in the position of a seller (Section 2-707) or abuyer who has rightfully rejected or justifiably revoked acceptance mustaccount for any excess over the amount of his security interest, ashereinafter defined (subsection (3) of Section 2-711).

b. Alternatively, in some circumstances, the seller is entitled to recover the lost profiton the transaction under § 2-708(2).

c. Proof of the market price at the relevant time may be difficult. For long-termcontracts § 2-723 helps to ease the difficulties of proof. Alternatively, the sellermay avoid the problem by reselling the goods under § 2-706 and recoveringdamages based on the resale price rather than the market price.(1) § 2-723. Proof of Market Price: Time and Place.

(1) If an action based on anticipatory repudiation comes to trial before the time forperformance with respect to some or all of the goods, any damages based onmarket price (Section 2-708 or Section 2-713) shall be determined according tothe price of such goods prevailing at the time when the aggrieved party learned ofthe repudiation.(2) If evidence of a price prevailing at the times or places described in this Articleis not readily available the price prevailing within any reasonable time before orafter the time described or at any other place which in commercial judgment orunder usage of trade would serve as a reasonable substitute for the one describedmay be used, making any proper allowance for the cost of transporting the goodsto or from such other place.(3) Evidence of a relevant price prevailing at a time or place other than the onedescribed in this Article offered by one party is not admissible unless and until hehas given the other party such notice as the court finds sufficient to prevent unfairsurprise.

d. Tesoro Petroleum Corp. v. Holborn Oil Co., Ltd. (N.Y. 1989).(1) Although the Official Comment to § 2-703 states that the “Article

rejects any doctrine of election of remedy as a fundamental policy andthus the remedies are essentially cumulative in nature,” it concludes that“(w)hether the pursuit of one remedy bar another depends entirely onthe facts of the individual case.”(a) White & Summers indicate that the Code and Comments are

“equivocal” and that “(w)hether the drafters intended a sellerwho has resold to recover more in damages under § 2-708 isnot clear.”i) On this question, White & Summers conclude: “a

seller who resells goods reasonably identified to thebroken contract for a price above the § 2-708(1)market price should be limited to the differencebetween the contract price and his actual resale price. We believe that this is an exact measure of hisexpectation and that he should not recover more thanthat. As indicated above, the buyer bears the burdenof showing that the seller was not a lost volume seller,and that the goods which in fact were resold werethose that would have been delivered to him, thebreaching buyer.

ii) In so concluding, the authors expressed the followingcaveat: “All of the foregoing discussion assumes thatthe buyer who wishes to limit the seller to thedifference between the contract and the resale pricecan show that the goods resold were in fact goodscontracted for. If the seller could have fulfilled the

-92-

JRC/Fall 2010/Sales

buyer’s contract by buying on the market or by achoice among a variety of fungible goods, the buyerwill be unable to limit the seller to § 2-706 damages. The buyer will not be able to prove that the resale is‘reasonably identified as referring to the brokencontract.’ Put another way, the difference betweenthe contract and a specific resale price is not theproper measure of the seller’s expectation damagesunless that resale is a substitute for the one actuallyconducted.”

(2) Moreover, if § 2-708 could not be employed if the goods had been sold,a merchant who sells from inventory would lose his profit if required toreduce damages recoverable from a defaulting buyer by the amount ofthe sale price of the item when sold to another customer. Thus, in Neriv. Retail Marine Corporation (N.Y. 1972), the Court of Appeals, inallowing a § 2-708(2) recovery of lost profits by a retailer of boats,quoted the following from an illustration contained in Hawkland, Salesand Bulk Sales (1958):

“Thus, if an automobile dealer agrees to sell a car to a buyer atthe standard price of $2,000, a breach by the buyer injures thedealer, even though he is able to sell the automobile to anotherfor $2,000. If the dealer had an inexhaustible supply of cars,the resale to replace the breaching buyer costs the dealer a sale,because, had the breaching buyer performed, the dealer wouldhave made two sales instead of one. The buyer’s breach, insuch a case, depletes the dealer’s sales to the extent of one, andthe measure of damages should be the dealer’s profit on onesale.”

(a) Plaintiff, in essence, wishes to be accorded the same treatmentas the car dealer in Hawkland’s illustration. However, there aresignificant differences that warrant the court declining such anapplication. Here plaintiff was selling to Esso Sapa a specificcargo aboard a specific vessel, and thus the gasoline aboard thatship may be considered as goods identified [see § 2-501(1)(1)]to a broken contract.

(3) The court concludes that the proper interrelationship of §§ 2-706 and 2-708 is that summarized by White and Summers above and followed inthe cases cited.(a) The situation would be different if plaintiff’s sale were from its

inventory (in which case it would be treated as the car dealermentioned above), or if it has already contracted to sell theproduct to Esso Sapa, or perhaps even if it was then actuallyengaged in negotiations for trades in this type of gasoline. However, no such claim is made.

e. Trans World Metals, Inc. v. Southwire Co. (2d. Cir. 1985).(1) With 10 installments remaining the market price of aluminum declined

steeply and the buyer breached. The buyer argued that § 2-708(1)overcompensated the seller and that § 2-708(2) should apply. The courtrejected this argument:(a) No measure other than the contract/market price differential

will award Trans World the ‘benefit of its bargain,’ that is, the‘amount necessary to put [it] in as good a position as [it] wouldhave been if the defendant had abided by the contract.’

(b) It simply could not have escaped these parties that they were

-93-

JRC/Fall 2010/Sales

betting on which way aluminum prices would move. TransWorld took the risk that the price would rise; Southwire tookthe risk that the price would fall. Under these circumstances,Trans World should not be denied the benefit of its bargain, asreflected by the contract/market price differential.

(c) [I]n Nobs Chemical (cited by the court in Tesoro), the seller hadcontractually protected itself against market price fluctuation. Thus, the Fifth concluded that it would have been unfair topermit the seller to reap a riskless benefit.

f. Union Carbide Corporation v. Consumers Power Co. (E.D. Mich. 1986).(1) The court stated that § 2-708(2), which authorizes the award of lost

profits when the remedy in § 2-708(1) is “inadequate to put the seller inas good a position as performance would have done,” must beunderstood to authorize the award of lost profits when § 2-708(1) is“incapable or inadequate to accomplish the stated UCC remedies ofcompensating the aggrieved person but not overcompensating thatperson or specifically punishing the other person.”

g. Leases. § 2A-528, the analog of § 2-708, contains the same ambiguity as to therelationship between a recovery based on resale and a recovery of lost profits.(1) Official Comment 4 to § 2A-501, however, tilts the Article 2A result

toward the result in Tesoro. Subsection (4), on which that Comment isbased, provides: “Except as otherwise provided in Section 1-106(1) orthis Article or the lease agreement, the rights and remedies in subsections(2) and (3) are cumulative.”(a) The Comment interprets the reference to 1-106 as denying the

party the right to cumulation of, or selection among, remediesif the result would be to place the aggrieved party in a betterposition that it would have been in had there been fullperformance.

(b) Of course, it could be argued that 1-106 says only that anaggrieved party should never recover less than the amount thatis necessary to put that aggrieved party in as good a position asif the other party had performed, and does not address the issuewhether the aggrieved party might ever recover more than theamount necessary to attain expectancy.

h. Neri v. Retail Marine Corp. (N.Y. 1972).(1) This issue is governed in the first instance by § 2-718 of the UCC which

provides, among other things, that the buyer, despite his breach, mayhave restitution of the amount by which his payment exceeds: (a)reasonable liquidated damages stipulated by the contract or (b) absentsuch stipulation, 20% of the value of the buyer’s total performance, or$500, whichever is smaller.(a) Section 2-718, however, establishes, in paragraph (a) of

subsection (3), an alternative right of offset in favor of the seller,as follows: “(3) The buyer’s right to restitution undersubsection (2) is subject to offset to the extent that the sellerestablished (a) a right to recover damages under the provisionsof this Article other than subsection (1).”i) Among “the provisions of this Article other than

subsection (1)” are those to be found in section 2-708,which the court below did not apply. a) Subsection (2) of § 2-708 provides, “If the

measure of damages provided in subsection(1) is inadequate to put the seller in as good a

-94-

JRC/Fall 2010/Sales

position as performance would have donethen the measure of damages is the profit(including reasonable overhead) which theseller would have made from fullperformance by the buyer, together with anyincidental damages provided in this Article(Section 2-710), due allowance for costsreasonably incurred and due credit forpayments or proceeds of resale.”

(2) It is evident, first, that this retail seller is entitled to its profit and, second,that the last sentence of subsection (2), as hereinbefore quoted, referringto “due credit for payments or proceeds of resale” in applicable to thisretail sales contract.38

(a) If the literal interpretation of this is accepted, it would destroythe concept of permitting the lost profit on the brokencontract. Courts have uniformly rejected this literalinterpretation because it would undermine the purpose of thestatute. The phrase “due credit for payments of proceeds ofresale” has been interpreted as referring to the privilege of theseller to realize salvage value when he has not completedmanufacture of a product and it would be useless to completethe manufacture.

(3) [Court quotes Hawkland’s car analogy] The buyer’s breach, in such acase, depletes the dealer’s sales to the extent of one, and the measure ofdamages should be the dealer’s profit on one sale. Section 2-708recognizes this, and it rejects the rule developed under the UniformSales Act by many courts that the profit cannot be recovered in this case.

i. R.E. Davis Chemical Corp. v. Diasonics, Inc. (7th Cir. 1987).(1) The Court of Appeals reversed a trial court ruling, holding that lost-

volume sellers are entitled to recover lost profits. However, the courtcontinued:(a) However, we disagree with the definition of “lost volume

seller” adopted by other courts. Courts awarding lost profits toa lost volume seller have focused on whether the seller had thecapacity to supply the breached units in addition to what itactually sold. In reality, however, the relevant questionsinclude, not only whether the seller could have produced thebreached units in addition to its actual volume, but alsowhether it would have been profitable for the seller to produceboth units.i) The economic law of diminishing returns or

increasing marginal costs, as a seller’s volumeincreases, then a point will inevitably be reachedwhere the cost of selling each additional itemdiminishes the incremental return to the seller andeventually makes it entirely unprofitable to conclude

The concluding clause, “due credit for payments or proceeds of resale,” is intended to refer to “the38

privilege of the seller to realize junk value when it is manifestly useless to complete the operation of manufacture.” The commentators who have considered the language have uniformly concluded that “the reference is to a resale asscrap under Section 2-704.” Another writer, reaching the same conclusion, after detailing the history of the clause,says that “proceeds of resale” previously meant the resale value of the components on hand at the time the plaintifflearns of the breach.”

-95-

JRC/Fall 2010/Sales

the next sale.(b) Thus, under some conditions, awarding a lost volume seller its

presumed profit will result in overcompensating the seller, and§ 2-708(2) would not take effect because the damage formulaprovided in § 2-708(1) does place the seller in as good aposition as if the buyer had performed.

j. Reasonable Overhead. The parenthetical in § 2-708(2), “including reasonableoverhead,” means that the seller is entitled to be repaid for the overhead allocableto the breached contract. Compensation for the out of pocket expenses that theseller has incurred before the breach is provided by the phrase at the of thesubsection, “due allowance for costs incurred.”(1) The allowance for reasonable overhead, therefore, refers to the portion

of the seller’s fixed overhead that is allocable to the breached contract. These are the costs the seller incurs regardless of whether it ever formedthe contract with the buyer. They include rent, salaries, insurance, andall the other expenses that are to be paid regardless of the existence ofthe contract in question.

3. Contracted-For Damagesa. § 2-718. Liquidation or Limitation of Damages; Deposits.

(1) Damages for breach by either party may be liquidated in the agreement but only at anamount which is reasonable in the light of the anticipated or actual harm caused by thebreach, the difficulties of proof of loss, and the inconvenience or nonfeasibility of otherwiseobtaining an adequate remedy. A term fixing unreasonably large liquidated damages is voidas a penalty.(2) Where the seller justifiably withholds delivery of goods because of the buyer's breach, thebuyer is entitled to restitution of any amount by which the sum of his payments exceeds

(a) The amount to which the seller is entitled by virtue of terms liquidating theseller's damages in accordance with subsection (1); or(b) In the absence of such terms, twenty percent (20%) of the value of the totalperformance for which the buyer is obligated under the contract or five hundreddollars ($500), whichever is smaller.

(3) The buyer's right to restitution under subsection (2) is subject to offset to the extent thatthe seller establishes

(a) A right to recover damages under the provisions of this chapter other thansubsection (1); and(b) The amount or value of any benefits received by the buyer directly orindirectly by reason of the contract.

(4) Where a seller has received payment in goods their reasonable value or the proceeds oftheir resale shall be treated as payments for the purpose of subsection (2); but if the sellerhas notice of the buyer's breach before reselling goods received in part performance, his resaleis subject to the conditions laid down in this chapter on resale by an aggrieved seller (§2-706).

b. Kvassay v. Murray (Kan. App. 1991).(1) The Code does not change the pre-Code rule that the question of the

propriety of liquidated damages is a question of law for the court.(2) Liquidated damages clauses in sales contracts are governed by § 2-718.

(a) Under the common-law, a stipulation for damages upon afuture breach of contract is valid as a liquidated damages clauseif the set amount is determined to be reasonable and theamount of damages is difficult to ascertain. This is clearly atwo-step test: damages must be reasonable and they must bedifficult to ascertain.

(b) Under the UCC, however, reasonableness is the only test. Section 2-718 provides three criteria by which to measure

-96-

JRC/Fall 2010/Sales

reasonableness of liquidated damages clauses: (1) anticipated oractual harm caused by breach; (2) difficulty of proving loss; and(3) difficulty of obtaining an adequate remedy.

c. Superfos Investments Ltd. v. FirstMiss Fertilizer, Inc. (S.D. Miss. 1993).(1) Issue. Whether the contract at issue is a true “alternative performance”

contract (giving the buyer the option of taking and paying for productor of paying for product not taken), or whether the contract is, in fact,one which provides for a primary obligation (taking and paying forproduct) with provision for payment of liquidated damages or a penalty(paying for product not taken) as a means of encouraging or ensuring thebuyer’s performance of the primary obligation.(a) If the contract falls in the former category, it is enforceable

according to its terms. If not, then it devolves upon the courtto determine whether the “pay” provision can be construed asan enforceable liquidated damages stipulation or whether it is,in fact, a penalty which cannot be enforced under anycircumstances.

(2) Although the parties may in good faith contract for alternativeperformances ... a court will look to the substance of the agreement todetermine whether this is the case or whether the parties have attemptedto disguise a provision for a penalty that is unenforceable.

(3) Courts have recognized, almost without exception, that “take-or-pay”contracts are alternative performance contract such that the “pay” optionin a “take or pay” contract is not a penalty provision, and in fact is not adamages provision at all, but rather is one of the buyer’s alternatives.(a) Take-or-pay contracts, which are common in the natural gas

industry, are viewed as risk-allocation contracts. And they areenforced primarily on the basis that what the buyer is actuallypaying for is not so much a “product”–gas–as the process bywhich the gad is made available. The payment is intended tocompensate the producer for the costs associated withproduction and to ensure a steady source of income so that hemay continue production.

(b) Factors of Take-or-Pay Contractsi) A seller’s assumption of the risk associated with

production is a fundamental feature of take-or-paycontracts.

ii) Buyer’s contractual right to “make-up” for gas paidfor but not taken.a) Whether the provisions of a contract truly do

provide “alternative obligations”–whetherthe buyer is given a “real choice” ofalternatives. The inclusion of a make-upprovision in a take-or-pay contract does justthat; it gives the buyer that choice. Conversely the absence of such a provisionwould provide the buyer no real choice.

(4) The court is, of course, cognizant that a contract which provide for thepayment of a liquidate sum of money as one of the alternative methodsof performance can be a valid alternative performance contract. Butwhere it cannot reasonably be conclude that at the time the contract wasentered, paying for a product not taken might prove as desirable astaking the product and paying for, then it cannot be reasonablyconcluded that the “pay” alternative is a true alternative.

-97-

JRC/Fall 2010/Sales

(5) The court, having concluded that the contract is not a true alternativeperformance contract despite its superficial appearance as such, mustnow determine whether the “pay” alternative may be construed as avalid liquidated damages provision, or whether it is, instead, a penaltywhich may not be enforced against FirstMiss.(a) Virginia law, which governs this dispute, recognizes that the

parties to a contract may liquidate damages if they do so in anamount which is reasonable in light of the anticipated or actualharm caused by the breach, the difficulties of proof of loss, andthe inconvenience or nonfeasibility of otherwise obtaining anadequate remedy.

(b) However, a term fixing unreasonably large liquidate damages isvoid as a penalty.

d. Martin v. Sheffer(1) § 1-102(3) and (4) provide:

(3) The effect of provision of this chapter may be varied byagreement except as otherwise provided in this chapter andexcept that the obligation of good faith, diligence,reasonableness and care prescribed by this chapter may not bedisclaimed by agreement.(4) The presence in certain provisions of this chapter of thewords “unless otherwise agreed” or words of similar importdoes not imply that the effect of other provisions may not bevaried by agreement under subsection (3).

(2) In addition, § 2-719(1)(a) provides that a contract for sale of goods “mayprovide for remedies in addition to or in substitution for those providedin this article and may limit or alter the measure of damages recoverableunder this article.”(a) The official comment states that “parties are free to shape their

remedies to their particular requirements and reasonableagreements limiting or modifying remedies are given effect.”

(3) A contractual provision expanding seller’s damages upon breach of thebuyer will therefore be upheld where the contractual provision isreasonable and in good faith.(a) Appellants have signed a contract agreeing to a specific

performance clause upon breach. Appellants do no argue intheir brief that they were fraudulently induced into signing thecontract, that the clause authorizing specific enforcement isambiguous or a mistake, or that the seller breached the contractby failing to deliver at the time promised.

VIII. Repudiation and the Prospect of BreachA. The Prospect of Breach

1. Perhaps the most extreme and dramatic form of breach is renouncing the obligations of thecontract. The law refers to this as a repudiation, and if the renunciation occurs in advanceof the time for performance, it is known as an anticipatory repudiation.

2. Under 2-610(b), a repudiation operates as a material breach.a. § 2-610. Anticipatory Repudiation.

When either party repudiates the contract with respect to a performance not yet due the lossof which will substantially impair the value of the contract to the other, the aggrieved partymay:(a) for a commercially reasonable time await performance by the repudiating party; or(b) resort to any remedy for breach (§ 4-2-703 or § 4-2-711), even though he has notifiedthe repudiating party that he would await the latter's performance and has urged retraction;and

-98-

JRC/Fall 2010/Sales

(c) in either case suspend his own performance or proceed in accordance with the provisionsof this chapter on the seller's right to identify goods to the contract notwithstanding breach orto salvage unfinished goods (§ 4-2-704).

b. Comment 1 to § 2-610 states, “anticipatory repudiation center upon an overtcommunication of intention or an action which renders performance impossibleor demonstrates a clear determination not to continue with performance.”

3. § 2-609. Right to Adequate Assurance of Performance.(1) A contract for sale imposes an obligation on each party that the other's expectation ofreceiving due performance will not be impaired. When reasonable grounds for insecurity arisewith respect to the performance of either party the other may in writing demand adequateassurance of due performance and until he receives such assurance may if commerciallyreasonable suspend any performance for which he has not already received the agreed return.(2) Between merchants the reasonableness of grounds for insecurity and the adequacy of anyassurance offered shall be determined according to commercial standards.(3) Acceptance of any improper delivery or payment does not prejudice the aggrieved party'sright to demand adequate assurance of future performance.(4) After receipt of a justified demand failure to provide within a reasonable time notexceeding thirty (30) days such assurance of due performance as is adequate under thecircumstances of the particular case is a repudiation of the contract.

4. Clem Perrin Marin Towing, Inc. v. Panama Canal Co. (5th Cir. 1984).a. UCC § 2-609 provides that when reasonable grounds for insecurity arise, a party

may in writing demand assurance and, if commercially reasonable, suspendperformance for which he had not already received the agreed return.(1) A ground for insecurity need not arise from or be directly related to the

contract under which a party suspends performance. UCC § 2-609,Comment 3.

(2) Furthermore, “a report from an apparently trustworthy source that theseller shipped defective goods would normally give the buyer reasonablegrounds for insecurity.” Id.

(3) The standard is one of reasonable insecurity, not absolute certainty. SeeUCC § 2-609, Comment 4.

B. Repudiation1. Definition

a. If the other party’s words or conduct amount to a repudiation of the contract, theaggrieved party need not go through the procedures of § 2-609 but instead maytreat the repudiation as a breach. § 2-610(b).(1) Alternatively, the aggrieved party may refuse to treat the repudiation as a

breach and may continue to await performance by the repudiating party. See § 2-610(a).

(2) Conversely, § 2-611 recognizes that the repudiating party may have achange of heart and want to retract the repudiation.

b. Ewanchuk v. Mitchell (Mo. App. 2005).(1) By both decisional law and statute, Missouri recognizes the doctrine of

anticipatory repudiation. (a) A party repudiates a contract by manifesting a positive

intention not to perform by words or conduct.c. Oloffson v. Coomer (Ill. App. 1973).

(1) The Uniform Commercial Code made a change in existing Illinois lawin this respect, in that, prior to the adoption of the Code, a buyer in theposition of Oloffson was privilege to await a seller’s performance untilthe date that, according the agreement, such performance was scheduled.(a) Commercially Reasonable Time Might Be Less Than Date of

Performance. To the extent that a “commercially reasonabletime” is less than such date of performance, the Code now

-99-

JRC/Fall 2010/Sales

conditions the buyer’s right to await performance.(2) Right to Await Performance Conditioned. Oloffson’s right to await

Coomer’s performance under § 2-610(a) was conditioned upon his: (1)waiting no longer than a “commercially reasonable time”’ and (2)dealing with Coomer in good faith.

(3) Since Coomer’s statement to Oloffson on June 3, 1970, was unequivocaland since “cover” easily and immediately was available to Oloffson inthe well-organized and easily accessible market for purchases of grain tobe delivered in the future, it would be unreasonable for Oloffson onJune 3, 1970, to have awaited Coomer’s performance rather than tohave proceeded under § 2-610(b) and, thereunder, elect to treat therepudiation as a breach.

(4) The words “for a commercially reasonable time” as set forth in § 2-610(a) must be read relatively to the obligation of good faith that isdefined and imposed expressly in Article 1.

IX. Discharge by Impossibility or Frustration of PurposeA. Courts of England developed the doctrines of impossibility of performance and frustration of

purpose. See Taylor v. Caldwell (K.B. 1863; Krell v. Henry (Ct. App. 1903). American courts haveembraced these doctrines, excusing the parties from their contractual obligations when anunforeseen, supervening event makes the performance of one of them impossible or frustrates thepurpose for which they formed the contract.1. Article 2 adopts these doctrines for sales contracts. See §§ 2-613, 614, 615 and 616.

B. § 2-613. Casualty to Identified Goods.Where the contract requires for its performance goods identified when the contract is made, and the goods suffercasualty without fault of either party before the risk of loss passes to the buyer, or in a proper case under a "noarrival, no sale" term (Section 2-324) then(a) if the loss is total the contract is avoided; and(b) if the loss is partial or the goods have so deteriorated as no longer to conform to the contract the buyer maynevertheless demand inspection and at his option either treat the contract as avoided or accept the goods with dueallowance from the contract price for the deterioration or the deficiency in quantity but without further rightagainst the seller.

C. § 2-614. Substituted Performance.(1) Where without fault of either party the agreed berthing, loading, or unloading facilities fail or an agreed typeof carrier becomes unavailable or the agreed manner of delivery otherwise becomes commercially impracticable buta commercially reasonable substitute is available, such substitute performance must be tendered and accepted.(2) If the agreed means or manner of payment fails because of domestic or foreign governmental regulation, theseller may withhold or stop delivery unless the buyer provides a means or manner of payment which iscommercially a substantial equivalent. If delivery has already been taken, payment by the means or in themanner provided by the regulation discharges the buyer's obligation unless the regulation is discriminatory,oppressive or predatory.

D. § 2-615. Excuse by Failure of Presupposed Conditions.Except so far as a seller may have assumed a greater obligation and subject to the preceding section onsubstituted performance:

(a) Delay in delivery or non-delivery in whole or in part by a seller who complies with paragraphs (b)and (c) is not a breach of his duty under a contract for sale if performance as agreed has been madeimpracticable by the occurrence of a contingency the non-occurrence of which was a basic assumption onwhich the contract was made or by compliance in good faith with any applicable foreign or domesticgovernmental regulation or order whether or not it later proves to be invalid.(b) Where the causes mentioned in paragraph (a) affect only a part of the seller's capacity to perform,he must allocate production and deliveries among his customers but may at his option include regularcustomers not then under contract as well as his own requirements for further manufacture. He may soallocate in any manner which is fair and reasonable.(c) The seller must notify the buyer seasonably that there will be delay or non-delivery and, whenallocation is required under paragraph (b), of the estimated quota thus made available for the buyer.

-100-

JRC/Fall 2010/Sales

E. § 2-616. Procedure on Notice Claiming Excuse.(1) Where the buyer receives notification of a material or indefinite delay or an allocation justified under thepreceding section he may by written notification to the seller as to any delivery concerned, and where theprospective deficiency substantially impairs the value of the whole contract under the provisions of this Articlerelating to breach of installment contracts (Section 2-612), then also as to the whole,

(a) terminate and thereby discharge any unexecuted portion of the contract; or(b) modify the contract by agreeing to take his available quota in substitution.

(2) If after receipt of such notification from the seller the buyer fails so to modify the contract within a reasonabletime not exceeding thirty days the contract lapses with respect to any deliveries affected.(3) The provisions of this section may not be negated by agreement except in so far as the seller has assumed agreater obligation under the preceding section.

F. United States v. Wegematic (2d. Cir. 1966).1. Section 2-615 of the UCC, entitled “Excuse by Failure of Presupposed Conditions,”

provides that “Except so far as a seller may have assumed a greater obligation ... delay indelivery or non-delivery ... is not a breach of his duty under a contract for sale ifperformance as agreed has been made impracticable by the occurrence of a contingencythe non-occurrence of which was a basic assumption on which the contract was made.”

2. We see no basis for thinking that when an electronics system is promoted by itsmanufacturer as a revolutionary breakthrough, the risk of the revolution’s occurrence fallson the purchaser; the reasonable assumption is that it has already occurred or, at least, thatthe manufacturer is assuring the purchaser that it will be found to have when the machineis assembled.

3. Acceptance of defendant’s argument would mean that though a purchaser makes his choicebecause of the attractiveness of a manufacturer’s representation and will be bound by it, themanufacturer is free to express what are only aspirations and gamble on mere probabilitiesof fulfillment without any risk of liability.a. If a manufacturer wishes to be relieved of the risk that what looks goods on paper

may not prove so good in hardware, the appropriate exculpatory language is wellknown and often used.

G. Force Majeure Clauses. These clauses typically excuse one or both parties from performing insituations in which 2-615 would not provide an excuse.

H. 2-615's Introductory Language. The drafting history of 2-615 reveals that the introductory languagewas intended to make it clear that a seller might assume greater liability by implication as well as byexpress agreement. That language apparently was used without any though that it might restrict aseller’s ability to contract for discharge in the event of occurrences that would not operates as adischarge under 2-615.

I. Chase Precast Corporation v. John J. Paonessa Co., Inc. (Mass. 1991).1. Doctrine of Impossibility. Under that doctrine, where from the nature of the contract it

appears that the parties must from the beginning have contemplated the continuedexistence of some particular specified thing as the foundation of what was to be done,then, in the absence of any warranty that the thing shall exist, the parties shall be excusedwhen performance becomes impossible from the accidental perishing of the thing withoutthe fault of the other party.

2. Doctrine of Frustration of Purpose. When an event neither anticipated nor caused by either39

party, the risk of which was not allocated by the contract, destroys the object or purpose ofthe contract, thus destroying the value of performance, the parties are excused from furtherperformance.

Another definition of frustration of purpose is found in the Restatement (Second) of Contracts § 265: 39

“Where, after a contract is made, a party’s principal purpose is substantially frustratedwithout his fault by the occurrence of an event the non-occurrence of which was a basicassumption on which the contract was made, his remaining duties to render performanceare discharged, unless the language or the circumstances indicate the contrary.”

-101-

JRC/Fall 2010/Sales

3. Both doctrines concern the effect of the supervening circumstances upon the rights andduties of the parties. The difference lies in the effect of the supervening event. Underfrustration, performance remains possible but the expected value of performance to theparty seeking to be excused has been destroyed by the fortuitous event.a. The principal question in both kinds of cases remains whether an unanticipated

circumstance, the risk of which should not fairly be thrown on the promisor, hadmade performance vitally different from what was reasonably to be expected.

4. The Restatement’s definition (see n. 38) is nearly identical to the defense of “commercialimpracticability,” found in the UCC § 2-615, which the court has held to be consistentwith the common law of contracts regarding impossibility of performance.a. It follows, therefore, that the Restatement’s formulation of the doctrine is

consistent with this court’s previous treatment of impossibility of performanceand frustration of purpose.

b. The question is, given the commercial circumstances in which the parties dealt:Was the contingency which developed one which the parties could reasonably bethought to have foreseen as a real possibility which could affect performance? Was it one of that variety of risks which the parties were tacitly assigning to thepromisor by their failure to provide for it explicitly? If it was, performance willbe required. If it could not be so considered, performance is excused. This aquestion for the trier of fact.

J. Wadlinger Corp. v. CRS Group Engineers, Inc (7th Cir. 1985).1. Assuming the seller has not assumed the greater obligation under the agreement, three

conditions must be satisfied before performance is excused: (1) a contingency has occurred;(2) the contingency has made performance impracticable; and (3) the nonoccurrence ofthat contingency was a basic assumption upon which the contract was made. UCC § 2-615.

2. The rationale for the defense of commercial impracticability is that the circumstancecausing the breach has rendered performance “so vitally different from what wasanticipated that the contract cannot be reasonably thought to govern.” a. Because the purpose of a contract is to place the reasonable risk of performance

upon the promisor, however, it is presumed to have agreed to bear any lossoccasioned by an event that was foreseeable at the time of contracting.(1) The applicability of the defense of commercial impracticability, then,

turns largely on foreseeability. The relevant inquiry is whether the riskof the occurrence of the contingency was so unusual or unforeseen andthe consequences of the occurrence of the contingency so severe that torequire performance is to grant the buyer an advantage he did notbargain for in the contract.(a) If the risk of the occurrence of the contingency was

unforeseeable, the seller cannot be said to have assumed thatrisk.

(b) If the risk of the occurrence of the contingency was foreseeable,that risk is tacitly assigned to the seller.i) The seller’s failure to provide a contractual excuse

against the occurrence of a foreseeable contingencymay be deemed to be an assumption of anunconditional obligation to perform. Phrasedsomewhat differently, if a contingency is foreseeable,the § 2-615 defense is unavailable because the partydisadvantaged by the fruition of the contingencymight have contractually protected itself.

b. This analysis assumes, of course, that the parties have not restricted the excusingcontingencies or eliminated the protection of § 2-615 by imposing upon theseller an absolute contractual duty to deliver. If a particular contingency is

-102-

JRC/Fall 2010/Sales

contemplated and the risk of its occurrence specifically assigned to the seller,foreseeability is not an issue. The parties will be held to their bargain.

K. Foreseeability. A number of commentators have pointed out that the frequently stated requirementthat the discharging event be “unforeseeable” or “unforeseen” (repeated in Official Comment 1 to§ 2-615) is not workable or accurate. 40

X. RIGHTS AND LIABILITIES OF THIRD PARTIES

A. Title1. Title is Irrelevant. For the purposes of Article 2, title is irrelevant to the determination of

the rights of the buyer and the seller against each other.a. Risk of Loss. Article 2 allocates risk of loss according to the rules of § 2-509 and §

2-510 rather than according to who has title.b. Right to Get Goods Does Not Turn on Title. The right of a buyer to get

contracted-for goods from a seller who refuses to deliver is determined by § 2-716 and § 2-502, and it does not suffice under those section that the buyer hastitle.41

2. Special Property Interest. Section 2-401 states that the buyer acquires, by identification ofgoods to the contract, a “special property.” This “special property” is, however, no morethan the right to exercise rights under § 2-716 and § 2-502, the right to insure (§ 2-501),and the right to sure third parties for injury to the goods (§ 2-722).

3. While the rights between buyer and seller do not turn on title, § 2-401 does state rulesfrom which one may determine when title passes to the buyer.a. Title for Purposes of “Public Regulation.” Official Comment 1 states that “[i]t is

necessary to state ... when title passes under this Article in case the courts deemany public regulation to incorporate the defined term under ‘private’ law.”(1) This public regulation includes such things as ad valorem taxes that are

assessed against the person who has title to goods on a particular date.(2) Title may also be important in determining which of the parties, buyer

or seller, has tort liability to third parties.4. § 2-401. Passing of Title; Reservation for Security; Limited Application of This

Section.Each provision of this chapter with regard to the rights, obligations and remedies of the seller, thebuyer, purchasers or other third parties applies irrespective of title to the goods except where theprovision refers to such title. Insofar as situations are not covered by the other provisions of this chapterand matters concerning title become material the following rules apply:

(1) Title to goods cannot pass under a contract for sale prior to their identification to thecontract (§ 4-2-501), and unless otherwise explicitly agreed the buyer acquires by theiridentification a special property as limited by this subtitle. Any retention or reservation bythe seller of the title (property) in goods shipped or delivered to the buyer is limited in effectto a reservation of a security interest. Subject to these provisions and to the provisions of thechapter on secured transactions (chapter 9 of this title), title to goods passes from the seller tothe buyer in any manner and on any conditions explicitly agreed on by the parties.(2) Unless otherwise explicitly agreed title passes to the buyer at the time and place atwhich the seller completes his performance with reference to the physical delivery of the

Official Comment 1 to § 2-615 states: “This section excuses a seller from timely delivery of goods40

contracted for, where his performance has become commercially impracticable because of unforeseen superveningcircumstances not within the contemplation of the parties at the time of contracting. The destruction of specificgoods and the problem of the use of substituted performance on points other than delay or quantity, treated elsewherein this Article, must be distinguished from the matter covered by this section.”

If the buyer has title but is unable to obtain possession of the goods under § 2-716 or § 2-502, title revests41

in the seller.

-103-

JRC/Fall 2010/Sales

goods, despite any reservation of a security interest and even though a document of title is tobe delivered at a different time or place; and in particular and despite any reservation of asecurity interest by the bill of lading:

(a) if the contract requires or authorizes the seller to send the goods to the buyerbut does not require him to deliver them at destination, title passes to the buyerat the time and place of shipment; but(b) if the contract requires delivery at destination, title passes on tender there.

(3) Unless otherwise explicitly agreed where delivery is to be made without moving thegoods:

(a) if the seller is to deliver a tangible document of title, title passes at the timewhen and the place where he delivers such documents and if the seller is to deliveran electronic document of title, title passes when the seller delivers the document;or(b) if the goods are at the time of contracting already identified and no documentsof title are to be delivered, title passes at the time and place of contracting.

(4) A rejection or other refusal by the buyer to receive or retain the goods, whether or notjustified, or a justified revocation of acceptance revests title to the goods in the seller. Suchrevesting occurs by operation of law and is not a “sale”.

5. Home Indemnity Co. v. Twin City Fire Insurance Co. (7th Cir. 1973).a. Each party to the transaction at issue is the “seller” of the goods it is to deliver.

(1) UCC § 2-304(1) provides: “The price can be made payable in moneyor otherwise. If it is payable in whole or in part in goods each party is aseller of the goods which he is to transfer.”

b. UCC § 2-503(1) states, in relevant part: “Tender of delivery requires that theseller put and hold conforming goods at the buyer’s disposition and give thebuyer any notification reasonably necessary to enable him to take delivery.”

c. Concerning the passage of title, UCC § 2-401(2) provides: “Unless otherwiseexplicitly agreed title passes to the buyer [Parker Truck] at the time and place[Bodge’s place of business] at which the seller [Bodge] completes his performancewith reference to the physical delivery of the goods, despite any reservation of asecurity interest and even though a document of title is to be delivered at adifferent time or place.”

d. Thus, the appellant’s line of reasoning is as follows: The truck was not preparedfor tender of delivery at Bodge’s place of business because the new tires had notbeen substituted with old tires. Then parties then orally agreed to change theplace of delivery from Bodge’s place of business to Parker Truck’s. Theappellants argue that since physical delivery had not been completed, and sincethe accident occurred while the tractor was being operated by an employee ofBodge en route to Parker Truck, title had not passed to the buyer.(1) The court holds that Imlay, Bodge’s employee, merely volunteered to

drive it for Parker Truck when it was ready. Imlay was driving as avolunteer to accommodate Parker Truck, rather than as a Bodgeemployee under a new agreement as to place of delivery which wouldhave affected ownership of the vehicle.

(2) Furthermore, Parker Truck by its own course of conduct, i.c. bringingthe tractor to its premises, repairing it, paying the balance owed to thelien holder, and reselling the repaired tractor, placed its mark of approvalon the meaning of the agreement of the parties by completing itsperformance in a manner consistent with the transfer of ownership to itprior to the accident in question.

B. Situations in Which the Buyer Gets Better Titles Than the Seller Had1. Rights of the Buyer Against a Secured Creditor of the Seller

a. Security Interest. A security interest gives the lender or supplier (the creditor) theright to seize and sell the goods to satisfy the debt if the seller does not pay the

-104-

JRC/Fall 2010/Sales

debt.b. Buyer Take Free of Security Interest? This issue is dealt with in substantial detail in

Article 9 of the Uniform Commercial Code and the substantive law of securedtransactions.

c. Perfection. To protect its security interest in a seller’s goods against the claims ofthird parties, a creditor (“secured party”) must “perfect” its interest, usually byfiling a document (a “financing statement”) in the relevant secretary of state’soffice showing the existence of the security interest.42

d. Buyer in the Ordinary Course of Business Takes Free. Under Article 9 the ordinarybuyer from a dealer in goods of the kind being purchased takes free of a perfectedsecurity interest created by the seller even if the buyer knows that the goods aresubject to a security interest. That buyer is called a “buyer in the ordinary courseof business.”(1) § 1-201(a)(9). “Buyer in ordinary course of business” means a person that

buys goods in good faith, without knowledge that the sale violates the rights ofanother person in the goods, and in the ordinary course from a person, other thana pawnbroker, in the business of selling goods of that kind. A person buys goodsin the ordinary course if the sale to the person comports with the usual orcustomary practices in the kind of business in which the seller is engaged or withthe seller's own usual or customary practices. A person that sells oil, gas, or otherminerals at the wellhead or minehead is a person in the business of selling goodsof that kind. A buyer in ordinary course of business may buy for cash, byexchange of other property, or on secured or unsecured credit, and may acquiregoods or documents of title under a preexisting contract for sale. Only a buyerthat takes possession of the goods or has a right to recover the goods from the sellerunder chapter 2 may be a buyer in ordinary course of business. “Buyer inordinary course of business” does not include a person that acquires goods in atransfer in bulk or as security for or in total or partial satisfaction of a money debt.

(2) Not in the Ordinary Course of Business. If the grantor of a security interestis not a merchant who deals in goods of the kind, perfection of thesecurity interest gives the secured party superior rights to the person inpossession of the goods, including subsequent good faith buyers.

e. Snap-On Tools Corporation v. Rice (Az. App. 1989).(1) A.R.S. § 47-9301(A) provided in part:

A. Except as otherwise provided in subsection B of thissection, an unperfected security interest is subordinate to therights of:

3. In the case of goods ... a person who is not asecured party and who is a ... buyer not in ordinarycourse of business, to the extent that he gives valueand receives delivery of the collateral without knowledgeof the security interest...

(2) Knowledge. For the purposes of the Uniform Commercial Code, thedefinition of knowledge is set forth in A.R.S. § 47-1202(25)(c), whichstates: “[A] person ‘knows’ or has ‘knowledge’ of a fact when he hasactual knowledge or it.”(a) A.R.S. § 47-9301 does not mandate good faith; it only requires

that delivery be taken without actual knowledge of Snap-On’ssecurity interest.

A security interest in a motor vehicle, other than one given by a debtor who is a dealer in motor vehicle,42

must be perfected by notation on the vehicle’s certificate of title. A security interest given by a dealer in motorvehicles is perfected by filing a financing statement, rather than by notation on the certificate of title.

-105-

JRC/Fall 2010/Sales

(b) Actual knowledge does not include a reason to know of thesecurity interest. The purchaser must have actual knowledgethat the security interest exists at the time the collateral ispurchased.

(c) The code does not require an inquiry into whether a securityinterest exists.

(3) Value. Value is defined in A.R.S. § 47-1201(44)[A] person gives value for rights if he acquires them:

(d) Generally, in return for any consideration sufficientto support a simple contract.

f. The rule applied in Snap-On Tools now appears in § 9-317(b).(1) § 9-317(b). [Buyers that receive delivery.] Except as otherwise provided in

subsection (e), a buyer, other than a secured party, of tangible chattel paper,tangible document, goods, instruments, or a security certificate takes free of asecurity interest or agricultural lien if the buyer gives value and receives delivery ofthe collateral without knowledge of the security interest or agricultural lien andbefore it is perfected.(a) To prevail against a secured party with an unperfected secured

interest, the buyer must both give value and receive delivery ofthe goods without knowledge of the security interest.

(b) The buyer loses if the secured party perfects its security interest(generally by filing) before the buyer gets possession, even if thebuyer has given value before the secured party perfects.

g. General Electric Credit Corporation v. Humble (M.D. Ala. 1982).(1) 9-306(2) [Now § 9-315] provides: “Except where this article otherwise

provides, a security interest continues in collateral notwithstanding sale,exchange or other disposition thereof by the debtor unless his action wasauthorized by the secured party in the security agreement orotherwise...”(a) 9-307(1) [Now § 9-320(a)] provides an exception when a

buyer in the ordinary course of business purchases the collateralfrom the debtor and such purchase is valid even though thebuyer knows of the existence of the security interest created bythe debtor.i) A buyer in the ordinary course of business is defined

by 1-201(9) [Now § 1-201(a)(9) and slightlymodified] as “a person who in good faith and withoutknowledge that the sale to him is in violation of theownership rights or security interest of a third party inthe goods buys in ordinary course from a person inthe business of selling goods of that kind.”

(2) Section 9-307(1) provides that even actual knowledge that a perfectedsecurity interest exists would not defeat a buyer in the ordinary course ofbusiness. To prevent a buyer in the ordinary course of business fromtaking free of the security interest, the secured party must also show thatthe buyer had knowledge that the sale by the debtor was unauthorizedunder some term of the security agreement.

h. Snap-On Tools and GECC are similar in that in both cases the major fact issue isthe buyer’s knowledge with respect to the prior security interest. The rulesapplicable to the two cases, however, are different.(1) For example, § 9-317(b) does not specifically state that the buyer must

be in good faith to take free of the prior unperfected interest.(2) On the other hand, a buyer in the ordinary course under § 9-320 must

“buy in good faith.”

-106-

JRC/Fall 2010/Sales

i. What if Secured Party Repossesses Goods from Seller After Sales Contract Formed ButBefore Goods Are Delivered?(1) Can the buyer be a buyer in ordinary course and get the goods from the

possession of the secured party free of the security interest?(a) Before the 1999 revision, some courts held that a purchaser

could not be a “buyer” and therefore a buyer in ordinarycourse until it obtained possession of the goods, while othercourts held that a purchaser becomes a buyer when the selleridentifies particular goods to the contract. See § 2-501 onidentification.

(2) The revision of Article 9 also revised 1-201(9), 2-501, 2-502, and 2-716to create greater certainty as to the time at which the purchaser becomesa “buyer” entitled to assert rights as a buyer in ordinary course.

j. Personal, Family, or Household Goods. A buyer for personal, family, or householduse may recover the goods from the seller’s secured creditor under either § 2-502or § 2-716. The latter reads: “The buyer has a right of replevin for goods identified tothe contract if after reasonable effort he is unable to effect cover for such goods or thecircumstances reasonably indicate that such cover will be unavailing or if the goods have beenshipped under reservation and satisfaction of the security interest in them has been made ortendered. In the case of goods bought for personal, family or household purposes, thebuyer’s right of replevin vests upon acquisition of a special property, even if the seller hadnot then repudiated or failed to deliver.(1) A buyer acquires a special property in goods when they are identified to

the contract. Therefore, the second sentence of § 2-716(3) really saysthe same thing as the first sentence with respect to the time when aconsumer buyer’s right to replevy the goods arises.(a) What the second sentence does not repeat is the requirement

that the buyer be unable to cover (or, if the goods have beenshipped under reservation, pay the price).

2. Rights of the Buyer when the Seller Does Not Own the Goods: Entrustmenta. § 2-403. Power to Transfer; Good Faith Purchase of Goods;

“Entrusting.”(1) A purchaser of goods acquires all title which his transferor had or had power to transferexcept that a purchaser of a limited interest acquires rights only to the extent of the interestpurchased. A person with voidable title has power to transfer a good title to a good faithpurchaser for value. When goods have been delivered under a transaction of purchase thepurchaser has such power even though

(a) the transferor was deceived as to the identity of the purchaser; or(b) the 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 thecriminal law.

(2) Any entrusting of possession of goods to a merchant who deals in goods of that kindgives him power to transfer all rights of the entruster to a buyer in ordinary course ofbusiness.(3) “Entrusting” includes any delivery and any acquiescence in retention of possessionregardless of any condition expressed between the parties to the delivery or acquiescence andregardless of whether the procurement of the entrusting or the possessor's disposition of thegoods has been such as to be larcenous under the criminal law.(4) The rights of other purchasers of goods and of lien creditors are governed by the chapterson secured transactions (chapter 9 of this title), and documents of title (chapter 7 of thistitle).

b. Atlas Auto Rental Corp. v. Weisberg (N.Y. City 1967).(1) Common Law. At common law, one could convey only such title as he

-107-

JRC/Fall 2010/Sales

himself possessed. Thus, no one could obtain good title from a thief, nomatter how innocent the circumstances of his acquisition.(a) Statutory Modifications. The harshness of this rule with respect

to innocent purchasers who had paid their money in perfectgood faith without any indication of anything amiss in thetransaction led to statutory modification of the common lawrule, so that where the title owner had conveyed a voidable titlehe would not be permitted to revoke it as against a bona fidepurchaser.i) Innocence would then transmute the imperfect title

into a state of perfection and impregnability. Impeccable virtue would receive its just award, andtitle would pass from a swindler, if not from a thief.

(b) Further Modifications. Protection of the innocent was furtherdeveloped to cover situations where the title owner had notconveyed even a voidable title, but had so clothed thetransferor with apparent vestiges of authority and indicia of titlethat equitable principles of estoppel were invoked to precludethe title owner from asserting his title.i) This would cover such circumstances as the delivery

of goods to a retail merchant on consignment, orother situations in which the transferor was permittedto retain and sell inventory, with title retained purelyas a security device.a) Possession alone by the transferor was not

enough; he must have been authorized to sellthe goods. Thus where the goods had beenobtained by false representations the trueowner was not estopped.

(2) The UCC has expanded the rights of a third person who has purchasedthe property in all innocence, even from a thief, or from a person whohas been entrusted with possession, even if not authorized to sell. UCC§ 2-403.(a) Under the Code, title ordinarily passes when goods are

delivered, unless otherwise explicitly agreed. UCC § 2-401(2).i) If passage of title is dependent upon the performance

of some condition subsequent, this is a voidable titlewhich can be transferred to a bona fide purchaser forvalue even if the transferor was deceived as to theidentity of the purchaser, the delivery was in exchangefor a check later dishonored, or procured through afraud punishable as larcenous under the criminal law.

ii) Subdivision (2) provides that the entrusting of goodsto a person in the business of selling goods of that kindcan validate a transfer to a buyer in the ordinarycourse of business. This is so even if procurement ofthe entrusting was larcenous. (Subd. 3).a) The “entrusting” provisions of UCC § 2-

403 are an extension of the principle ofestoppel, it would appear to be essential thatthe actual vocational status of the merchantbe established, but also that the originalowner and the ultimate purchaser must beshows to have been aware of that status.

-108-

JRC/Fall 2010/Sales

1) An owner entrusting his goods toanother cannot be said to haveconferred the indicia of ownershipand apparent authority to deal withthe goods unless he knows he hastransferred possession to a dealer.

2) Similarly, the ultimate purchaser candemonstrate reliance and invoke thestatutory provision only if hebelieved he was buying from adealer.

b) If he acquired the property from one whohad voidable title, he must show that he wasa “good faith purchaser for value.”

c) If he acquired the property from a merchantwho was entrusted with possession, he mustdemonstrate that he was a “buyer in theordinary course of business.”

(b) The Uniform Commercial Code protects the innocentpurchaser, but it is not a shield for the sly conniver, the blindlynaive, or the hopelessly gullible.

c. Certificate-of-Title Law States. In a state with a certificate-of-title law, can a personin possession of the motor vehicle but not in possession of the certificate of titletransfer good title under either 2-403(1) or (2)?(1) Mattek v. Malofsky (Wis. 1969).

(a) The court held that a dealer who purchased without seeing thecertificate of title could not be in good faith. The court statedthat the dealer, being chargeable with notice that a certificate oftitle was outstanding and that the seller was required by law togive him the certificate, was unreasonable, as a matter of law, innot procuring the certificate.

(2) Medico Leasing Co. v. Smith (Okl. 1969).(a) A dealer who purchased from another dealer without securing

the certificate of title was held to be a buyer in ordinary courseunder 2-403(2) because the purchaser had been told that theoriginal certificate of title had been lost.

(3) The courts of some states have held that, under their certificate-of-titlelaws, title does no pass until the certificate of title is delivered to thepurchaser.

C. Situations in Which the Buyer Gets Worse Title Than the Seller Had1. Fraudulent Conveyances

» “No debtor should be free to conceal or dispose of his property with a view topreventing his creditors from satisfying their legal claims. He must be just to hiscreditors before he can rightfully be generous with his property for the benefit ofothers. These basic principles are, in Anglo-American law, associated with theStatute of 13 Elizabeth, c. 5, which declared conveyances with intent to delay,hinder or defraud creditors utterly void, frustrate and of no effect against thepersons so hindered, delayed or defrauded.”43

» The original Statute of 13 Elizabeth invalidated conveyances made with the actualintent to hinder creditors, and over time the courts identified indicia of thatintent.

J. MacLachlan, Bankruptcy 253 (1956).43

-109-

JRC/Fall 2010/Sales

R Badges of Fraud. These indicia created a presumption of fraudulentconveyance when one of them was present.P Something of these badges of fraud remain, and the current law

of fraudulent conveyances is found in the Uniform FraudulentTransfer Act (or its predecessor the Uniform FraudulentConveyances Act), the Bankruptcy Code, the UCC, and thecommon law.

» Fraudulent conveyance law employs an extraordinary notion–that a transfer oftitle, valid between the parties, is invalid as to creditors of the transferor.R Creditors Need Not Be Secured. A fraudulent conveyance of

unencumbered goods may be set aside. This means, in effect, that thetransferee gets less than a complete interest in fraudulently conveyedgoods, even if the transferor has a perfect, unencumbered title.P The law is designed to protect creditors, within limits, by

enabling them to rely on the property of their debtors. Theprotection is given at the expense, at least initially of thetransferee.

» Guilt or Fault of Transferee. Normally, fraudulent conveyance law is limited by theprinciple that a transfer will not be upset unless some guilt or fault can be assignedto the transferee.

a. Seller’s Retention of Possession After the Sale(1) Fraudulent Retention in which the seller continues in possession of goods

after selling them.(2) Lefever v. Mires (Ill. 1876).

(a) The evidence fails to show other than a contract for sale. Theproperty remained where it was before the sale–Brewer stillbeing in possession of the farm–until the levy of the execution;and there is no proof of even a symbolical delivery to appellant.i) The rule undoubtedly is, where the goods are

ponderous or bulky, or cannot be convenientlydelivered manually, there may be symbolical delivery.

(3) Blumenstein v. Phillips Insurance Center, Inc. (Alaska 1971).(a) Alaska statute provides that a conveyance of goods made with

intent to hinder, delay or defraud creditors is invalid. Thisstatute provides Alaska’s basic prohibition against transactions infraud of creditors.i) Another Alaska statute complements the basic

prohibition by providing that the existence offraudulent intent is a question of fact. Thus, undernormal circumstances, fraud will not be presumed.

ii) However, another Alaska statute qualifies theseprovisions by erecting a prima facie presumption offraud in cases where a sale of personal property is notaccompanied by the immediate delivery and the actualand continued change of possession by the vendee.a) This presumption is rebuttable. It serves

merely to shift to the vendee the burden ofproving that a conveyance was made withoutfraudulent intent. Under the statute, if avendee has failed to establish immediate andcontinued possession over personalty whichhe had purchased, and if he makes no effortto show that the transaction was entered intoin good faith, then a finding of fraud will be

-110-

JRC/Fall 2010/Sales

compelled.b) Where, on the other hand, the grantee

introduces evidence tending to show that theconveyance in question was transacted ingood faith, then the presumption will bedispelled, and it will be incumbent upon thefinder of fact to determine whether there wasactually an intent to defraud creditors.

b. Sales Made With Actual Intent to Defraud Creditors(1) There are two main types of fraudulent transfers other than those

involving seller’s retention of possession.(a) Actual Fraud. One is a transfer that is in fact

fraudulent–transfers made with actual intent to hinder, delay ordefraud creditors.i) Transferee In Good Faith/Value Insulated. The

transferor’s intent to hinder, delay, or defraudcreditors is not necessarily enough to defeat a transfermade to implement that intent. The transfer cannotbe set aside as against a transferee who took in goodfaith and for reasonably equivalent value.

(b) Less Than Fair Value/Insolvency. The other is a transfer at lessthan fair value which leaves the transferor insolvent or withinsufficient assets to reasonably continue a business.

c. Sales for Less Than Fair Value by Sellers Who Are Insolvent or Who Are Leftwith Insufficient Capital.(1) If the transfer is for less that “reasonably equivalent value,” the transfer is

assailable irrespective of the good faith of the transferee, although, agood faith transferee is entitled to a return of the consideration paid.

(2) Since the statutory test is fair or reasonably equivalent value, it wouldseem to follow that a buyer who innocently gets a very good bargainfrom an insolvent seller runs the risk of participating in a fraudulentconveyance.(a) This has not necessarily been the case. In the application of the

“fair equivalence” rule of the 1918 Act in the seller-buyersituation, the courts usually have not resolved the matter solelyby determining the value of the thing sold and comparing it tothe price paid.i) Rather, they have taken into account all the

surrounding circumstances attending the sale, anddeclare the conveyance fraudulent only when theconsideration paid by the buyer is so short of the realvalue of the property conveyed “as to startle a correctmind.”

(b) The same rule may be applied under the UFTA, but a SeventhCircuit case has rejected that test, holding instead that underthe “fair equivalent value” test in section 8(a) of the Act, if thenet effect of the transfer is to diminish the transferor’s estate,any difference in value between the property transferred andthe price paid for it could be recovered by the creditors of thetransferor.

(3) If a conveyance is found to be fraudulent, protected creditors may set itaside to the extent necessary to satisfy their claims, or disregard it andattach and levy execution on the property conveyed.

-111-